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Cullen/Frost Bankers Inc (CFR -3.30%)
Q1Â 2020 Earnings Call
Apr 30, 2020, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the Cullen/Frost Q1 Earnings Results Call. My name is James, and I'll be facilitating the audio portion of today's interactive broadcast. [Operator Instructions]
At this time, I would like to turn the show over to Mr. A. B. Mendez. Sir, the floor is yours.
A. B. Mendez -- Director of Investor Relation
Thanks, James. This morning's conference call will be led by Phil Green, Chairman and CEO; and Jerry Salinas, Group Executive Vice President and CFO. Before I turn the call to Phil and Jerry, I'd like to take a moment to address the safe harbor provisions. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 as amended. We intend such statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 as amended. Please see the last page of text in this morning's earnings release for additional information about the risk factors associated with these forward-looking statements. If needed, a copy of the release is available on our website or by calling the Investor Relations department at (210) 220-5234.
At this time, I'll turn the call over to Phil.
Phillip D. Green -- Chairman And Chief Executive Officer
Thanks, A.B. Good morning, everyone, and thanks for joining us. Today, I'll review the first quarter results for Cullen/Frost, and our Chief Financial Officer, Jerry Salinas, will also provide additional comments before we open it up to your questions. In the first quarter, Cullen/Frost earned $47.2 million or $0.75 per share compared with earnings of $114.5 million or $1.79 a share reported in the same quarter last year. In a very challenging environment in which our bank lobbies are closed, more than 2/3 of our employees are working remotely, our team continues to serve our customers at a very high level that Frost is known for and to execute our strategy of pursuing consistent above-average organic growth. In the first quarter, our return on average assets was 0.57% compared to 1.48% in the first quarter of last year. Average deposits in the first quarter were $27.4 billion, up from $26.1 billion in the first quarter of last year, and average loans in the first quarter were up to $15 billion from $14.2 billion in the first quarter of last year. Our credit loss expense was $175.2 million for the first quarter, and that compared to $8.4 million in the fourth quarter of 2019 and $11 million in the first quarter of 2019.
In addition to changes related to CECL, our credit loss expense was elevated in the first quarter as a result of COVID-19 related business closures and also challenges faced by our energy industry customers due to recent commodity price declines. Net charge-offs for the first quarter were $38.6 million compared with $12.7 million in the fourth quarter of 2019 and $6.8 million in the first quarter of last year. Annualized net charge-offs for the first quarter were 1.04% of average loans. Nonperforming assets were $67.5 million at the end of the first quarter, down 38% from $109.5 million at year-end. Most of this decline came from charge-offs related to two energy credits we've been dealing with for some time as they move through the SNC toward resolution. Overall, delinquencies for accruing loans at the end of the first quarter were $122.3 million or 80 basis points of period end loans. Those numbers remain within our standards and comparable to what we've experienced in the past several years. Total problem loans, which we define as risk grade 10 and higher, were $582 million at the end of the first quarter compared to $511 million in the previous quarter. Energy-related problem loans were $141.7 million at the end of the first quarter compared to $132.4 million for the previous quarter and $119.3 million in the first quarter of last year.
Energy loans, in general, represented 10.2% of our portfolio at the end of the first quarter, well below our peak of more than 16% in 2015 and down from 11.2% in the fourth quarter of 2019. Clearly, we entered the current downturn from a position of strength, but we're not confused. The deterioration of the economy brought on by COVID-19 pandemic will have a negative but manageable effect on our portfolio. We're in the early stages of this downturn, which is unprecedented in our lifetime. We don't know the length. We don't know the ultimate resolution. We don't know the impact of massive financial fiscal stimulus brought to bear on problem. But we do know that we'll address these issues consistent with our culture and core values that have guided us through multiple crises over our 152-year history. And while we don't have all the answers and outcomes, I'd like to share a few data points we hope will be helpful. We've identified seven portfolio segments, eight including energy, that we feel have higher-than-usual risk to the current economic dislocations brought on by the pandemic. They include restaurants, hotels, aviation, entertainment and sports, retail, religious organizations and associations and organizations. The total of these portfolio segments represents $1.36 billion at the end of the first quarter. There were $227 million in deferrals related to this portfolio at quarter end. The reserve for loan losses against these segments at the end of the quarter was 2.25%.
Looking at energy, this portfolio totaled $1.57 billion at quarter end and carried loan loss reserve of 6.58%. Reserve-based borrowers represented 82% of the quarter end total. Significantly influencing our energy reserve number was an oil price scenario of $9 per barrel for the remainder of 2020. This assumption was combined with borrowers' plans to manage through the current cycle, hedge positions, cost structures, debt levels, other secondary sources of repayment and other factors. A similar analysis was performed on nonreserve-based borrowers. 57% of the production portfolio is hedged in 2020 and 32% in 2021, both at prices in the mid-50s. The average breakeven for the portfolio is $18.66 per barrel. Our focus on commercial loans continues to be on consistent balanced growth, including both the core component, which we define as lending relationships under $10 million in size as well as larger relationships, while maintaining our quality standards. Regarding new loan commitments booked, the balance between these relationships went from 53% or larger and 47% core at the end of 2019 to 57% larger and 43% core so far in 2020. The movement toward larger loans year-to-date was mostly due to two large public finance transactions.
New relationships were off to a strong start in the first part of the quarter, but were negatively affected in February and March by the COVID-19 pandemic, resulting in a decline of 16% compared with the first quarter of last year. The dollar amount of new loan commitments booked during the first quarter rose by 6% compared to the prior year. We continue to look at many deals. And in the first quarter, we booked 13% more loan commitments from opportunities compared with the same quarter last year. In CRE, we saw the market become more liberal in terms of structure. Our percentage of deals lost to structure increased from 76% this time last year to 91% in the first quarter of this year. Our weighted current active loan pipeline in the first quarter was down about 30% compared with the end of the fourth quarter due to the effects of the pandemic. On the consumer banking side, we continue to see solid growth in deposits and loans. Overall, net new consumer customer growth for the first quarter was 3.3%, up from 2.9% a year ago. Same-store sales is measured by account openings, were down by 1.1% through the end of the first quarter. In the first quarter, 33% of our account openings came from the online channel, which includes our Frost Bank mobile app. Online account openings were 31% higher compared to the first quarter of 2019. The consumer loan portfolio averaged $1.7 billion in the first quarter, increasing by 2.6% compared to the first quarter last year. Overall, Frost Bankers have risen to the unique challenges presented by the pandemic and its resulting shutdowns with a mix of keeping our standards and sticking to our strategies, along with a truly remarkable amount of flexibility and adaptability.
We opened the 11th of our 25 planned new financial centers in Houston region in the first quarter, and we have two more openings scheduled for May. Even if lobbies remain close through the new branches scheduled openings, one of the new locations has a motor bank and will begin serving customers on day 1. We continue to hire talented, experienced bankers as part of our Houston expansion, and we've already filled more than 170 of the approximately 200 positions expected. I'll talk more in a minute about our efforts around the Paycheck Protection Program, but I wanted to note that during the first round of funding this important small business program, Frost was #1 in the Houston market in terms of the number of PPP loans it got approved. In Harris County, we've held nearly 2,000 businesses get loans for $616 million. And that shows our strong commitment to the Houston market and reinforces our strategy of bringing in our value proposition to more customers there. Late in the first quarter, we began offering programs to assist our customers similar to the disaster loans and other relief efforts that we implemented after Hurricane Harvey, and Frost announced that it would donate $2 million to nonprofit agencies assisting with pandemic relief in the areas where we have operations. Just before the quarter ended, Congress passed the CARES Act, which included provisions for $349 billion in small business loans through the Paycheck Protection Program or PPP. We knew that Frost small business customers would benefit greatly from PPP loans. So even as we close our lobbies and set up our employees to work remotely to protect them and our customers, we mobilize for the PPP application process. Even though the SBA finalized its application with only hours to spare, we were ready to begin processing on day 1, and the demand was tremendous. We received more than 9,000 applications in just the first four days. By comparison, we process about 9,000 commercial loans in a typical year, but we dug in and the Frost Bankers adapted with technologies and they developed systems on the go, and through lots of hard work and many long hours, we wrestled PPP to the ground.
The initial funding was set up to last two months, but it was exhausted in less than two weeks. Before that happened, Frost received 14,000 PPP applications for a total of $3.3 billion. And because of the dedication and commitment and effort of thousands of Frost Bankers, more than 10,500 of our small business customers or more than 3/4 of those applying received SBA funding in the first round for $3 billion or 90% of the amount requested. Based on our size, we projected we'd be fortunate to receive approval on about $900 million. Instead, we were able to secure more than 3 times that amount. That $3 billion represents continued paychecks for workers or employers have been affected by the pandemic. Through this process, our small business customers were in a true value of having a relationship with Frost. Every quarter when we share our financial information, I talk about the great work that Frost Bankers do and executing our strategies while taking care of customers. This time I can say that I've never been proud of the work our people do on behalf of our customers. I hope our shareholders have that same sense of pride knowing that their company is truly a source of strength for our customers and our communities and also a force for good in their lives. That's what makes me optimistic that we'll get past the many challenges that remain.
Our credit teams have reached out to borrowers in our industries that are most affected by the pandemic. We continue to work very closely with both commercial and consumer customers. We're keeping a close eye on the recent anomalies in oil prices and the impact that that's having on the economy. We'll follow our best practices and public health guidelines as we formulate plans to return to our offices and reopen our lobbies.
Our commitment to customer service was confirmed this month when Frost received the highest ranking in customer satisfaction in Texas in J.D. Power's U.S. Retail Banking Satisfaction Study for the 11th consecutive year. We sometimes take these achievements for granted or consider them routine. The events of the past few months should stand as a reminder that there's nothing routine about Frost and its culture.
Now I'll turn the call over to our Chief Financial Officer, Jerry Salinas, for some additional comments.
Jerry Salinas -- Chief Financial Officer
Thank you, Phil. Today, I'm going to skip our usual comments about the Texas economy. Given the level of economic uncertainty in the short term, there wouldn't be much value in macro comments at this time. I will point out that it has been reported that businesses in Texas received more PPP loans than businesses in any other state, and we are proud to have been a leading participant in that program, as Phil mentioned in his remarks, making approximately $3 billion loans over a remarkably short period of time. We are now involved with the second tranche of that program, and we continue to assist our customers during this challenging time.
Now I'll turn to our financial performance in the first quarter. Looking at our net interest margin, our net interest margin percentage for the first quarter was 3.56%, down six basis points from the 3.62% reported last quarter. The decrease primarily resulted from lower yields on loans and balances at the fed as well as an increase in the proportion of balances at the fed as a percentage of earning assets, partially offset by lower funding costs. The taxable-equivalent loan yield for the first quarter was 4.65%, down 23 basis points from the fourth quarter, impacted by the lower rate environment with the March fed rate cuts and decreases in LIBOR during the quarter.
Looking at our investment portfolio, the total investment portfolio averaged $13 billion during the first quarter, down about $678 million from the fourth quarter average of $13.6 billion. The taxable-equivalent yield on the investment portfolio was 3.46% in the first quarter, up nine basis points from the fourth quarter.
Our municipal portfolio averaged about $8.5 billion during the first quarter, up about $109 million from the fourth quarter. The municipal portfolio had a taxable-equivalent yield for the first quarter of 4.07%, down one basis point from the previous quarter. And at the end of the first quarter, about 2/3 of that municipal portfolio was PSF insured. As we mentioned last quarter, during the fourth quarter we purchased $500 million in 30-year treasury security yielding 2.27% 2.27% as a hedge against falling interest rates.
During the first quarter, given the volatility in the yield curve, we decided to monetize the gain associated with those treasury and sold them, resulting in a pre-tax gain of approximately $107 million. The duration of the investment portfolio at the end of the first quarter was 4.6 years, down from 5.4 years last quarter and was impacted by the sale of those 30-year treasuries. Our current plan does not include any material investment security purchases for the remainder of the year.
Looking at our funding sources, the cost of total deposits for the first quarter was 24 basis points, down five basis points from the fourth quarter. The cost of combined fed funds purchased and repurchase agreement, which consists primarily of customer repos, decreased 26 basis points to 0.95% for the first quarter from 1.21% in the previous quarter. Those balances averaged about $1.26 billion during the first quarter, down about $158 million from the previous quarter.
During the first quarter, we did redeem our $150 million in preferred stock, resulting in the recognition of $5.5 million in debt issuance costs, which reduced net income available to common shareholders for the first quarter and result in the elimination of that $2 million quarterly dividend going forward.
Looking at our credit loss expense, the components of our total credit loss expense consisted primarily of $110 million for the energy portfolio, $34.8 million for the commercial real estate portfolio and $22 million for the C&I portfolio. Our energy reserve coverage at the end of the first quarter was 6.58%.
Moving on to noninterest expense, total noninterest expense for the quarter increased approximately $22.4 million or 11.1% compared to the first quarter of last year. Excluding the impact of the Houston expansion and the operating costs associated with our headquarters move in Downtown San Antonio, noninterest expense growth would have been approximately 7.6%. We are withdrawing our previous earnings guidance and will not be providing any EPS guidance for full year 2020 at this time given the uncertainty surrounding the economic impact of the pandemic including the potential impact of future expected credit loss expense. I will say that given the fed rate cuts in March and the continuing decline in LIBOR rates, we do expect our net interest income and net interest margin percentage to decrease from the first quarter level. We will see a positive from the impact of the PPP loans, but given the short-term nature of those loans, we expect that benefit to be relatively short-term as the fees associated with those loans will be earned into interest income over the life of those lines.
During our call last quarter, we did provide guidance around projected expense growth for 2020 over 2019. During these uncertain times, we continue to focus on managing expenses including looking for ways to operate more efficiently. As a result, we currently expect that noninterest expense in 2020 will grow at about 8.5% over 2019. That's about a 2% lower than our previous guidance.
With that, I'll now turn the call back over to Phil for questions.
Phillip D. Green -- Chairman And Chief Executive Officer
Thank you, Jerry. Okay, we'll open it up for questions now.
Questions and Answers:
Operator
[Operator Instructions] Your first question comes from the line of Brady Gailey of KBW. Your line is open.
Brady Gailey -- KBW -- Analyst
Hey, thank you. Good morning, guys. So if you look at period-end loan balances, you had some strong growth in the first quarter. Can you expand on what drove that and how you're looking about loan growth for the rest of the year, excluding the P3?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, let me see guess, it's period end. Are you looking at period end or are you looking at average numbers?
Brady Gailey -- KBW -- Analyst
I was talking about period end which grew about 16%.
Jerry Salinas -- Chief Financial Officer
Yes, Brady, we did. From a linked-quarter basis, we did have a pretty significant growth. We grew 4% on period end. So about 16% annualized. A big portion of that growth, if you annualize, it was related to our C&I portfolio that was up almost 6.7% just actual growth. And if you annualize that, almost 27%. And we did see some increases in commercial lines that were drawn on during the quarter, and especially during that time period leading up to March period end. We have seen some of that begin to subside the pace of those draws. And I'm going to say that was the bulk of the increase there. We actually had a decrease in energy between December and March. They were down $84 million.
Phillip D. Green -- Chairman And Chief Executive Officer
We also had some nice gains in the public finance area with some large deals, one related to a port in the state, a very large one. The other one was related to a medical center, large medical center, HPAC. So both of those things were also positive.
Brady Gailey -- KBW -- Analyst
All right. And then when you look at the SBA's PPP, you did $3 billion in round one. How much do you expect to do in round two and where is that be coming? I think most banks are saying it's around 3%, would that be a fair estimate for Frost?
Phillip D. Green -- Chairman And Chief Executive Officer
It is our fee is running about that. I think it ended up maybe being a tad lower in the first round, but I think we're seeing a little bit smaller balance in the second and so I think it will make it solidly in the 3%. As far as volumes, couple of things are happening. One is we are making sure that we get through as best we can, the applications that were not processed in the first round. So our backlog there was somewhere between 3,000 or 4,000 applications. I can't remember the exact number right now. And so we're working on those. As we look at the second round applications, which we may be at the point of processing those now. As of late last night, we may have started that. We're seeing little bit lower volume about we received about 2,000 applications. As I recall, this has been at end of yesterday with loan balances, as I said, being a little bit on the smaller side. So still good activity, but not the huge rush that was there at the beginning because I think a lot of larger customers, more sophisticated customers have more visibility just in terms of their awareness of the program. So we saw a larger rush than at the beginning. As far as where we're booking that, that's going into interest income.
Brady Gailey -- KBW -- Analyst
Okay. That's helpful. And then finally for me, you mentioned 57% of the energy production is hedged in this year, 32% next year. Those reserves are 100% of the total production or those are the percentages of your energy customers that just have some level of hedging?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, that's those are customers that have some level of hedging.
Brady Gailey -- KBW -- Analyst
Okay, great, thanks guys
Jerry Salinas -- Chief Financial Officer
Thank you, Brady.
Operator
Your next question comes from the line of Ken Zerbe of Morgan Stanley. Your line is open.
Ken Zerbe -- Morgan Stanley -- Analyst
Great, thanks, good morning. Good morning. Great. Maybe a multipart question a little bit. Can you just talk a little bit more about the increase in net charge-offs in the quarter, but also layer in how much of that related to energy and certainly whether how much of the energy reserve build related to specific reserves versus just sort of normal CECL reserves, if that makes sense?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes. Well, first of all, the charge-offs for the quarter were heavily related to energy. There was, as I recall, $38 million related to two credits who were nonperforming, and we've described those has been moving through the SNC, really for a couple of years now or even longer. They were written down to values, which at that time were based upon deals that were on the table in one case and bankruptcy in another, which there's been an offer related to. Honestly, as we've seen the COVID-19 pandemic impact and the reduction in volumes, in demand usage worldwide. I think those and user certainly at risk. So that's really what that relates to. And it brought both of those two credits now that, I think, a combined amount of $28 million. And so we'll we're close to getting them out of the SNC, but they didn't quite move through in time for the pandemic.
Jerry Salinas -- Chief Financial Officer
Just to clarify there, our total was $38.6 million for the quarter and $33.8 million of that was energy related, as Phil mentioned.
Phillip D. Green -- Chairman And Chief Executive Officer
Thanks, Jerry. 33.
Ken Zerbe -- Morgan Stanley -- Analyst
$33 million for energy?
Jerry Salinas -- Chief Financial Officer
$38 million was the total.
Ken Zerbe -- Morgan Stanley -- Analyst
And then in terms of specific energy reserve build versus more general CECL?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes. We didn't book any specific energy reserves. I'm going to let Jerry speak to the CECL aspect of it, which will include some overlays and Q factors.
Jerry Salinas -- Chief Financial Officer
Yes. So what we did was our team ended up using the Moody's baseline forecast that was adjusted around the middle of March that took West Texas intermediate down to $35 flat for three years, and that's an area I think, it's called the S8 scenario. And then what happened was that Moody's continued to reduce that given what was going on in the global economy, if you will, between Russia and Saudi Arabia. And so we were in a pandemic start coming in and so we decided that what we would do is we would use really more overlay than adjust or update the usage of a different Moody's model, if you will. So our energy reserves that we created were primarily related to overlay rather than specific reserves, and we can kind of talk a little bit, if you like, about the work that was done there, but that's how that's what increased the reserves. Was not so much specific, it's much as more macro sort of overlay type test that we're done.
Phillip D. Green -- Chairman And Chief Executive Officer
And as they update their models to be more reflective of the situation with energy and the pandemic, we can see maybe a reduction of overlays.
Jerry Salinas -- Chief Financial Officer
Exactly. That would be our expectation. And just to give you a little bit of insight, and all this is in our 10-Q and we'll file this here this morning. But the stress testing that was done on that in energy portfolio assumed $9 per barrel during 2020. And then we did create a sort of, I guess, they call it an energy oversight council that became that was created in toward the end of March, and they reviewed the credit portfolio of all our major energy credits. And so that group was very involved with what was done. And so they took the decision to go ahead and run those stress tests, assuming $9 in 2020 and then increasing to $36 in 2021, $40 in '22 and $45 thereafter. And that work that was done was what created the overlay, and I think the overlay in the energy portfolio was if you include a few factors in the overlays like $88 million. And as Phil said, the expectation for us is that during the next quarter, if you will, when the CECL models are rerun, we would expect that we would use more updated modeled inputs. And our expectation currently is that a big portion of that overlay would be moved into more modeled type results. But we'll have to see what the model is. That's kind of what's happened during this first quarter.
Ken Zerbe -- Morgan Stanley -- Analyst
That makes sense. And then just one follow up. I think you said you brought your energy as a percentage of total loans from 11.2% down to 10.2% of total loans. Just kind of how did you bring it down so much in the quarter? And where do you envision this going over the next few quarters?
Phillip D. Green -- Chairman And Chief Executive Officer
I think that we had a little bit of an anomaly in that and the previous quarter had gone from basically 10% to 11%. I think it just came down to a more normalized level based upon activity. I don't think there was any one thing. We have been working to reduce the exposure of the energy portfolio, and we'll continue to do so. We're going to get it below the 10% level. I'd like to see it move more toward the mid-single digits over time. But that takes time to do because you've got credit agreements in place that you've got to move through, and we're not in charge of the timing on all that. We're still going to be in the business, as we said. We want to be there with the best customers. And as we in periods like this, we call them prune the hedge, and we want to continue to do that. So we're working hard to continue to rationalize our exposure down to more in line with some of the other significant components of the loan portfolio.
Jerry Salinas -- Chief Financial Officer
And of course, as Phil mentioned earlier, we did have almost $34 million in charge-off.
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, we did.
Jerry Salinas -- Chief Financial Officer
They're going to affect that percentage also.
Phillip D. Green -- Chairman And Chief Executive Officer
It's true.
Ken Zerbe -- Morgan Stanley -- Analyst
Sure. Understood. Thank you very much.
Operator
Your next question comes from the line of Dave Rochester of Compass Point. Your line is open.
Dave Rochester -- Compass Point -- Analyst
Hey, good morning guys. On the energy book, definitely appreciate all the color you gave there. And sorry if I missed this, but was just wondering if you could give some background on how far along you are in the redetermination process and what you're seeing in terms of how much lines are declining for customers and what utilization is at this point?
Phillip D. Green -- Chairman And Chief Executive Officer
Okay. We're about I'd say about 1/3 through the redetermination process that happens at this time of year. And what we've been seeing thus far is about a 13% reduction in valuations.
Dave Rochester -- Compass Point -- Analyst
So the actual lines to customers have only come in 13%?
Phillip D. Green -- Chairman And Chief Executive Officer
That's a reduction in the valuations. I don't know that we we've been working to reduce that over and above the redetermination process. As Jerry mentioned, the energy council that we've put in place and where we're talking with customers, making sure we understand what their operating plans are, what their expense reductions are, cash flow, etc. We've been pretty successful even before maturities of getting some line reductions. So I don't want to say it all relates to the redeterminations, but because it has been just working with customers as well. As far as that we could look, I guess, on commitment levels and see what the difference is there, but I don't have it hand right now what the reduction is in that we can look over on the call.
Dave Rochester -- Compass Point -- Analyst
And then how does that inform the reserve for the quarter? Do you sort of extrapolate results for that 1/3 onto the 2/3s remaining that you're still working on and then you set the reserve that way? Or are we going to see that incremental reserve flow into 2Q for the additional 2/3s you're working on now?
Jerry Salinas -- Chief Financial Officer
Well, remember some of what we did in this first stage of CECL and the overlay was really based on a stress test that had based on $9 oil for the year. And I think that's, really, at that point, what they use, but they'll use the reserve levels that before the redetermination.
Dave Rochester -- Compass Point -- Analyst
Okay. Got it. And then for the two energy credits, you talked about charging off. What was the severity on those?
Phillip D. Green -- Chairman And Chief Executive Officer
What do you mean severity?
Dave Rochester -- Compass Point -- Analyst
In terms of the book value, which you had the mark. What was the percentage, a charge that you ultimately took to resolve those?
Phillip D. Green -- Chairman And Chief Executive Officer
Those it's pretty big on those. I can get somewhere around here the original amount, but there is charge down, I would say, it's at least three quarters on those. Those are...
Jerry Salinas -- Chief Financial Officer
These are some of the credits. I think Phil may have said this that are making their way through the SNC.
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, they were put in place.
Jerry Salinas -- Chief Financial Officer
They had some pretty significant charge-offs associated with it.
Phillip D. Green -- Chairman And Chief Executive Officer
Yes. I would still say, as a rule of thumb, say, use three quarters. It's not our finest hour, for sure.
Dave Rochester -- Compass Point -- Analyst
Okay. And then just backing up to the total loan book level. Could you just give that deferral amount again on the higher risk bucket that you mentioned that combined $1.36 billion, I think it was that you mentioned? And then what was the total deferral percentage for the entire loan book at this point?
Phillip D. Green -- Chairman And Chief Executive Officer
Okay. Well, the deferrals for the higher risk bucketing, this is not including energy, would have been and this was as of the end, let's say, April 23, $227 million of the $1.361 billion outstanding. And if you look at the deferrals for the entire company...
Jerry Salinas -- Chief Financial Officer
They're about $1.3 billion, about 8% of our loans.
Dave Rochester -- Compass Point -- Analyst
8%, OK. And maybe just one last one on the NIM. In 2Q, I know is when you'll get that full quarter impact of the rate cuts. You talked about the trend there being down. I was just wondering if you could sort of bracket that in terms of rough range or estimate in terms of magnitude of what you're expecting for 2Q? That would be great.
Jerry Salinas -- Chief Financial Officer
I think the only color I can give there really is, I don't think any of us really completely understand how the PPP loans will affect the net interest margin, how quickly they'll be repaid. Some of our conversations internally, we talk about potentially 75% of them may be getting paid within, say, the first 10 inputting into the system. There's no secret there. I know there's a lot of credit associated with that. So I don't fully understand yet how all that's going to play out as we move forward. But that would be a big assuming that it worked out that way, obviously, you'd have a significant hit there from a positive standpoint.
Dave Rochester -- Compass Point -- Analyst
Yes. Any way to just estimate backing that out you're absolutely right. I mean, that's going to be some noise in 2Q and maybe even 3Q too depending on when these things are forgiven or whatever happens with those. But maybe just backing that impact out, any sense just from a magnitude perspective?
Jerry Salinas -- Chief Financial Officer
Yes, I would tell you that if you back them out, again, I think that our net interest margin, we were at $356 million. I think that full year, we'll still be north of three is what our current projection is, but you're going to see some drag, especially between the first and the second. After that, it still levels out a little bit, but you're going to see some significant reductions in the NIM. Again, we're not making any investments, assumptions. Of course, there's nothing really to buy right now. Well, liquidity program. So yes, there's going to be obviously some pressure on that on the NIM and especially with LIBOR going down as much as it has here recently. It was kind of nice to have it at higher levels, but it's moving down pretty quickly now.
Dave Rochester -- Compass Point -- Analyst
Yeah, OK. All right, thanks guys. Appreciate it. Thank you.
Operator
Your next question comes from the line of Jennifer Demba of SunTrust. Your line is open.
Jennifer Demba -- SunTrust -- Analyst
Thank you. Good morning. Phil, you mentioned your $1.36 billion of loans in more vulnerable categories. Of those categories, what are the larger exposures within that $1.36 billion?
Phillip D. Green -- Chairman And Chief Executive Officer
Well, let me just give you what the segment for you. We'll if you look at the category for religion, few public finance outstandings at the end of the quarter were approximately $336 million; restaurants, total bear outstanding is $275 million; hotels, $239 million; aviation, $196 million. If you look at the public finance area, looking at associations and organizations was $115 million. Entertainment and sports were $114 million. And retail businesses, not the investor real estate, but the retail businesses were about $86 million. So that's the breakdown in those categories.
Jennifer Demba -- SunTrust -- Analyst
Are any of those SBA loans or...
Phillip D. Green -- Chairman And Chief Executive Officer
We have some, but not a lot of them. I mean, our portfolio of SBA is I would say, it's can't remember it right. It's in the $150 million range. So are you talking about PPP loans, Jennifer? Or are you talking about traditional SBA loans?
Jennifer Demba -- SunTrust -- Analyst
No, regular.
Phillip D. Green -- Chairman And Chief Executive Officer
Regular SBA. If you give me a minute, I'll not be able to pull that up. I could have seen that somewhere. It's not a big factor.
Jennifer Demba -- SunTrust -- Analyst
Okay. And I assume the hotels are mainly limited service-type properties.
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, some are. Our hotel exposure is committed. I gave you outstanding as committed. It's $314 million. We've got 28 projects. We've got eight of them in construction. The construction ones will be finished sometime this year. Remains to be seen when they're going to open them. We've got average loan-to-value on that. Those properties is 64%. So our owners are experienced. They've got a lot of equity in the projects. Good operators, a lot of Hilton and Marriott flags. They're no gateway cities, nothing related to cruise ships or theme parks or those kinds of things. Four of the projects, they've actually closed. It's $38 million in commitments. They've actually closed them from operations just going dark on because they've seen occupancy levels get down at such low levels. So actually, we feel really good about the portfolio. I think we're going to have some risk rate increases in our parlance, which means increasing risk but really don't feel at this point we see any loss in that portfolio. Good sponsors, many of which have good liquidity.
Jennifer Demba -- SunTrust -- Analyst
How does the restaurant look like now?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes. The restaurants, our commitments there sorry, I gave you outstandings before, we analyze mainly on commitments. About $340 million commitments, 119 million of them have asked for deferrals at this point. 2/3 of that portfolio of committed dollars are associated with multiple format restaurants, multiple sites like franchisees with obviously loss locations.
Jennifer Demba -- SunTrust -- Analyst
So I think the exposure there, Jennifer...
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, it probably relates to the small restaurant that maybe isn't as used to deal with the takeout format. I'd say maybe borrowers of less than $100,000 where you don't have a lot of value in the collateral associated with it. It's not a big number. It's $6.4 million for small restaurants that are loans less than $100,000. Obviously, they add up a bit. I think right now, that's where we see the exposure. The hard thing about all this is that the numbers that we're working with really are from third quarter, year end. We don't have audit reports for a lot of the companies. And even if you did, I mean, numbers look good for everything. So what we're doing is, we're just having to analyze where we are and use our experience just to estimate where these things going to show up. So when I tell you, in the restaurants, we think it's under $100,000 and that portfolio is $6.4 million. That's true. It's our best guess of where we'll see it. But the fact is we just know about right now. We're still waiting to see the impacts.
Jennifer Demba -- SunTrust -- Analyst
Thanks so much. Good color.
Operator
Your next question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is open.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Thanks, good morning.
Jerry Salinas -- Chief Financial Officer
Hey, John. Good morning.
Jon Arfstrom -- RBC Capital Markets -- Analyst
I had a different topic, but I just wanted to follow-up one on Jennifer's questions. It looks like you had some downgrades in terms of problem loans outside of energy. Just curious about that and maybe can you touch on maybe broadness and frequency of your loan grading process?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes. I think that we saw new problem loans. Some of the larger ones, public finance related. Organizations that maybe in the arts or the education area, we saw some downgrades there. We think it would be fine, but we saw that. I'd say energy is the main area where we did see the increases in what we call problem loans, which are risk grade 10 and higher. As far as the grading process, I mean our officers are responsible to have the grades and make sure they're accurate. We really want to avoid any double downgrades, and we measure that as we measure individual relationship manager performance. So they're responsible for keeping up with it. And I didn't really notice anything that gave me much pause in the nonenergy migration to the downgrades that we saw. I think may have somewhere around here. Jerry, do you have the nonenergy numbers?
Jerry Salinas -- Chief Financial Officer
Yes, I have to look for. Maybe give me a little bit time.
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, OK. So Jon, excuse me, we're having to pull that up.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Maybe we can come back to that. Just on PPP, curious why you think you were able to secure 3 times what you expected? And also wondering if you'd take a stab at how much of that 3-plus or $3 billion is maybe people that are new to Frost, customers that are new to Frost?
Phillip D. Green -- Chairman And Chief Executive Officer
Well, first of all, our position was that we would deal with Frost customers. So you didn't have to be a borrower, but you did need to be a commercial customer when it started out. And the reason for that wasn't it was all based upon what was the fastest way to get money into the community. Because if we were dealing with noncustomers, we would have to go through the federal government's regulations on BSA, AML, Know Your Customer, and we really didn't have any slack. They didn't cut any slack for anyone that I'm aware of in that area. And so the fastest way to process the applications was to do it with people that we'd already gone through that process with. And that's the first thing as it relates to that. The second thing I'd say is regarding how we were able to do it as effectively as we did. It's just as I said before, it's just terrific people and an outstanding culture that has a culture going above and beyond. We had over 500 volunteers. People that didn't do anything like this in their regular job and wanted to be a part of the process and it inputs applications at night from home everyone is doing the stuff at home, but not just application inputting.
I mean, the completion rate accurate completion rate of the applications that comes in, I'd be surprised if it was 60%. And so a tremendous amount of work had to go into contacting the customer, getting information that might have been missing. Some cases, we had suspicion that they filled it out wrong based upon how they've given the answers on the questionnaire. So we spent a lot of time talking to customers and getting those applications ready. And so being able to get 75% or so of the applications through, I think was just amazing, because I guarantee you that we didn't get 75% completed ready input-ready applications. And so there was a tremendous amount of working from home at late hours around the clock. We've been doing this seven days a week. We took Easter Sunday off, and it's just been the grit, just grit of our people. I really think that what I've seen and not just us, but others other community banks and other banks. I mean, everyone's trying their best. But it's just it's unprecedented. It's historic. And truly, really it's heroic what we've seen. And so I'm just amazed that the success we've had.
Jerry Salinas -- Chief Financial Officer
John, just one thing I was going to say, we I've got the information for you, but it's really broken down by risk rated by commercial loan class, and so I had to go through all the numbers, but we're going to file our Q right after this, and it will be on Page 17. It will be the current year by class and by risk rate of the current year. Then the next page, on Page 18, will be the December information with the new CECL disclosures that we just don't have I don't have a comparison here that I can just read it to you one versus the other.
Jon Arfstrom -- RBC Capital Markets -- Analyst
Thank you.
Operator
Your next question comes from the line of Steven Alexopoulos of JPMorgan. Your line is open.
Steven Alexopoulos -- JPMorgan -- Analyst
Hey, good morning everybody. To start, just a follow-up on energy quick. What were the problem loan balances at the end of the first quarter? I think it was $132 million last quarter. And then what specific deferrals that you provide to energy companies in the quarter?
Phillip D. Green -- Chairman And Chief Executive Officer
Okay. The problem loans would have been, at the end of the first quarter, $141.7 million. And the previous as you said, they were $132.4 million at the end of the previous quarter. So a decline in risk rate 10s around that was about 40 and an increase in the risk rate 11, looks like about, say, 85 or so. So we had a little migration there. We talk as far as that, we talked about a credit for the last two quarters that was really dependent upon asset sales in order to make their business plan work, and they were fighting the issue that discount rates had gone so high with the absence of equity in the business, private equity moving out of market. You added that on top of that what's going on with this demand destruction, COVID-19. So you've got not just discount rates being high, but also prices being low. So we saw some deterioration in that relationships. So that I think that drove most of that, that I just described. So that's I think those are the most
Jerry Salinas -- Chief Financial Officer
Yes, on energy deferrals, we've not seen really a whole lot at all. We made a pretty de minimis amount of energy customers that have asked for.
Steven Alexopoulos -- JPMorgan -- Analyst
Okay. That's helpful. And then on the expense outlook being taken down for 2020, is that or how much of that is related to the Houston expansion? Is that being slowed at all, can you give some color there?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, the it's not related to the Houston expansion, it's just we're being careful on the people that we're hiring. We're reducing expenses really in all categories, just trying to be smart about it. As we do lose people and we see we're losing people for various reasons and we're just answering the question, do we need to replace that position? I think we're just we're doing a good job there. We're continuing on with the Houston expansion. We've been investing in that for the last couple of years. I feel good about what's going on with regard to that. We were looking at it seems like ancient history now, given everything is either PPP or COVID-19. But I'm really excited about the performance we had in Houston. If you look at our new household goal and where we are versus it, we're 146% ahead of our new household goal. And by the way, actually, when I look at mostly to get to that one, it's taken care of. It tends to take care of everything else. We're 260% of our loan goal for our Houston expansion at this point in time. Our deposits are 68% of goal, but it has been improving, for example, if you look over the last three months, we're 108% of our goal for deposits. And that's really because of the commercial side. The consumer side is, actually, over the last three months, 240% of our goal. And so the commercial side takes longer to develop where you can move a relationship over, but it takes a while for that operating business to really end up in your numbers as they move and mature. So we're about 50% of our goal over the last three months in commercial, but I'm not worried about that. That's our wheelhouse, and I'm expecting that to go up.
And as we mentioned, the business journal Houston Business Journal reported that we were the #1 PPP lender in that market from any bank, including very large banks to community banks. And I think that's getting around in the marketplace. People are learning the value of relationship. I had one customer mention that they didn't realize when they decided to open a checking account 15 years ago that they would be making a decision on whether their business would stay in business or not because they were able to get a PPP loan through the company that they had they have a deposit relationship with. So I'm excited about the Houston expansion. I'm excited about the performance that we've had, and it is a it's a tough market to do that in, but this is a very strategic, very long-term effort for us that we're showing success, and not only success because we knew that we just need our pro forma goals is to be great. But in my mind, we're exceeding that. And I'm extremely happy about it. I'm looking forward to getting past this pandemic situation and getting back to a more normalized environment. I think we're really going to be able to trade-off of our value proposition in that marketplace.
Steven Alexopoulos -- JPMorgan -- Analyst
And how many branches have you opened at this point for Houston and how many are left?
Phillip D. Green -- Chairman And Chief Executive Officer
11.
Steven Alexopoulos -- JPMorgan -- Analyst
11 remaining or 11 opening?
Phillip D. Green -- Chairman And Chief Executive Officer
Remaining, no. We were opening 25. So we have 14 remaining.
Steven Alexopoulos -- JPMorgan -- Analyst
14 remaining, OK. Okay, thanks so much for the color.
Operator
Your next question comes from the line of Matt Olney of Stephens. Your line is open.
Matt Olney -- Stephens -- Analyst
Hey, good morning and thanks for taking my question. Most of my questions have been addressed. But Phil, you mentioned the bank's intention to reduce the energy exposure over time to the mid-single-digit level. And it sounds like this could take a while, but can you talk more about the driver of that decision? Was it made at the Board level? And does this speak to the risk profile of the asset class that isn't as favorable as it once was? Or does it speak more to the volatility of the stock price? Just trying to understand the driver of this decision.
Phillip D. Green -- Chairman And Chief Executive Officer
Yes. No, it was made at the Board level. I've been talking about this. Keep in mind, when I first started talking about this, we were at 16%, going to 20% probably, and so we stopped the growth. We made the decision to move it down, and we said we wanted to be between 10% and 13%. I think we and obviously, moving it down to 10. I've said in previous calls that we'd like to see a single-digit handle on that. And one of the things, as you referred to, I'm just sort of came up on the finance side, I'm a big believer in asset allocation, right? And just take your business. I mean, you can pick the best stock in an industry segment that's not doing well, and you're not going to do well even if you pick the best stock. And so I think our shareholders sign up for less volatility with a company like ours. And if you looked at the correlation of our stock price to energy prices, we had the highest correlation of stock price to the price of oil of any of our peers. And I just don't think that our shareholders sign up for that kind of volatility.
I'm a big shareholder, I don't sign up for that kind of volatility with a company like ours. So I think this makes sense that while we needed to be doing was not just they're on the long-haul around energy, but just like doing the ground gain of we've talked about for a long time now, the core loans was under $10 million. And we're also making sure that we're doing what our culture and our what we said we do around underwriting, making sure that we're really being conservative around that around all our portfolios, but including energy portfolio. So we've been moving that way. We've been talking over the last year about we have gotten down to 10, moving it down to single-digit levels, and as I have sort of referred in previous calls and I think that there is the next largest portfolio segment for our company is probably around 6% or 7% in terms of its size.
I don't think there's any reason for the energy portfolio to be any larger than the next largest segment of our portfolio as I think we're doing the hard work of growing the rest of the business as well. I just say, we'll even at that level reduced level, it will be a significant portfolio for us, but with less exposure than we had historically. And it's a important business for the state. And then it'll be something that I think that we're good at, and we'll continue to do. But we have been trying to, and we are ready to reduce that exposure over time. But as I said, it's not something you can do unilaterally, it has to be done in a smart way over time and in accordance with the lending agreements that you've got in place and maintaining the great relationships that we have with a great number of great customers that we have today.
Matt Olney -- Stephens -- Analyst
Perfect, thank you very much.
Operator
Your next question comes from the line of Ebrahim Poonawala of Bank of America Securities. Your line is open.
Ebrahim Poonawala -- America Securities -- Analyst
Good morning, guys. Most of my questions have been asked and answered. Just a couple of follow-ups. You previously talked about, obviously, the organic expansion in Houston and your interest there. I guess in the world where there is some market dislocations and some M&A opportunities come up, can you talk to in terms of your interest level? And like if there's something like a distressed situation, would you think about M&A in the current environment or you would still rather go back to the organic growth that you were doing pre this crisis?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, Ebrahim, I think that still focused on the organic growth for all the reasons that we have in the past, a lot of that around brand, a lot of that around operational exposure. I think this the pandemic introduces some other variables as well around credit, that type of thing. But I mean, it at the core, it's still that strategic decision that we've been able to create a brand that's shown demonstrated its ability to grow organically. And we just think it's the best deal for our shareholders who have let us build a company with a brand like that to be able to prosecute it, even though it does take some operational burn in the build-out period, but it's a winning long-term strategy and one that we really like to see the benefits of go to the current shareholders that allowed us to build that brand as opposed to other companies that might dilute that. It continues to be our focus.
Ebrahim Poonawala -- America Securities -- Analyst
Understood. And then just one follow-up in terms of you gave out a lot of numbers around the energy book. I think I heard you say that you assume $9 in oil prices for this year and $36 next year. Is it reasonable to take the $36 and assume that if oil prices are higher, like power prices next year above that mid-13, your portfolio is well reserved for based on the stress analysis that you've performed.
Phillip D. Green -- Chairman And Chief Executive Officer
Well, did you say, you assume that yes, next year, it's in the low 30s. We'll see some we're believing we'll see some increase in demand. I think one thing that you're seeing also with the disruption of production in the U.S., one thing that we have to keep an eye on is, are we going to see such a reduction in over the next 12 to 24 months that we see price movements up. So I think they tend to not be a small moves. Just small changes in the in swing volumes up or down tend to make fairly large price changes. So we're expecting to see some resumption of usage in burn with current inventory, and that's why we have the 30 for next year.
Jerry Salinas -- Chief Financial Officer
36 is from the stress test, we did right.
Ebrahim Poonawala -- America Securities -- Analyst
Thank you.
Operator
Your next question comes from the line of Michael Rose of Raymond James. Your line is open.
Michael Rose -- Raymond James -- Analyst
Hey, thanks for taking my questions. Just two follow-ups. Looks like the total potential problem loans were up $71 million. Looks like about $9 million or $10 million of that was energy related. What made up the other component of it and how much of it was in the higher risk category that you mentioned?
Phillip D. Green -- Chairman And Chief Executive Officer
I believe that the largest increase the biggest increase that we saw there was the credit that I mentioned earlier and have mentioned for the last couple of quarters with this reliant on sales of property. And as I mentioned, with equity through drying up in the market, you saw that discount rates increase. It made anybody needing to sell properties was under some stress and would be under stress, and we saw that and then we saw prices go down. So not only discount rates really high, but prices are low. And so it really is hurt what was the operating model that credit has. So and that, as I mentioned before, that one is about $50 million. It's about $49 million exposure.
Michael Rose -- Raymond James -- Analyst
Okay. That's helpful. And then just one additional question on capital. You guys were really strong during the great financial crisis and actually continued to increase your dividend. Can you just give us some updated thoughts on the dividend and how you're thinking about buybacks at this point?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes, Michael, I think at this point, our focus would be around the dividend and the importance of that as opposed to buybacks. I think you're going to see us lean toward the dividend as opposed to the buyback. I think we're going to...
Jerry Salinas -- Chief Financial Officer
Yes, I think we've got $70 million left on our program that is authorized. I think it expires in July. We've made the decision we're not going to do any buybacks under that program.
Michael Rose -- Raymond James -- Analyst
Okay, that's it and no other thoughts on the dividend. I assume it's stable here?
Phillip D. Green -- Chairman And Chief Executive Officer
Yes. We'll look out. So we haven't announced anything on that. But it's certainly a priority for us and something that we want to maintain in place.
Jerry Salinas -- Chief Financial Officer
Yes. I mean, that we it certainly it's important to us on ensuring that we keep that. We got good capital levels. So yes, very focused on the dividend and continue to keep that there. Time will tell us, but that's our focus.
Michael Rose -- Raymond James -- Analyst
Great, thanks for taking my questions.
Operator
There are no further questions at this time. You may continue.
Phillip D. Green -- Chairman And Chief Executive Officer
Okay. Well, we thank everyone for your interest. And with that, we'll be adjourned. Thank you.
Operator
[Operator Closing Remarks]
Duration: 71 minutes
Call participants:
A. B. Mendez -- Director of Investor Relation
Phillip D. Green -- Chairman And Chief Executive Officer
Jerry Salinas -- Chief Financial Officer
Brady Gailey -- KBW -- Analyst
Ken Zerbe -- Morgan Stanley -- Analyst
Dave Rochester -- Compass Point -- Analyst
Jennifer Demba -- SunTrust -- Analyst
Jon Arfstrom -- RBC Capital Markets -- Analyst
Steven Alexopoulos -- JPMorgan -- Analyst
Matt Olney -- Stephens -- Analyst
Ebrahim Poonawala -- America Securities -- Analyst
Michael Rose -- Raymond James -- Analyst
