Stellar Bancorp Inc (STEL) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CBTX Q1 2020 Earnings Call. (Operator Instructions)

I would now like to hand the conference over to Justin Long. Please go ahead, sir.

Thank you. Good morning. I'm Justin Long, the General Counsel of CBTX, and I'd like to welcome you to our earnings call for the first quarter of 2020. We appreciate you joining us. We also filed our quarterly report this morning on Form 10-Q, our earnings release and a slide presentation that we'll refer to during this presentation, copies of which are available on our website.

Before we begin, I'd like to remind you that during this presentation, we may make forward-looking statements regarding future events or financial performance or our business prospects. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. Additional information concerning factors that could cause actual results to differ is available in our earnings release and in the Risk Factors section of our annual report on Form 10-K, our quarterly report on Form 10-Q for the first quarter and our other filings with the SEC, which can all be accessed on our Investor Relations website at ir.cbtxinc.com. Any forward-looking statements are made only as of the date of this call, and we assume no obligation to update any such statements.

You should also be aware that during this call, we will reference certain non-GAAP financial information. A reconciliation of these financial measures to the most directly comparable GAAP financial measures is included in our earnings release and our investor presentation.

I'm joined this morning by Robert Franklin, our Chairman, President and CEO; Ted Pigott, our CFO; Joe West, our Chief Credit Officer; and Joseph McMullen, our Controller. At the end of their remarks, we'll open up the call to questions.

With that, I turn it over to our Chairman, President and CEO, Bob Franklin.

Thank you, Justin. Welcome to the earnings call for CBTX for the first quarter of 2020, our first earnings call in the company's history. We've chosen this moment for our first earnings call because we feel this is the best way to get our information out to the most people simultaneously in a quickly changing environment. You will also hear from Ted Pigott, our Chief Financial Officer; Joe West, our Chief Credit Officer; and Joseph McMullen, our Controller.

I want to start by recognizing that this is a challenging time for all. We are thinking of those impacted most by the coronavirus, especially those fighting to recover, their families and those on the front lines. I also want to acknowledge our staff, who have worked tirelessly to continue to serve our customers and our communities.

Before we discuss specific results from our first quarter, I would like to give an update about some of the actions the company has taken in light of the current environment and will touch on several topics that we will get further information into during today's call, our response to the coronavirus and dealing with our employees and customers, our current deferral program, our response to the PPP program, our thoughts around the impact of the changes in the price of oil and gas and the impact of an extended low interest rate environment.

As to the response to the coronavirus with our employees. Harris and Jefferson counties continue to be under a shelter-in-place order with essential businesses remaining open. As an essential business, we have worked with our employees to keep them safe but also keep all of our services available to our customers. Our team started our preparations at the outset of March as we obtained supplies and kicked our plan into gear. We moved quickly to emphasize hygiene, to implement social distancing in our facilities and have deployed and utilized technology to allow up to 50% of our workforce to work from home. We have kept our branches open but have closed the lobby services in those branches that have drive-through services. We have a senior management meeting that meets every morning at 8 a.m. to discuss any topic that may appear the previous day or we may encounter in the future as to the response to the coronavirus in dealing with our customers.

I wrote in our annual letter to our shareholders in mid-March of this year and noted that for community banks, our strength is often our resolve, the resolve of our customers and our employees as we work to find solutions on an individualized basis. Since writing that letter, that statement has been demonstrated to me to be very true. We are a bank with a team that is well experienced working through challenging times in our markets, including dealing with hurricanes, floods and economic crisis that have occurred in the past. Although not identical to the challenges that the coronavirus brings, we have a tested business continuity plan and a tested team for dealing with the unexpected.

We have supported our customers through participation in the PPP program and also a payment deferral program. I'm very proud of our employees for their work to support our customers during these anxious times. Though we are not normally a bank driven by volume, our team worked together to find a solution to process a large volume of loan applications in a very short period of time. Their actions allowed Community Bank and our customers full access to the government's PPP program. Our team was able to process and receive SBA authorization for a total of 1,378 applications for a total of $287 million as of April 21, 2020, with an average loan size of approximately $208,000.

Even with our social distancing measures, our employees worked around the clock to address the challenges presented by the program, the significant number of applications and to move through the approval process. We are very pleased to be able to help with what we think is a positive impact to our customers and our communities. We also began processing new applications in the second phase of the program immediately to help our customers who did not receive authorization or apply during the first phase.

We are also working with our customers to support them in their businesses through payment deferrals. We have been working directly on a customer-by-customer basis, drawing upon our experience in dealing with some of the recent natural disasters in our communities. We believe our team is doing a good job, being mindful of the regulatory guidance relating to working with our customers and a good job of documenting these deferrals and testing for TDRs as we enter the deferral arrangements. As of April '21, we have approximately 550 loans under deferral, $466 million of principal amount of loans entered into deferral arrangements or 17.4% of our portfolio. The majority of the deferrals have been 90-day arrangements with only a few 6-month periods. Many of these loan payments will resume beginning in June and July. Of the $466 million, $108 million relate to retail strip centers, $51 million relates to hotels, $32 million relate to restaurants and $23 million relate to convenience stores.

As we think about our loan portfolio and deferrals, our team has been active in reaching out to our customers to understand their positions, any stresses and to maintain contact. In past dealings with natural disasters, like Hurricane Harvey, we thought of our loans in 3 general categories or buckets as we got to the end of a deferral period and expect to do the same with the recent deferrals that we have entered. We also keep in mind the regulatory guidance given to us, allowing for a 6-month deferral without automatically being a TDR.

The first category or bucket consists of those customers who are impacted by the virus but are back off and running and don't need any further work. The second category is those customers who may still be struggling a bit, but 90 days was not quite enough to resume a full payment schedule. The example is a retail center that lost some tenants or have some tenants that are struggling that seek another 90-day extension to either replace those tenants or help their tenants get by. What we will do is evaluate the relationship and the customers as we reach the end of the deferral period, review a plan for the next 90-day period for the customer and, if the plan makes sense, we will defer another 90 days, if necessary. At this point, we will also be evaluating interest-only periods, use of guarantor funds, strength of location, other factors that may put this property in a temporary stress situation versus a more long-term workout.

The third category is highly stressed customer category. These customers whose businesses were not helped by the deferral are on the wrong track and which remain highly stressed. We will move those customers to a workout status. We will devise a workout plan that is individualized to their specific business and take the appropriate provisions or markdowns as may be appropriate. We will not know until the shelter-in-place restrictions are lifted what real effect this shutdown may have cost. We must see what damage the floodwaters have caused to be able to do a real assessment of the damage and know better what our time frames are for repair. Our markets are resilient, and we'll try to resume normalcy quickly if history is our guide.

As to the fall in oil and gas prices, along with the spread of the world coronavirus, the first quarter included a major fall in oil and gas prices. Our markets have come to understand that every few years we will get a new mark on oil and gas and a new alignment and reset of the industry. What we know is that the oil and gas industry is not going away. The question is, what the new pricing, supply and demand factors will be and how the industry will reshape itself to deal with these factors. The oversupply of product is substantial, and the demand is weak. We think it will be some time in 2021 before we see any real resurgence in the oil markets. We have never been heavy energy lenders as our total direct and indirect exposure to oil and gas is approximately 7.2% of our gross loan portfolio.

There's no question that low oil and gas prices impact our region, but Texas can be painted with a broad brush when it comes to oil and gas. While energy companies contribute significantly to the Houston's GDP, the economy in Houston has become much more diverse over the last 3 decades, and several industries contribute to the economy's growth and diversification. Major industries for employment include energy, health care, our large port, manufacturing, education, petrochemical and finance. However, we will need to see the cloud of the coronavirus lift before we can truly evaluate the impact. Joe will address our oil and gas exposure more specifically later in this presentation, which will give you a better idea of how we look at our exposure. As to the low interest rate environment. Next, I want to cover our actions with respect to the low interest rate environment we're in today. We began dropping our interest rates in late November since -- November 2019. Since November 2019, we have continued to monitor interest rates on our deposit accounts and our competition and reduced our rates in March and late in the quarter as the Federal Reserve continued to lower rates. We feel our deposit accounts are competitively priced in today's rate environment. We continue to have a stable deposit base with approximately 43% of our deposits in noninterest-bearing demand deposits and 92% of our deposits being core. While the amount of our deposits may be influenced by the coming quarters, in part by the impact of the coronavirus, along with traditional seasonality, our deposits are continuing to hold strong.

With pushout of the IRS payments and the coronavirus effect, we have not seen our normal early year withdrawals and deposits have held fairly steady. Deposit -- however, it is likely that as those IRS payments come due later in the year, we will see some additional withdrawals and possibly a slowness in our deposit build that we usually see during the half -- back of the year.

As to our loans, we're working to maintain our rate and underwriting discipline. We began tightening our underwriting last June, given the intensity of the political climate going into the presidential election along with the downward pressure on interest rates and the uncertainty around the near-term recession. We have worked over the years to maintain our focus on building a quality loan portfolio, which we think is evidenced by our credit quality metrics that Joe will touch on later in this call. Currently, we have 54% of our loans in variable rate loans with floors ranging from 3% to 6% and most in the 4% to 5.5% range to go along with 40% -- 46% of our portfolio in fixed rate loans. Our net interest margin remained strong at 4.06% for the first quarter. With competition, the coronavirus, the stress in the market, we think we will continue to see some downward pressure on the margin compressing slightly over the next few quarters.

As for CECL. We adopted CECL, effective January 1, 2020, which resulted in an initial $874,000 increase in our reserve. We also increased our liability relating to the allowance for unfunded commitments as a result of the accounting change by $2.9 million. The initial move to CECL resulted in a net reduction of our retained earnings of approximately $3 million when tax affected. At the end of the quarter, we had an additional increase of approximately $5 million in our allowance for credit losses, including the reserve against our unfunded commitments. The reserve bill was primarily driven by the impact of the coronavirus and the decline in oil and gas prices. Although we did not have a specific increase in classified loans, we did have an increase in several economic variables associated with our Q factors for the CECL model. The increase to our allowance for the quarter was a result of weighting certain of our qualitative factors around current local and national economic forecasts. For example, we increased our risk level for our current local economic conditions based on the impact of the economic shutdown relating to the coronavirus, combined with the negative effects on the local economy of oil and gas prices. Our risk factor relating to the national economy for the next year increased as a result of an assumed sharp decline in the economy with a U-shape recovery that occurs within a 1-year period with less of an impact in year 2 of our forecast. That said, we are -- these are weightings and forecasts, and we still have unknowns, including how government fiscal and monetary actions will impact the economy and how our deferral programs will impact our losses. Like all, we will continue to evaluate the circumstances and changes as we move forward.

With that, I will -- with that lead-in, I will turn this over to Ted Pigott, our CFO.

Thank you, Bob. We'll move into a discussion of the results of operations for the quarter. Earnings for the first quarter of 2020 were significantly impacted by the provision for credit losses of $5.0 million. This increase in the provision for credit losses for the first quarter of 2020 was primarily due to the impact of COVID-19, the drop in the price of oil and gas in the local and international economies and also on current and forecasted expected credit losses.

The company reported net income of $7.5 million or $0.30 per diluted share for the quarter ended March 31, 2020, compared to $12.6 million or $0.50 per diluted share for the quarter ended December 31, 2019, and $10.5 million or $0.42 per diluted share for the quarter ended March 31, 2019. Net income was $7.5 million for the quarter ended March 31, 2020, which was a decrease of $2.9 million or 21 point -- 28.1% compared to the quarter ended March 31, 2019, primarily due to the increase in the provision for credit losses during the first quarter.

Pre-provision net revenue was $14.5 million for the quarter ended March 31, 2020, compared to $15.4 million for the quarter ended December 31, 2019, and $14.2 million for the quarter ended March 31, 2019.

Net interest income was $32.2 million for the first quarter 2020 compared to $33.3 million for the first quarter of 2019. Net interest income decreased $1.1 million during the first quarter of 2020 compared to first quarter of 2019. The yields on interest-earning assets trended downward from the first quarter of 2019 by 0.47% to 4.56% for the first quarter of 2020. The rates on interest-bearing deposits fluctuated within a narrow band during these periods. The cost of interest-bearing liabilities was 0.94% for the first quarter of 2020 and 0.95% for the first quarter of 2019. Yields on earning assets decreased, and the cost of interest-bearing liabilities have not decreased to the same extent, which has caused compression of the company's net interest margin on a tax-equivalent basis to 4.06% for the first quarter of 2020, down from 4.56% for the first quarter of 2019. Although competitive pressures have caused the cost of interest-bearing deposits not to drop in tandem to decreases in market rates, they remain a low-cost source of funds as compared to other sources of funds, such as debt.

The provision for credit losses was $5.0 million for the first quarter compared to $1.1 million for the first quarter of 2019. The increase, as we said in the provision for the first quarter, was primarily due to the impact of COVID-19, the drop in the price of oil and gas prices and current and forecasted expected credit losses.

Noninterest income was $4.3 million for the first quarter of 2020 and $3.5 million for the first quarter of 2019. Interest -- the increase in non-interest income during the first quarter as compared to the first quarter of 2019 resulted from $965,000 in swapped origination fees on 3 new swap agreements originated during the first quarter of 2020.

Noninterest income -- noninterest expense was $22.1 million for the first quarter of 2020 compared to $22.6 million for the first quarter of 2019. The decrease in noninterest expense of $496,000 between first quarter 2020 and first quarter of 2019 was primarily due to lower professional and director fees, predominantly legal fees, and lower regulatory fees partially offset by increased salaries and benefits as a result of annual salary increases and increased employee headcount on a full-time equivalent basis.

Legal fees, which are a part of professional and director fees, were lower during the 3 months ended March 31, 2020, compared to the quarter ended March 31, 2019, primarily due to lower legal fees incurred in the bank's responding and cooperating with an investigation by FinCEN regarding the bank's compliance with the Bank Secrecy Act and anti-money laundering laws and regulations. The bank incurred legal fees related to this investigation of $256,000 and $1.1 million in the 3 months ended March 31, 2020 and 2019, respectively. Regulatory fees are lower in the first quarter of 2020 compared to first quarter 2019 primarily due to an FDIC deposit assessment credit received in 2020.

Income tax expense was $1.9 million for the first quarter of 2020 compared to $2.6 million for the first quarter of 2019. The effective tax rate was 19.85% for first quarter 2020 versus 19.86% for the prior year quarter. The differences between the federal statutory rate of 21% and the effective rates were primarily related to tax-exempt interest in bank-owned life insurance.

Moving to our balance sheet. Total assets were $3.4 billion at the end of March 31, 2020, compared to $3.5 billion at December 31, 2019. This was a decrease of $52.9 million primarily due to an $87.2 million decrease in cash and cash equivalents partially offset by an increase in loans of $32.5 million. As of March 31, 2020, loans, excluding loans held for sale, were $2.7 billion, an increase of $32.5 million or 1.2% compared to $2.6 billion at December 31, 2019. The increase in loans was primarily due to organic growth and increased capital needs of existing customers.

Nonperforming assets, which include nonaccrual loans, loans that are accruing over 90 days past due and foreclosed loans, remained low relative to total assets at $1.4 million or 0.4% (sic) [0.04%] of assets as of March 31, 2020, and $977,000 or 0.03% of total assets at December 31, 2019.

Company has certain loans which have been restructured due to the borrower's financial difficulties. The recorded investment in trouble debt restructuring was $15.9 million and $8.9 million as of March 31, 2020, and December 31, 2019. The company expects that the number of troubled debt restructurings may increase during 2020 due to the impact of COVID-19 and the drop in prices of oil and gas.

The company adopted ASU 2016-13, which related to the CECL, which was effective January 1, 2020. As a result, the allowance for credit losses for loans was increased $874,000 and the liability related to credit losses for unfunded commitments increased $2.9 million. This all resulted in a net reduction to retained earnings of $3 million effective January 1, 2020.

The allowance for credit losses was $31.2 million or 1.17% of total loans at March 31, 2020, compared to $25.3 million or 0.96% of total loans at December 31, 2019. The increase in the allowance for credit losses for loans is primarily due to the impact of COVID-19 and the price of oil and gas during the first quarter. These factors resulted in an approximate increase of 0.21% to the allowance for credit losses as a percentage of total loans. The liability associated with the allowance for credit losses for unfunded commitments was $3.7 million at March 31, 2020, compared to $378,000 at March 31, 2019.

As of March 31, 2020, the carrying amount of company securities totaled $234 million compared to $231.3 million as of December 31, 2019. This is an increase of $2.8 million or 1.2%. Amortized cost decreased $2.3 million as a result of maturity, sales, calls and paydowns, which outpaced purchases. The unrealized gain of the security portfolio was $8.1 million at March 31, 2020, compared to a net gain of $3.0 million at December 31, 2019. This increase of $5.1 million was due to changing market interest rates.

Total deposits as of March 31, 2020, were $2.8 billion, a decrease of $60.2 million or 2.1% compared to December 31, 2019. Noninterest-bearing deposits as of March 31, 2020, were $1.2 billion or an increase of $10.7 million or 0.9% compared to December 31, 2019. Total interest-bearing accounts -- account balances as of March 31, 2020, were $1.6 billion, a decrease of $70.8 million or 4.2% from December 31, 2019. The changes in deposits from December 31, 2019, to March 31 are due to normal fluctuations in normal customer activities. The ratio of average noninterest-bearing deposits to average total deposits was 41.8% for the 3 months ended March 31, 2020, and 43.3% for the year ended December 31, 2019.

Concerning borrowings, the company has a loan agreement with Frost Bank, which provides a $30 million revolving line of credit. There were no outstanding borrowing under this line at March 31, 2020, and the company did not draw on this line during the quarter ended March 31, 2020, or the year December 31, 2019. The Federal Home Loan Bank allows the company to borrow on a blanket floating lien status collateralized by certain loans. The borrowing capacity available under this agreement was $1 billion, both at March 31, 2020, and December 31, 2019. FHLB advances outstanding totaled $50 million both at March 31, 2020, and December 31, 2019. These borrowings were on a long-term basis. There were no borrowings under this agreement during the 3 months ended March 31, 2020. The company also maintains 4 fed fund lines of credit with commercial banks that provide the company the availability to borrow up to $75 million. There were no outstanding borrowings under these lines of credit as of March 31 and December 31.

Total shareholders' equity increased to $536.9 million as of March 31, 2020, compared to $535.7 million as of December 31, 2019, an increase of $1.2 million, primarily to current quarter income of $7.5 million, a $4.0 million increase in other comprehensive income and $557,000 of stock compensation expense partially offset by $5.4 million paid to repurchase shares of our common stock, $3 million due to the implementation of CECL and $2.5 million of dividends paid to common shareholders declared during 2020.

During the 3-months ended March 31, 2020, the company repurchased 240,445 shares under its share repurchase program at a price of $0.2229 per share, which shares were retired and returned to the status of authorized but unissued. At March 31, 2020, and March -- and December 31, 2019, the company and the bank were in compliance with all regulatory capital requirements at the bank holding company and bank levels. And the bank was classified as a well-capitalized bank for the purposes of the FDIC Prompt Corrective Action regulations.

Now let me turn it over to our Chief Credit Officer, Joe West, who will discuss certain aspects of our loan portfolio.

Thank you, Ted. Let me speak a bit to our loan portfolio, starting with Slide 8. As Ted noted, for the first quarter, our loans were $2.678 billion versus $2.647 billion at the end of December 2019, an increase of 1.2%. Our portfolio yield was down from Q1 2019 with a yield of 5.13% versus 5.48%, largely the result of a drop in the prime rate over the prior 12 months. For the quarter, commercial and industrial loans were up 3%, commercial real estate up 4%, construction and development up 6%, 1-4 family down 1% and multifamily down 4%. At 3/31, we had approximately 54% of our loan portfolio with variable rates, and the majority of these set at their rate floor if there is a rate floor present. At the end of the first quarter, approximately 71% of our variable rate portfolio has floors. The maturity distribution of fixed rate -- of the fixed rate portfolio provides for 71% maturing within 5 years and available to reprice.

Our credit quality remains strong through the first quarter. Past dues were $6.2 million at Q1 '20 versus $2.9 million at Q4 '19. Classified credits rated sub-standard or worse were $51 million at Q1 '20 versus $29 million at Q4 '19. The increase in substandard loans was due primarily to one relationship moving from special mention to substandard.

Troubled debt restructurings increased $6 million over Q4 '19 as 6 classified loans requested and received COVID-19-related payment deferrals in late Q1 '20. The bank had net recoveries of $300,000 from previously charged-off loans in Q1 '20 versus net charge-offs of $200,000 in Q4 '19.

Slide 13 sets forth our oil and gas exposure. I think different institutions quantify their oil and gas exposures differently from each other. We quantify our direct oil and gas exposure as loans to an entity with more than 50% of its revenue related to the well-head, oil in the ground or extracting oil and gas. This includes any activity, product or service related to the oil and gas industry, such as exploration and production, drilling, downhole equipment or services, oilfield services, machine shops, pumps or compressors at the well, midstream companies and midstream service companies. Our indirect oil and gas are loans to an entity with a material portion, say, 20% to 50% of its revenue from the type of companies defined as direct. Examples could include trucking companies, machine shops, commercial real estate with reliance on oil and gas companies. Our oil and gas loans continued a downward trend from Q1 last year to Q1 this year, with total falling from 12/31 by approximately $5.5 million largely because of loan payoffs.

Slide 14 sets forth the components of our oil and gas loans and the makeup of our oil and gas loan portfolio.

Turning to Slide 15. As Bob mentioned earlier in the call, our thoughts and our work with our customers on the PPP program and talked about how we are doing and working in deferral in light of all that's going on. Just to touch on the PPP program. During the first phase, we made 1,378 loans with an aggregate principal amount of approximately $287 million. Our estimated gross fee is $9.5 million before taking into account the cost we have incurred with technology and processing the high-volume that we incurred. We have also been working applications in the second phase of the program.

With respect to payment deferrals, generally, upon customer requests, we give consideration to a payment deferral. We gather updated credit information and request that the borrower complete a questionnaire describing the COVID-19 impact on the business operations. Our credit staff reviews the request and supporting data to determine if TDR recognition is appropriate. And a firm request is reviewed by a committee of lenders, credit staff and senior management. The typical deferral we are seeing is a request for 90 days of full payment deferral. At the bottom of Slide 15, you will see that as of 4/21/20, the bank had approved deferral requests for loans totaling $466 million or about 17.4% of our total portfolio at March 31. The largest component of our deferrals has been in our commercial real estate category and the majority have been approved since the end of the quarter.

Slide 16 will give you more depth as to the types of loans we have approved for deferrals and the deferral -- deferred payment amounts. If you look at Slide 16, you'll see a breakout of what we think are the elements of our portfolio that are most sensitive to the COVID-19 virus: retail, commercial real estate, oil and gas, convenience stores, hotels and restaurants. Those higher-risk elements comprised approximately 27% of our total loans at March 31.

Slide 17 also sets forth information regarding deferrals for this group, which comprised 47% of all deferrals. For this group, the deferred loan totals are retail commercial real estate, $108 million; hotels, $51 million; restaurants, $32 million; oil and gas, $6 million; convenience stores, $23 million.

Let me turn it over to our Controller, Joseph McMullen, who will discuss certain aspects of our adoption of CECL and the provision made during the quarter.

Thank you, Joe. If you turn to Slide '18, you'll see a breakdown of our allowance for credit losses associated with our loan portfolio. As Bob Franklin mentioned earlier, we adopted CECL effective January 1, 2020, which resulted in an initial $874,000 or 0.3% increase in our allowance for credit losses. We also increased our liability reserve related to our allowance for credit losses on unfunded commitments as a result of the accounting change by $2.9 million. This also had an associated increase of 100 -- sorry, $809,000 on our deferred tax assets, which resulted in a net reduction to retained earnings of $3 million upon adoption. Additionally, we increased our allowance by $4.7 million as a result of the impact of COVID-19 and the decline in oil and gas prices during the first quarter as well as the impact to our local and national economic forecast. As part of our forecasting methodology, we have utilized the final March Moody's baseline scenario forecast, which considered both the COVID-19 impact and the economic stimulus. As Bob noted at the outset of this call, our risk factor relating to the national economy for the next year increased as a result of and assumed a sharp decline in the economy with a U-shaped recovery that is expected to occur within a 1-year period with less of an impact in year 2 of our forecast. The allowance for credit losses for loans was $31.2 million or approximately 1.17% of total loans at March 31, 2020, compared to $25.3 million or 0.96% of total loans at December 31, 2019, and $24.6 million or 0.97% of total loans at March 31, 2019. These factors resulted in an approximate increase of 0.21% to our allowance for credit losses as a percentage of total loans.

Slide 19 sets out our allowance for credit loss related to our unfunded commitments at the end of Q1 2020. This liability is associated with expected credit losses on our unfunded commitments or off-balance sheet exposures. The balance at March 31 was $3.7 million compared to $378,000 at December 31, 2019, and March 31, 2019. The increase was primarily due to the adoption of CECL, as previously mentioned, and the impact of COVID-19 and oil and gas price declines, as discussed previously. The economic impact from COVID-19 and oil and gas prices resulted in an approximate increase of 0.08% to the liability associated with the allowance for credit losses as a percentage of the total availability of those unfunded commitments. Our commercial and industrial and commercial real estate classifications carry both the largest balances of our allowance, which represent 0.36% of our total loans at the end of Q1.

Additionally, due to our strong capital position and more than adequate capital ratios, as Mr. Pigott previously mentioned, we have opted out of the election to transition the CECL impact into our regulatory capital based on recent final and interim rules posted by the federal agencies.

With that, I turn it back over to Bob Franklin.

Thank you, Joseph. In conclusion, although there are still many unknowns in front of our company, we do feel that we are well prepared to deal with the impact of the coronavirus, the decline in the oil and gas prices and the current rate environment. Our liquidity and capital ratios are strong. We are a bank that has worked hard to maintain discipline in building quality relationships that result in quality deposits and loans. We have recent experience and muscle memory from dealing with natural disasters in our communities. Many of the mechanics are the same. We believe that while impacted, our Texas markets remain good business-friendly markets. Our markets and customers are resilient. And assuming we are on track to get back to some semblance of normalcy in the coming weeks, we are well positioned to work with our customers and communities and also to take advantages of opportunities that may present themselves.

As of today, our governor is launching 2 phases. We're opening up some of the businesses in our communities starting on Monday. And then Phase 2 starts on May 18, which would be the majority of the businesses. So we still have some coronavirus overhang as we get back to work, but the city of Houston is starting to get back to work.

With that, I'll open it up to questions. And Chantellier, if you could do that for us.

(Operator Instructions) And our first question will come from the line of Matt Olney with Stephens.

I want to start with the capital base there at the bank. Obviously, very strong capital, which is very nice to have during these uncertain times. And in the past, we've talked about various strategies to deploy the excess capital. But where we sit today, I'm curious to understand what the updated view is of capital and potential deployment.

Sure, Matt. We haven't changed our view much. We're going to continue our plan to continue with our dividend. And we constantly look at what level of dividend we should be paying, look at that on a quarterly basis. Second of all, we are still -- we still would like to see the bank do an M&A, continue an M&A. But it's something that today, we don't look -- we don't think is going to happen. But possibly in the near future, there may be some things that would allow us to do that, depending on how some of these folks come out of the coronavirus and some of the other things. But sometimes shocks to the systems allow M&A activity to pick up a little bit when people that may have been reticent to sell their banks before may have a different view today. We did have a buyback in place. We pulled that back just to be conservative around not knowing what the future might bring. However, we will consider reinstituting that buyback over time if the economy gives us a signal that we feel comfortable in doing that.

So we're going to continue in the same way to manage our capital the way that we have. We understand that we've built up quite a bit of capital. It's times like these that we feel that it gives us some advantage in going forward. So we feel very strong that we are in a very good position to weather whatever storm is ahead of us. There's still a fog around the coronavirus. And until the fog lifts, I don't think anybody can tell you exactly where we are. But it doesn't feel like there's been nearly as much strain as people might think out there. But I think the piece that is going to be difficult for people to try to assess until this coronavirus fog moves off is what the impact of oil and gas is going to be. We know that it's going to be difficult for oil and gas companies, especially anybody that's above ground. And so we'll just have to take that as it comes. But the Houston economy is used to these resets, and it will get through this reset again. And I think probably each time we go through these, it seems to get back to normalcy a little quicker than the next -- the last. So -- but that's how we intend to look at our capital.

Okay. Bob, that's helpful. And then you mentioned the energy piece, and you guys broke out the direct impact versus the indirect impact and gave some good examples in the press release. So I think that's helpful. I'm curious between the indirect and the direct, how should we be thinking about the risk profile of each one of those? Is it simply about duration and the indirect impact would be -- would come into focus the longer we stay here at these current prices? I'm just kind of curious what the indirect impact and how you guys think about the -- when that could be -- when that could come into focus from a risk profile standpoint for the bank.

Well, the trickle-down effect of the oil prices and what it does to starting with the majors and then trickling down all the way through to the guy that works in this machine shop that happens to be a tenant in one of our projects that we financed, these are the effects that -- what level of business and how fast these guys can move to do something else with that machine shop or whatever the other business that it might have. Most of ours is indirect. Most of our exposure in that category is indirect. But I think it's -- as we think about it, most of it is kind of what is the real effect of the oil and gas around the greater Houston economy and the markets that we're in. This oil and gas piece is a little bit different than the past, and looking at something where we're so oversupplied and then you cut demand off totally, we're not sure exactly what the effects of that are going to be. And you're already seeing some of these larger majors start to restructure or even contemplate bankruptcy in the form so that they can actually restructure what they have. So it's all a reset, but we don't -- if somebody is a tenant in one of our industrial buildings, we have the opportunity to re-tenant that building. The values are still relatively there. It depends -- we could get a whole reset depending on how difficult it is for people to come back after this coronavirus. So I don't think anyone can tell you yet exactly what the values are of those cash flow streams until we know what the tenancy is going to be in a lot of the strip centers, retail centers out there.

So as we look to see what the vacancy rates are going to be, how many people are going to reopen their businesses? And I think to some degree, we've seen ourselves -- this last month has felt like 6 months or a year. It just felt so long. It has really not been that long. And so it appears to us that many of these small businesses are going to come back and going to reopen. But we -- it's just very hard to assess that today. So we'll see what happens after the fog lifts and where we are. But if we come back and it's 5% or 10% vacancies versus 50% vacancies, there's certainly going to be a difference in the way that we value those properties. So it's probably a long-winded answer of all of that.

No. That's great commentary. I appreciate that. And on the loan growth front, it was some nice loan growth in the first quarter, but as you mentioned in prepared remarks, lots of headwinds emerged late in the quarter between coronavirus and lower energy prices. So at this point, given the pipeline, given kind of the macro uncertainty, how are you thinking about loan growth in 2020 for the bank?

Well, we're certainly not being aggressive in trying to bring in new loans when we can't really assess risk. I think until it's clear that we can clearly assess the risk of a new credit, we're going to be very cautious around that. So the other side of this is payoffs have slowed down. So I mean, we're not getting the pressure from the bottom side nearly as much. But I think we're going to be fairly cautious around new credits until we can better assess what the risks are out there.

(Operator Instructions) And your next question will come from the line of Brad Milsaps with Piper Sandler.

Just curious, any new updates on Dallas? What you're doing there? Obviously, with what happened with the virus, it's probably slowed things down a bit, but sorry, if I missed earlier, but just kind of curious kind of what's going on with your expansion efforts there.

Well, Dallas is still small. I think sometimes you go and do something and everything that can happen to you happens to you. Bill fell ill and had some issues and continues to have issues. We do have a -- we have a good crew in Dallas, and they're doing a great job, and we made some good loans in Dallas last year. But we haven't been able to expand up there the way we would like to. Then we have coronavirus and everything else. I mean, it's just been one thing after another. But we're still looking for opportunities. We would like to do some M&A up there possibly. And maybe this gives us some opportunities, maybe not. But -- and we also would like to hire some additional folks up there, and we have been talking to some people before this coronavirus kind of came in and everybody's kind of changed their outlook on things. But we're going to continue to expand up there. I mean, we want -- we need to have a presence there. And right now, it is very small, but we are going to continue to try to expand that.

Great. And second question, on Slide 12, you guys touched on the construction and development book some during your comments. But just kind of curious if you could offer a little more color there on maybe what's going on with some of the bigger projects. Are they continuing to push forward? You've still got over $800 million of commitments out there kind of relative to the $558 million outstanding. Just kind of curious your thoughts on how quickly those draw up. And then is there a market or markets for those to kind of move on into the more permanent market given what all is going on?

Yes, Brad, this is Joe. We would review our activity in our construction management department, look at the level of draws over the last 3 months and into April. And our draws have remained very constant in terms of numbers of draws. So our construction activity is continuing. The builders have not slowed down that much. These people are continuing to finish their products -- projects, rather, and bringing them forward. So it's probably a little bit of the uncertainty is the leasing market when you get these -- get completed and we'll just -- as Bob said, there's quite a bit of fog around what that is. But they haven't slowed down the construction. The projects haven't stalled out or anything like that. We're continuing to advance on their construction loans.

And then maybe specifically to the multifamily community development piece, does what's going on slow that down further? Or does -- is that impacted in any bigger way than any other pieces of the portfolio might be?

No, I don't think so. Those projects are continuing to build out the -- just to give you an example, there's no -- have been no requests for deferrals in that group. The metrics on the perm loans remain strong. So we see those continuing forward. And actually, that would be one of the, a stronger piece to the overall portfolio. So we've been pleased with how that's performed in the current environment.

And your next question will come from the line of Brady Gailey with KBW.

So when you look at the activity you've had with the SBA's PPP of $287 million in Phase 1, how much more do you think you could do in Phase 2? And in Phase 2, do you think that, that fee of roughly 3.3% would be fairly constant?

We have -- the activity for our applications has slowed down quite a bit. So we're pretty much able to process the ones we're getting. But it's going to be significantly lower than -- because we continue to do it for our customers. It's going to be significantly lower than what we did before. However, the loan amounts appear to be a lot lower, so the fees are higher. But I don't have -- we've just given numbers through the 21st. So second phase, I don't really have numbers for you quite yet, but it looks like the loan amounts are smaller because the smaller guys are starting to get their act together around getting some of this information together. And then -- we're having our lenders call their customers, try to find out whether they need this or not and be a little more active around folks because the first phase it was sort of a fire drill. Second phase, we've got our act together. And I think we can process these things fairly well.

All right. And then when you talk about the net interest margin, when you talk about going forward it's going to compress a little bit, which is no surprise. The NIM was down about 12 basis points linked quarter this quarter. What do you think the magnitude of the margin compression could be as we look to the rest of the year?

Well, we'll see. I think it's going to be fairly -- it's going to be marginal. We lowered our rates significantly at the end of March. So we didn't get full benefit of that for the quarter. So we're going to see some benefit of that going forward. However, loan rates going forward are going to be lower. One of the things that we're doing as we're working with some customers on -- and also from a competitive standpoint, just on the new rate environment that we have, are -- if we feel like we need to move a rate, we will give them a floating rate with a floor and a ceiling. So if we lower a guy's rate from 5%, we will get that down to somewhere in the 4s, but then be allowed to float back as rates move back the other direction. So it's a give and take. We give -- and these are typically some of our better customers that we just have to deal with on a rate-sensitive basis. But -- so it will depend on kind of what that piece does and how much adjustment we have to make around the loan piece. Our whole -- our floors are holding pretty well. I think Joe touched on that. So that's going to hold up. So I don't think it's going to be significant downward pressure but I think if we're looking at whether the pressure is up or down, it's certainly in a downward pressure.

And there are no more audio questions at this time.

Well, thank you very much, and we appreciate your interest in CBTX, and I think we're concluded. Thank you.

Thank you, everyone. This does conclude today's conference call. You may now disconnect.