Home BancShares Inc (HOMB) 2020 Q1 法說會逐字稿

Good day, and welcome to the Home BancShares First Quarter 2020 Conference Call. (Operator Instructions) Please note today's event is being recorded.

I would now like to turn the conference over to Donna Townsell, Director of Investor Relations. Please go ahead.

Thank you, Rocco. Welcome to the Home BancShares 2020 First Quarter Earnings Release and First-ever Social Distancing Conference Call. I am Donna Townsell, Director of Investor Relations, and on behalf of the Home team, I would like to thank you for your continued support of our company and especially during such uncertain times.

Today, from their respective quarantine locations, you will hear from Tracy French, our President and CEO of Centennial Bank; Brian Davis, our Chief Financial Officer; Kevin Hester, Chief Lending Officer; Chris Poulton, President of CCFG; John Marshall, President of Shore Premier Finance; Stephen Tipton, Chief Operating Officer; and wrapping up the comments will be our Founder and Chairman, John Allison.

As you can imagine, everyone has a lot of information to share. So I will turn the call over to Tracy French to get us started.

Thank you, Donna. We have gone from a very vibrant and moving economy just 45 days ago to a time of uncertainty. I remember meeting John Allison and the Home BancShares team 18 years ago, back in 2001, when the bank I was asked to help was at a time of uncertainty. I've had a good fortune with the company, and we've gone through some other times of uncertainty, like in 2009. There's one thing for certain, Home BancShares and Centennial Bank is the right place to be during these times. Our Board of Directors, our management team, some of which you will hear from in just a moment, work and represent this company are the right ones in times like this. It brings out the best of all of us. Our management team has been proactive in getting out in front of this uncertainty. The 1,900-plus bankers that made our bank one of the best in the nation in performance is now making us one of the best in the business and customer service.

To watch our team over the past 6 or 7 weeks has been remarkable. The focus on taking care of customers has gone above and beyond everyone's expectations, all while taking care of our fellow teammates. Our business continuity team kicked off into gear at the end of February, and our group were in motion the first week of March. They were out in front of what was mostly unknown at the time. To give you just a few examples, our IT department made it possible for over 1,000 of our staff members to be able to work from home in a short period of time. Our treasury department separated its group among other bank locations in order to be safe and to continue to take care of our customers' needs without missing a beat. And simply, wow, it was amazing to watch our lending group do what they have done over the past 13 days with the PPP program. I can go on and on, but I believe you all get my point.

Banks are an essential business. Our customers are essential to our success. Our business continuity plan has been tested in the past with hurricanes, and we even had a tornado blow right through our location in Jonesboro a couple of weeks ago. While yes, we have made some adjustments along the way on the fly, Centennial Bank has not missed a beat in our daily operations and taking care of our customers.

The core results that you'll hear from Johnny in a moment were very, very, very strong. Our company is well capitalized. Our liquidity is well positioned for these times. Our ALCO team has been working weeks in getting in front of this potential need of liquidity. Our lending team and staff and others have put countless hours to assist all needs. Our risk management groups are managing our risk, and our Board is active and engaged with their responsibilities, all while staying safe.

It's fair to say the financial world is working together more than ever today. I'm not sure the number of hours a week, along with Saturdays and Sundays, in spent time discussing this situation. Yes, lots of Sunday afternoon conference calls with bankers across the country, pulling together to assist on banking issues. I would like to thank Lorrie with the Arkansas Bankers Association; Alex, with the Florida Bankers Association; Rob with the American Bankers Association; and Brent with the Mid-Sized Bank Coalition, for all their valuable assistance over the past month. I also want to thank the Federal Reserve Bank, Arkansas State Bank Department, which are our primary regulators, for their support, their efforts, the communication that they have given us over the past month with our company. And it will make all of us feel better with the way all of us are working together during this time, the results will be very impressive.

Donna?

Thank you, Tracy. And I agree with you, Centennial Bank is a great place to be right now.

Now we will hear from Brian Davis for updates on our NIM and CECL implementation.

Thanks, Donna. Today, I would like to discuss net interest margin, the impact of our adoption of CECL on January 1, liquidity and capital.

Let's start with margin. The first quarter was another solid quarter for our net interest income and net interest margin. On a tax equivalent basis, we recorded net interest income of $141 million for Q1 2020 compared to $141.1 million for Q4 2020. The first quarter net interest margin was 4.22% compared to 4.24% for the fourth quarter.

I'd like to give you some color on the 2 basis point decline in the margin. First, the accretion income for the fair value adjustments recorded in purchase accounting was $7.6 million during Q1 compared to $9.1 million during Q4 for a decrease of $1.5 million. This decreased our NIM by 4.5 basis points. Second, from the fourth quarter of 2019 to the first quarter of 2020, we experienced a $671,000 decrease in investment premium amortization as a result of changes in prepayment speeds. This decreased investment premium amortization positively impacted the net interest margin for the quarter ended March 31, 2020, by 2 basis points.

Lastly, on margin, during Q1 2020, event interest income was $558,000 compared to event interest income of $549,000 for Q4 2019. Thus, there was not any impact for the linked quarter comparison related to event interest income.

Let's change to CECL. On January 1, 2020, the company adopted CECL. Due to the adoption, the opening balance for the allowance for credit losses was increased $44 million. The new CECL accounting standard requires for both a discount and an allowance for credit losses to be recorded on loans during an acquisition. This is commonly referred to as the double accounting. During Q1, we completed the acquisition of $400 million of loans from LH-Finance. As a result, we recorded a $6.2 million loan discount and a $9.3 million increase in the allowance for credit losses for the double accounting for this acquisition.

During Q1 2020, we recorded $86.8 million of total credit loss expense. This expense is comprised of the following components: investment securities, CECL double accounting for LH, CECL loan provision and CECL COVID-19 loan provision. We recorded $842,000 for credit losses on investments related to our sales tax bonds with lower coverage ratios. The CECL double accounting for LH-Finance was $9.3 million. The normal CECL loan provision was approximately $5 million, and the CECL COVID-19 loan provision was approximately $71.7 million.

Our CECL provisioning model is significantly tied to projected unemployment rates. As a result of COVID-19, the unemployment rate projections significantly increased from January 1 through the end of March 2020, which resulted in the $71.7 million provision related to COVID-19.

Additionally, CECL requires a liability for unfunded commitments. This quarter, we increased our liability for unfunded commitments by $7.8 million. This expense is primarily related to the impact from COVID-19.

Next, let's go to liquidity. When COVID-19 began its onslaught to the economy, my funding team met to determine actions we should take. For example, our policy states, we should always have a minimum of $50 million in our Fed cash balance. Normally, this balance is around $100 million. In one of our first funding meetings during the COVID-19 process, we made the decision to increase our target balance at the Fed to $250 million. We have continued to increase those targeted balance. And today, we have $650 million of cash at the Fed.

Another liquidity item is we do plan to use the PPPLF program to fund the PP loans. We view the PPPLF as an attractive funding option at 30 basis points. Plus using the PPPLF will give us regulatory relief for our regulatory leverage capital ratio.

Speaking of capital, I'll conclude with a few remarks on capital. Our goal in Home BancShares is to be extremely well capitalized. I'm pleased to report the following strong capital information. For Q1 2020, our Tier 1 capital was $1.5 billion, total risk-based capital was $2 billion and risk-weighted assets were $12.7 billion. As a result, the leverage ratio was 10.8%, which is 117% above the well-capitalized benchmark of 5%. Common equity Tier 1 was 11.6%, which is 78% above the well-capitalized benchmark of 6.5%. Tier 1 capital was 12.1%, which is 52% above the well-capitalized benchmark of 8%. The total risk-based capital was 15.8%, which is 58% above the well-capitalized benchmark of 10%.

With that said, I will turn the call back over to Donna.

Thank you, Brian. With CECL and COVID-19, the accounting world just got a little bit more interesting.

Now for much anticipated update on our loan portfolio, we will hear from Kevin Hester. Kevin?

Thanks, Donna. Just a short time ago, we were talking about the prospects for organic loan growth and the best asset quality numbers that we could remember. How quickly things can change. I have several topics to cover today, and I'll start with loan deferrals. We developed a loan deferral program in 2017 in response to Hurricane Irma in the Keys. And again, in 2018, in response to Hurricane Michael in the Panhandle. In both cases, the numbers were significant for the geographic reach of the event, affecting over 40% of the loans in the Keys region and affecting over 10% of the loans in the Panhandle region.

In both of those circumstances, most borrowers were able to go back on P&I payments after one 90-day deferment, with a very few needing more than a second 90 days. While the 2 recent Florida hurricane events do not match the portfolio-wide reach of the COVID-19 event, the fact that this was familiar to us allowed us to put in place quickly, giving us plenty of bandwidth to tackle other effects of the pandemic.

As of last Friday, we had roughly 2,500 loans, totaling just over $2 billion or 18% of the loan portfolio in some sort of deferment, with the vast majority consisting of a 90-day full deferment.

Geographically, Alabama has the largest percentage deferred at 30% of the loan balances, followed by Florida at 24% and Arkansas at 20%. CCFG and Shore have fared much better early on at 5% and 6%, respectively. Loans over $10 million totaled $540 million or 26% of the deferral total.

From an industry standpoint, based on NAICS Codes, lessors of real estate had the highest number of $701 million deferred, but that number was similar to the overall average at 20% of the total balances. Next is accommodation and food service at $493 million, and this makes up 63% of the overall balance in that NAICS code. Health care would be 1/3 at $157 million, and that's 35% of the overall balance.

The review of our construction projects over $20 million shows that excepting 6 projects that have been stopped in the New York City area, all of our projects are still moving forward, and we do not see any issues on those credits at this time. Obviously, the length of this event could affect stabilization on projects at/or nearing completion, so we'll have to continue to review the needs for additional interest carry on those. In the 6 New York projects that are impacted by the work stoppage, they are either complete multifamily or early stage with nothing in the mid-stages, which we think is a positive.

Between the deferral balances of $2 billion and the construction balances of $1.9 billion, that's about 35% of our loan portfolio. Based upon our history with the deferral programs in the past, we expect that the remainder of the portfolio will pay as agreed. We will be monitoring the portfolio closely for rising past dues and the normal symptoms of portfolio stress.

While the scope and reach of COVID-19 is unlike anything we've ever experienced, so is the governmental response. Hurricanes result in physical damage and insurances attempt to replace the physical damage and some of the economic damage. This event will not create physical damage, so insurances are not useful here, but the government response is unprecedented. From a plus/minus standpoint, our current deferral borrowers are going to defer around $28 million each quarter that they are deferred. But we have already entered over $800 million into our PPP workflow, and if spent properly, 100% of that will be forgiven for these borrowers.

In our experience, it's always difficult to know how a disaster will affect asset quality until you get months into the event itself. With each of the CAT 5 hurricanes, it was truly a year before you can really determine what the lasting effect of the event would be. This event will be even harder to assess because no one can even tell you when it will be over or how the recovery will look. Much will depend on the behavior of individuals post-COVID, and no one knows how people will respond in a post-COVID world. What we do know is that the events of the last quarter have resulted in an increase in our allowance for loan losses to $229 million, which is 2.01% of loans. We believe this is an extremely strong number that will serve us well as we head into the remainder of the COVID-19 event.

Brian discussed CECL in his remarks, but I believe it's quite possible that the CECL models using drivers that correlate to losses experienced in the past will not necessarily result in a better estimate of future losses in this event because this event and the related responses are nothing like anything we've ever experienced. The significant provision driven by the sudden spike of those primary drivers could reverse itself also if the recovery is timely.

The next important topic to discuss is the paycheck protection program. Guidance from the government on how to implement has been slow and prone to change, however, they set very high expectations on the banks in performance. In spite of all the challenges around PPP, I'm very proud of the process that we've built in less than a week and the progress we've made in working through an unprecedented volume of applications. We have a very large group of employees who have worked tirelessly to try to get this money out to our customers.

About 1/3 of our employees are involved in some way in this process, along with their other job responsibilities. We've been live for 282 hours. And as of this morning, we've accepted over 5,500 loan applications totaling, as I said, over $800 million. We've obtained SBA loan numbers for over 80% of these applications and are currently clearing 900-plus applications per day through the SBA. Funding has begun in earnest this week with an average loan size currently around $160,000 and dropping due to the delaying of the lower balance sole proprietor loans to begin a week after the larger corporate loans.

We understand that the banks are the facilitators of what is largely expected to be a grant rather than a loan, and this program was intended to depend in large part on the representations of the borrower. However, we've still taken many normal lending precautions to try to detect potential fraud and to ensure validity of the notes. This includes activities such as the active confirmation of loan requests within the region of the customer and confirmations of certificates of good standing for corporate borrowers.

Circling back to the industry discussion initiated earlier in the discussion of deferral balances, it seems appropriate to discuss hospitality exposures. At March 31, completed hotel properties reflected a balance of $806 million, consisting of 191 properties with 13,520 rooms. The average loan amount per completed property was $4.2 million, which is $60,000 per key. The completed portfolio has a weighted average LTV of 56% and a weighted average debt service coverage ratio of 1.58x. These balances are primarily centered in select service properties in the Marriott, Hilton, Hyatt and IHG flags. This totals 25% of the properties in number, but 42% of the rooms and 50% of the balance is at $404 million, with a weighted average LTV of 60% and a weighted average debt service coverage ratio of 1.54.

There's a secondary concentration in independent properties, which is 71 properties totaling $163 million or 20% of the balances. However, 47% of these balances are in the Florida Keys where loyalty programs are much less important. These independent properties perform even better as a whole with a 51% weighted average LTV and a 1.79 weighted average debt service coverage ratio.

Geographically, 40% of the balances are in Florida, followed by Arkansas at 16%, Texas at 11%, Oklahoma at 9% and California at 6%. From an overall perspective, our loan portfolio of just over $11 billion is 47% CRE, which is down slightly over previous years. As a result, CRE concentrations have reduced as well over recent years, with an overall concentration at quarter end at 279% of capital. The construction bucket has fluctuated between 90% and 100% of capital in the recent quarters but stands at 101% at quarter end.

The asset quality numbers for the quarter remained very strong with NPAs at 0.45% and NPLs at 0.54%, up 2 basis points and 4 basis points quarter-over-quarter, respectively. This slight increase is a result of a couple of loans in the Southeast Florida region that have moved to nonaccrual. We think that the larger of the 2 will work out once we get outside the current code event. The allowance coverage of nonperforming loans doubled from 186% to 370% due to a large provision added in the first quarter. Past dues increased 20 basis points quarter-over-quarter in large part due to the 2 credits mentioned above, but at 0.69%, they're in a range consistent with previous 3 quarters.

As I said at the beginning of my remarks, these are not the topics that we expected to be discussing today, but I'm very proud of our bankers for the way that they have contributed to the role that the banks are to play in this event. And I believe that we are well prepared to adjust to the effects that this event will have going forward.

With that, I'll turn it back over to Donna.

Thank you, Kevin. That was very informative. And it's obvious that PPP has kept our entire lending staff busy. So very good job to all of those involved for making this happen for our customers.

Up next, we're going to hear from Chris Poulton with our CCFG division.

Thank you, Donna, and good afternoon to everybody. Loan balances at CCFG grew by approximately 10% during the first quarter, increasing by $174 million to just over $1.75 billion. This growth was a result of continued organic growth throughout the quarter and approximately $280 million of payoffs and paydowns, with the majority of these in the first 2 months of the quarter. With that said, we have received $70 million of paydowns in the first 2 weeks of April, a majority of which were expected in late March, but were delayed due to the shutdown.

Looking ahead, we would expect to see a slowdown in payoffs during Q2 as more borrowers will either exercise their extension options or delay their planned early payoffs. On the origination side, while we continue to evaluate potential opportunities, I do expect overall production to be impacted as deals are delayed or put on hold for the coming months until we have less uncertainty.

While we're together today, I thought it would be a good opportunity to remind everyone about the makeup of our portfolios. In total, we have 104 credits with an average balance of $17 million. Approximately 74% of those outstandings are commercial real estate with the remainder in C&I credits. We segment the C&I book into 3 primary loan categories. The first being structured facilities, which are generally borrowing base-driven, and these account for $200 million or 42% of C&I outstandings. We have 7 facilities with an average balance of $29 million. The next 2 categories are single asset exposures. The second is broadly syndicated loans, which is 33% of the balances. And the third category being middle market loans, which account for 25% of the balances. We have 38 single credit positions with an average balance of $7 million. Generally, we have good spread across industries with most industries accounting for 10% or less of our exposure.

In commercial real estate, we have 59 credits with an average outstanding of $22 million and average commitment of $35 million. We've always been a low leverage, short duration lender, and this is evidenced by our average LTV of 39%. We have no credits with an LTV above 60%.

In CRE, we have 3 primary products: the first, structured multi-asset facilities, which account for 28% of the balances; the second, single asset bridge loans, which account for 42% of balances; and then the third is construction loans, which account for 30% of balances. In construction, a majority of our 22 credits are in early stage. And on average, we funded approximately 36% of our total commitments in construction. We have limited exposure to hotel at 7% of our portfolio and retail at 3%, with mixed-use and multifamily being the largest categories with a combined 34%.

By geography, we are concentrated in areas where we have offices. 42% of our portfolio is in the New York metro area; 34% is on the West Coast, primarily California, specifically Los Angeles and San Francisco areas; 6% in Florida; and 3% in Texas. The remainder of the assets, 15%, are spread across various states with most of these in national multi-asset facilities.

To date, we've only had a handful of requests for relief. These requests have largely been to allow deferred amortization or smaller refilling of payment reserves, for instance, 3 months instead of 6 months. The benefit of a smaller, focused, low-leverage portfolio is that we're able to work with our borrowers in a detailed and collaborative nature to ensure that the best outcome despite these unprecedented disruptions.

Thank you for your attention. And Donna, I'll hand it back to you.

Thank you, Chris. Now John Marshall will provide an update on Shore Premier and the acquisition of LH-Finance.

Thank you, Donna, and good afternoon. I suppose the first quarter of 2020 has been the most entertaining if not the most ambitious for Shore Premier Finance since joining Centennial Bank in the summer of 2018. Certainly, the highlight of the quarter was the acquisition by Centennial Bank of LH-Finance from People's United Bank at the end of February, to include $410 million of consumer and commercial marine assets. Acquisition made strategic sense for the Bank and for Shore Premier. Because of the similar nature of our business models, common risk policies, practices and risk appetite, a substantial increase in our interest-earning assets, without the attendant fixed overhead expenses, has already created financial benefits as we scale the specialty finance unit.

Let's consider some numbers, understanding that some of these are preliminary and others are estimates. In the portfolio, we have just over $800 million of consumer yacht loans. The average FICO score is 775; average loan-to-value, 73%; and liquid payment reserves, on average, are 65 months. Commercial floor plan commitments are $250 million, funded roughly at $140 million. And the combined assets as of March quarter end were $942 million. So the unit's performance should have positive implications for the Bank overall.

As Kevin mentioned, 6% of our consumer customers have availed themselves of a 90-day payment relief program in April, May and June. Interest continues to accrue, and the balances will be added to the end of each note. In partnership with our boat builders, a similar program has been made available to each of our dealers for their floor plan inventories to postpone principal payments up to 90 days. In this case though, interest continues to accrue and is still collected each month.

Our dealers are seasoned through multiple economic cycles, and our floor plans have repurchased recourse back to each of the boat builders. The retail buyers have strong credit profiles, and their liquidity and income resilience may insulate them from some of the vagaries of the pandemic disruption that we're experiencing in the economy. Of course, we'll continue to monitor the portfolio closely.

On that positive note of optimism, let me conclude my remarks and return the conversation back to you.

Thanks, John. And now Stephen Tipton will share with us about our cost of fund and repricing activity.

Thank you, Donna. I will give some color on deposit activity, repricing efforts and trends and a few additional details on the balance sheet today.

We saw strong deposit growth again in the first quarter of 2020, with a total increase of $237 million. We're seeing that trend continue through the month of April as well.

As Brian mentioned, we are being mindful of liquidity levels in these uncertain times, but our teams have done a great job getting deposit rates in line with the market. Rates were moving downward in February, but that certainly accelerated with the combined 150 basis points reduction by the FOMC in the month of March.

Total deposit costs in Q1 2020 were 85 basis points, down 10 basis points from the previous quarter. Given the Fed cuts in March, I think it makes sense to discuss more recent numbers. Total deposit costs in the month of March was 75 basis points. And based on recent activity, I would expect to see April come in at 60 basis points or possibly less. While time deposits have not been a significant funding source for our company, currently $1.9 billion or 17% of our total deposits, we will have opportunity to reprice as those mature. We have over $400 million maturing in Q2 2020 and over $1.4 billion of the total maturing in the next 12 months. With a weighted average yield of approximately 1.6% today, we will see improvement in these funding costs fairly quickly.

Switching to loans. We saw total production of $730 million in Q1 2020, with a little over $450 million coming from the Community Bank footprint and $235 million coming from CCFG. Payoff volume was lower than the previous 2 quarters at $561 million, but in line from a year ago. I would also like to give a little color on the variable rate components of the loan portfolio.

As we have mentioned in the past, the CCSG loan portfolio of approximately $1.7 billion is variable rate with the vast majority tied to 1-month LIBOR, adjusting monthly. As of March 31, approximately $890 million or 51% of those balances were protected by floors.

The Community Bank and Shore portfolios consist of approximately $1.6 billion in variable rate balances set to adjust over the next 6 months. Nearly $900 million of these balances are tied to Wall Street Journal Prime as the index with the ballots tied to LIBOR and other various indices. As of March 31, over $825 million or 52% of these balances are now protected by floors.

I would like to close my comments, as others have mentioned, to thank all of our nearly 2,000 employees for their effort and energy over the past 30 days. Our human resources team, electronic banking and treasury services areas, deposit operations and credit operations have done a tremendous job supporting our staff so they can support the customer. Most recently, our customer care center and retail staff and the volume of calls they are receiving related to the economic impact payments that began yesterday.

Finally, as Kevin mentioned, the effort to stand up the PPP loan program has been immense, with operational leaders, technology teams, lenders and loan assistants working around the clock and around the weekend to serve their customers.

Thank you to all. And with that, I'll turn the call back over to Donna.

Thank you, Stephen. Well, as you have heard, this quarter has no doubt been busy and interesting. So for additional thoughts on our quarter, we will now go to our Chairman, John Allison.

Thank you, Donna. Thank all of you for your report, very, very interesting. Good afternoon. We wish you all good health, and we wish recovery for our country. A special thanks to our PPP team, our lending team, they've taken the bull by the horns, they didn't back up, they never quit. I've watched Kevin go through some rough times there. As we were working with the SBA, he didn't panic, he just kept pushing forward. I'm very proud of this exceptional group of people. And I thought it was about 25% of our team working on PPP, but I now find out that it's almost 1/3 of our people. And many of these people had never worked on the loan side before and they just jumped in to help because they understand the importance.

Community banks are really doing an amazing job, and our team did very well on that. The good thing about community banks is we know our customers. I was watching TV and a lady called in to a major bank trying to find out some information. She couldn't remember exactly the name of her loan officer. She didn't have a relationship, and that's what community banking means. And I think it'd be interesting when this is over to see how much money was put out by community banks.

Speaking of teamwork. It's really wonderful to see the Fed, the Treasury -- which is headed by a businessman, just thought I'd throw that in -- the State Bank Department, SBA, and even Congress working together for the benefit of our economy. The Republican Senate has led and the Democratic house has reluctantly followed. But after we got the Kennedy Center funded, that was really important to get that done, we've got cooperations from the -- let me also say we got PBS funded, too. So that was another plus.

Once we got the cooperations with the Democrats, as very needy American businesspeople stood by the sign and watched the sideshow, regardless of how it happened, the program appears to be a huge success. So successful, we need to reload the funds because we're running out of money. And I heard today, we may have already run out of money. Kevin's team, as he said earlier, pretty amazing, at about 13 days, 5,500 loans and over $875 million. And they're still coming in.

Let's go to the quarter. The first quarter of 2020 will certainly go down as one of the most bizarre quarters in history. It certainly is the strangest of my 50-year business career. Actually, 2018, 2019 and the first quarter of 2020 will make you wonder what could possibly happen now. In 2018, the Fed nearly blew up the entire country with a consistent and foolish rate increases every quarter. The only rational explanation is that they needed dry powder in the event of a downturn in the economy or maybe a pandemic. I said that.

Then they continued on with their statements that there are going to be 2 more increases in 2019. After tilting the country towards a recession, the Fed then revised the statement to a pause. And next was 2 reductions of 25 basis points each. That was done to prevent a recession. And then here comes 2020, and you know the story there.

Let me say that 2018 and 2019 and the first quarter of 2020 have certainly been a cram course in asset/liability management. Add to that the confusion of the new clown act in town called CECL. These overeducated fools have turned a simple process into an expensive and a complicated fiasco. I have become a believer that if it can happen, it will happen. It's our responsibility to take care of our employees, our customers, our shareholders and our communities that we serve. I think we've done a good job of honoring that social responsibility. Discipline has been the strength of this company.

Was it Jamie Dimon that said, "The hardest thing for a CEO is not to do the silly thing, he sees other CEOs do it." There are a lot of great CEOs in this country, and they will listen to some kind of the squeaky wheel gets greased and some of their people complain once in a while, and the next thing you know, the CEO breaks down like a double barrel shotgun and does silly stuff in the marketplace. It takes real commitment and guts to stay the course because anyone can take the wrong, but easy, ramp. At the end of the day, the weak CEO has not helped his people, and he's been disloyal to his shareholders.

Remember, what you used to say to us was growth, growth, growth. I told you it was not the right time. This was not the kind of growth in the market that was prudent to put our shareholders' money into. I have said that late in the cycle, there were several banks chasing few deals which led to high leverage, low rates, longer terms. I called it the race to the dumbest. The loan customers were totally driving the bus because most -- the loan officers in that market were pretty weak.

There is no right way to do the wrong thing. There is a time to hold them and a time to fold them. We chose to hold them tight. We take what the market gives us and don't push the envelope. As it turned out, I think we've made the right decisions, as tough as it was not to match the silliness to the market. We held them, and I'm damn glad we had. We did.

There is no substitute for experience. I did not see this one coming. But you remember, we started building additional capital in '19, just in case there was a downturn. Little did we know, we are going to be facing a pandemic.

A hurricane is not the same, as Kevin said. However, we are in hurricane mode, which is the closest experience we have to a total disaster. We had 2 category 5 strikes, as Kevin said, Irma and Michael. Irma in the Florida Keys and Michael in the Panhandle. And we are following the hurricane process that was extremely successful for us during those disasters. We deferred those that needed the assistance for 30, 60, 90 or 180 days, providing additional financing for those who deserve financing or refinancing. And if you remember, the losses were minimal. We expect the same in this process. The insurance company here is the U.S. Treasury.

The difference today from '08 and '09 is that nobody had any money in their deals back in those days. 95% finance and 100% financing and more. It was a way of life. It was the way business was done. It was another race to the dumbest. Much harder to walk away today because our customers have millions of dollars of equity in their deals. Then in the midst of the pandemic, with thousands of people dying, and hundreds of thousands people infected, and Americans locked in their homes, the accounting clown show up with the new circus act called CECL. Total disregard for the mess they've created by creating uncertainty in the market.

The circus genie should have never been allowed to get out of the bottle. No disrespect to accountants. The program was created by a bunch of accountants who probably have never run a business in their lives. They account for what others do. That's why they call them accountants. Now they're creating a new industry to solidify their position forever in the space of banks, while creating for banks hundreds of millions of dollars of additional expenses to pay for the Barnum & Bailey act called CECL. The rational thing to do was to look at how banks maneuvered through the worst economic cycle in 80 years and reserve properly.

Pretty simple, a 1.5% to 2% reserve has been sufficient for us while making specific allocation reserves when warranted. However, this doesn't cost much and doesn't create much distraction. Guess what? After all the costs, all the distraction, all the people, all the modeling and the reserve getting hit with an additional $71 million due to unemployment, for the month, our reserve came out at 2.01%. You cannot make this stuff up.

Asset quality. I think our hospitality book will be fine. Maybe some will take a little time. We may refinance some of our customers, but remember that 98% of our hotel book has so much equity that we'll be in a position to help finance them out of problem if needed. Each situation is different, but we know our customers. In '08 and '09, as I said earlier, nobody had any equity in the deal, so they could just walk. But that ship left the port a long time ago.

Banks' balance sheet should be in the best shape they've ever been. And if they're not, shame on them. We had a large customer in about '10 that came to us. He had -- it was a large loan, and he put it on a 7-year amortization and was paying 100% of what is revenue, basically was coming in to pay for that loan. Well, it was about 3.5, 4 years into that when economic problems of '08 took some of his renters out of the business, and he needed some help. But think about it, he had all that equity in the day. We simply put him on 10 years and never looked back. So I think equity in this situation will be extremely important, and Home has lots of equity in their deals. I like our book.

From a loan growth perspective, you heard Kevin's report on PPP. So short term, it's going to be strong. I think the new Main Street lending will be the next step. And we have some people who qualify there that didn't qualify for PPP.

Buybacks. We suspended buybacks when the President made negative comments about buybacks. With the stock market hitting all-time lows, we're damned if we buy it back, and we're damned if we don't. With the SEC allowing these algorithms to determine when it's time to file the short zone without regard to the smallest shareholder, appears to me they're running the small guy out of the market. A wealthy investor and somebody I have a lot of respect for, said that the fix is in, the big guys are in charge. Where is the SEC? After 9/11, they prohibited shorting on financial stocks and reinstated the uptick rule. The Europeans have had the rule in effect. They -- about a month ago, they put it in. The SEC could at least reinstate the uptick rule and protect people for just shorting companies into infinity.

Deposits, as Stephen said, good solid growth on that. Dividend, solid as we can see today. In order to bring some sanity back to the loan market, maybe we needed an adjustment in thinking. We did not need a pandemic to make it happen. But certainly, bring those who won the stupid award back to reality. Our decision is to maintain conservative discipline in this company and will continue to pay our dividend. I suspect that not all banks are in the same strong capital position as Home is today. Couple that with the strength of the earnings power, which has been best-in-class for years, and the knowledge and the ability to recognize opportunities, plus the experience to know how to turn weak banks in the top performers. This could be our turn again. If the recovery becomes a long U or an L, there will be many opportunities.

Where there's something bad, there's something good, just find it. We may not be good at everything, but we're pretty good at picking good opportunities, and we certainly have the capital to play the game.

Again, a special thanks to David Carter, Kevin Hester, Randy Mayor, our 11 regional presidents, loan assistants, plus the new recruited people that came in. Amazing accomplishments. Thousands of loans, hundreds of million dollars, if not a billion, in spite of the COVID-19 and the $95 million CECL circus, we would have had -- excuse me, we would have surprised The Street with $0.43 and almost $71 million in earnings. That's about what we've earned per quarter for the last couple of years, so solid performance continues.

Before I go to questions -- we go to questions, Donna, do you have any comment? Anybody leave anything out that they wanted to say that they wish they'd said?

I'm going to give it back to you Donna, and you can do whatever you need to do.

Okay. We appreciate that. Rocco, I think we are good for questions.

(Operator Instructions) And today's first question comes from Joe Fenech with the Hovde Group.

Johnny, the main thing I'm trying to figure out is if you look back to your history, you guys have always taken decisive action early. You've always been real conservative. Remember going back to when you guys took the big charge years ago all in 1 quarter, and that took care really of all the credit issues you had from '08. From what you can see today, is that what you guys did here with the $72 million provision for the virus? Did you clear the decks? Do you think you got it all? Or is this potentially just the tip of the iceberg? Or is it maybe somewhere in the middle of those 2 extremes?

We've never been here before, Joe. We didn't -- after evaluating the quarter, we -- as things got worse at the end of the quarter, we looked at Moody's at March 31, and then we looked at Moody's at April 10. And we took the -- even though it's worse, you're right. We're going to get it behind us if we can get it behind us. We took the April 10 numbers, which were 12.5% unemployment, I believe was the number. Is that right, guys, 12.5%?

So that was -- I think we took as much of it as we could rationally take and hopefully, we got ahead of it. We -- I think Brian Davis may have some additional numbers. I think we won't even -- I think Brian even ran it a little further than that. I didn't think it was necessary. We may be -- we're known for overkilling. I can't answer to you. I can't tell you right now that we've overkilled this. We hope we have. We think -- I like our book about as well as I've ever liked the book. I think we're in as good a shape with our asset quality and as our capital and our earnings power as we've been ever.

So I'll let Brian -- Brian, you want to pick up on that and tell what else you did on the -- when you looked at that?

Yes. I sure will, Mr. Allison. Joe, we -- Mr. Allison is correct. For the Moody Analytics, we had a 12.5% unemployment factor, which accounts for about 70% of our overall CECL calculations. We project out of few quarters. And can I say that this is it? No. Can I say we will have much better forecast later? No. But I'll give you a little color, we had 12.5% for the upcoming quarter, and then it kind of went back down to 9% for the next 3 quarters. If that's the way it turns out, then that will probably be a good allowance for loan loss of 2% going forward for the rest of the year.

We did run a kind of a more worse scenario because there's no guarantees that this is going to get better. Well, there's no guarantee it's going to get worse. But let's assume it gets worse. And let's assume that the unemployment factors go to 20%, and then instead of leveling back out at 9%, it goes to 15% for a while. That would have caused us to have an additional increase in our credit losses. And for example, we're at $228 million today in allowance, going to a 20% and then down to a 15%, 15%, would take us to about $350 million in needed allowance.

So we think we're in good shape. We've got plenty of capital. We did a break-the-bank scenario, which said, "What happens if we just had, for example, where does it take us to get to the point where we no longer are well capitalized in all of our ratios?" And it was almost $1 billion of loss before the bank's total risk-based capital ratio fell below 10%. So there's a little color on where we stand, Joe.

That's really helpful, guys. So Brian, I guess the way to summarize it is, another, call it, the difference between the $228 million and the $350 million is the additional provisioning, if we go to that 20% unemployment and then settle in at 15%?

That is correct.

Okay. And Johnny or Brian, I guess, also, at what point does the dividend come into consideration? I know you suspended the share repurchase, but at the $350 million in needed allowance, does that keep you comfortable in maintaining the dividend? Or you kind of look at the dividend along the way?

I think actually that it will be cheaper for me to remain married. Because if I cut the dividend, I'm probably going to have to do a stock split because my wife depends on that. It's her toy money. She owns about 1 million shares a piece. So I think it could be I think it'd be better off to pay the dividend. So as we see it today, we think we make the dividend solid. We have suspended buybacks because the President said there was a dislike. I was thinking there may be a bank program that comes out at some point in time, and those that were continuing to buy stock might be eliminated from it. So that's really the reason. I can't hardly stand not going in there with both feet today and just buying all the stock we can get our hands on. But we'll -- and I can't tell you that we're going to stay out of the market because it's so tempting to get in and buy the stocks. Did I answer your question?

Yes, you did. I appreciate the color. Johnny, forgetting for a minute how the regulators make you classify loans and stress test, what does the Johnny stress test look like here? Meaning the way you look at things, how do you bucket the risk for the company in your own mind? What worries you the most here? You said hospitality wasn't at the top of your list of concerns. What is the thing that tops the list right now?

I never -- our biggest losses in our history have been C&I. I worry about our C&I. I just never been -- I've never been a C&I lender. I know the regulators have pushed and given credit for C&I over the years and I just never have been a big C&I lender. We don't have a huge book of C&I. I think Chris has got a book of, what do you say, $500 million is what I think or something in that range in C&I? But I think that's probably the risk. I really actually -- I'm feeling good about our position. I hope I'm not foolishly feeling good about it, but I think this company is in is -- look, the banks have had 10 years to build fortressed balance sheets.

Most of them had -- those that hadn't, shame on them. Those that did the low rate, high leverage stuff, shame on them. We didn't do it. It was difficult not to do it. A lot of times when our people see that, we held the course. We didn't do the silly stuff. And I couldn't be happier with the sustainability of what I believe this book is. So the Johnny call is I like what I'm -- I like our book.

Okay. And then, Johnny, you were one of the first to see the benefits from the failed bank opportunity last time around. You alluded to the U and the L in your comments if we get into that type of recovery. What does your gut tell you as to when the right time to go on offense will be? Could it be this year? Or still you think everyone stays hunkered down for the rest of this year?

It depends on what they've done in the past. And how many of them want the stupid award. So some people are going to -- everybody is not going to get through this clean. There was one failed bank, I think, last week, a week before last, small one, $100-something million. But I said to a friend of mine, I said, "Well, there's a -- it started." So I've got my eye. And I think there'll be some that will have some problem, particularly those are heavy in oil. I think oil is a problem. I think that energy is a problem. There's going to be some real problems there. I think it's maybe a major problem. We don't have much of that. And Chris has got a little, and we got $16 million, $17 million with our credit we've had for about 10 years. But I think that could be a problem for a lot of people. And I'm not sure you're not going to see it happen later this year. We'll be aggressive when that happens.

So could this be your pivot to Texas opportunity, like in the late -- with Florida?

Could be. It could be if there's an opportunity there. I don't know where the opportunity is, but it'd be a great pivot opportunity. I don't know if Tracy is ready to pack it. He left for 3 years when we sent him to Florida. Tracy, are you ready to go back?

Ready to get out of the office or quarantine that has kept us in.

Got it. A couple more quick ones, guys. How should we think, maybe for Kevin, how do we think about the revenue contribution from PPP here? Is there any added expense in terms of people or anything else? And then, Kevin, do you have the breakdown of PPP loans in the different buckets? I know you said $160 million was the average, but if you could bucket it out for us, we can kind of back of the envelope at what the potential revenue is here.

Yes. I don't have the breakdown with me. As far as the revenue contribution, there'll definitely be a revenue contribution. Our accounts have said that the fees are going to be accrued over the life of loan. So depending on how much of it gets forgiven and how much we have to carry for 24 months, that -- there's a lot of uncertainty there as to when it will be contributed. And there are some additional costs because we're going to have to -- we've got a lot of people working overtime and putting a lot of time into and still have much more to go between now and the end of the funding and then the end of the forgiveness phase of this. So it's a little too -- kind of like a lot of it is a little too early to determine how much contribution there is going to be.

We had -- we lacked -- we didn't get them all funded. We had about 800 or 900, maybe 1,000 that didn't get funded before they ran out of money. Hopefully, they'll reload that, and we can go again. But you can do the math, the majority of them were less than $350,000, and there were, like 4,400 of them, approximately 4,400 of them that we have SBA numbers on. They haven't all funded yet, but we have about 4,400.

You can get an idea of that. We had some that were $2 million and some that were $700,000, $800,000, but the majority of them were $350,000 or below. So you know what the numbers on that is. But we always -- the Fed doubled the interest rate on those. So it's good. We went from 0.5 point, all the way up to 1%. So...

I see. Okay. Then last one from me, Johnny, you alluded to -- we talked about Texas. And when you did the Florida deals, you stayed in the concentrated area, you didn't hop all around the southeast to do your failed bank deals or whatever. Will you look to do the same thing? Could you look to do the same thing in Texas? Or should we think about this as you'll be opportunistic in maybe Louisiana or Oklahoma? Or some other areas are on the radar, as you had your eye on a specific geographic area you would focus on?

Well, we like to build a franchise, and that's what we were able to do in Florida. We'd like to do that again, to say we wouldn't step outside of that and take a look. As you know, last time, regulators really want us to bid in Georgia. We never bid in Georgia. We just stayed hitched to us in Florida and built that -- built the franchise in Florida, which worked out well for us. And maybe there'll be 1 or 2 in that market that -- most of the banks are in pretty good shape, but there could be 1 or 2 in that market that got hurt. They didn't -- we'd be aggressive after those. But I think Tracy has a cowboy hat and a pair cowboy boots. So if he needs to go -- he doesn't have a big belt buckle, Joe, we need to get him one and we can send him into Texas. You have a good [day].

Our next question today comes from Brady Gailey with KBW.

So I wanted to start -- You all gave some great color about the hotel loan portfolio. But how much do you have in outstandings in the restaurant food service business?

Brady, this is Kevin. I don't have it broken down. I mean that [next quote], we gave some numbers on about $493 million deferred in a $788 million balance, that includes the hotels too. I mean we don't have a huge restaurant exposure. It would be things in our local markets. We don't have a group or division that focused on that type of lending. So it would be the normal customer base that we have within our markets.

All right. That's helpful. And then maybe a question for Chris Poulton. Chris, as you look at your loan book, what's the area that you think will see the most stress, just given this new backdrop?

Brady, it's Chris. The most immediate stress will be on the C&I side. You're lending on cash flow, and cash flow is drying up over the last 30 days. So from an immediacy standpoint, it's C&I, just because you're lending on cash flow. And with regard to CRE, we just don't have a lot of cash-flowing assets, right? I mean you're doing construction or bridge or what have you. So you've got a lot of duration built in and we have payment reserves. So we haven't seen a lot of stress yet in the CRE book. We think over the course of the 6 to 9 months, you'll start to see some things shake out, et cetera, but a lot of multifamily, a lot of mixed use. We think that weather is pretty well if you can build in duration.

So from my point of view on CRE, it's all about building in duration and getting people where they should be. At these low LTVs with a lot of cash in the deals and a lot of payment reserves, you should be able to weather for a while. The portfolio is built for withstanding a recession, I don't think any portfolio is built for withstanding a shutdown. And so as we move from shutdown towards the aftermath of that, I think the CRE works pretty well, but we're staying very focused on C&I right now.

All right. That's helpful. Then the last question from me, I guess, either for Brian or Stephen. But as you look at the net interest margin, it held in great this quarter, the core NIM was actually up a little bit. But with the new backdrop, and we're back to 0 Fed funds and the long end of the curve, it's a lot lower. How do you think the margin trends from here? How far do you think it could go down?

That would be Stephen.

Brady, our ALCO models show -- and I can kind of tell you what the ALCO models show and then what we're seeing on a daily basis. Down $100 million scenario was about a 6% contraction to NII, and then it's pretty linear, 3% on, down $50 million, down $100 million, down $200 million. So we think the model shows somewhere in the 9% to 10% down range, on a down $150 million, which is where we're at today. Yes, in my comments, said, and we're seeing today that funding costs are -- we're able to get down a little quicker maybe than what we've seen in past rate tightening cycles. Yes, I don't -- caution how much optimism to give there. But I mean, I think we have seen that able to get funding costs down a little better. And then we've had just over the last 3 or 4 months, as the variable rate loans have changed, we've had several hundred million hit floors and become protected. So the investment portfolio will reprice it as it does. But we're working it daily.

April 1 was a big day for us. We had a lot of adjustments on April 1. I started looking at the first 9 days of the month of this month and was quite surprised at the reduction in interest expense. So the team's done really a good job of reducing that interest expense. Pretty pleased with that, and we got, as Stephen said in his remarks, we got about $400 million repriced in this quarter and about $1 billion...

$1.4 billion.

$1.4 billion were priced in -- over the next 12 months. So they've worked it pretty hard. Tracy attacked early. And it -- so far, so good. When you see those brackets around interest expense this month compared to last month, and they're becoming big numbers, you would -- that's pretty good.

Our next question comes from Stephen Scouten with Piper Sandler.

Glad to talk to you in these crazy times. I appreciate it. I appreciate the color you guys gave around some of these loan deferrals. And I don't know if I missed it, but do you have any breakdown between what that looks like on maybe a resi mortgage or consumer-type of a standpoint versus commercial loans?

Kevin?

Look, I don't have a breakdown from a commercial to residential standpoint. I mean our residential book is not huge. I can try to ferret that out for you, if you'd like for me to, after the call.

Okay. And then I'm kind of curious, just -- I've heard differing views from different banks. And just what the accounting treatment could be for these loans after the 90-day period of time. And if you then actually extend the maturity or modify the loans further, would they theoretically become TDRs at that point in time? And is that an expectation that you have at the end of these kind of forgiven period?

Well, it's not an issue we've had in the past in the 2 hurricanes. And obviously, it was not as material to the bank as a whole. The numbers we had there they are going to be going forward. But I don't anticipate, from what I've read so far, I don't envision that a second 90 days is going to trigger a TDR at this point. I think they're going to give us some flexibility on this.

I think it was -- when that's part of the legislation, that part of it, as I read, that the -- we wouldn't have TDRs, we'd keep a record of the amount and the numbers that we've deferred over a period of time as we did in the hurricanes -- when we got hit in the hurricanes, but as I understand it, this -- we're not going to create TDRs. What we asked, we got called by our Senator, and we asked that not be classification changed on the loans and that we not have TDRs after we did, kind of similar to 9/11, what happened at that point in time. We asked for some of that same grace. It worked out fine. If you remember, they didn't classify hotels after 9/11. We asked for that same grace, not to classify hotels. So I think the regulators are going to be -- going to work with us as well as we -- everybody is cooperating together to get through this cycle.

Okay. Makes sense. And then when you think about loan growth for the rest of the year, I mean, obviously, like you said, you guys have been pretty conservative on that front for the last 12 or 18 months, and that is really proving you right here today. And I'm just wondering how you guys view what the rest of this year could look like? I mean would you expect it to look like 2019? Or further reductions in loan balances even possible there? Or will PPP and drawdowns of lines on the CCFG book kind of prop things up in your mind?

I'll take a piece of that and let Kevin have it. The Main Street Lending looks interesting to us. I think that's got some real potential to help some people in the marketplace. Some of our customers -- larger customers didn't qualify for PPP, qualify for Main Street Lending. And I'm not sure all the details of that are out yet or not. We'll probably, at some point in time, after we get through the PPP, switch over -- have some people -- some of our teams switch over here early to move on Main Street Lending because we think that could really help some companies out there that need help because it's -- I mean it's a 4-year program. First year, interest and principal are deferred. We have to keep 5%, the government takes 95% of that. So that has some real appeal for us going forward in the future.

So we'll continue -- so we haven't backed up on loans. We've asked the question with our loan officers when they're presenting an executive loan, have you talked to your customer lately? Have you talked to them since this pandemic hit? Is he still thinking clearly? Is he still going forward? He appears to have the money to be able to do what he wants to do, but have you checked with him? So we just kind of -- we're being a little more cautious about what could possibly go wrong with him.

As far as underwriting, we're underwriting exactly like we always underwrite, maybe do more -- maybe we look more. I don't know. Kevin, what would you say?

Well, certainly, from a financial statement perspective, our guarantors and our sponsors, if that statement's even 3 years old -- I mean 3 months old, it's too old. So we're having to reassess the current numbers and current values of things, what their projects are doing. So Johnny is right, we're not changing our underwriting, but we do have to take into account what's going on in this particular situation and see what kind of effect that might have on a project or on a borrower.

So I think Johnny said it, we're still going to -- we're still open for business. We're going to keep doing what makes sense. And I think that's been our -- what we've always done, whether it be acquisitions or lending or whatever we do, we take the opportunities that we have. And this could create an opportunity in some places. Chris can say the same thing about his book of business and what he is doing. And so we'll continue to look at things in a prudent manner and do it based on what we see that's happening in the market today.

I'd just add to that. I mean the payoffs now are certainly going to be less. And we're seeing that come across. So that's been part of our -- not growing as much. And with all of our customers probably in a position today, could be some opportunities to advance some funds, to help them through whatever times they go through now, and there probably won't be as much paydowns over the near future, until the world gets back right again. So the loan growth does have an opportunity.

Well, you're going to have -- if nothing else happens, you're going to have over $600 million in PPP loans that are going to come on in the second quarter and probably go off in the third and fourth quarters. So you're going to have some noise just because of that program by itself.

Makes sense. And then as it pertains to the CCFG book of business, and I think, Chris, if I heard you correctly, you said maybe $280 million in payoffs and then net growth, it was around $168 million. So that $448 million, if I'm doing that math right, was that new production? Is that predominantly drawdowns on these facility lines? And can you give us an idea of, maybe for the book as a whole, how much -- where you guys are in a percentage of line utilization or unfunded commitments and what could get drawn down on?

Yes, happy to. Yes, generally, the quarter was really a tale of 2 quarters, right? January and February was pretty normal, activity that you'd expect. We don't have a lot of paydowns in the first 2 months generally anyway. And then you had new production a little bit and a lot of draws on the construction facilities as they go through their work. And then we had some activity on our single -- or on our multi-asset facilities as well.

In terms of the sort of the idea of drawing down on lines, I think you'll potentially remember that in our real estate portfolio, our facilities really aren't lines, they're at our sole discretion. So new assets can be added, but they're each individually underwritten and they're done at our sole discretion. So there really isn't lines to draw down on because it's not really a line, it's more a guidance facility. We have 7 facilities in the C&I space, as I mentioned. Those are more borrowing base facilities. And so they do have an ability to draw down on lines if they have -- if they meet the criteria and have enough borrowing base. We did see $60 million of draws on lines in the C&I space out of those 7 credits, and then we had $15 million of that payback actually the first week of April. So it's a pretty small part of our business. And we do generally see those facilities and lines in the C&I space draw down at the end of the quarter anyway. So I would have expected some of that to draw down. I think we got more of that drawn down at the end of March, just given that a number of people wanted to be able to draw down and show they had liquidity. And then after that, I assume they pay that back a little bit as we've seen.

I would generally expect, going forward, we'll continue to see construction draws as those projects progress, though we do expect there to be certain delays and they'll move a little bit slower. And then we'll sort of see where new production leads. We've never really been hungry for growth, and we've always sort of taken where -- what we see in the market and evaluate that. I would say we're continuing to evaluate opportunities. We probably look at those a little bit differently today, and we're still out there. We're still looking for opportunities, and we're going to be helpful to our customers and former clients and friends and such. But we're taking a look at those each individually, and I think there'll be opportunities to come out of that. But I also think there's a lot of things that we're being shown right now that just don't make sense.

Our next question today comes from Jon Arfstrom with RBC Capital Markets.

A couple of follow-ups here. Stephen or Brian, just back on the assumptions that you used for the provision for the quarter. There's a $5 million number that you referenced, which the ordinary CECL provision -- I guess my question is, if we're sitting here and we're around 12.5% unemployment 3 months from now, is that the kind of number that we should look at for your second quarter provision, just the way it sits today?

I'll take that. Yes, that is correct. That $5 million is -- we're still at the 3.6% unemployment rate. That would have been what our provision would have been.

Okay. Good. And then I guess the other thing, big picture on -- how would you guys like us to think about nonperforming trends? It sounds like you feel like you've captured maybe the most of the potential pain in terms of your reserve levels now. But is it fair to assume that we are going to see a pretty material jump in nonperformers, but you feel like you have the loss content covered with your current reserves, if that makes sense.

We're not going to see a huge jump in nonperformers because they're deferred. So you're not going to see that. And Kevin said, it may be as it was in the hurricane. It's not a hurricane, but it's going to be treated similarly. And I'm glad that we had the experience of the hurricane because we're deferring those people at this point in time. Some of them will probably have to refinance out of their problem, maybe at some point in time. We did that in the Keys we had to help some people get out of the problem. They got out of the problem without any loss to us. So I don't think you might see a spike, a little -- small spike, but I mean we're deferring these people. In the meantime, we're talking to them where they are, what they're doing. Kind of it really depends on what the economy does and how quick we come -- business comes back.

It is. And you got -- I mean, we're going to be writing checks for $680 million to these customers as well over the course of the next week or 2, that -- that's something you don't normally -- that's not something that we've ever seen. So it's really very hard to try to determine what we think nonaccruals will look like. The deferrals and that $680 million are a big help.

So we didn't have that in the hurricanes. We just deferred them. I mean we knew the customers, and we just deferred them. And as they got their insurance checks or fought with the insurance company, and we took them one by one, the situations, what they needed, what we could do to help, and they all walked out. I don't -- did we lose any money?

Very little. It was not material at all.

Very little. That's the closest thing that I know to compare it to, John.

I think that contends on the additional money from the SBA, too, right? I mean if Congress moved back and put some more money out there for the small business that protects them and us as well.

Yes. You can have the -- Stephen is right. If Congress acts and we get some more money out there to business, that will be great. But you can also have a Main Street Lending loan and a PPP loan. So we can do both.

And just following up on a couple of comments you made. Just that -- you talked about deferrals, and you're saying it's 2,500 loans or about $2 billion. Where do you expect that to go? Or do you feel like you've contacted everyone that would take advantage of a deferral?

I think that it's been increasing. It slowed down a little bit last week. We had a couple of hundred million one day this week. So I mean there's still some trickling in as we go forward. I think that pace, the determination of what that pace looks like will be determined by what this -- how long this event lasts. There's discussions of beginning to open up some things and you think Arkansas would certainly be part of that. I don't know about Florida and how that -- what the individual plans look like, but those plans will have a lot to do with whether another 90-day deferral is needed or not.

Another 90-day deferral would not be the worst thing in the world. I mean we saw in the hurricanes a second one for some folks was needed, and that wasn't a big issue when they were able to get back to get their properties repaired and get back to full employment and full business. Same thing here. It's not physical damage, but if they're able in 6 months to come back to full employment and full revenue or somewhere close to that, these deferrals will be a big part of that.

Well, you think about the Keys. I mean the Keys will come back. They stopped 2,000 cars so far trying to get into Keys. I mean the Keys will come back fairly rapidly. I think people have been cooped up long enough. When you think about the marine business we have, that's really a plus to be in the marine business. It is the only thing that families can really do. They can ride a bicycle together. I guess they walk through the neighborhood together, maybe. But I'm just back from the Keys, and boats are everywhere in the Keys. And families, they're staying 6, 8, 10 feet, the boats are not side to side, but the families are out in the boats, and there's boats going everywhere, the fuel stations are open. I heard some of them in Miami were closed, but I understand you can get fuel on intercoastal. So I mean, that recreational activity is still alive, and that's a real plus for us on the marine side.

Think about the Keys in 2018. I mean the hurricane that hit down there was as impactful on that geography as this COVID is on the entire country as a whole. And it took them 6 months to a year to get back where they needed to be. And at the time of this event, they were doing as well as they've ever done. I mean the folks that we talked to, they were having some of their best years. So there's no reason that, that couldn't happen on a larger scale here. Just depends on -- none of us know whether that's going to be a V, a U or an L.

Our next question comes from Michael Rose at Raymond James.

Most have been answered, but I wanted to follow up on John's question in sorts. If this -- it does seem like there's going to be some behavioral changes, to say the least, as it relates to the impacts from COVID. If I were to look at your loan portfolio, outside of the obvious things, like leisure and hospitality and stuff like that, what percentage of your loan book do you feel would be at risk from like the large gatherings not really happening as much, at least in the kind of nearer term, things like that? What other industries should we be thinking about? And do you have a rough guide for what percentage of the loan book could potentially be impacted?

I guess we -- outside of leisure and hospitality, I think marine is fine. I'm not a fan, never been a fan of C&I, but we got C&I. It's -- we don't have a lot of it though. Energy. Energy has got to be a problem. I mean a $19 barrel of oil, that's got to be a problem. Even our company that owes us about $16 million, it's been with us for 10 or 12 years, they've cut back substantially. And they sold their hedges and picked up about $30 million and paid the banks down. So I think energy probably is very suspect at this point. Kevin, you got...

There would have to be some service-type industries that -- your gyms, your things where people do congregate in mass or in -- where they wouldn't -- where social distancing really doesn't work, those are probably related a lot to real estate. And so that real estate could probably be repurposed. But at this point, we've not identified specifically anything -- any types of industries like that. We haven't gone through that exercise yet.

Okay. So maybe just all those categories that you mentioned, do you have a sense for what they comprise as a percentage of total loans?

Say that again -- I'm sorry, I didn't hear you. Say that again, please.

Yes. All those categories from oil to all the troubled -- the hospitality, leisure stuff, if you just add all the ones that you mentioned together, what does that represent as a percentage of total loans? Just trying to size the problem -- potential problem bucket.

I mean you got $800,000 in hotels, and you got -- we had $16 million in oil and gas. Chris, I'll call on you there. I don't -- and you might give a little color. I think you said -- or Chris said some of the projects have been slowed down or stopped or something. You might give a little color on that, too, if you would.

Okay, sure. Yes. On energy, Johnny, it's -- we have a facility with $50 million of exposure on energy, but it's across a number of credits. It's across about, I think, about 60 credits in there. So it's pretty diversified, and it's a facility against other loans. So we have a little bit of protection on that one as well, at least downside protection. We had moved out of some of our single credit names and energy into this facility, and we keep energy at 10% or less of our portfolio. It's generally about 15% of the overall economy, but we keep that underrepresented, and we're continuing to monitor that, but we feel okay about it right now.

As it relates to other projects, we have 6 projects in New York that are stalled or -- sorry, that are on hold right now or have been stopped by work order under New York, New Jersey and Connecticut. But really for us, New York, New Jersey, effectively all construction has been stopped. And so we would expect that to restart this summer. We had 3 of the 6 are effectively complete, and so they're really waiting on the city offices to reopen so that they can get their TCOs, those are multifamily credits. And then we really had 3 that just started. And so a short delay here isn't going to have a meaningful impact for their ability to carry, et cetera, just pushes it back a little bit further.

All of our other construction projects are actually continuing, albeit some of them a little bit more slowly because they're in geographies where there have not been stop work orders on construction. And so we expect them to maybe move at a little bit slower pace, but they are all active in continuing, and we're monitoring and updating those weekly.

Okay. Maybe just one follow-up for me, just back to the unused commitments. How much is outside of Chris' group? And then what is the utilization rate on that? And has that -- has had those drawdowns slowed some -- into April, some of the other larger banks have mentioned?

On the construction side, I mean, those -- other than the 6 projects that Chris was talking about in New York, our projects have continued to progress. There's been really not -- I'm not aware of any significant delays in the construction process itself of anything outside those 6.

Back to your question about the -- any other segments. We do have a -- in our CRE book, we break it down by collateral code, and one of those is a -- what we consider single purpose building. It's kind of a catch-all for anything outside the major asset classes, and we have about $750 million in there. If you look at the deferments by collateral code, that would have a higher percentage, it's up around the same percentage deferred as the hotel portfolio. So if you want to pick up another segment, real estate loans will certainly keep our eye on, it's probably that one, just because of the percentage of deferrals that are in there.

Our next question comes from Brian Martin at Janney.

Just one question, maybe for Brian. Just, Brian, if you go back to your comments just about if you went to a worst-case scenario on the unemployment where if it goes to 20% and then settles at 15%, that additional add to the provision that you guys would anticipate, is that likely -- when do you likely make that decision on? I guess what employment rate do you have -- what date of the unemployment rate you have to see? I mean would it likely be a 2Q event and kind of get everything in front of you? Or just how do you think that reserve build unfolds, I guess, is ultimately what I'm getting at, if needed.

Well, Brian, I mean, it would probably follow similar to what we did this quarter. We're using the Moody's Analytics forecast -- economic forecast. And we would look to see where we are at June 30. When we're at June 30, which may be a bit a couple of days into July, we would see what the forecast is. If things have gotten a lot worse, and the unemployment is up at 20%, then that's the likely scenario. If things have improved, then that would not be the case. But it would be right at the end of the quarter when we'd make that decision.

Okay. All right. That's helpful. And maybe just one for Stephen on the margin. Just, Stephen, big picture on the margin. If you think about that 9% to 10% hit, if you have the 150 basis point emergency cuts here by the Fed, and that seem like it would translate to, I don't know, somewhere around 30 or 35 basis points. But given your comments on where the cost of deposits were and how the success you're having and bringing those down in April, if it's around 60 basis points. I'm not sure what you're seeing on the new loan yields. But would you expect that 9% to 10% to possibly be a little bit better as things unfold if you're able to get deposits down like you're suggesting? Just trying to get some context of how to think big picture about the margin.

Yes, I think so. I mean I think if you got to pick a side up 10%, I mean, I think, there's some uncertainty around investment -- reinvestment rates. But there's a floor somewhere on loans in terms of where we put new credit on the book outside of the PPP program. So I mean, I think that lends itself to potentially be a little better than that. But it's -- yes, we go back to it. We're working it every day and but also mindful of liquidity and other things during these times. And the level -- I think Brian mentioned the level of cash we're holding will -- may be an offset to some of that.

Brian, look at the last 9 quarters, look at the margin for the last 9 quarters. I mean we work very, very hard at it. And in spite of all the craziness that's going on in this marketplace, we've handled our margin. So I mean, within reason, one of the best in the country, I would say. So I mean, Stephen thinks it still might go down 10% or around -- I don't believe that. I mean I don't believe that. He's probably right. The model says that, but I don't believe that. I think this company with -- they've done -- Tracy and Steve, they've done a great job on cost of funds. I mean they've really brought that down, and they brought it down in a hurry. So I think there's still some more room there to come. So I -- we're still riding in the high 4s. So I'm pretty optimistic.

Yes. Okay. That's what I was taking away from the comments about the fundings being at 60 basis points in April. So it seems like it would be better. So that is helpful. And just maybe one last one, just on the expense levels. I guess this current level around $69 million or $70 million, given all of the things and the people working overtime, I guess, is that kind of a good baseline to think about as we enter second quarter? Or is there something that would really ratchet it up or adjust it significantly as we think about it, given all the initiatives on the PPE and other events you talked about?

This is Tracy, Stephen is looking -- we're looking at each other like, you hit the nail. It is going to take some personnel to do this extra work, and that would be no problem if that's the case. But there shouldn't be anything outside normal, what we're seeing today. We're always trying to improve it, of what we can do. And I think once this uncertainty settles down, we'll be able to make adjustments that need to be made throughout the company to take care of the customer in different ways potentially. So...

Yes. I think the low 70s run rate's fine.

I want to qualify the margin. That's ex PPP, if you understand what I'm saying, that's ex PPP. If the yield on the PPP will really be good, I mean if they take us out in 8, 10, 12 weeks, that's like it's scheduled to do, then you'll see a pretty good yield kick there. So I guess that Brian, does that go in to -- if that -- that will go into interest income, correct?

That is correct.

Yes. I was going to ask you, Brian. That was my other question was just, the impact of the PPE that, obviously, the loan rate that you've got and then you've got the fees. The fees are going to go through the fee income line. Is that the way to think about that?

That is correct. You're supposed to account for that the same as you would origination fees. So we could get 4%, 5% extra that would -- could potentially amortize over 12 weeks.

It will be a margin.

Yes, it will be a margin.

And our next question today comes from Matt Olney at Stephens.

Just want to follow up on some of the commentary that you had on the loan deferrals. I'm curious on the loan deferrals, how much of these are from Centennial Bank reaching out to the customers versus the customers reaching out to the bank? I don't know if you have any stats on that or just some general commentary on that.

Yes. I think it's a healthy combination above. I think our vendors are out talking to their -- not out, but they are talking to their customers. And I think their customers are calling the bank to find out what the bank can do for them. So I think it's definitely a 2-way conversation.

Okay. And then on the PPP program. How many of these customers you're working with are current customers versus how many are newer customers? Just trying to get a better idea. Is this an opportunity to build some new relationships for the bank?

So virtually all of the first -- this first pass is existing customers or a new customer that's part of a relationship that we already had that maybe they banked partly somewhere else, and they brought us all of it. So almost all of this is related to an existing relationship. The next tranche, if there's more, then we certainly could and would be open to opening it up to new business. And that's -- there aren't, we're modest, from what I've been hearing, there are many banks that were doing that. Everybody was keeping it to existing customers.

We couldn't really get there, Matt. We were so busy. I mean this team's worked almost 24 hours a day for 10 days. I mean they just couldn't get there. I mean we would have liked to reach out and picked up some outside customers, but we had to take care of our own first.

Sure. No, understood. And then, Johnny, I guess going back to the marine loan portfolio. I'm curious how you think about the risk profile of these loans. On one hand, these are high-net-worth customers with good credit scores that can afford larger ticket items. But on the other hand, these are discretionary purchases that are probably seeing some lower valuations. So I'm curious what your thoughts are on just the risk profile of this portfolio.

Well, it's the same risk profile of the first $400 million that we bought. And it is the only recreational activity that families can do. And if being in Florida recently and in the Keys, is any example of families in their boats, because they can do it. I mean they're sitting in the house, right? And they can ride a bicycle, they can walk around the block, I guess. But they're getting out in their boats. So it is the recreational activity that is -- that everybody can do. I think before some -- number one, boaters are pretty serious about their boats to start with. And if they can get their family out of the house and get them in a boat and get them out and let them have a big day, I think that's a hell of a plus for them. And I -- having seen what I've seen in Florida. I'd say the likelihood of someone giving up their boat is slim and none. Yes, there'll be some probably, but we're not seeing it.

Well, I mean, I think if you look at 6% so far, the same period comparing against the rest of the portfolio, 6% deferred out of shore compared to 18% on the entire portfolio, I think tells you what our customers are thinking where they're at right now. They're certainly willing and able to continue to pay the full P&I payment. And to your point of having customers with high net worth and good liquidity, they have the wherewithal to withstand this short-term adjustment and what the value might be in their asset. They're not going to worry about that short-term change. If we come out of this and the values come back up, then that's -- they've got the ability to withstand that.

And our next question comes from [John Holst] with [Voya].

Quick technical. On the PPP, are you at -- we're not funded yet, right? Are we loans closed but not funded? Or are we still awaiting loan closing? I'm just curious like, personal as well as investment.

So Phase 1 of going through the SBA ended at 9:00 this morning. We were solely -- it was not solely, we were heavily focused on trying to get as much through the SBA portal as we could. We are funding. The funding is -- it's going. It's not going as well as we like for it to. It is happening, and we're moving people from the SBA process now to the funding process to help them ramp up and get the money out the door. But we definitely are closing, and that is increasing by the day.

It sounds like you're ahead of the game. I appreciate it. Good for you.

What you say? The SBA has done more loans in -- what you say, Kevin?

I think I said 14 years' worth of loans in 14 days.

Yes. They did 14 years' worth of loans in 14 days, so you can imagine there'd be some hiccups. So thanks, John. Appreciate it. And I think that is all the questions that we have.

That is correct, sir.

I'll just wrap up, and we'll hang up. Thank you, everyone, for the support. It was a long meeting today. There was a lot to cover. I can understand all the questions. And hopefully, we had the answers. We feel good about things at Home BancShares and look forward to some opportunities.

It may be a little -- CECL was instituted to try and put some stability in the reserve program. It may look like a yo-yo here for the next 2 or 3 years. It certainly didn't add stability, it added lots of uncertainty to the market. So -- and as I watch CNBC and Financial Network, they said JPMorgan put $6.3 billion in for bad loans. Well, JPMorgan didn't put $6.3 billion in for bad loans, they put $6.3 billion there because they had to do it for CECL. So this is all -- the world's not panicking. The world is not panicking and saying that's the end of the world. It is the fact that CECL hit, this crazy program hit at this time, right in the middle of this, and everybody has given credit to the fact that we got bad loans. Well, that's not the case. That's not the fact at all. The fact is it's the CECL program that's causing all the disruption.

So anyway, in light of that, I think we'll have better news in 91 days and look forward to talking to you. And thanks for your support.

Thank you, sir. This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.