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Howard Bancorp (HBMD)
Q1 2020 Earnings Call
Apr 30, 2020, 10:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, and welcome to the Howard Bancorp, Inc. First Quarter 2020 Financial Results and COVID-19 Response Conference Call. My name is Doug, and I will be your operator for today. [Operator Instructions]

I will now turn it over to Robert Carpenter, Interim Chief Financial Officer of Howard Bancorp, Inc. Mr. Carpenter, you may begin.

Robert L. Carpenter -- Interim Chief Financial Officer

Good morning. I would like to begin by thanking everyone for joining the call this morning. And again, my name is Bob Carpenter. I am the Interim Chief Financial Officer of Howard Bancorp.

Before we begin the presentation, I'd like to simply remind everyone that some of the comments made during this call might be considered forward-looking statements. Our Form 10-K for the fiscal year 2019, our quarterly reports on Forms 10-Q and our current reports on Form 8-K, all identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake the process to update any forward-looking statements as a result of new information or future events or recent developments.

Our periodic reports are available from the company either online on the company's website or via the SEC's website. I would like to remind everyone that while we think our prospects for continued growth and performance are good, and we have to keep in mind the COVID-19-related challenges, it is our policy not to establish with the markets any earnings, margin for balance sheet guidance.

And so with that said, I now would like to introduce Mary Ann Scully, the Chairman and CEO of Howard Bancorp.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

Good morning, everybody. Thank you all for being on this call. We hope as we hope in all times right now that everybody is safe and well, and appreciate the opportunity to take you through a reiteration of some of the value propositions that we've stated before as well as to provide you with an overall financial update and with an update on our assessment of our readiness for the COVID-19 challenge.

I started the presentation that each of you have received with a reiteration of the value thesis. Some of that is related to our size and scale in a consolidating market. Some is related to our presence in a demographically attractive markets. Some related to the relatively unique focus that we have on small and medium-size businesses. And some related to our positioning [Technical Issue] all of those together and we'll start the thesis with that statement.

We have seen continued linked-quarter growth in our commercial loan portfolio, 17% C&I annualized. And as Rob Kunisch and Bob will talk about later, that was not materially impacted to the degree it was in some other banks with drawdowns online, so representing growth. We continue to see that growth funded with transaction accounts, most specifically non-interest-bearing commercial DDA stickiness form of funding.

At the end of quarter we saw funding costs dropping faster than loan yields and saw some protection for the net interest margin, which is on top of the fixed to floating advantage that our loan yield provides in a declining rate environment in any case. We saw asset quality trends improving, although we've acknowledged, as Bob will discuss when he discusses the allowance, significant economic uncertainty and headwinds. And we acknowledge that with a significant increase in the allowance. You will all remember that we are not a bank that needs to report on a CECL basis for two more years. We came into this with no significant concentrations in either outsized individual customer exposures or highly impacted industries, and Randy Jones, our Chief Credit Officer will take you through those.

Probably most importantly in this type of an economically distressed environment, we have very strong capital levels in excess of well-capitalized and believe, as Bob will discuss, that even under various stress scenarios, we remained strongly capitalized. And we came in with strong liquidity on and off balance sheet, which as I'll discuss in a minute, with significant one in the first couple of weeks of this crisis.

Rob Kurnisch will talk about the great success that we've had in helping and supporting our customers in the PPP program and that will provide us with significant fee upside impact that will in turn help us to make standard provisions. We're showing in our ability to undertake in the first round of PPP funding almost 800 loans, more than the loan volume originated in all of 2019. That was only done with incredibly strong teamwork and very specifically and tactically shows the fruits of a recently reorganized business banking and branch partnership.

We have, and I'll talk a little bit about this as we move on, taken a very proactive approach, first and foremost to maintain employee and customer health and safety. And as we always do, we've been very proactive in supporting the community having announced a slightly larger than $100,000 group of gifts to several not-for-profits.

What we see on Page 6, the instrument COVID-19 representation is actually the website that we put in place within a week of COVID-19 becoming on important issue for the company. And I think that that's guided many of our actions and obviously it's going to guide much of our conversation this morning. I've already talked about the fact that we came into this prepared and financially strong and improving earnings outlook, improving asset quality, strong capital position, customer deposit base very strong and a strong liquidity position, and we've certainly acknowledged that it's always better to come into this type of the exogenous shock environment both prepared and financially strong and that's contributed to the confidence that we have for what we see ahead of us in the next few quarters.

I'll talk a little bit about the strong capital position. And I think it is important to note that the regulatory capital ratios exceed all well-capitalized standards. Our Tier 1 leverage decreased slightly as a result of the buyback that we actually completed in the first quarter of 2020. We repurchased $7 million that was the maximum allocated in the last buyback programs and bought a total of 390,000 shares with 372,000 of them bought in 2020.

And then from a liquidity perspective, obviously coming into this sort of a shock environment, we were looking closely at the possibility of deposit drawdowns at line usage at a much higher level and had seen neither of those happen. But in anticipation of that, brought our cash and cash equivalents up significantly. Then you see that it was at a $196 million at the end of the fourth quarter. Coupled with off balance sheet liquidity, we've seen significant resources available to us.

We have since the end of the first quarter significantly brought down those cash and cash equivalents. We've bolstered our off balance sheet liquidity. And we have received approval to go into the Federal Reserve Bank Paycheck Protection Program Lending Facility, which provides us with additional availability to the $580 million shown on that slide.

From a human perspective, again, our first and foremost call was to make sure that our employees were protested and that we could work in an environment that protected our customers. We've publicly and proactively at a very early stage communicated employee and customer health and safety. We tangibly began augmenting the cleaning procedures, provided our employees with PPE, reiterated and modified healthcare policies consistent with FCRA and we're able to move into an environment where almost all of our commercial back office and support staff began working from home. The ability of our technology team to turn that traditional office environment into an almost exclusively work from home environment should be noted.

We've done a number of things to also award and recognize both our front-line employees, those branch employees still working at the 12 of our 15 branches that are open but also to acknowledge the teamwork available to us in the PPP effort and so we have announced additional pay time lost days, provided a very popular dinner on us evening for all colleagues that encourage them to use take out facilities of local restaurants and received very good publicity.

And of course, as we always have done at Howard Bank we have a deep-felt and tangible obligation to strengthen our communities and announced in April additional donations and pledges totaling $104,000 to support a local organization that's focused on mitigating the inequalities in certain city neighborhoods through a very proactive social enterprise environment, contributed significantly to the Maryland Foodbank especially for the efforts that they've had in supporting school lunches for children no longer in schools, supported some digital efforts of the Enoch Pratt Free library including some efforts that they have under way from a PPE manufacturing perspective, and obviously supported our medical communities.

We announced our partnership in Operation Shop Local where local small businesses submit a direct link to their non-essential company's website. We've reinitiated our Keep It Local Small Business Program and we've been named with State Professional Services Task Force to develop recommendations for our government on the next step of returning to work policy. So, our community leadership has been outstanding.

I'm going to ask Rob Kunisch, our President and Chief Operating Officer to discuss what we've done specifically for our customers.

Robert L. Carpenter -- Interim Chief Financial Officer

Thank you, Mary Ann. So, as mentioned, we started to recognize COVID-19 as a real issue back in February. We started to test remote operations both on the loan outside and in our deposit operation side, so we asked people to stay home from work during those days to test our system to work remotely.

Then in March as we targeted -- personally our target March 16, as the date that we started to see material impact from COVID-19. At that time, we pro-actively looked for ways how we can continue to service our clients at a high level without jeopardizing the safety of our employees.

At that time, we closed all branches that did not have a drive-through. We did leave them open for appointments only. If people wanted to make an appointment and visit those branches they could. Then we conducted all business through our drive-throughs at 12 of our 15 branches.

We redeployed the employees from our closed branches and established a virtual call center to assist with the increased call volume regarding both loan modifications and information on PPP. We've built a library of information on our website relating to COVID-19. In the SBA PPP program, we're able to refer our customers too.

In addition, we proactively utilized our treasury management team and our client-facing group to reach out to customers to educate them to take advantage of our online banking tools, which has been critical for us during these times. So, at this time, we are able to provide a high level of service to our customers remotely and under restricted access at our branches.

Early on, as I said, March 16 was the date that the governor announced the closing of restaurants and we can really use that data as the single time when we started to see the greatest call volume coming in for the customers looking for loan modifications. We immediately granted loan modifications both PNI. Randy Jones will speak specifically about those.

We suspended all foreclosure actions. We waived certain service charges and fees, all an effort to help our customers at a time of need. We began to prepare to participate in the PPP program and we took a very consultative role with our clients and helping them understand the PPP program. We took about 150 of our employees here out of 250 help with that program, which we'll talk about specifically now.

We began accepting applications for the PPP program on April 3 and our first loan funded on April 15. We received a total of 856 applications. We are able to get 797 of those approved in the first round. The total amount of loans approved was $185 million. Our average loan size was $232,000. We generated about $5.9 million in fees, which is an average fee of about 3.2%. We estimate that we've retained about 18,000 jobs for the employees that we supported through the PPP program. I'll note that, through this morning we have funded $172 million under the Phase 1 of PPP.

We had, as I mentioned already 150 of our employees working around the clock to assist our clients in this endeavor. We redeployed them throughout into different roles and stages in the PPP program and we have been approved by the FRB, as Mary Ann said, to utilize the Paycheck Protection Program Liquidity Facility.

This week we started on Phase 2 of the program. We have 163 applications in our queue, 142 have already received acceptances from the SBA, total amount of $15 million. It's another additional $500,000 in fees.

So, on the PPP program very early on, we made a decision as an organization that we were going to use it to support our clients. We thought that it was less risky than going out and soliciting prospects under the know-your-customer guidelines and also just from an overall capacity both from a total amount of outstandings to the single program and also from internal resource allocations.

If you take a look at our loan portfolio, you'll see that it is well diversified and that within each one of those segments we do not have any concentrations. Randy Jones is going to talk about impacted industries during his presentation.

I will tell you that up in through to March 16, we are tracking above our budget and we're tracking right around a low double-digit loan growth through March. Obviously a lot of our settlements in March either got canceled or delayed but we expect those will come back here and hopefully in the near future.

Mary Ann touched upon our credit line utilization, which we track on pretty much a monthly basis. You will note that our average usage of lines are still below 50%. We saw a slight tick up in March but nothing that was out of the ordinary that gave us concern. You can see the total amount of unutilized lines as of April 24 is $326 million.

So, our customers have great confidence in the bank and our ability to support their needs going forward and I think that's validated by the fact that the majority of them did not pull their lines down in a time of stress.

So, with that, I'd like to turn it over with Randy and ask him to talk about our credit culture.

Randy Jones -- Executive Vice President, Chief Credit Officer

Sure. Good morning. Just some opening statements about our credit culture which have always been in place. I believe they are especially pertinent now given everything that's going on. We strive to build a strong credit culture here and that started with a base of very strong experienced, tenured credit trained loan officers, coupled with a very deep bench in the credit field with several members having over 25 years' experience.

No one has been through what we're seeing right now but they've certainly been through other industry moving issues. So, I feel like we have an excellent team assembled to address what's coming.

Our focus on long-standing customer relationships, knowing our borrowers very well, knowing all aspects of their business and our underwriting and selection of customers I think will continue to serve us well. Just our general underwriting philosophies I believe have prepped us for being able to get through the issues we're seeing today.

Finally, go without being remiss without mentioning that we do have a very strong special assets group. They're battle-tested, they've worked through some other difficult situations with other institutions and they're focused on resolving problems and capital preservation and have continued to do a good job for us even through these times.

The next slide show, as Mary Ann mentioned, we were on a trend of improving credit quality. Again our groups to resolve issues and address issues properly. We've seen management of our charge-offs have been reasonably low. We're watching delinquency very carefully. We're also managing that proactively with loan modifications, and I'll give you some more detail on the loan modifications. Bob will also talk about our issues with increasing our allowance and being proactive on that front.

As has been previously mentioned, starting in mid-March and through present date, we've seen a fair amount of loan modification requests. These are being reviewed on a daily basis by the senior loan officer and me. And we're approving these based on need and impact of the customers. To date, we've modified over 340 loans, both commercial and consumer. We've provided a breakout of that.

Most of our modifications, slightly more than half of our modifications have been converting amortizing loans to interest-only for a period of time. These range from two months to six months. In some cases, with more severely impacted industries, chiefly the hotels and restaurants, other businesses have seen closures. We are granting full payment deferrals again for a period of anywhere from two months to six months.

On the consumer side, we've not seen tremendously heavy volumes. We're staying abreast with the industry mandates for what we would have to do for consumers. But for anybody that's reaching out, we're immediately providing 60 days of full payment deferrals. We may be extending some of those depending on industry guidance. I would note that we are very light on FHA loans in our mortgage portfolio, those sometimes have heavier requirements for providing deferrals.

We try to isolate out what we feel to be our most impacted industries. This level of impact can be seen with the modification activity related to those portfolios. We've outlined those here on the slide. Notably, we have very light to no exposure in energy, travel, transportation, aerospace and trucking. Some other industries that we've seen other folks struggling with. We do have hotel exposure that's manageable and I think pretty well positioned. But you can see, for example, on that line, we've modified nearly 87% of that portfolio already. Hotel operators were telling us pretty quickly that they were seeing their reservations decline and their operations impacted. But I do believe, the core portfolio there is well positioned for when things resume.

Some of our other industries were seeing, the retail space within our commercial real estate portfolio, restaurants and caterers at the fairly high penetration level there of modifications at 74.7%, arts, entertainment and recreation is a smaller portfolio, but again, a lot of those businesses have seen mandated shutdowns. We've also tried to demonstrate where the PPP funds from the first round, how they benefited those particular sub-sectors. Based on the PPP program, it was not heavily beneficial to real estate type credits based on the payroll calculation. But it was very beneficial to some of our other businesses that are impacted or may see an impact. We continue to track those dollars and how they are allocated and how they benefit those particular sub-sectors.

I'll now let Bob talk about allowance and the financial aspects.

Robert L. Carpenter -- Interim Chief Financial Officer

Thank you, Randy. Well, to start out, just if you look on Page 21, the graph highlights where we've come from. So our allowance has been growing gradually from Q1 '19 through Q4 '19 from 53 basis points to 60 basis points. And now with this large provision we've recorded in Q1, it's now 0.76% of loans.

I would remind everyone on the call today though that when you look at us relative to peers, the allowance still is on the low-end of the range. The reminder here is we do have the fair value marks, related primarily to our acquisition -- the acquisition activity back in early 2018. So if you were to include those marks, the allowance at -- the pro forma allowance with marks at year end '19 was 1.1% and now it would be 1.25%. So just wanted to highlight that. And of course the marks continue to run down over time.

And just a couple of comments I'd make as we roll into the end of the first quarter. Absent some of the events of COVID-19, we were in a position where our allowance from an adequacy perspective was even stronger. Our historical loss rates had continued to decline. We had a large allowance attributable to one credit at year end that was resolved in form of charge-offs. And we didn't have any additional specific allocations during the quarter.

But on the other hand, as we looked at events unfolding very sharply very dramatically, looking for instance, the unemployment rate here in the State of Maryland, the general state of the national economy. We felt that it was prudent. We took a harder look at the allowance. We certainly are of the view that recession risk has increased. And we feel that even with the loan modifications, the PPP program, we still think there is a likelihood we'll see risk rating downgrades in the future and potential increases in our charge-offs.

So we increased the allowance on average by roughly 20 basis points through our qualitative factors. And it was primarily in two areas; our economic condition factors and also our concentration risk factors. Again, if you look at the potentially highly impacted loan sectors, this is largely -- it's a mix of CRE both owner-occupied and non-owner-occupied and our C&I portfolios.

So we also did increase the factors based on some proportional analysis of these highly impacted sectors relative to our portfolio as a whole. So as a result, we ended up of 3.4 million provision for the quarter, which resulted in our allowance increase of $3 million. And so again, as I said earlier, the bulk of that $3 million if you were to attribute to various portfolios, it would have been primarily our CRE and C&I portfolios.

So moving on, if we talk about -- one of the things we did is we took a look at the stress test and try and gauge our loss absorption capacity. And what we did is, we had our third-party that performs loan review services had performed a capital and allowance stress test for the bank back in June of 2019. Obviously, some of the data was little stale, but what we did is we started with the cumulative nine quarter -- what was referred to as a severe adverse case loss rate and we had some further stress.

So for instance, we took that stress, particular stress test 3.9% loss rate, we increased it to 20%, up to 4.68%. We took our pre-provision net revenue as per our 2019 Form 10-K and we reduced that by 20%. And so as we ran those stresses through our portfolio or we ran those stresses and look at the impact on capital, what we saw was that in a scenario over nine quarters with aggregate credit losses of $82 million and pre-tax or pre-provision net revenues of $47 million and assuming no tax benefit, so we tried to keep it as conservative as possible, we would still have pro forma capital ratios in June 2022, nine quarters later that would be in excess of what I'd call targets here which were essentially for Tier 1 and total capital, 100 basis points above well capitalized.

So those results indicate that we can maintain this capital ratios in excess of well-capitalized, even in a stress scenario like this. Needless to say, we will overtime continue to further stress the portfolio as we get more intelligence. And I just -- I don't think I should just again remind everyone on the call, this is a stress test only, it's not a forecast of future expectations or performance.

Net interest margin trends are certainly a challenge in the rate environment we're currently in. Now if you look at our last five quarters of net interest income, it's essentially a flat line. And during that period of time, even with growth in the balance sheet, our net interest margin as a percentage has declined from 3.64% a year ago to 3.34% here for the quarter ended March 31 of this year.

And what we see is, loan yields certainly have driven a lot of that decline. We've been fairly aggressive in terms of -- well actually not fairly aggressive, we've been very aggressive in lowering our deposit rates, especially with the fed's actions here in the first quarter, we've taken the rates in a lot of cases about as low as we can go.

Anyway, the other point I'd make here as we talk about net interest margin trends is we have in previous presentations shown the impact of our purchase accounting adjustments. That's a continuing downward impact on our net interest margin. For instance, if we were to look at that in the first quarter of last year, those adjustments added 10 basis points to the net interest margin and that has now declined here in the first quarter of this year down to 5 basis points and certainly that trend will continue.

Then let's talk about our-- on Page 24 we have what we call our earning snapshot. I just should before we get too far into this just remind everyone that the core net income in the EPS section at the bottom of the page, these are non-GAAP measures. We disclosed on Page 3 of this presentation the usual caveats around the use of non-GAAP measures.

If we look at our reported results, as we talked in the earnings release, our EPS we know was down $0.04 per share from the same period a year ago. We had a couple of big drivers in the first quarter results. Obviously, the increase in the provision for loan losses. You see we had a one-time item related to the cost attributable to the departure of our former CFO, which we estimate is $0.03 a share.

We were the beneficiaries as a result of the Cares Act of a pretty significant one-time tax benefit. Essentially the ability to carry back our net operating loss was generated in 2018. That created a $1.2 million tax benefit or $0.06 a share.

As we look at our core income, it's important that we've made -- one of the adjustments we've made for this reporting cycle and we will continue to do this through the remainder of the year is, we have taken out the impact of the performance of our mortgage banking activities. And we have -- and I have a slide a few pages later where we'll talk in more detail about that. But what we want to try to do is show our performance especially going forward. By lifting those impacts out of our results.

And so, when we look at the results for the first quarter $0.14 a share, compared to the same quarter we've got to $0.23 a share. Again, the provision is the bulk of that story. And when we compared to fourth quarter again provision is a big chunk of that story as well.

And one of the things we've noted is our -- we've seen some stress in our non-interest income and some of that is COVID-19 related. And we've certainly seen some lower volumes in our interchange income, some under NSF and overdraft charges. And on the expense side, we are trending downward relative to both the same quarter a year ago and the most recent quarter on a core basis.

Our ratios are -- on Page 25, we talk about our profitability measures. As several banks have done, we're reflecting our pre-provision net revenue. And again, the impact in our reported basis is driven by the large provision for loan losses in Q1.

On a core basis, our pre-provision revenue is trending favorable to Q4, down a bit from Q1 of 2019. Our efficiency ratio, we've made a little progress into Q4, were a little higher than Q1 of last year. And you can see our average -- return on average assets.

We show this and I think this is -- not think, this is consistent -- what we've done in previous presentations, we show the return on average assets and then we adjusted for the effect of our core deposit intangible expense. That doesn't change much; it adds about 9 basis points to the ROA when we look at it on that basis.

Now, lot of the balance sheet comments I was going to make have -- Marry Ann, certainly mentioned as we talked about liquidity. We had that large buildup of our cash and cash equivalents, and again we're working that down as we speak.

We did during the quarter -- we did increase our securities portfolio by over $60 million and the offsetting funding was our home loan bank advances.

We are, as Marry Ann said, we're continuing to increase our contingency funding and our off-balance sheet funding capacity. Rob mentioned some of our loan growth, but just kind of reiterates some of the key takeaways there. Overall, our loans increased by roughly $16 million. That was a 3% annualized rate in the quarter and it was driven largely by our commercial portfolio and commercial real estate.

We did see a decline in our residential mortgage portfolio, certainly some of that was two factors; number one, with the exit of the mortgage business one of our sources of new loan originations, it has obviously diminished; and then secondly, we did see a pretty significant run-off of the portfolio, because of the lower rates and a lot of refinance activity during the quarter.

Our deposit transaction accounts, we saw some growth there, and we're still in a great position of 45.5% of our total customer deposits in the form of those transaction account balances.

Book value per share increased from the fourth quarter and our tangible book value per share, so up -- upto $12.91 at the end of the quarter.

Mary Ann mentioned that completion of the buyback program. I could talk a little bit about our mortgage banking activities. And again, the good news is we have substantially completed the previously announced exit of those activities during this quarter. The mortgage pipeline has been processed and funded. We still have a few remaining loans held for sale at the end of the quarter that would be -- that regardless have been resolved here in the month of April. There are no remaining [Phonetic] employees in the business.

And for those who have looked at our 10-K, we had a note in the 10-K that talks about our mortgage banking activities and the numbers were breaking out to adjust to our core earnings are consistent with that tabular disclosure in the 10-K.

So, as we would have expected with the exit of the business are very de minimis contribution to the consolidated earnings in Q1, but it's certainly gross is up both our non-interest income and our non-interest expenses as you can see there. Roughly $1 million for gross up of each of those again we strip that out of our core presentation. By comparison, business did contribute $0.03 of earnings $0.03 per share of earnings in Q4 of 2019. And there was nothing in Q1.

Now, as we look ahead, the impact of the mortgage business in Q2 of last year was about $0.45 a share and about $0.015 a share in Q3. We have -- at the back, in our Appendix, we have a lot of detailed financial information. We have our GAAP to non-GAAP reconciliations that hopefully help walk down all of the adjustments that we have made to those quarter results.

And with that, I'll turn it back over to Mary Ann.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

So, I'll conclude briefly, so that we can open it up for questions. Again, we think that one of the strongest on value propositions that we have is the market that we operate in. The small and medium sized commercial focus that we have, the experience in terms of the breadth and depth of our team in handling that type of portfolio in a consolidating industry where it is become very apparent to us with the PPP program that the small and medium-sized businesses are continuing to acknowledge that they need a local bank in order to have the responsiveness and the flexibility and the individual organization that those businesses work.

From a balance sheet standpoint, we're building on very tangible growth in DDA, which is the primary funding mechanism that we looked at to differentiated growth in our C&I portfolios in our commercial real estate portfolio.

We announced just earlier this week that we were able to successfully have a very experienced commercial real estate officer in the greater Washington area. So, we continue to make progress on strategic initiatives as well.

Now, I mentioned earlier that reorganized business banking branch partnership, and again, those who concretely demonstrated their value in the ability to outperform our deposit market share by a multiple of over two, indicating those strength that we have in this market.

We believe that we're really very well prepared from a capital perspective, liquidity perspective. The trends that we were seeing going into this, not to mention the breadth and the depth of that team for this once in a century shot and do believe that there will be not only challenges for us, but opportunities. We've tried to take out much of noise that was previously present in our income statement by subtracting the mortgage operation so that people can look at the trend over the last few quarters of the core commercial banking operations. And we're able to retain, reward our employees. And again, it's those recent new hires on top of some of the hires that we announced in the fourth quarter, show that we're attracting not only new customers, but new talents, which in turn will lead to more customers.

So we're obviously very focused on asset quality, very focused on the significant economic challenges that we have. We'll be working very hard continuing to make sure that as the portfolio is stressed that we're prepared to react. But I would say that we're very confident about our ability to not only react, but to proactively take advantage of some of these opportunities in the marketplace.

And with that, we'll open it up for any questions that anybody might have on any of those presentations or anything else that you've seen in the financials.

Questions and Answers:


Thank you. [Operator Instructions] Our first question comes from the line of Brody Preston with Stephens, Inc. Please proceed with your question.

Brody Preston -- Stephens, Inc. -- Analyst

Good morning, everyone. How are you?

Robert L. Carpenter -- Interim Chief Financial Officer

Good morning.

Brody Preston -- Stephens, Inc. -- Analyst

Welcome, Bob. So I appreciate all the detail you guys gave in the deck, particularly around the impacted industries. I just wanted to ask a question. The CRE, the residential rentals that you call out, those are -- are those one to four family rentals?

Randy Jones -- Executive Vice President, Chief Credit Officer

Those are mostly multifamily.

Brody Preston -- Stephens, Inc. -- Analyst

Okay. And are any of those -- are those mostly like rentals to long-term tenants? Are any of those driven by Airbnb?

Randy Jones -- Executive Vice President, Chief Credit Officer

No Airbnb.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

Not at all. Those are all traditional rental contracts, Brody.

Brody Preston -- Stephens, Inc. -- Analyst

Great. Thank you for that. And then I am thinking that the provision increase was the result of adjustments to the qual factors just given the charge-offs are still pretty benign?

Robert L. Carpenter -- Interim Chief Financial Officer

Absolutely. It was 100% qualitative factors. Because again, as I mentioned, our loss -- our historical loss rates actually trended down roughly four basis points quarter-over-quarter as we factor that into allowance. So it was exclusively a qualitative factor.

Brody Preston -- Stephens, Inc. -- Analyst

So I guess just thinking about the provision as we move forward in 2Q, obviously the economic scenarios has kind of worsened and the data that we got yesterday on GDP was worse than we expected. So should we expect another elevated provision in 2Q, just given some of the worsening economic data should support even higher qualitative factors?

Mary Ann Scully -- Chairman, President and Chief Executive Officer

Well, it's not -- one thing I would point out, Brody, in terms of time of to allowance is the timing and the magnitude of allowance of these attributed to the first quarter was obviously covered by what we were seeing in April of 2020 as we made those decisions. So it was not reflected just what was known in March, but certainly reflected what was known in April. And we'll continue to watch the portfolio and see whether there are additional qualitative allowances that are made as both Randy and Bob noted, we do expect to see individualized stress in the portfolio. So there may also be certain specific allocations and provisions that we need to make. And we think that the next quarter, we'll see some combination of the two of those. But I do want to stress that the addition that we made to the first quarter numbers was certainly informed by what was happening in April.

Brody Preston -- Stephens, Inc. -- Analyst

Okay, great. Thank you. Thanks for that detail. The line utilization, I know it's in the chart and it's trended down post-quarter. Just wanted to better understand, was that borrowers paying it back sort of on their own or did you work with some of these borrowers to maybe provide deferrals. So they would be paying the bank back with line drawdowns. As we move forward throughout the year?

Randy Jones -- Executive Vice President, Chief Credit Officer

No. I'll classify that as ordinary business use that none of that related to any type of deferrals or anything like that.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

The uptick that you saw, Brody, in the first quarter, modest uptick again nothing like we saw at some of the larger banks was reflective to some extent of a couple of borrowers doing what I'll call prophylactic usage of the lines where they drew down just out of concern for what might be facing them and kept the funds in the demand deposit balances. It was about $7 million. I think that we've disclosed that. And then repay those back on their own when they not unlike us in terms of our initial concerned about line usage and deposit withdrawals, didn't see the stress in their businesses that they expected to. So those couple of borrowers both ticked the line usage up in the first quarter and then when they paid us back, brought us back down in April.

Brody Preston -- Stephens, Inc. -- Analyst

Okay. Got it.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

And the other thing that I would note is, a bank out size, our line composition is very different than some of the larger reporting banks. We don't have a lot of unsecured lines of credit. We don't have a lot of lines of credit that are tied to borrowing bases and conditions for borrowing. And so I think the size of our customer base and the structure of their lines of credit is one of the reasons why we see that a bank our size have very different utilization picture in the first quarter than we did at some other reporting banks.

Robert L. Carpenter -- Interim Chief Financial Officer

And Brody, I would only add to that that going into this pandemic, most of our customers were experiencing record profit years. And so the line utilization for us has been down significantly over the last two years. Typically those line utilizations puts up higher at about 60%. But because of the cash flow that these companies are generating, we've been seeing lower utilization over the last 18 months.

Brody Preston -- Stephens, Inc. -- Analyst

Okay, great. And then on expenses, I appreciate backing out the mortgage-related expenses. But just from like a core run rate perspective, maybe for salaries and whatnot, just where was the mortgage expense within the income statement?

Robert L. Carpenter -- Interim Chief Financial Officer

It was heavily in the compensation and benefits area as well as in the line item that we call, let's see here, just to double check not to sort of misspeak, loan production expense. So -- but heavily on the comp line.

Brody Preston -- Stephens, Inc. -- Analyst

Okay, great. And then last one on the margin. Understand, you said you sort of brought deposit costs down as low as you can sort of put them. What is the incremental cost of deposits right now and what's the incremental loan yield that's coming on the book?

Mary Ann Scully -- Chairman, President and Chief Executive Officer

So when you incremental, you're talking about the marginal dollars in terms of what it's costing us to fund the liquidity or you're talking about some of the opportunities that we see where more extensive CDs are going to roll off and those customer deposit costs are going down dramatically or you're talking about some combination of the two, Brody?

Brody Preston -- Stephens, Inc. -- Analyst

Yeah. I'd like the combination of the two. Like, just a roll-on, roll-off from a cost and a loan yield perspective?

Mary Ann Scully -- Chairman, President and Chief Executive Officer

So we have -- well, I'll may be able to quantify. We have a number of CDs that were for us higher rate CDs that we put on the books when rates were rising in the early part of 2019 and late 2018, and those are rolling off. So, you have CDs that might have been got a cost factor of 1.5 or 1.25, we have no special is right now on the CDs, so you're are looking at a fairly significant drop-off in those maturing CDs.

Robert L. Carpenter -- Interim Chief Financial Officer

The other thing that I would add to that is part of the PPP program, we required all of our borrowers that received funds into that program to deposit those proceeds into a separate DDA account opened with us. We did that for a convenience factor for them both in trying to track and document how the proceeds would be used. But as you know those maybe you don't know, but those loans are funded 100% day one.

So, as we settle those $172 million. We've seen our non-interest-bearing deposits grow by that amount and we expect that that will kind of come down over the next 8 weeks as a sponsor utilized for payroll.

Brody Preston -- Stephens, Inc. -- Analyst

Okay, great, thank you for taking my questions.


[Operator Instructions] Our next question comes from the line of Stewart Lots with KBW. Please proceed with your question.

Stewart Lots -- KBW -- Analyst

Hey guys, good morning.

Robert L. Carpenter -- Interim Chief Financial Officer

Good morning.

Stewart Lots -- KBW -- Analyst

And welcome to the team Bob. Already asked a fair amount of my questions, but maybe just one follow-up on the margin. Bob, how are you thinking about where the NIM can kind of bottom out and as we adjust for a lower for longer environment, coupled with accruable yield run off, you know it was lower this quarter than you expected to continue trailing off.

Just trying to kind of zero in on where you think that margin can look like at the bottom sometime this year? Any color there would be helpful. Thanks.

Robert L. Carpenter -- Interim Chief Financial Officer

Well, I think it's fair to say that we are going to feel some of the -- we're going to have a couple of dynamics here. Number one, the deposit costs will continue to trend downward, as some of those higher rate CDs do roll off and replaced at lower rates. So, that's a positive on that side. On the other hand, we're going to see some continuing -- a lot of the challenges we face, as I see it, is we have the situation where -- now again, not knowing how much COVID-19 will impact it, but to the extent we continue to see, for instance, res mortgage prepayments in a lower rate environment, that'll continue chipping away at the loan yield.

Right now, if I had to call it, I think what you're going to see is the net interest margin percentage is going to trend downward a bit in the second quarter, and a little bit more in the third, but should -- I think it'll level off at some point late in the year, assuming the market rate environment remains unchanged.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

I think one of the -- what Bob's addressing is sort of a normal ying and yang of the portfolio. We're going to book $185 million, and we're booking loans, we're getting approval for loans in PPP too. So that number is going to be well over $200 million in 1% loans. If those loans are quickly forgiven, then we're not going to see that having any sort of an impact on the margin.

If 10% to 25% of those loans don't seek full forgiveness, then you've got a fairly low yielding asset for that portion, and we're just not going to know that out for another six weeks or seven weeks.

The good news is we'll have a pretty clear picture that by the time we report on the second quarter. So, we're looking at that kind of net utilization. That's obviously also going to affect quickly those $6 million plus in fees that we're anticipating are allowed to be accelerated and brought into the income statement.

On the positive side though, the other thing that I would note is that we talk about how we immediately, not knowing what this was going to do form a liquidity standpoint, boosted our on-balance sheet cash assets. And those were of the minimum yield, given that the marginal cost of funds, in many cases, to fund those, might have been anywhere from 65% to 1.2%.

And so, as those cash balances have worked their way down, look at the yield on earning assets, not just on just yield. You'll see that yield on earning assets improved simply because of the lack of drag on the spread from having a high cash balance. Those cash balances that we showed on the liquidity slide that I talked about are less than half of that level today.

So, you've got some positives in terms of customer deposit cost. You've got some unknowns in terms of how much of those PPP balances end up being two-year loans, rather than forgiven loans. But you've also got some uplift on the earning asset side because of the lack of cash that, in some cases, might've even had a negative carry.

So, no doubt that when you're in an environment where the Fed is saying that they're going to do whatever they need to do protect the economy, likely that you're going to have some pressure on this. And as Bob said, we expect that pressure in the second quarter and third quarter, but flattening out. But we think the pressure is going to be fairly insignificant.

And I'd just point out to the fact that we maintained it better than most people expected in the first quarter, even with some of those earning asset pressures.

Robert L. Carpenter -- Interim Chief Financial Officer

Stuart, if I could just add -- I just want to pick up on what Mary Ann was mentioning about the Paycheck Protection Program loans. We've modeled those out. You heard the number earlier in our presentation, $185 million of loans, average fee of roughly 3.2% of the loan amounts.

Now again, those processing fees we know under Generally Accepted Accounting Principles will be deferred and amortized as a yield adjustment over the life of those loans.

So, one of the things we did, we've modeled that out based on forgiveness ranges from 100%, which is our aspiration within six months, to zero and they become 18-month amortizing loans after the initial six-month period.

And so, one of the positives you would see -- and by the way, when I talk about our net interest income and net interest margin, it was before the impact of the PPP program. We in fact, even at a zero forgiveness, which we think is highly unlikely, we're looking at a yield of almost 3.5%. If they're forgiven within six months, that yield number of pushes closer in that six-month period to 7%.

To the extent we fund these through the Payroll Protection Program lending facility, 35 basis point cost of funds. So I just wanted to -- so again, when I talk about margin, it's before the effect of that, and what we will do is make sure that we can isolate the impact of PPP program when we talk about our margin going forward.

Stewart Lots -- KBW -- Analyst

All that color was super helpful. Thank you, guys. I guess my last question. I appreciate the additional color on the income statement, specifically within expenses. As we back out the -- and you guys provided that in the deck as well, but as we back out the mortgage expenses and then also just any other cost efficiencies, given the work from home environment, how are you guys thinking about a run rate? And if you providing any specific guidance on where you'd like to end up in the second quarter on I think -- and then also, if you back out obviously the $800,000 and one-time payments related to the former CFO, any guidance for a core run rate in the second quarter? Thanks.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

So, Stuart, I think the last time I checked, you guys were modeling something in the $12.8 million to $12.9 million a quarter range for a run rate, and I think that's probably a good number.

Again, the first quarter numbers were inflated not only by those one-time expenses of the CFO severance costs, but were also influenced by the fact that the mortgage operation back office was present on our financial statements for a little bit longer than we had anticipated when we talked about the exit of the business in the fourth quarter.

And Bob clearly laid those out, but you can see with those costs are. We felt we have maybe three weeks to four weeks of those back office costs as we work through loans that have been originated. We ended up more with like eight weeks or nine weeks of those costs. So, it was important that you understood that.

And we know the first quarter is always a heavy quarter. We usually talk about that in terms of some benefits because of higher-paid employees and what that does to reflect the costs in the first quarter. But on the other hand, we had probably some lower marketing costs in the first quarter, partly because of COVID-19 that we might see going forward. So, I don't want to overly predict what those ups and downs might be. But we follow what you've predicted, and we're not uncomfortable with some of the numbers that you've got in there.

Stewart Lots -- KBW -- Analyst

Great. Yes, Mary Ann, thank you very much for that. And sorry, just one more. The tax benefit that was realized this quarter, there's currently no anticipation that you'll see that again this year? Or is there a possibility that we could see additional benefit in 2Q?

Robert L. Carpenter -- Interim Chief Financial Officer

No, that is the extent of it. That's the carry back of our 2018 net operating loss to tax years '13 through '15. That's absent any new change in tax law, arising from CARES Act. That is it. It's purely one time.

Stewart Lots -- KBW -- Analyst

Great. Thanks for taking my questions, guys.

Robert L. Carpenter -- Interim Chief Financial Officer



There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Mary Ann Scully -- Chairman, President and Chief Executive Officer

Well, first of all, we want to thank everybody. We know this is a really stressful time for all of you, as well as for us. You've got the seasonality of earning season and on top of all the pressures that we're all feeling inside our companies and our families, so we're actually grateful for the attention that you pay to us. We also are always ready as you work through on your questions, whether those be as investors or analysts, to take any time to work through specific line items.

We apologize for the noise in the statements, but are happy with the approach that we've taken to move out mortgage. But it will give you a clearer picture of what those core run rates really are and what core fee income really looks like.

I'll note, just as a very minor point, that first quarter of '19 fee income was unduly impacted by a prepayment penalty that we received. So that makes the pressure that we're seeing on the fee income side look possibly a little greater than it is, although we do anticipate the consumer behavior is going to affect interchange income and merchant party income, but probably not as dramatically off. And now that that first quarter of '19 is out of the comparison place, it helps.

We're feeling good about our capital position, feeling good about the allowance, feeling good about our ability to handle an even greater level of stress, as Bob indicated, except in June [Indecipherable].

So, as confident as you can feel in this type of once-in-a-century event, we're feeling confident in the core strength that we have. And again, I can't really overestimate the opportunities that we're also see coming out of this. So, thank you.


[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Robert L. Carpenter -- Interim Chief Financial Officer

Mary Ann Scully -- Chairman, President and Chief Executive Officer

Randy Jones -- Executive Vice President, Chief Credit Officer

Brody Preston -- Stephens, Inc. -- Analyst

Stewart Lots -- KBW -- Analyst

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