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National Bank Holdings Corporation (NYSE:NBHC)
Q1 2020 Earnings Call
Apr 22, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the National Bank Holdings Corporation First Quarter Earnings Call. My name is, Sheryl and I will be your conference operator for today. [Operator Instructions] We will conduct a question-and-answer session following the prepared remarks. [Operator Instructions]

I would like to remind you that this conference call will contain forward-looking statements, including but not limited to statements regarding the company's strategy, loans, deposit, capital, net interest income, non-interest income, margins, allowance, taxes and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties and other factors, which are disclosed in more detail in the company's most recent filings with the US Securities and Exchange Commission. These statements speak only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise these statements.

It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Sheryl. Good morning and thank you for joining National Bank Holdings first quarter 2020 earnings call. I have with me, our Chief Financial Officer, Aldis Birkans and Rick Newfield, our Chief Risk Management Officer. With the emergence of the COVID-19 pandemic, we quickly shifted our priorities to: one, protect the health of our associates and clients; two, ensure the safety and soundness of our bank; and three, to prudently support our clients and communities.

We moved quickly to implement remote working arrangements, as well as appointment only services in our lobbies, while maintaining drive through services. We also expanded associate healthcare provisions for COVID related illness. With respect to safety and soundness of the bank, our teams moved quickly to assess and manage the emerging risk. Further, our internal and third-party stress testing indicate that the diversity and granularity of our loan portfolio supports the ability to maintain strong capital throughout a severe economic downturn. Rick will address stress testing and another critical credit-related details in just a moment.

I'm also pleased to report that our operational contingency plans were activated and proved to be highly effective. It's also important to note that we continue to hold high levels of excess liquidity and the bank maintain Tier 1 common equity of 12.9% at quarter end. With respect to supporting our clients and communities, I'm proud of our team's tireless work with the SBA to approve over $332 million in Paycheck Protection Program loans supporting close to 1,500 of our small and mid-sized business clients and helping save an estimated 32,000 jobs in the communities where we do business.

On that note, I'll turn the call over to Rick Newfield.

Richard U. Newfield -- Chief Risk Management Officer

Thank you, Tim, and good morning everyone. I'll cover three areas in my comments. First, I'll briefly summarize our first quarter credit metrics and performance; second, I'll discuss the actions we have taken to mitigate potential risk emerging in our loan portfolio, due to the COVID-19 pandemic; and third, I'll provide information on our exposure to sectors at a higher risk due to the pandemic.

With respect to our credit metrics trends were positive in the first quarter with reductions in criticized classified and non-accrual loans. Our criticized loan ratio improved from 2.90% at December 31, 2019 to 2.35% at March 31, 2020. Our classified loan ratio improved from 0.96% to 0.86% and our non-accrual ratio improved from 0.49% to 0.47% with total non-performing asset ratio improving from 0.66% to 0.63%.

Net charge-offs for the quarter were only $352,000 or 3 basis points annualized. The positive credit trends and strength of our loan portfolio leaves us well positioned to deal with the challenges presented by the pandemic. Given the impact of the COVID-19 pandemic Tim, myself and our banking teams have intensified our portfolio management diving deep into our loan portfolio with particular focus on higher impacted industries and commercial property types. Consistent with our change in corporate objectives, given the pandemic our teams are working intensely with our clients to monitor impacts and ensure the safety and soundness of our bank.

In March, we implemented additional approval requirements for commercial line of credit draws and we experienced no unusual activity in the quarter. The COVID-19 pandemic has reinforced the importance of our disciplined adherence to our concentration limits and to prudent underwriting standards and client selectivity. I'll point out that no industry called out by the street has been highly impacted by COVID-19, represents more than 5% of our total loans. With that said, I'll cover a number of highly impacted industries in more detail.

Our energy loans were now down to $30.6 million or just 0.7% of loans. Three midstream operators and one natural gas royalties client all stable and well capitalized make up 97% of that exposure. Senior living is only $21.5 million less than 0.5% of our total loans. Our restaurant exposure is $223.1 million and 5% of loans. Importantly, 77% our QSR franchise clients and thus able to operate with drive-through and carryout capabilities during the current restrictions.

Multi-family loans totaled $77.3 million just 1.5% of loans. The average loan to value on our exposure is 65% with average 2019 debt service coverage of 1.35 times. Our hotel exposure is $181.4 million and 4% of total loans. 97% of our exposure is flagged with the major brand families such as Marriott and Hilton. The average loan to value is 56% and the average debt service coverage in 2019 was 1.67 times.

Our hospital and medical exposure is $202 million or 4.5% of total loans. $116 million of that exposure is to very well capitalized municipal critical access hospitals, which have strong liquidity as well. $40 million of our exposure is to doctors and dentists with an average loan of just $357,000. We have $120.8 million of exposure and retailers, which is 2.7% of loans. 52% of this exposure is to retailers classified as essential and who remain open selling groceries, gas and staples. We also have $55.5 million of non-owner occupied retail commercial real estate or only 1.2% of loans. The average loan to value is 66% and the average debt service coverage in 2019 was 1.33 times.

Our transportation exposure is $139.7 million and 3% of total loans. This is granular in nature secured by tractors and trailers, with an average exposure per client of $1 million. Credit exposures to industries such as transportation, restaurant, hotel and multi-family are managed by specialty banking teams, including dedicated, specialized underwriters.Finally, it's noteworthy where we have no direct exposure. Aviation, Cruise Lines, Malls, Energy Services, Casinos and Gaming, Convention Centers and Hedge Funds. We have no dealer floor plan, indirect auto car, leasing and no consumer credit card exposure. We remain in frequent contact with our business clients, I do believe also that maintaining a diverse granular loan portfolio as a strength. We've conducted twice a year stress test on our commercial loan book those results demonstrate that an economic scenario more severe than the Great Recession, we would remain very well capitalized above 8% Tier 1 leverage.

Non-owner occupied commercial real estate is only 14% of our total loan portfolio and only 95% of our Company's risk-based capital. We are well diversified across industry sectors with most industry concentrations at 5% or less of the total loans and all concentration levels remain well below our self-imposed limits. I believe our bank is in a strong position to manage through the challenges presented by COVID-19 pandemic.

That concludes concludes my comments. I'll turn the call over to Aldis.

Aldis Birkans -- Chief Financial Officer and Treasurer

Thank you, Rick and good morning. In my remarks, I will summarize this quarter's financial results, as well as give an update on our CECL implementation. In light of the uncertainty caused by the COVID-19 pandemic, our prior 2020 guidance is no longer applicable. But I will provide limited forward-looking guidance as of today.

As we reported yesterday, our first quarter's net income was $15.8 million or $0.50 per diluted share. This quarter's pre-provision net revenue of $26.5 million, reflected an increase of 9.7% annualized on a linked-quarter basis and an increase of 5.7% from the prior year's first quarter. This quarter's financial results were driven by solid net interest income, as well as strong residential mortgage banking results. The quarterly results also reflect the impact of the CECL model, which incorporates a recessionary environment into early 2021.

During the quarter we originated $292.9 dollars in new loans, which resulted in the total loan growth of $90.3 million or 8.2% annualized. This quarter's loan originations once again were led by commercial loans with $163.6 million in new loan fundings. Our new loan originations continue to be granular in size with the average commercial loan of $1 million. The quarter's loan originations were well balanced across various asset classes, geographies and industry sectors. We also continue to maintain our discipline when it comes to new loan rates. With interest rates, decreasing throughout the quarter our focus remained not just on the loan spreads to LIBOR, but the absolute rate levels. As a result this quarter's originations came on at a weighted average rate of 4.2%.

The fully taxable equivalent net interest income totaled $51.6 million, which resulted in our net interest margin widening 10 basis points on a linked-quarter basis. Interest income benefited from $1.2 million and accelerated loan mark accretion income or and an equivalent of a 9 basis point benefit to earning asset yields. The accelerated accretion income combined with a 7 basis point decrease in our total cost of funds, resulted in a strong net interest income for the first quarter.

On a go-forward basis, we expect the full margin impact from the Federal Reserve emergency rate cuts to be in the 40 basis point to 45 basis point range. Rick provided an overview on credit, but in light of the CECL adoption, I do want to provide more color on the provision expense and the allowance for credit losses.

We finished the quarter with an allowance for credit losses of $51 million or an increase of 30% from the prior quarter-end. ACL to total loans was 1.1% at quarter end, as compared to 0.88% as of the prior year-end. During the quarter we recorded $6.2 million in provision expense, of which approximately $5 million is the result of CECL Day 2 impact from the deteriorating macroeconomic conditions. The rest of this quarter's premiums covers new loan growth, as well as the quarterly net charge-offs of just $353,000.

Our seasonal model uses macroeconomic forecast from Moody's, and this quarter it reflect a recessionary economic outlook continuing into early 2021. In addition to the first quarter's provision expense, we also recorded a $5.8 million increase to the credit loss allowance related to the CECL Day 1 adjustment. As we discussed in our prior earnings calls, approximately half of this allowance increase is driven by the acquired loan book. Our investment securities portfolio consists of US agency mortgage-backed securities and it requires no Day 1 or Day 2 CECL related adjustments.

As of March 31, 2020, we also held $17.4 million in loan marks against the acquired loan portfolio, which not only continues to be accretive to the net interest margin, but also provides additional protection from credit loss. The first quarter's non-interest income of $23.5 million was $3.3 million higher than the fourth quarter of 2019. The linked-quarter increase is primarily driven by the gains on sale of our residential mortgage loan originations, we saw very strong residential mortgage rate lock activity this quarter. For the quarter, we closed $366.2 million in new loan -- in new mortgage loans or an 85.2% increase from the same quarter last year, 55.8% of this activity was driven by the refi market.

Regarding expenses, our first quarter's non-interest expense totaled $48.7 million and increased $2.6 million from the prior quarter. The linked-quarter increase was entirely driven by the higher mortgage banking production compensation expense. We also received an FDIC small bank assessment credit that lowered our FDIC insurance expense by $0.5 million, this was the last quarter for the FDIC credit.

As it relates to capital, we finished the quarter with a strong 11.1% Tier 1 leverage capital ratio and 12.9% common equity Tier 1 ratio. During the quarter we purchased $19.5 million of our stock, as the quarter progressed, however, we suspended the repurchase activity in order to focus on supporting our clients and communities through programs such as the Paycheck Protection Program. The tangible book value per share during the quarter increased $0.38 to $21.27, as our quarterly earnings exceeded the combination of the quarterly dividend payout CECL adoption impact in this quarter's stock buyback impact.

Tim with this, I will turn it back to you.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you, Aldis. As Aldis shared with you, we are operating under a range of assumptions that suggest a protracted level of economic stress running into 2021. We believe that our prudent approach to credit and capital management leave us well positioned to address the severe consequences of the COVID-19 driven crisis. Further, we've tested our ability to deliver our dividend in a range of stress scenarios and we believe our ability to do so with solid.

Sheryl, I, in my prepared comments on that point and ask you to open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Jeff Rulis from D.A. Davidson. Please go ahead, your line is open.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning, Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Hi, good morning. Question on, let's see, maybe I'll take the margin first. Aldis, what was the accretion benefit last quarter?

Aldis Birkans -- Chief Financial Officer and Treasurer

Last quarter, if you recall we actually talked at our accretion benefit was lighter than typical for prior quarters in 2019. So I'd say it was there, we didn't have a whole lot of accretion benefit last quarter. Outside of the normal amortization of the mark.

Jeff Rulis -- D.A. Davidson -- Analyst

Got you. So...

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Aldis go ahead and speak first -- speak a little more to the accretion this quarter relative to average quarters.

Aldis Birkans -- Chief Financial Officer and Treasurer

Yes. So I mean, the way if you look at it is, if you look at the acquired loans are yielding approximately 8% to 9% with the loan mark accretion as it typically amortizes, in this quarter we realize 10.4% acquired loan yield and that's really that 14 basis points, sorry, that's a 1.4% pickup, driven by the -- this $1.2 million accretion mark that we highlighted this quarter.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay, so with a 9 basis point accretion benefit this quarter and a 10 basis point reported a lot of the -- it's pretty -- a stable core margin, is that how you put it for the quarter?

Aldis Birkans -- Chief Financial Officer and Treasurer

I'd say it was pretty stable core margin as the LIBOR and prime rate decreases then take place until March and late in March for that matter. So not much of the Fed rate cut impact has walked its way through our loan book yet. We did see nice drop in cost of funds as I pointed out 7 basis points, but the full impact of the March rate cuts will start taking place here in April and in second quarter.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay. And that -- I think you said 40 basis point to 45 basis point impact. Is that -- what's the timeline for that? I mean, generally speaking, is it...

Aldis Birkans -- Chief Financial Officer and Treasurer

I'd expect all of that to be in our balance sheet already here in second quarter. I'll caveat that 40 basis point, 45 basis point, it does depend on the PPP loans, because those are at the end of the day lower yielding loans and that could have put additional pressure on that margin. Now it also depends whether at what time they're being forgiven and the early amortization of what early realization of that fee income. So there is going to be some volatility in the margin for the coming quarters, because of that.

Jeff Rulis -- D.A. Davidson -- Analyst

Okay. I appreciate the color. Next question, just on maybe for Tim, I think in some ways interested in your view of NBHC maybe better equipped to address, sort of, remote operation or branches being consolidated or operation sort of moved from COVID pressures, due to, kind of, the banks pre-existing, our branch consolidation efforts over the last few years bakes in. And if you think about communication customer impact things that you've been dealing with, there's sort of ramps, but just kind of thinking about the preparation for your bank versus peers, if you think you're any better suited in that environment?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Alright, so very good question. Jeff, we've been focused on the move of clients from traditional brick and mortar to digital channels for some time now. Having said that, what's remarkable is that we realized a 75% increase in new mobile activation during the first quarter of 2020 versus the first quarter of 2019. More specifically, we realized in the month of March alone year-over-year mobile sign up an increase of 103%. I do think COVID-19 and working remotely sheltering in place has been a catalyst for driving even some of our more reluctant clients to engage digitally, and that does put us in a position at the right time to continue to assess our banking center channel and related optimization.

I think, equally important, we've demonstrated a pretty solid track record over the years of constantly focusing on improving our operating efficiency and realizing opportunities to reduce expense and 2020 certainly should not be any different than prior years, if anything given the circumstances it will be an increased focus.

Jeff Rulis -- D.A. Davidson -- Analyst

Got you. And that was the last question I had, kind of, bleeding into the expense, obviously you had a pretty good mortgage banking quarter that led to that uptick, Aldis detailed the credit that you received. But if we think about maybe tackling two things at once. How do you see mortgage banking revenue playing out this year? And then maybe just to touch on the expense run rate from here? Thanks.

Aldis Birkans -- Chief Financial Officer and Treasurer

Sure. You bet. Jeff, as it relates to residential banking it's been remarkable what we've witnessed moving into the second quarter, while as you would expect first mortgage purchase activity has certainly dropped off the radar screen. We've actually continued to see refinance activity move along quite well. In fact, I would describe it as strong, I think perhaps again with folks staying at home, having a bit more time to focus on their own financials they're recognizing an opportunity to reduce their own expense through the refinance process.

Now having said that, we're very cautious with respect to refinancing activity, Rick can speak to this in detail -- our coming on refinance activity and again Rick can speak to what we keep on our balance sheet versus what we sell to investors. But nevertheless, very strong FICO scores, multiple layers of verification of employment, which we think is increasingly important in this environment. And even as we look to our existing book very attractive loan to value on that mortgage business.

And then just more broadly, we've -- all this working with our Head of Residential Banking and that team, they've done a great job of correlating compensation expense to production. We still believe we operate at a time where should that business really see a precipitous decline, which again we haven't seen to-date. We'll see expense decline accordingly, and we believe we've built a model where we should never expect to have losses coming out of that business on an operating basis. And again as I said before, as it relates to any other operating expenses it's always been a focus, it will continue to be a focus and we do think we have levers to pull here in 2020.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Rick, do you want to add any additional color on residential banking?

Richard U. Newfield -- Chief Risk Management Officer

I mean, Tim maybe just a couple of other comments to amplify some of what you said. I mean, specifically on the employment verification we're conducting several, but one must be conducted within 48 hours of closing, just given the increase in the number of folks that are unemployed currently. We've also looked at our refinance with any cash out and we're examining not just loan to value, but we're looking at the loan to cost. What do the homeowner pay and that's just as important as the current valuations. So I could go on, but we're taking the right steps with what we're currently originating and you did point out and we have it in our additional disclosures, we have a very, very solid existing portfolio of residential loans.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Yes. Jeff, did you have other questions?

Jeff Rulis -- D.A. Davidson -- Analyst

No, you guys did a great job. I appreciate the color.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Alright, thank you.

Operator

Thank you. And our next question comes from Gordon McGuire from Stephens. Your line is opened.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Hello, Gordon.

Gordon McGuire -- Stephens Inc. -- Analyst

Hello, good morning.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning.

Gordon McGuire -- Stephens Inc. -- Analyst

Aldis, I just wanted to clarify or follow-on to the NIM -- NIM guidance, I think you said the 40 basis point to 45 basis points would probably already be in the numbers at this point outside of any PPP impacts? How much do deposit cost repricing factor into those numbers? Or is there opportunity in the longer run to get some of that back? I guess how should we be thinking about the deposit cost relief?

Aldis Birkans -- Chief Financial Officer and Treasurer

Yes, that's I would call that, that's a net impact to the margin that I'm guiding to. So it takes in account the actions we're taking in deposit costs. I'll say it doesn't deposit costs, though, do expect that to continue coming down for us. We've talked about time deposits, first quarter of this year being the first or being the peak on the different scenario or different operating environment being the peak quarter and the cost of that book and that's going to be coming down here in second quarter. But also on transaction deposits now to be back to zero rate environment, I think if you are -- if you look where we were priced our -- we have priced our deposits, the last time we were at zero rates, we -- our target is to get back to -- get back down there.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

I would add, Gordon. I would add that government programs in the checks going out to individuals is certainly contributing to a lower cost basis in our deposit book. We've seen that as we've moved here into the second quarter. And frankly, it does balances have been higher than we would have expected.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay, appreciate that. Maybe moving on something, Rick could help me with. Rick, could you provide a little color on any loan deferrals or modifications that you've implemented so far?

Richard U. Newfield -- Chief Risk Management Officer

Yes, certainly. Gordon, that's a terrific question. Look our relationship banking model is allowed us to work individually with each client versus a programmatic approach. For business banking and our commercial banking clients, we're obtaining cash flow forecast, we're working with the owners and guarantors where applicable on their support and we're leaning toward 90-day interest only structures, so deferment of principal, but non-interest where appropriate. I'll also point out, we've never used a black box underwriting for our small business clients, we have dedicated underwriting teams responsible for conducting full credit analysis before we consider any business loan in our bank.

Now in terms of where we are through mid-April our pipeline of modifications not all of these are in place, total a $110 million of loans and commercial and specialty banking and $24 million of loans and business banking, and well let me touch on our residential banking portfolio and again I'll refer to the pipeline, what we have received as opposed to what's completed, because with consumer residential banking clients, as well we take that relationship approach and spend time with the client, it's not a specific program. Through mid-April we've got approximately $40 million of requests or about 7% of our residential mortgage loans for what we hold in portfolio and $21 million or approximately also 7% of request for loans that we service, but are not on our books.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Gordon, does that cover [Phonetic] your question? Yes.

Gordon McGuire -- Stephens Inc. -- Analyst

That does and I'm wondering in the commercial and the specialty, how much of that is related to these at risk portfolios that you provided updates on?

Richard U. Newfield -- Chief Risk Management Officer

Yes, Gordon, I would say the majority of it is within those portfolios still relatively modest percentage, but for areas like hotels, certain restaurant clients, not all, that's where we're seeing a more significant penetration of those modification requests.

Gordon McGuire -- Stephens Inc. -- Analyst

Got it. Appreciate that. I guess, Rick. Could you provide an update, you mentioned the CECL model incorporating a recessionary environment through early 2021. Is there any way you can quantify what unemployment figures you guys are looking at?

Richard U. Newfield -- Chief Risk Management Officer

Yes, and this is all the [Indecipherable]

Gordon McGuire -- Stephens Inc. -- Analyst

Notice?

Richard U. Newfield -- Chief Risk Management Officer

Yes, so like I mentioned in my remarks, we use Moody's for this scenario of modeling, in these scenario we contemplated to their scenarios and ended up with the combination of the two. The primary drivers for our model is unemployment rate, GDP, housing, price index and we ended up with a model that has negative GDP, quarterly GDP is going into first quarter of 2021, double-digit unemployment here in second quarter and then high single-digits for rest of the year and into 2021.

Gordon McGuire -- Stephens Inc. -- Analyst

Okay. I'll step back. Thank you, guys.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Alight, thank you, Gordon.

Richard U. Newfield -- Chief Risk Management Officer

Thank you, Gordon.

Operator

Thank you. Our next question comes from Andrew Liesch from Piper Sandler. Your line is opened.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning, Andrew.

Andrew Liesch -- Piper Sandler & Co -- Analyst

Hey, everyone, good morning. Hi.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Good morning.

Andrew Liesch -- Piper Sandler & Co -- Analyst

Just a question on the loan growth here was pretty solid in the first quarter. Was there anything specific driving that by draws on operating lines or working on to the capital, what was the main driver there? I know you said, you can maybe tightened, some of the requirements to do so. But I was curious what was behind that?

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Right. Yes, to be clear and again I'll turn this back to Rick, but to be clear, we had no unusual draws on lines of credit in the quarter. We were prepared to work -- frankly scrutinize any additional or unusual draw requests and just simply didn't see it happen with our client base. As it relates to the production in the quarter a lot of it was just good solid carryover from marketing activity and development coming out of '19. So no unusual last minute activity. I will say, just as we approach the end of the quarter, we did apply additional scrutiny to any new relationships where we were approving credit exposure, and what came on the books is business that we felt good about -- had to feel very good about it in fact. Rick anything you would add?

Richard U. Newfield -- Chief Risk Management Officer

Yes, Tim. Just maybe an additional comment on the line drawdowns, as it relates to the total originations and growth for the quarter. For lines that were in place coming into the year in other words, those that were on the books as of December 31 2019, that drawdowns were only $14 million. So it was not significant a driver. And as I said, no unusual line activity was noted in the quarter.

Andrew Liesch -- Piper Sandler & Co -- Analyst

Great, that's very helpful. And then just shifting back over toward mortgage banking, it sounds like purchased activities dried up from now, this is just based on what your pipeline is. So should we just expect maybe an uptick of refi that with more capacity to do that here in the summer?

Richard U. Newfield -- Chief Risk Management Officer

Yes, well, first of all, I'll say that mortgage activity for the first quarter just to give a data point, it was up on the seasonal quarter basis 11%. So, the mortgage business that we acquired from Peoples a few years ago was built on -- of banking purchase or on purchase model. So we buy any stretch or not abandoning that, and that is the fallback that we're looking to always refer to. But in terms of what's going to happen here in second quarter, I think the refi, as Tim mentioned is surprisingly strong. I do think there are people even that are having financial trouble was the shelter at home type of things. There are ways that people are finding to refinance to support them.

Andrew Liesch -- Piper Sandler & Co -- Analyst

Okay. You have covered all my other questions, I'll step back now.

Richard U. Newfield -- Chief Risk Management Officer

Thanks.

Operator

Thank you. And our next question comes from Chris McGratty from KBW. Please go ahead, your line is opened.

Chris McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. Good morning, everybody. Tim maybe a question -- the high level question most of the granular ones have been asked. Like banks like you have some PPP fees coming through, which is certainly, you know, well earned and well deserved revenues in this environment. What are the thoughts of using this as an opportunity to provide a little bit more cushion in the reserve given just a high level of uncertainty, not anything specific to your book, it's pretty granular. But just conceptually, thanks.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Look we recognize that as an industry it was going to be pretty much kitchen sink, kind of, quarter. What we struggled with is, again if you think about it, the CECL models are built with a lot of scrutiny, our auditors are KPMG, they earn substantial fee income over the course of the last six months, building, working with us as we built our CECL model. We -- our credit portfolio is what it is, we input our credit portfolio information, we've outlined the assumptions we've made using Moody data, which calls for a recessionary period running into 2021 and then we get our outputs.

And our outputs included again CECL Day 1 and CECL Day 2. And my bias is always going to be for larger allowance for credit losses, but I've got to do it within the confines of what can be validated by these models. Do I think we've got the capacity to build more provision, hey, with Tier 1 leverage of 11.1% and Tier 1 common equity of 12.9%. We've got more than enough capacity to build greater allowance and we'll do so if the model dictates. And I would suspect given the recent climb in unemployment with 22 million Americans out of work, that we're going to see the industry on the whole making additional allowance adjustments. But our Day 1 and Day 2 were built on the basis of the credit portfolio and the economic metrics we shared and to a large degree there was little else we could do to justify more allowance build at this point.

Chris McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Well, thanks. That's great color. Thanks, Tim.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

You bet. I do want to come back and be clear on Aldis's response to Andrew, as it relates to residential mortgage banking activity and refinance, while there may be folks at home as that have more time to devote to things like refinance if we're refinancing them, it's not because they're not working, it's because they're working remotely again we're going through multiple layers of job verification, employment verification, income verification and our level of scrutiny on that front is very high. And we believe we're being very careful as you would expect us to be as a prudent bank.

Aldis Birkans -- Chief Financial Officer and Treasurer

Yes, thanks for clarifying that, Tim.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

That's why I'm in.

Operator

And thank you. I am showing we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Thank you very much. I do want to thank -- thank you for your questions this morning, very good range of questions. As I said in my opening -- our priorities have rapidly shifted to first ensuring the health and safety of our associates and clients too. We are very focused on the safety and soundness of our bank and prepared to work through any stress scenario that the country and the industry may face down the road.

And finally, we'll continue to work to support our clients and the communities where we do business and we actually believe that this kind of downturn and challenge will represent unique opportunities to grow new relationships with clients, sort of, perhaps been ignored by larger institutions in this difficult time and to again support our communities and come out with them stronger on the other side. So thank you for your time this morning and I wish you all good health. Good day.

Operator

And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately two hours and will run through May 5th, 2020 by dialing 855-859-2056 or 404-537-3406. And referencing the conference ID 1344438. The earnings release and an online replay of this call will also be available on the Company's website on the Investor Relations page.

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

G. Timothy Laney -- Chairman, President and Chief Executive Officer

Richard U. Newfield -- Chief Risk Management Officer

Aldis Birkans -- Chief Financial Officer and Treasurer

Jeff Rulis -- D.A. Davidson -- Analyst

Gordon McGuire -- Stephens Inc. -- Analyst

Andrew Liesch -- Piper Sandler & Co -- Analyst

Chris McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst

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