Good day, and welcome to Hilltop Holdings First Quarter 2020 Earnings Conference Call and Webcast. All participants will be in listen only mode. Please note, today's event is being recorded. I would now like to turn the conference over to Eric Yohy. Please go ahead, sir.
Thank you, and good morning. Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial condition and the impact and potential impacts of COVID-nineteen are forward looking statements. These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties. Our actual results, capital and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our discussion today and those included in our most recent annual report and quarterly report filed with the SEC. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Additionally, this presentation includes certain non GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir. Hilltop holdings.com. With that, I'd like to turn the presentation over to our President and CEO, Jeremy Ford.
Thank you, Eric, and good morning. My, how the world has changed since our last earnings call. We hope that you and your families are healthy in handling the current COVID-nineteen pandemic as best you can. Before getting into the results for the quarter, I would like to spend a few minutes going through our organization's approach to the pandemic and some of the actions we have taken. Since the onset, we have worked hard to ensure the business continuity of Hilltop and our operating company.
Our highest priorities have been to ensure the safety of our employees and their families and to ensure our customers have the access and resources they need during this unique and challenging period. Of our nearly 5,000 employees, approximately 65% are currently working from home, with the remainder still coming into offices and branches to meet with customers on an employment basis and to execute critical function. We have extended our health benefits to cover COVID-nineteen testing for all employees and their families, have enhanced cleaning and maintenance procedures across all locations and are monitoring any positive or presumptive positive COVID-nineteen cases across our organization and any shared office location.
We are
facing a lot of uncharted territory with the current situation, but I am proud of how our business leaders and their teams have responded. As well, I would like to commend our employees for their courage and commitment during this stressful time. Moving to Slide 4. Currently, 58 of our 61 PlainsCapital Bank branches are open for appointments, along with 130 of our 300 prime lending mortgage branches. Though certain branches are not open, almost all of the employees associated with those branches are still able to fully service their clients remotely.
Bank ATMs and drive through capabilities are still functioning at 100%, and we have introduced fee relief for multiple situations. We are supporting customers on a case by case basis with different loan modification and deferment program. As of April 23, we have worked with over 300 clients to help with deferments or restructurings equating to $253,000,000 in loans with more in the pipeline. Notably, all payment deferral requests must be need based and require at least a senior credit officer approval. We are working with the SBA to execute the Paycheck Protection Program and have registered over 3,100 applications equating to 7.70 $7,000,000 in loans.
Our bank employees have been working around the clock to get these loans processed and funded. And as of last Friday, we had funded nearly 2,000 loans for $585,000,000 Given an average loan size of $282,000 for the funded loans, our bankers are truly supporting the small communities that drive our local small businesses that drive our local community. With the newly approved funds for the program, we have an additional pipeline of close to $60,000,000 that we aim to process as well. Although the economy has entered into a recession, we believe the prior decisions and recent preparations made to strengthen our capital and liquidity alongside our conservative lending approach puts us in a strong position to weather even a severe economic scenario. Hilltop Consolidated and Plains Capital Bank are well capitalized with approximately $513,000,000 $167,000,000 respectively of excess capital as of March 31, 2020.
This equates to $740,000,000 $357,000,000 respectively of capital above regulatory defined well capitalized levels, including the conservation buffer. From a liquidity perspective, management began evaluating actions to further strengthen our bank liquidity position starting in February and since then has raised additional funds through broker deposits and by increasing the availability of our Hilltop Securities Suite deposits. The bank is primarily funded by deposit, which is reflected in our loan to deposit ratio of 98%, including loans held for sale. Additionally, we maintain just under $3,900,000,000 borrowing capacity at the Federal Home Loan Bank, of which $3,600,000,000 was available with the utilization of only 6% as of March 31, 2020. We are in a stronger liquidity position today than when the pandemic began impacting markets late in
the Q1.
From a credit perspective, no bank is going to be immune from the impact of this pandemic and the shelter in place orders issued around Texas and the rest of the country. Additionally, the decline in oil prices has created another set of economic challenges in Texas. While we are unable to accurately forecast the impact these will have on our business and future earnings, we do anticipate a higher level of credit losses and a reduction in overall lending and the potential for negative impacts to our mortgage purchase volumes and trading portfolio. Our response to the current pandemic has been quick and well coordinated across all of our businesses. We are focused on taking care of our people and our customers and we'll continue to make those our top priority.
Financially, we are well positioned with excess capital and sources of funds that are diversified and accessible. From a risk management perspective, we have scoped our at risk industries and are actively monitoring and mitigating them as we work with our borrowers during this challenging environment. Will is going to provide additional details on our impacted and energy loan portfolios later in this presentation. Now moving to Slide 5, I'll provide an overview for the Q1. Notwithstanding the challenges in the economy and the market, our results for Q1 2020 were very positive and a good example of our diversified business model.
We reported Q1 2020 net income for Hilltop Consolidated of $49,600,000 or $0.55 per diluted share, an increase from the Q1 of 2019 of $10,900,000 or $0.13 per diluted share. Return on average assets for the period was 1.5% and return on average equity was 9.4%. Please note, these are HDH consolidated results and we have called out the discontinued operations figures below. Discontinued operations include our insurance company, National Lloyds, which we believe remains on track to close in the Q2. At Prime Lending, mortgage origination volume of $3,600,000,000 increased 48% compared to the Q1 of 2019 as the decline in rates push refinance volumes up.
Having strong fee businesses like Prime Lending and Hilltop Securities in the current environment is a tremendous advantage for us from a diversification of risk and earnings standpoint. Average loan growth in the quarter of 6% compared to prior year was driven by National Warehouse Lending that was positively impacted by lower rates and the increase in the mortgage refinance market. Additionally, average deposits grew by $650,000,000 or 8% from Q1 2019. Growth in deposits has been a mix of non interest and interest bearing deposits with interest bearing adding $440,000,000 year over year and $164,000,000 since Q4 2019. At Hilltop Securities, January February were particularly strong from the impact of both the mortgage industry and high asset valuations in managed accounts.
In March, as market uncertainty increased, we proactively reduced limits and positions across the businesses, but did experience a significant mark on the TBA pipeline. Overall, the fixed income and wealth management businesses had strong quarters that offset declines in the structured finance business. During the Q1, Hilltop repurchased 700,000 shares for a total of $15,000,000 of the board authorized $75,000,000 for the full year 2020. However, given the fallout from the COVID-nineteen, we will be suspending buyback activity until further notice. That said, the dividend has been maintained at a prudent level.
And while management is monitoring the credit and economic impact resulting from the virus, there is no recommended change to the dividend at this time. On January 1 this year, we introduced CECL. Since the beginning of the year, we have been in a very volatile market where assumptions are changing rapidly and we'll continue to do so over the coming quarters. Our allowance for credit losses as of March 31, 2020 was $107,000,000 an increase of $33,000,000 We use this scenario much like many others that projects a significant deterioration over the next few months with improvements coming later in the year. Since new assumptions are coming out and we will continue to model accordingly.
We will talk through our CECL process and provide further detail on credit and loan portfolios later in this presentation. Moving to Slide 6. Total pre tax income for HDH consolidated was $70,000,000 for quarter, an increase of 35% over Q1 last year. The bank's decline in income can be primarily attributed to the $34,000,000 loan loss provision. Aside from the provision expense, the bank had a nice quarter.
Though NIM was under pressure, net interest income increased as asset balances increased and the bank's efficiency ratio declined to 55.5% from 58.8 percent a year ago. Work being done within the bank around overhead and branch PPP program and the overall demands placed on our bankers from the PPP program and the overall demands placed on our bankers from the pandemic has been very high. I'm very proud of Jerry and his leadership team and all the people working to support our customers during this stressful time. The volume of PPP applications over the past few weeks has been unprecedented for our bank and our people have stepped up to support small businesses and communities across Texas. Compared to what is historically a slow mortgage quarter, prime lending started the year strong and volume increased as the 10 year declined throughout the quarter, accelerating into the end of March.
Pretax income increased $37,000,000 from the Q1 2019, driven by higher volume relatively stable gain on sale margin of 3 25 basis points. From a risk standpoint, our business model of selectively retaining loans is focused on enabling us to originate certain mortgage products as opposed to building a long term mortgage servicing asset. As a result, our servicing portfolio is relatively small for our size and reflects approximately $1,500,000,000 or 10% of our annual originated volume. The broker dealer reported an 18% pre tax margin for the period and an increase in income by $1,800,000 from the prior year. Market volatility in the quarter drove higher revenues across multiple business lines.
Our leadership team at Hilltop Securities continues to do a good job of managing the risk and daily liquidity needs that arise from a market that has been as dynamic as this has been over the past few months. National Lloyd's underwriting income improved year over year as lower loss experience led to an improved loss and LAE ratio of 39.7%. However, NLC did take mark to market losses on its equity investment portfolio of $4,400,000 consistent with the broader market decline in March. Overall, we are pleased with our Q1 performance considering the tough conditions facing everyone. We have a history of conservative lending and a strong balance sheet supported by diversified and low cost funding model.
And we have a diversified business model with a strong foundation that we have continued to invest in for times such as these. With that, I will now turn the presentation over to Will to talk through the financials.
Thank you, Jeremy. Before I get started, I want to review a few items that have impacted our presentation during the Q1. First, as Jeremy mentioned, we have moved National Lloyds into discontinued operations as we continue to make steady progress toward the closing of the pending sale of that business. Please refer to the footnotes on each slide for references to the basis for the presentation, whether consolidated or continuing operations. Secondly, on January 1, 2020, we adopted CECL, the new accounting standard for credit losses.
Further, we have elected to phase in the impact of this adoption over 5 years and the impact of this election is reflected in our capital ratios as presented throughout the presentation. Now I'll start on page 7. As Jeremy discussed, for the Q1 of 2020 Hilltop reported consolidated net income attributable to common stockholders of $49,600,000 equating to $0.55 per diluted share. Income coming from operations attributable to common stockholders equated to $46,500,000 or $0.51 per diluted share. During the Q1, National Lloyds generated earnings of $3,200,000 Hilltop's continuing operations generated $100,000,000 of pre provision net revenue or PPNR during the Q1, which increased by $55,000,000 or 120% versus the prior year period.
Growth versus the prior year period was driven by our diversified revenue streams and led by strong mortgage originations. During the Q1, revenue related to purchase accounting was $6,700,000 and expenses were $1,300,000 resulting in a net purchase accounting pretax impact of $5,300,000 for the quarter. In the current period, purchase accounting expenses largely represent amortization of deposits and other intangible assets related to the prior acquisitions. As we entered the early phases of the pandemic, which has brought on significant uncertainty surrounding economic growth, Hilltop's capital position remains strong with a period end Common Equity Tier 1 ratio of 15.96% and Tier 1 leverage ratio of 13.08%. I'm moving to Page 8.
As previously noted Hilltop adopted CECL during the Q1 of 2020. As a result of the adoption, day 1 allowance for credit losses increased by $12,600,000 with the largest portion of that increase being the transfer of the credit discounts that remain on our purchase portfolios and allowance into allowance for credit losses. The capital impact of the day 1 transition was approximately $6,000,000 Further, during our day 2 assessment, as of March 1, Hilltop recognized deterioration in 2 credits, one in the energy portfolio and the other in the Houston real estate portfolio. The combination of the noted deterioration in these loans contributed to certain specific reserves totaling $17,600,000 during the quarter. Additionally, as a result of the significant deterioration in the economy, driven in principle by the pandemic and the acute strength of oil price declines in our energy portfolio, Hilltop recognized a significant build in the allowance for credit losses during the Q1 related to economic factors, which also include all qualitative assessments related to our portfolios.
Our economic assessment assumes unemployment to rise to approximately 9% during the Q2 of 2020 and would rebound to approximately 6% during the Q4 of 2021. Further, the scenario presumed that GDP would fall by approximately 18% during the Q2 and then during the Q3 would begin to rebound and grow at a more stable pace into 2021. In total Hilltop recognized $34,500,000 of provision expense related to our loans held for investment portfolio, including $1,500,000 of net charge offs during the Q1. This resulted in a net increase in the allowance for credit losses on our loans held for investment of $33,000,000 In recent weeks, market estimates for the negative economic impact of the pandemic have deteriorated. We continue to monitor both the economic outlooks from a number of sources as well as the performance of our portfolios to determine the impact on our credit reserves.
If it remains the case that the actual economic data and the outlook for our critical metrics continue to deteriorate, Hilltop may require additional credit reserves in coming quarters. As we've noted, we do expect the allowance for credit losses could be volatile the future given significant shifts in the economic outlook from one reporting period to another. I'm turning to Page 9. Net interest income in the Q1 equated to $110,000,000 including $6,700,000 of purchase accounting accretion previously mentioned. Versus the prior year quarter, net interest income increased by $2,000,000 or 2%.
Somewhat offsetting net interest income growth, which was driven by higher average assets, including wholesale for sale, was a decline in purchase accounting accretion of $1,900,000 versus the Q1 of 2019. We expect the purchase accounting accretion will continue to decline throughout the balance of 2020 as the balances of the previously purchased loans continue to decline. Further, versus the Q4 of 2019, both average HFI loan yields and average HFS loan yields have declined by 6 and 13 basis points respectively. These declines in loan yields reflect both the lowering of the rates by the Federal Reserve during the Q1 and ongoing competitive pressures. The Federal Reserve had reduced the target range for the Fed funds rate to 0% to 25% so 25 basis points.
This decline resulted in a portion of our loans falling to their contractual floor levels. In our loan portfolio, approximately 55% or $3,600,000,000 loan balance for variable rate loans. Of the variable rate loans, 67% or $2,400,000,000 are currently at their contractual floors. We do expect that these contractual core rates will help to provide value and additional stability in our net interest income throughout this rate cycle. Interest bearing deposit costs decreased 17 basis points versus the Q4 of 2019.
Overall, interest bearing deposit business have lagged through the early quarters of this rate cycle and we expect to continue to manage our deposit costs lower over the coming quarters. During the Q1, average loans held per sale increased by $605,000,000 versus the same period in the prior year. We do expect these balances will remain elevated through the Q2 as March 2020 mortgage loan loss of $3,700,000,000 were substantially elevated versus normal seasonal levels. Moving to Page 10. Total non interest income for the Q1 of 2020 equated to $272,000,000 1st quarter mortgage related income and fees increased by $61,000,000 versus the Q1 of 2019 as mortgage rate loss during the Q1 equated to $7,200,000,000 which was a record for prime lending.
During the Q1 of 2020, the environment in mortgage banking remained strong and our business outperformed our expectations in terms of origination volumes, principally driven by lower mortgage rates, which drove improved demand for both refinance and purchase mortgages. Versus the prior year quarter, purchase mortgage volumes increased by $291,000,000 or 14% and refinanced volumes increased by $884,000,000 or 223%. While volumes during the quarter were strong, gain on sale margins compressed versus the prior year by approximately 5 basis points as the mix shift related to the higher percentage of refinance volume lowered our secondary margins. Securities fees and commissions improved versus the same period in the prior year by $7,000,000 as ticket volumes and overall activity increased as a result of the additional volatility in the marketplace. Versus the prior year period, other income declined by $12,000,000 driven primarily by a $20,000,000 unrealized mark to market loss on the mortgage pipeline in our structured finance business.
While the markets have been functioning more normally over the last few weeks, there were periods during March where significant dislocations were present, including very limited liquidity for certain sectors across our business. In particular, mortgage product pricing moved materially, causing our pipeline value to change significantly in the period. If pricing stabilizes, as these loans are funded, we could recoup a portion of this unrealized loss. Turning to Page 11. Non interest expenses increased from the same period in the prior year by $3,200,000 or $282,000,000 The growth in expenses versus the prior year were driven by an increase in variable compensation of approximately $14,000,000 of private lending and Hilltop Securities.
This increase in variable compensation was linked to strong fee revenue growth in the quarter compared to the prior year period. Over the past 8 quarters, we have continued to make progress in aligning our businesses to current market conditions and driving efficiencies across the franchise. Through these efforts, headcount, non variable compensation, professional services costs and marketing and development expenses continue to trend lower as we make progress against our efficiency initiatives. During the Q1 Hilltop incurred $1,900,000 of costs on $5,300,000 of spending related to ongoing core system improvements. We are moving into the final stages of implementation of the new loan origination system in PrimeLending and beginning the implementation of the new platform at Hilltop Securities.
Both of these implementations will bring significant value to our franchise and positions Hilltop for profitable growth in the future. Turning to page 12. Total average held for investment loans grew by 6% versus the Q1 of 2019. As noted previously, growth versus the same period the prior year was driven by growth in our mortgage warehouse lending business and growth in the real estate portfolio. Loan yields declined throughout 2019 and continued to decline in the Q1, Both lower market rates including the prime rate and LIBOR rates coupled with lower purchase loan accretion that contributed to the yield decline.
We do expect that loan yields will continue to be pressured in the coming quarters as market rates remain low and we had over $775,000,000 of PPP loans that yield 100 basis points to the balance sheet. Lastly, our new loan pipeline remains stable, but many clients are delaying pricing and funding of new loan commitments until they have greater clarity into the economic impacts of the pandemic. Turning to Page 13. During the quarter, net charge offs remained low and equated to $1,500,000 or 9 basis points of total HFI loans on an annualized basis. In the upper right graph, we note that non performing assets have increased during the quarter.
The increase is related to the adoption of CECL in the Q1 and the deterioration of certain loans during the quarter, which significantly impacted non performing loans. First, the impact of adopting CECL accounts for $13,000,000 of the increase as loans with prior discounts were grossed up and the associated credit discount was moved into allowance for credit loss. Secondly, we transferred an energy related credit in 2 real estate properties in Houston to non performing. In combination, these credits accounted for $39,000,000 of the increase. The credits that were moved to non performing experienced significant deterioration from the combination of the pandemic and the significant decline in oil prices during the quarter.
In the graph on the bottom right, Hilltop's allowance for credit losses to bank loans held for investment increased to 1.56% during the quarter. I'm turning to Page 14. In response to the strong mortgage activity during the months of February March, as well as the uncertain implications of the pandemic, Hilltop began to take a series of steps to expand our liquidity position during the quarter. PlainsCapital increased its sweep balances from Hilltop Securities to $1,500,000,000 prior to the end of March. Further, our treasury team was able to secure $745,000,000 in brokered money market and brokered CD funds from the wholesale market.
The weighted average cost of the brokered money market funds is approximately 30 basis points, while the CDs have a weighted average cost of approximately 105 basis points and mature across a 3, 6, 9 12 month time horizon. These actions are the cause for the substantial increase in interest bearing deposits during the Q1 of 2020. It is notable that non interest bearing deposits have continued to grow through the early stages of pandemic and now equate to $2,900,000,000 Moving to Page 15. As noted earlier, Hilltop took substantial steps to increase liquidity during the Q1 and those steps have continued into April. As of March 31, PlainsCapital's cash, securities and secured borrowing capacity equated to $5,100,000,000 or approximately 30% of that total assets.
During April, we continued to improve our liquidity position by securing additional broker deposits and have experienced positive client deposit flows. I'm moving to Page 16. During the Q1 of 2020, PlainsCapital Bank generated $11,500,000 of pre tax income during the quarter. The quarter's results reflect the benefits of growth in National Warehouse Lending as well as solid expense reductions versus the prior year. However, these benefits were substantially offset by the credit reserves related to the deterioration of 2 credits as previously noted the impacts associated with the CECL adoption.
In response to the pandemic and the unknown economic impacts, we have suspended the retention of single family mortgages by PlainsCapital Bank at this time. Turning to Page 17. To provide further clarity in the loan portfolio of PlainsCapital, the table provides an overview of the non energy loan segments that we believe could be most impacted by the pandemic. In total, these portfolios represent $1,100,000,000 or 16.5 percent of loans outstanding. Over time, as the stress of the pandemic becomes clearer, we may add additional segments to our enhanced assessment reviews.
Our priority in managing these exposures as well as other loans that come under stress related to the pandemic, oil prices or any other unforeseen challenges is to protect the principal balance outstanding and Hilltop's capital, while working with our customers to help them through these challenging circumstances. Further, we are supporting our clients as they work to assess CARES Act, PPP and Healthcare Enhancement Act and other alternatives that they may have to weather this pandemic. As Jeremy mentioned earlier, we have processed approximately 775,000,000 dollars of PPP loan request and have provided borrowers with balances of approximately $250,000,000 with payment deferrals and forbearance as of April 23. Further, we do expect the number of payment deferrals will continue to rise in the coming quarters. As of March 31, Hilltop maintained an allowance for credit loss on these portfolios of $16,000,000 or 1.45 percent of the outstanding balances.
I'm moving to Page 18. While the pandemic has impacted a number of portfolios that were otherwise performing well in prior periods, the energy sector had been experiencing challenges before the pandemic struck the United States. As such, page 18 provides an overview of Hilltop's current energy portfolio. In total, the energy portfolio represents $146,000,000 of outstanding balances and $66,000,000 of unfunded commitments for total exposure of 212,000,000 dollars Noted in the graph at the bottom left of the page Hilltop has progressively reduced credit exposure to the energy sector over the last 4 years with a concentration falling from 4.4 percent to 2.1%. As was noted earlier, we incurred a $12,500,000 specific reserve on large services credit during the quarter.
As of March 31, our allowance for credit losses equate to $13,700,000 or $9,400,000 of the outstanding balances in this portfolio. Turning to Page 19. PrimeLending generated a pre tax profit of $39,800,000 for the Q1 of 2020, driven by strong origination volumes that increased from the prior year by $1,200,000,000 or 48%. As noted earlier, gain on sale margins compressed during the Q1 versus the prior year driven by the shift in origination towards refinance. During the period, refinance activity represented 35% of total originations.
Further, we expect that during the Q2, the portion of originations that are refinanced transactions will remain elevated from our historical levels. While overall volumes were elevated in the Q1, the focus on operating efficiencies has not waned as PrimeLending has maintained consistent rigor around staffing and other middle and back office expenses across the platform. Our mortgage origination team has executed very well under some challenging circumstances and delivered profitable growth during the Q1. Moving to Page 20. Hilltop Securities delivered a pre tax profit of $18,000,000 in the Q1 of 2020.
In the quarter, fixed income services generated solid revenue growth as our traders were able to happily negotiate challenging conditions both in terms of pricing and liquidity, specifically in the month of March. The performance of this team demonstrates the progress we've made over the last few years in improving our hedging and risk management capabilities as well as our focus on exposure management when markets become dislocated. Also, Wealth Management business delivered net revenue growth in retail as clients reposition their portfolios as volatility grew the equity and debt markets during the quarter. As was noted earlier, our structured finance business did incur a $20,000,000 unrealized net negative pipeline mark in the quarter as interest rates and pricing moved substantially during March. While this negative mark was disappointing, the structured finance business remains very active in supporting our clients and supporting their origination of approximately $2,000,000,000 of mortgage loans during the quarter.
It remains important to note that results from our fixed income and structured finance businesses can be volatile as market rates, spreads and volumes can change significantly from period to period. Now moving to Page 21. National Lloyds recorded $4,000,000 of pre tax profit in the quarter, reflecting both mark to market losses of $4,400,000 on certain equity securities held in the portfolio as well as lower frequency and severity of storm activity and claim related losses. Underwriting income, which excludes the impacts of losses in the investment portfolio, improved versus the prior year period as the business introduced its streamlined product offering and substantially completed the optimization efforts that have been underway. Moving to Page 22.
Given the uncertainty surrounding the economy, specifically related to the pandemic, we are withdrawing our full year 2020 guidance at this time. And while it is not clear exactly how the economy will rebound or the timeline of that rebound, which we believe will be directly linked to the success in managing the virus and subsequent outbreaks, we remain focused on delivering against those items that we can control. We are committed to the ongoing safety of our associates and our clients, as well as helping our clients work through the unprecedented challenges that the pandemic has presented us all. We remain committed to executing our platform growth and efficiency initiatives and delivering against our 2021 commitments. Lastly, and most important, we are focused on delivering prudent growth across our business lines, while maintaining a moderate risk profile and delivering long term shareholder value.
Operator, that concludes our prepared comments. And we'll turn the call over for Q and A at this
time. Thank you. We will now begin the question and answer Our first question today will come from Michael Rose of Raymond James. Please proceed with your question.
Hey, good morning guys. How are you?
Good morning.
Hey, maybe for Will or Jeremy, can we get some color on the increase in non performers this quarter? It looked like they jumped fairly meaningfully. Thanks.
Yes. So I try to note, we had really two principal things that occurred. First, we had the adoption of CECL, which accounted for about $13,000,000 of the change in non performing loans. That's really driven by, as you know, the gross up of the loan balance and then the movement of the prior discount into allowance for credit losses. So that's about 13,000,000 dollars And then as I noted in my comments, we did have 2 relationships that were moved into non performing, 1 in the oil and gas sector and the other in our Houston real estate portfolio that were moved into non performing and that equated to about $39,000,000 of the increase specifically related to the oil and gas item.
We did take the $12,500,000 specific reserve for that credit.
Great. I'm sorry if I missed that. And then I appreciate the color that you guys provided on the kind of at risk categories or exposures. Can you give us an update on what the credit statistics there look like in terms of what percentage are not performing and then maybe what percentage are deferred and stuff like that? Thanks.
I think as we're evaluating these portfolios and we're in the early days, we have not seen at least through the first I'd say through March and even to some extent into early April, we've not seen some significant delinquency emerge in these portfolios as customers were making their March, in many cases, their April payments. We are working through, I think it would be a false number as we relate to the 2 $50 odd 1,000,000 of deferrals. We're going to be unfair because we have had many deferral requests that we're working through and we're working through those one at a time with our clients. So we'll continue to provide updates as it relates to the deferral levels as well as delinquency in these portfolios. But again, as of coming through April, we had received the preponderance of payments as contractually required even for those customers who were asking for referrals out of the gate.
And again, we're continuing to work with price every day to try to help mitigate what has been kind of an unprecedented set of circumstances over the last month.
That's helpful. Maybe just one more for me. I just wanted to touch on the margin and specifically with and without the PPP program. Is it fair to assume that given the number of rate cuts, I know you guys have floors and appreciate all the color there, but is it fair to assume that the core margin we should anticipate some pressure? And then secondly, will the fees from the PPP flow through the margin?
And I think you mentioned last quarter that you expected purchase accounting accretion to be down 20% to 30%. So just wanted
to see if that was still intact? Thanks. Yes. So on our 2020 commentary slide, Page 22, we reaffirmed that the purchase accounting accretion is not going to decline. That's on a scheduled basis.
Those loans are running off and we expect that to decline 20% to 30%. We are seeing, as you'd expect, based on falling rates as well as relatively flat yield curve pressure on net interest income over the coming 12 month period, and we do expect that to continue given both the decreases in our loan yields, but also I'd say a slower growth from an asset perspective. As I mentioned, customers at this point from a new loan perspective outstanding at PPP are pretty reluctant to kind of take down new credit as you would imagine they would be. So both lower asset levels from kind of prior outlook as well as flatter yield curves and lower rates are going to put pressure on net interest income going forward. And yes, the PPP fees will be reflected through net interest income, but those will be amortized over the life of the loan.
Great. I appreciate all the color.
Thank you.
Our next question will come from Michael Young of SunTrust. Please proceed with your question.
Hey, good morning. Good morning, Michael. Wanted to start just as a follow-up on the TBA business. You mentioned the $20,000,000 fair value, I guess, mark to market impact there. Can you provide any more detail on that?
Because typically when 10 year rates move down, that typically expands. So just wanted to see if there's something idiosyncratic. And then any thoughts on where you would expect that to be in subsequent quarters?
Yes. What occurred is we have, in certain cases, fixed delivery prices that when prices declined materially, we were that the pipeline, the hedge was kind of underwater. So that's the nuance there. As prices have recovered, as I mentioned in my comments, we have seen, I think, overall trading activity in both mortgage and municipal become more constructive each day and certainly more constructive through the month of April. As I mentioned, as it relates to that specific mark, which was unrealized in terms of the pipeline, as prices have rebounded and trading becomes more constructive, we could recoup some portion of that mark throughout the second and third quarters.
Okay. So there is some hedging present there then? Because I thought before it was unhedged and then you're seeing a rebound in valuations there. So you would expect that to not really be a hedge capital,
I guess.
We are providing the hedging for the housing authority. And as we've had gains in the past, this was you take a snapshot in March 31 and that was the impact on the value of that hedge. We have a contract to purchase the loan at a later date.
So it is, but just to reiterate, we are hedging that we are hedging the pipeline for our clients. And then we have agreed we have kind of price delivery of those securities upon funding.
And I just would add on Hilltop Securities and they really had a phenomenal quarter with the exception of this, this is part of the market and the environment. And we did a lot starting in February to kind of pull back our exposures and be cautious in this environment. And we're going to continue to do so, I think, for the Q2 and the foreseeable future until we see things stabilize more so hopefully in the Q3.
Okay. And maybe another one on Hilltop Securities. Just the expense levels were better than expected. The comp to net revenue was down pretty considerably. Is that sustainable or is there something episodic in that number?
I think the comp to net revenue being down is really more of a function of mix shift of the business than it is anything else.
Okay. And then maybe lastly just on the servicing portfolio, can you just talk about the impact of kind of deferments within the mortgage the mortgages that you service? And then also you mentioned that you're going to build that servicing book. I assume that's just due to market dislocations and the ability to sell the servicing assets going forward?
That's correct. So I think it's worth noting and we noted in our slides, we did execute a sale in the 1st few months of the quarter, which was a positive. That was about $19,000,000 of MSR value. So kind of closed the quarter with a $31,000,000 MSR, which reflects about $3,500,000,000 worth of serviced assets. We have all those assets subserviced on our behalf, so we are the master church.
That said, there's a we've got a subservicing arrangement. We are monitoring forbearance requests. I think those have been between 5% 6% of that portfolio. And we are also watching advances as the primary servicer. We have to provide advances servicer advances on behalf of those loans to the extent they were in forbearance or otherwise didn't make their payments.
And as a result, we would have that liquidity exposure. We have sized that. It's we view it as reasonably immaterial. At this time, we'll continue to watch it. If it becomes something of note, we'll manage we'll note it and manage it as such.
In terms of the dislocation of servicing market, obviously, we've seen a pretty material dislocation in the pricing for servicing and the willingness of what I'd call traditional providers to provide to kind of purchase servicing. And as a result, we would expect to be retaining a large portion of our servicing originations over the next couple of quarters. And in the second quarter, a very significant portion up to 100%, just as overall pricing and execution in the servicing space has been challenged, I think, due to forbearance and other environmental challenges.
Okay, thanks.
Thank you.
Our next question will come from Brady Gailey of KBW. Please proceed with your question.
Hey, thanks. Good morning, guys.
Good morning, Brady.
Could you give us a little more color on the 2 Houston based real estate loans that went into the non performing bucket, maybe the size and what type of CRE those are?
They were office buildings. And again, the aggregate size was about $15,000,000 total loans.
Okay. And was that related to what's going on in energy or unrelated?
I think Houston is being impacted by the oil price declines and overall demand. So as we try to call out the energy, specifically our energy related portfolio, we have not put in our kind of pandemic portfolio, if you will, because we're calling that a little bit different, but Houston in particular is being impacted by both in a reasonably aggressive way. So it's hard to tease out the absolute driver, how much of it was pandemic and how much of it was oil prices, but the combination of those certainly drove a material deterioration in the quarter.
Okay. And then I think those banks have been earning roughly a 3% fee on the PPP loans. Is that roughly where Hilltop's up?
I think that's a reasonable estimate.
All right. And then just bigger picture, Hilltop's Chairman, Jerry Ford has a pretty good track record over decades of buying some attractively priced assets during times of stress and uncertainty. If you look at Hilltop today, you clearly have excess capital. You'll have even more excess capital after the insurance company is sold. How do you think about the opportunity to buy cheap assets, to buy the struggling banks over the next couple of years just given the uncertainty?
I think 1st and foremost, we're going to continue to be patient and work on our own businesses. And then when the environment presents itself, going to be very
aggressive. All right. Thanks guys. Thank you.
Our next question will come from Chris Gamaitoni of Compass Point. Please proceed with your question. Good morning guys. Morning.
Could you disclose what the overall LTVs are on average for your CRE portfolio?
I think the way to think about it is as we work through the different asset class and I'll specifically reference the ones we've called out on our package slides, I think that's most relevant. But for our and I'm going to give you the underwriting kind of max underwriting LTVs and certain other portfolio is going to be better and certain is going to be materially better. But as we think about kind of retail, it's in the 75 percent kind of LTV underwritten. From a hotel perspective, it's in the 70% to 75% range. And then for restaurants, it's in the 80%, 85% range.
The reason I give you those rather than kind of go through and the reason we didn't call out the LTVs on the slide here is as we go through this price there's going to be some price dislocation for assets. And what we can give you is what we underwrote it to in the event that you had to actually liquidate it, there hasn't been a significant amount of price discovery at this point.
Okay. That makes sense. And moving to the mortgage business, historically, Prime Lending has been very purchase focused. I'm wondering how, from a marketing standpoint, the business is shifting to focusing more on refinances in the more immediate term?
Well, I think it's just been what the market's been given. So I think that the nature of being purchased focused is the nature of being real industry veterans that are embedded in their communities and are able to have that sticky business when the refi market is not. And when the refi market has been like it has been, they're going to take advantage of that as well.
Okay. And I was wondering if you could give any insight into how you're talking on sale margins?
Sorry, Chris, we lost you for
a minute. I think you fell away. Can you just talk to gain on sale margins?
Yes, I asked the gain on sale margins through April, what they're looking like this month after the Fed came in and the bond market changed?
Yes. I think we have seen a constructive improvement in gain on sale margins through the month of April, and we expect that to continue through Q2 based on what we can see and and kind of how the market is performing today. So we do think gain on sale margins have gotten a little more constructive here as the market stabilize.
All right. And one last one. I was just any high level thoughts on what you think the municipal finance business will look like over the next year? Obviously, we're in a very weird situation, Number of issuance, do municipalities need more debt, less debt? Is there going to be delay in a big wave?
Just what your bankers are seeing right now?
So we saw a pretty good start for the year and then the March activity was notably weaker. And we had expected a very strong municipal year for 2020. And we do think that the second half of the year is a good likelihood of being reasonably strong. But until stability returns, I mean, I think that you're going to have some weakness and that we think the revenue bond deals could be remain challenged. However, like the tax obligation and essential services deals will do fairly well.
Okay. That's perfect. Thank you so much.
Our final question today will come from Matt Olney of Stephens. Please proceed with your question.
Hey, thanks and good morning. I want to circle back on the discussion around mortgage. You gave us some good commentary around gain on sale expectations. And I'm curious at this point, given what we know, what are your thoughts on volumes? Do you expect mortgage volumes to peak in the Q2 and fall beyond that?
Just kind of curious what your crystal ball says?
Yes. I think from a mortgage volume perspective, I think your crystal ball reference is a good one. We are as I think I mentioned, we are expecting to see a higher percentage of refinance volumes. As I mentioned in our kind of 2020 commentary, we think purchase volume will be under some pressure until citizens kind of feel comfortable going out looking at homes and getting a little more a little further away from the peak of the pandemic and that presumes no flare ups in kind of overall pandemic related activity. But from a we don't have an actual given outlook in terms of overall volumes, but the reality is it will be, I think, more heavily refinanced centric, certainly for what we can see into the Q2.
And then we'll we're all watching for how the consumer and how the homebuyer responds through what is traditionally the one of the stronger periods of the year as states and cities and markets start to, I'd say, reboot from the shutdown.
Okay. And then going back to the loan modification discussion, I think, Will, you mentioned the expectations are that the number of modification requests continues to rise. I'm curious if you've seen this so far in recent weeks. I know you disclosed the amount of modifications as of April 23 on that Slide 4, but do you have that amount as of March 31? Just trying to appreciate if this has changed much in recent weeks.
Yes. I'd say it's March 31. It was a pretty small number. But again, you were a couple of weeks into it. But it has we expect it will continue to grow as the shutdowns continue to persist and depending on the pace of recovery.
So if you just take one of some of the most impacted from a hotel perspective, we've gotten most of our hotel portfolio has set forth some modification request. If you look at restaurants, I think the feedback is a bifurcated set of feedback there. It's QSRs and other kind of takeout ready organizations have outperformed obviously the full service dining experience restaurants and for those full service dining experience restaurants, it's the question of what type of deferment and what type of kind of profile they carry forward is solely dependent on how quickly markets reopen and more importantly than how quickly they reopen from a governmental perspective, how quickly customers come back to reasonable spending levels over the coming months. I think most of at least what we're hearing, most of them are realistic and that's not going to happen in May June. So as we look into the Q3, that will continue that question will continue to persist, but we'll start to get a better pulse on this through the latter parts of the Q2 and certainly into the Q3.
The customer the client and customer response is going to be for hotels and restaurants largely the most significant driver and the pace of that, it's just it's hard for us to estimate and it's an unknown as to how quickly that's going to occur.
Okay. That's helpful. And then last question for me. You mentioned that the Houston portfolio previously. Just remind us how big that portfolio is at this time?
I got it here. I think, well, the Houston portfolio total assets is under $500,000,000 want to say offhand that I've had it here about $480,000,000 Yes,
just under $500,000,000 total loans.
Okay. Thank you, guys.
Thank you. Thank you.
This concludes our question and answer session. Thank you very much for attending today's presentation. The conference has now concluded. You may now disconnect.