Good day, ladies and gentlemen, and welcome to Hancock Whitney Corporation's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Trisha Carlson, Investor Relations Manager. You may begin.
Thank you, and good afternoon. During today's call, we may make forward-looking statements. We would like to remind everyone to carefully review the safe harbor language that was published with the earnings release and presentation, and in the company's most recent 10-K and 10-Q, including the risk and uncertainties identified therein. You should keep in mind that any forward-looking statements made by Hancock Whitney speak only as of the date on which they were made. As everyone understands, the current economic environment is rapidly evolving and changing. Hancock Whitney's ability to accurately project results or predict the effects of future plans or strategies or predict market or economic developments is inherently limited.
We believe that the expectations reflected or implied by any forward-looking statements are based on reasonable assumptions, but are not guarantees of performance or results, and our actual results and performance could differ materially from those set forth in our forward-looking statements. Hancock Whitney undertakes no obligation to update or revise any forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. In addition, some of the remarks this morning contain non-GAAP financial measures. You can find reconciliations to the most comparable GAAP measures in our earnings release and financial tables. The presentation slides included in our 8-K are also posted with the conference call webcast link on the investor relations website. We will reference some of these slides in today's call. Participating in today's call are John Hairston, President and CEO, Mike Achary, CFO, and Chris Ziluca, Chief Credit Officer.
I will now turn the call over to John Hairston.
Thank you, Trisha. Good afternoon, everyone. Our timing for this quarter's earnings release and call is different than our normal practice. We thank you for joining us late in the day. Today's economic environment is challenging and evolves daily, sometimes hourly. In light of those challenges and volatility, we took significant steps in the second quarter to continue de-risking our balance sheet. After building a solid reserve for credit losses in the first quarter and then issuing sub-debt in June, we made a strategic decision to opportunistically divest a large portion of our energy portfolio. Since 2014, we have communicated a goal of reducing our energy-related exposure. We went from a high of 13.4% of total loans to just under 4.5% as of March 31st.
Our plan to diminish the reliance upon and impact from this portion of our loan book was successfully working the book down to a less material level. In recent months, growing concerns due to an ongoing supply-demand mismatch were exacerbated by the global pandemic, leading to a decision to accelerate reductions in exposure. We were pleased to reach an agreement with Oaktree Capital Management and sell over half the energy portfolio as of March 31st, including the entire RBL book and a substantial majority of the larger relationships in midstream and energy services. Some, but not all, of the credits in the sale were in default. Our remaining energy concentration is a portfolio of mostly granular support service credits with an average outstanding balance of approximately $670,000.
We have a healthy reserve on the remaining portfolio at 5.7% of energy loans, and the transaction brings our energy portfolio sharply down to 1.7% of total loans, excluding PPP. Both non-performing loans and criticized loans declined significantly as shown on slides eight and nine in the deck, and all but two of the remaining loans are pass-rated credits. To complete the transaction, we booked a special provision of $160 million or $1.47 per diluted share in the second quarter, in addition to releasing the existing reserve on those credits of $82 million. Additionally, based on updated economic forecasts, during the second quarter, we built what we believe to be a stronger level of reserves for potential pandemic impact in our markets. Additive to the special provision for the loan sale, we booked a provision of $147 million or $1.34 per diluted share.
Our ACL to loans now stands at 2.3%, excluding PPP. On a positive note, loan payment deferrals applied at the onset of the pandemic began expiring in June. As noted on slide 10, from a peak of $3.6 billion in outstandings in May, deferrals ended June at $2.7 billion and were further down to $1.4 billion as of July 15th. We expect the trend to continue through mid-August, all else equal. In an 8-K we filed in late June, we indicated an expectation of more than 50% of deferrals returning to normal payment upon maturity. Since that date, through July 15th, our expectations have been further refined such that we currently expect two-thirds to three-quarters of our commercial customers to return to normal payment while we work with the remaining on either a structured solution or a second deferral.
Stepping back from credit, the core businesses within our company improved linked quarter. Growth in loans and deposits both reflect the impact of PPP fundings. PP&R was up 2.4% linked quarter, and we kept expenses under control despite the sizable cost in overtime and other expenses necessary to assist over 12,000 of our primarily small business clients with PPP loans. Looking forward, we remain committed to helping both our clients and associates manage through this pandemic event, and we believe we are making decisions in the best interest of our shareholders. With that, I'll turn the call over to Mike Achary for a few additional comments and details.
Thanks, John. Good afternoon, everyone. Our second quarter results reflect a loss of $117 million or $1.36 per share. They include, as John mentioned, $160 million special provision for the energy loan sale, as well as an additional $147 million provision related to updated COVID-19 forecasts and modeling. Excluding the special provision for the loan sale at a 21% tax rate, earnings would've been $9.4 million or $0.11 per diluted share. We're calling out the tax rate since our second quarter effective tax rate was 39%. Due to our year-to-date loss, tax credits, and other tax-related items, we were able to report a profit after tax excluding the sale. We do expect the effective tax rate to normalize in the back half of the year at about 18%. Loans for the company increased $1.1 billion from March 31st.
This growth included $2.3 billion in PPP fundings, partly offset by the energy loan sale of $497 and about $500 million in paydowns on lines of credit. As a reminder, we had a similar amount of line draws in the first quarter as clients built liquidity in an abundance of caution associated with the uncertainty surrounding COVID-19. Deposits were up $2.3 billion as PPP funding remained, for the most part, in customer DDA accounts. Also, the balance sheet was flush with liquidity with almost $760 million at quarter end and $17 billion in untapped sources of funding. Consistent with our intra-quarter comments, the margin declined 18 basis points linked quarter, mainly related to the Fed rate moves at the end of March. Slide 23 notes the headwinds and tailwinds, and the waterfall chart notes the basis point impact per item.
We believe the NIM will mostly stay in a range of a couple of basis points ± from where we are now, at least for the next couple of quarters, which is about as far out as we have decent visibility. John has already covered the loan sale and provision discussion points, but I would like to mention that for the quarter, we used Moody's June forecast for our macroeconomic assumptions. These are listed on slide 18 in our earnings deck. We believe these scenarios present a reasonable mix of economic forecast and are appropriate for our ACL modeling purposes. Our fee income balances were down in most areas, either related to market dynamics or stimulus payments reducing overall fees. Secondary mortgage income is offsetting some of those declines in what's becoming a very favorable rate environment for mortgage banking with increased volumes.
Non-interest expense was down $7 million linked quarter, reflecting equity write-offs of energy-related credits in the first quarter. The increase in personnel expense was mostly related to annual merit increases in April and overtime pay related to mortgage lending and PPP applications. Our capital remains solid and in excess of regulatory minimums, including buffers, as detailed on slide 28. TCE did fall below 8% to 733 as of June 30th. We expect to rebuild to levels closer to 8% by year-end. 36 basis points of the drop from last quarter was related to the loan sale, with another 56 basis points due to the impact on TCE of the $2.3 billion in PPP funding. We do expect to pay our quarterly dividend but are in consultation with our examiners. As always, the board reviews our dividend policy quarterly. With that, I'll turn the call back to John.
Thanks, Mike. Let's just open the call for questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press the star then the number 1 key on your touch-tone telephone. To withdraw your question, press the pound key. Our first question comes from Michael Rose with Raymond James. Your line is now open.
Hey, good afternoon, guys. Certainly understand the loan sale. I think a lot of us were surprised by the magnitude of the severity that you guys took. Can you just give some rationale as to why to sell now and maybe why didn't you hit the bid a couple of months ago as you were de-risking the portfolio? Maybe what does energy lending look for Hancock Whitney going forward? Is it a business that you continue to plan to be in? Thanks.
Thanks, Michael. This is John. I'll start and Mike can add color, or Chris can. If we look back in time, we've been ratcheting the concentrations down really since 2014, and had in the last couple of years a good bit of quarter-over-quarter improvement in the book. Then as we got toward the end of the year, the end of last year, supply-demand mismatch began to get worse. We all saw what happened as fears in the market took place around storage capacity and whatnot. When looking in the future, the likelihood in a pandemic environment that demand was going to go up fast enough with the challenges that RBL, particularly companies in the RBL business, have with raising equity just in the private market.
The concern was that demand just wouldn't get up fast enough to cover some of those issues, and we would see further deterioration in the book. We had a buyer who was both sophisticated and had the capacity to purchase meaningfully all of the RBL midstream and a very large percentage of the lumpy credits in the services side. I think the degree of the quality of the partner that we had allowed us to do a transaction that was more conclusive than just small pieces at a time. While certainly we admit the discount appears steep, I think time will tell whether it was a steep discount or whether it was a reasonable discount just over time.
The benefit to us and to shareholders is the fact that the book is now de-risked from an energy perspective, and the residual book has a far lesser average loan size than what we sold. I think the average outstanding on the book we sold was a little over $11 million, and the residual amount's about $1 million per loan. By the time you take out all the zero balances, about $1 million a loan.
In terms of going forward, Michael, the book that remains are primarily small to medium-sized businesses with a more diversified revenue stream, and just simply the scale of the book being less and the client size being something that we believe is a lot less risky from an investor point of view, is a business that while I think the balance sheet will continue to diminish, the content of it is something we're a lot more comfortable with.
Michael, this is Mike. The things I would add to John's comments, probably first and foremost is, on Friday we announced that the agreement to sell the portfolio was executed, and then this afternoon we actually were able to close the transaction. All aspects of the transaction are really kind of behind us now. The other thing that I would add, and I think this is obviously pretty important, but we look at all of these activities that we've kind of undertaken in the first half of this year as part of our overall de-risking strategy, if you will. We proactively built reserves pretty substantially in the first quarter. We added to that in the second quarter, aside from the loan sale. Our ACL to loan stands at about 236 basis points right now.
We raised some sub-debt during the second quarter and then took the opportunity, as John mentioned, to deploy some of that sub-debt, if you will, toward further de-risking our balance sheet through the sale of a big part of the energy portfolio. Again, we look at all of those activities really as kind of an overall de-risking plan.
I appreciate all the color. Just as a follow-up, wanted to talk about the dividend a little bit. We had a larger bank in Texas today. Note that regulators really have not given them any guidance around using the CCAR four-quarter look-back in terms of dividend tests. If we were to use that for you guys, given two consecutive quarterly losses, it doesn't look good for the dividend, but there also are some countervailing forces. Maybe if you could just walk through how you guys think about ability to pay the dividend and capital adequacy. Thanks.
Sure. Be glad to. Look, we think and believe that our capital ratios really do help us support the payment of the dividend in the third quarter and kind of on a go-forward basis. Look, we've been real transparent with our examiners. Through really the entire process of looking at de-risking our balance sheet through the reserve builds as well as through the sale of the energy book, we've kind of kept in constant contact with our examiners. They absolutely support the actions that we've done. As we said in the deck and on the script, we do intend to pay the third quarter dividend. Of course, we're in consultation with our examiners as well as our board. That process should be completed within the next 30 days or so, and then we'll kind of go from there.
Great. Thanks for taking my questions.
You bet. Thank you, Michael.
Our next question comes from Kevin Fitzsimmons with D.A. Davidson. Your line is now open.
Hey, good afternoon, guys. If we could just touch on deferrals. I appreciate that detail that it peaked and now it's declined. Just curious what your outlook is on where this settles. In other words, there's probably some remaining first-round deferrals that have not yet matured, and I'm not sure where you're at in the process of having conversations with folks that may need a round two deferral. If I did my math right, I think as of mid-July, you're roughly at a little over 6% of loans in deferral and where you think that might settle as you progress out over the next several weeks and get into more of a round two scenario.
Chris, you want to take that one?
Yeah, sure. Yeah, this is Chris Ziluca. As you pointed out, right now we're settling out as of at least 7/15 at around a little over 6%, closer to 7% right now, deferrals. That's come down pretty steadily since the peak. As we also indicated earlier on in the conversation, we've kind of refined our expectation around customers going back to normal payment to the two-thirds to three-quarters level, which basically indicates that the remaining portion is where we're focusing our attention. Mostly around structured solutions to handle issues that may linger longer than just the regulatory guidance around less than 180 days. To the extent that a customer feels that they're closer to resolving their operating challenges, we would entertain a shorter second deferral to kind of bridge that gap.
We have pretty active dialogue on a weekly basis with our client-facing teams to ensure that we're executing on the plan more focused on structured solutions to the extent that anything additional goes beyond that timeframe. We're feeling pretty confident in a lot of the conversations that we're having. Certainly, a lot of them are focused around the hospitality sector, including hotel and some of our full-service restaurant clientele in the New Orleans market. Overall, I think we see some real positive dialogue going on between us and our clients to kind of bridge the divide here as it relates to the pandemic.
Great. Thanks, Chris. Just one quick follow-up. On the subject of de-risking, other than obviously monitoring the loan book and deferrals for COVID-19, are there other de-risking type of activities or moves that you guys are evaluating and you think you have at your disposal? As a related point, are there any expense initiatives that you're considering that might fall into that line as well? Thanks.
Okay, this is John. I'll start at the end and work my way back to credit. In terms of expense treatment, we've had a good history of taking good views of rationalizing expenses in both good times and bad. Certainly, the environment that we're in now leads to volumes of various activities being somewhat diminished. Some of those are coming back, like fee income and et cetera. Some may take a little longer. We'll be taking, I think, a very disciplined view of expenses around every category, ranging from office space to facilities to non-people-related expenses. Also in terms of workforce. We're obviously hiring very few folks right now, and that's predominantly because very few folks were attriting. We have extremely good retention of team members at the moment, but we aren't hiring very many when vacancies appear.
I do think expenses will be a more favorable story as we go through the back of the year, but not ready to try to wrap any bookends around numbers as of yet. In terms of credit now, in the first and second question, I couldn't tell if you meant around other books that we thought were selling or not. If you did, I think the answer to that is we have no other plans at the moment to do anything like that and aren't in any dialogue with anyone. You obviously never say never, but that's not our intent. Then in terms of just credit in general, obviously we've tightened credit in certain sectors. Chris, you want to go into any specifics on that?
Yeah. Again, we're learning from a lot of the deferral activity. We're utilizing some of that experience to really tighten our underwriting guidance to the field and to our credit officers. We have been focused for a while around making sure that the types of transactions that we're onboarding are less chunky and sizable in nature. Certainly that sort of thought process continues. Overall, when we think about some of the sectors under focus that's in the earnings release, we are providing general guidance around just ensuring that existing accounts meet our criteria as well as any new relationships that we might be considering with the idea that some of those sectors under focus are ones that we're going to be a little bit more selective and cautious about before we consider new opportunities.
Kevin, this is John. The page that Chris is referring to is on page 16 of the investor deck. That's a little bit of a more enhanced slide than the one we had last quarter where we had whole sectors. For that slide, we divided it between the subsectors, and in some cases even within the subsector, and broke those into tiers of concern. You can somewhat see from that page that the total book of loans that we have under the most intense look right now is a bit smaller than maybe what we talked about a quarter ago. I think as we get toward the end of the year, instead of focused on sectors, we'll be talking about individual credits.
I think over the course of the next quarter, as the deferrals are completely retired, as we know what the credits are that end up needing modest modifications versus additional restructuring, then we're going to see migrations based on actual risk ratings and not just sectors under focus. Page 16 was intended to give a little bit more detail that was helpful, we thought, for investors to understand what part of the book could be at the most risk or less risk.
I will also just add to that. The reality is during the last earnings release, this was all fairly new, and we were really focused on broad categories. Over the past quarter, we've been able to refine our understanding such that in certain areas and in certain situations, we've realized that maybe it's slightly less of a concern. In other areas, we still have the same level of concern, and we have the same level of intensity around managing those transactions and books of business.
Kevin, I think the last thing to add related to this question is, look, I think we feel good about where we are in terms of the de-risking activities we've done up to now, and there's nothing else out there, as John mentioned, on the horizon as far out as we can see. We believe we've done a significant amount of de-risking and really look forward to a return to more or less a normal level of provisioning in the second half of the year. Normal in this environment is kind of a wild card, but as best we can tell, we should be able to return to a more normalized level of provisioning. That would also imply a level of profitability as well.
Okay. Thanks very much, guys. That's helpful.
You bet. Thank you for the questions.
Our next question comes from Casey Haire with Jefferies. Your line is now open.
Yeah, thanks. Good afternoon, guys. Follow-up question on the deferrals. The loans that are not curing, that are coming back for a second wave, is there a concentration from slide 16 that you're seeing there, like a pattern?
Yeah, I think what we're seeing in general is some of the hospitality-related credits, hotel and restaurant, are the ones where the deferral has expired, and we're in the process of essentially executing on the structured solution. I think that's probably the most obvious pattern.
Casey, this is John. I know you haven't had a chance to see the whole deck. It just went out about an hour ago or so. If you look at pages 12 through 15, that highlights those sub-sectors that we mentioned on the far right. You'll see what the deferral dollars and percentages are as of July 15th. Now, a caveat to that is we're in deferral maturity season right now. Every day, those numbers are coming down. When doing the comparative within the midcap space, that date, the as of date, really is meaningful. Ours is as of the 15th, and each day those numbers come down a bit.
Okay, great. Yeah, I'll take a closer look. On the capital build, Mike, I think you said you expect to get back to 8% TCE by year-end. If we get a lot of forgiveness of PPP, you'll be there at 7.9 ex PPP, plus you got lower provisioning coming post the divestiture. Is there something that I'm missing? Do you expect loan growth to bounce back here? Why would TCE not come back meaningfully given PPP forgiveness and less provisioning?
No, we absolutely think it will. You're right, if we just back out the PPP loans, we're at 7.89. We've also talked about having a good deal of excess liquidity on the balance sheet. That I think will largely subside by the end of the third quarter. That's another dozen to 15 basis points. Look, I think we would be very disappointed if we're not back over 8% by year-end.
Okay, great. Just one last one on the PP&R front. The service charges, I think John or Mike, you guys said that those have come back later in the quarter. Is there a trend line that we can point to like June versus April, just to get a better line of sight on the service charges?
On service charges, I wish there was a simple answer, but it kind of depends on which charges we're talking about. If you look at the hit from 2Q to 1Q, it's a pretty big number of about $10 million pre-tax. Of that number, depending on how you count it, 40%-60% of the overall $10 million in reduction was really the presence of stimulus. By stimulus, I'm talking about beneficial unemployment payments building PPP deposits into business accounts and just really what was early quarter fear-driven hoarding of cash. NSF/OD charges and regular deposit maintenance account charges were dramatically down. That was about half, I'm going to call it 40%-60% of the $10 million hit. Those will come back as deposit account balances normalize.
Another $1 million, maybe $1.1 million or so, were directly waived fees, and those ended in July. The remainder would be in transaction-related fees that were very much diminished just when the economy was largely shut down. Those would be like annuity sales, loan fees that are not amortized, debit card volumes, et cetera. Both annuity and debit card balances have we're not at normalized levels yet, but they have resumed more so in July than June. Time will tell whether that sticks around for the whole quarter, but it looks maybe pretty good right now, particularly given the rate environment for annuities. I think we'll start seeing some return on 3Q. It's very hard to project what the service and NSF/OD income patterns will be because it's tied to the excess balances in the deposit accounts.
Without a place to deploy those funds, we're not getting the type of interest income benefit you would get from that excess liquidity. Right? We're staying very liquid right now for that reason because we do expect those deposit balances to diminish as people begin to use the money. Now, a totally different topic goes to secondary mortgage income, where that revenue, which we thought would ease up a little bit more in 2Q, did not, and it continued booming right through the second quarter and really through July so far has still remained stronger than we would've anticipated. How long that lasts, I don't know, but it's rate driven and there is a somewhat attractive percentage of first-time homebuyers beginning to get into the market, probably due to the attractiveness of rates. We'll see how long that actually holds up.
Does that help you, or do you have any others you'd like to?
No, Yeah. That's great. Thanks, guys.
You bet.
Thanks, guys.
Our next question comes from Brad Milsaps with Piper Sandler. Your line is now open.
Hey, good evening, guys.
Hey, Brad.
Hey there.
Mike or John, I'm just curious if you could maybe comment on the charge-offs away from the energy sale. Any particular sector that encompassed those charge-offs outside of what you had to take on the energy portfolio?
Yeah, I'll start. This is John, then Chris can add color if you like. When you get to non-energy charge-offs, there were a small number of credits, some in the behavioral modification book, which is quite small. There was a fraud in a construction company. Several of those were somewhat in play before the pandemic began, and there were some signs that we thought were pretty bright that they'd be able to work through it and come back and actually do well. The pandemic took the wind out of that sail, as a result, we opted to go ahead and proactively take those charges in 2Q. It really wasn't any particular sector. It was more the inventory of credits that had some weaknesses that were maybe headed better, that the pandemic eliminated, in our opinion, a chance of them actually recovering. That's been dealt with.
Anything to add to that, Chris?
No, I think that's a fair summation.
Beyond that, just the normal stuff that happens every quarter. Really haven't seen a big uptick in consumer losses or anything like that caused by the pandemic as of yet.
I think also fair to say that, again, we took a proactive approach to dealing with issues. Not that we haven't in the past, but first half of the year, that's been our MO.
Got it. Just back to the energy sale. I'm curious, at what point, was this something that you guys contemplated early in the quarter, maybe earlier in the year when you were sort of going through your initial CECL estimates? Just kind of curious how it transpired and how it will impact your thoughts around provisioning going forward. I appreciate that it's very difficult to predict. You guys know that you do expect it to go lower. Also just curious, any color you could give us on kind of marks in E&P versus midstream versus service as you kind of went through the process, kind of what you saw in terms of what the market kind of demanded there?
This is John. I'll start and kind of tackle the first question. We've made no secret our desire. We want to take down energy concentration over a course of time, and have successfully done that, and the book really was improving. We were beginning to get towards the back of the year, and I think I may have mentioned that on a call at some point, that we were getting onesie, twosie offers. Some of those we took. Most of them we didn't. On individual credits, the discounts were not terribly attractive because generally these were credits that were already distressed, that for whatever reason, a buyer was trying to accumulate debt for their own purposes. This transaction was the first opportunity to do something conclusive and a meaningful step towards a big de-risking maneuver.
Because of that, and because of the size of it unfortunately drove the discount to be higher than I think we'd all like to see, but that was just our reality. In terms of discounting between books, when these portfolios come together, generally it just comes down to a number. I'm sure there were individual numbers that were very different on the other side, but we're not privy to that, and it'd be improper for us to discuss it even if it were. I think you just kind of look at the whole pool and look at there were certainly credits in that book that we expected zero loss from. There were credits that might have had material loss in it.
By the time you roll them all together, you get a number we viewed as what our current expected losses may be if our darker scenarios came to fruition. Then the other opportunity to exit it all right now and redirect those resources and the company's focus towards business we want to grow versus shrink. That led to the decision. Do you have anything else you want to add to that, Mike?
Just briefly, you asked a little bit about the process, Brad. Look, this is something certainly we've thought about over time as we've gone through the process of reducing our concentration pretty substantially over the past few years. A number of factors, I think, came together in the second quarter that brought us to the conclusion to kind of initiate a process. That's what we did. We had multiple individual firms that were involved in taking a look at the book. In the end, we received multiple bids, and it was fairly competitive, and we were pleased really with how the process played out. As John indicated, typically in a process like this, you're not going to get folks to differentiate their pricing by credit or even by segment of the book.
For the most part, it was really a portfolio sale with portfolio-level pricing. Hope that helps.
Yeah, no, that's great. Just any additional color, Mike, you addressed this a little bit earlier, but just magnitude of provisioning, I know there's so many unknowns, but just any additional color would be helpful there.
It's really hard to put a number on that. We're not going to go there in that regard. Suffice to say that, again, we've really kind of completed the de-risking that we thought was necessary in the first half of the year. We look for a return to a much more normalized level of provisioning, both in the third and the fourth quarter. What that is will depend on a number of different factors. I think that we've built reserves substantially and don't really, at this point, look at or are looking at building reserves too much beyond where we are now.
Yeah. Brad, this is John. Only thing I would add, and just staring at numbers, NPLs are now down 33%, criticized commercial down 34%. The deferral percentages have obviously significantly reduced. The ones that don't come back to normal payment will migrate to an answer, probably through the end of the year. I think we'll all know a little bit more about what that has. The one big wild card that I think none of us really know is what direction does the economy go. That has a big impact from an ACL perspective as we apply different scenarios, right? It seems as if the resurgent infection rate has not led to the somewhat knee-jerk reaction of close everything, and that it's much more measured this time around. If that continues, then I think the future's may be a little more brighter.
If we end up with massive closures, that'd be a little more tough. All things equal, and at the current posture we're at, you would certainly expect provision to decrease meaningfully.
Great. Thank you, guys. I appreciate it.
Thank you.
Our next question comes from Ebrahim Poonawala with Bank of America. Your line is now open.
Hey, guys. Most of my questions have been asked and answered. Just one follow-up, I guess, on the energy book. Why not sell the entire book, John? Why have we kept the remaining $350 million? I'm just wondering, given it feels like you just wanted to remove the tail risk if oil went lower, you kind of sold it at the best price you could get so that you don't have to worry about this. The impact on stock is diminished. Why not sell the entire portfolio?
It's John. I'll start. The honest answer is when you get into the very small credits, the appetite for a buyer is very low. When you get into credits that have a $300,000 balance, $500,000 balance, there's just not a lot of appetite. On the larger end, the few remaining large credits we have, and when you're fairly far down the road in a workout situation, it can become problematic to include one of those credits in a portfolio sale. Those items that were meaningfully close to a resolution, one way or the other, it's better to leave those alone. The rest was just very small. There was also a large number of accounts that have a zero balance right now. There's no real incentive for a buyer to buy a zero balance at zero, and just take the remaining commitment.
That's the reason.
Yeah. Ebrahim, just to add a little bit of color to John's points. On the book that we sold, the average size of the relationship was about $11.3 million, and we sold about 44 relationships. In terms of what's left, the average size of the relationship's only about $670,000, and it's well over 240 different relationships. What we have left is extremely granular. Again, to John's point, not sure that there was much of an appetite by folks to acquire that granular of a portfolio.
We should also call out there were two credits that were not passed, right?
Better performing book.
Yeah, the vast majority of what's left is really kind of bilateral relationships. These are true customers. Much of what we sold was a syndicated book.
Got it. Mike, remind us what's the SNC book at the end of the quarter? I guess it goes beyond just the energy loans.
Yeah, our total SNC book, about $1.8 billion. Again, our concentration in SNCs is down pretty substantially pre-sale versus post-sale. Post-sale, it's about, what, 8.5%? Before that, it was about 10.5%, near 11%.
Got it. Thanks for taking my question.
Sure.
Okay.
Our next question comes from Jennifer Demba with SunTrust. Your line is now open.
Thank you. I just wonder if you could give us some color on the mortgage pipeline as it stands now. I am just wondering what kind of revenue impact you're expecting in the second half of the year and how much momentum is carried?
That's a terrific question. The first one's easier to answer than the second. The first one, the pipeline is still full. In fact, just this morning, we were looking at the pipeline. It's still so full for refi that it's somewhat getting in the way of working with portfolio relationships that while they're not quick revenue, they're valuable. Our dialogue was, do we need to peel off any resources to focus on the primarily private banking portfolio that we expect to retain? The pipeline's still very full. In terms of revenue, second half, all things being equal, you'd expect secondary mortgage to be similar in 3Q to 2Q if that holds up. I'll confess to you, I'm really surprised, Jennifer. I didn't expect there to be that much more refi business out there. It just keeps on coming.
We're glad to take it. I think 3Q ought to look like 2Q if that pipeline stays where it is right now. Fourth quarter is a little too far to think out there, but sadly, I don't think we're going to see rates going up really in the near term. You would think there'd be an end to the refi business at the volumes we're actually producing.
Thank you.
You bet. Thank you for the question.
Our next question comes from Matt Olney with Stephens. Your line is now open.
Hey, thanks for taking my question. Just want to go back to the asset sale. I think most of us have been assuming that the midstream assets are lower risk, and therefore, midstream assets have lower loss content. Would you agree with that assessment of midstream assets? I guess the RBL asset sale makes sense given some of the losses there. Just trying to reconcile the midstream sale. Thanks.
This is John. It's a good question. That is a business historically that has done very well. If you look at a forecast, and these things ripple, right? If you see a lot of pressure on RBL, then you begin, or at least you could begin to see more pressure on contract rates for transport and storage on the midstream side. To date, I think, Chris, if I'm right, there was only one significant concern in that book. As you begin to look forward, if we're right, or if we begin to see a darker scenario there, we could end up with problems in the midstream remaining book. Made the call to do a much more broader exit of energy in total.
The fact that those were syndications without core relationships meant it followed the pattern we've been following in terms of managing more towards more granularity and more full service relationships. That's really why it was included, was downside risk potential and the lack of offsetting liquidity.
Okay. That makes sense. Thank you for that. Shifting over to loan balances. If I exclude the PPP impact and the energy bulk loan sale, it looks like loan balances were still down sequentially. You mentioned the previous line draws were paid down. Just curious where you think loan balances go from here, and if credit is tightening in certain segments that you mentioned before, should we assume that loan balances continue to contract from here, ex PPP?
It's a good observation. I think the headwinds do appear stronger than the tailwinds in the very near term. Forgive me for doing anecdotals on you, but I think they're applicable. First, in terms of just attrition from the portfolio, other than amortizations, we're seeing very, very little attrition in the book, i.e., customers that are out pricing existing debt. Clients appear to be more hunkered down. The downside of that, I mean, that's the upside, that we see less runoff relative to prior quarters in the book, particularly the commercial book. The downside to it is the same thing's happening everywhere else, there's just not as much deal flow available. It's hard to tell, is that hunkering down in clients who are, for whatever reason, are unhappy where they are, but they're not willing to take the chance of moving to a new bank?
Is it just straight up light demand because business sentiment is poor. It's hard to tell exactly why, the bottom line is demand is very light. As we look towards Q3, while we do have pipelines, they don't look that bad. In fact, the pipeline for the end of 2Q is the same as the pipeline for the end of 2Q last year, that doesn't correlate with that demand scenario. As we move through that pipeline, the credit risk appetite and sectors under focus begin to apply, I think the pull-through rate is going to be much lower for the 3Q pipeline than it was for 3Q last year. I gave you a lot of information there's a lot of anecdotal information that points to lighter attrition, much lighter demand.
With the secondary refinance activity causing diminishment in the mortgage portfolio, coupled with a runoff of the indirect books, which we are not replacing, coupled with our appetite being a little tighter on the home equity line side, and at the upper end, and certainly with syndications being more tight, then that would suggest to further shrinkage in the third quarter before we begin to see increases in loan balance sheet going forward. The only other wildcard I'll put in there is some of the PPP balances apparently went to paying down existing debt, because the recovery didn't happen as quickly as people thought. With no expenses to use the PPP balances to burn, it just went to paying off other debt in the short term. As the reopening occurred, we began to see some of that come back, but only very recently.
It's really tough. We're not going to give any guidance because the guidance would be too much of a guess versus an informed decision. I would just end it with saying the headwinds are outweighing the tailwinds for the near term.
Okay, that's very helpful. Thank you, guys.
Okay.
Our next question comes from Catherine Mealor with KBW. Your line is now open.
Hi, Catherine.
Thanks. Good evening, everyone. A question on CECL. I noticed that you're weighting between the baseline and the various scenarios changed from last quarter. I guess last quarter you were 80% baseline, and then 20% of the two severe scenarios, and then looks like now you're at 50% baseline and then 25%, actually a better scenario, and then 25%, just a slower growth scenario. It seems at least your baseline is more optimistic. Just any kind of commentary on your thought process there?
Sure, Catherine, this is Mike. I'll be glad to comment on that. Yeah, you stated the various mixes between first and second quarter accurately. I guess the thing I would point out is the mix that we used in the first quarter was pretty detrimental. As you recall, as the first quarter was proceeding, the various Moody's scenarios got kind of darker and darker as we went through that quarter. They also continued to get a little darker as we went through the second quarter, although now that we're in the third quarter and have had a chance to look at the July scenarios, they seem to be stabilizing a bit.
The reasoning for why we changed the mix a little bit, I think, has everything to do with some of the comments John made earlier about our regional economies opening and probably, I think, on balance, doing fairly well. There's also the prospect of additional stimulus out there over the next quarter or so, that played into our thinking as well. I think on balance, we really look at the two kind of together, and then we look at the result of how much we built our reserve and where we stand now and feel that we're in a pretty good place, all things considered.
Catherine, it's John. The only thing I would add is, as we look across our footprint, there are pronounced differences in the degree of recovery already experienced market to market. Just using something as simple as hotel occupancy, average daily rate, and RevPAR, the relativity between markets is extremely different. We've seen a lot of questions around New Orleans, and the pressure in the city is primarily around the lack of convention and trade show business. As you get to other markets, particularly the beachy markets, the beach-facing markets, in some cases, unbelievably, the numbers are only like 10%, 15% off of where they were a year ago. That also plays into the scenario differences, trying to throw a net around the whole footprint with both good and bad relative to baseline experiences.
Okay. That makes sense and helpful. My only follow-up is just on the deferral conversation. Is there a way to quantify the balance of loans that are now off deferral? They didn't take the second round, but they're undergoing some kind of structured solution. Where would we see that balance of loans in terms of loan grades?
I'll take a quick run at that. It's Christopher Ziluca.
Hey, Chris.
If you look at where we peaked in the way of deferrals and where we report kind of the 715 numbers, I think page 10 really kind of articulates that. We peaked at $3.6 billion. We're down to $1.4 billion. The net obviously is kind of what's run off, the $2.2 billion that have kind of run off. I think we also indicated earlier that we're seeing two-thirds to three-quarters of our loans essentially going back to repayment. You can assume from that the remaining amount are the ones that we're actively discussing or continuing to discuss second deferrals, but really more steering them towards a discussion around whether or not a second deferral is really sufficient, or whether or not a structured solution is probably the better way to go. It's a mix of both of those.
I wouldn't say that they're all going to go to a second deferral on situations. Some are just needing an additional month or two to kind of get them to what they feel and what we feel is a little bit more stabilized operating rhythm. From there, then, we start to explore risk ratings and the risk rating migration related thereto. To the extent that the structures that we're talking about with our customers would indicate that we should be looking at potentially downgrading those credits, some of which may be just downgraded kind of within pass and some might be moving to watch or some sort of special mention substandard category. We'll probably see some migration in that regard. I think we've talked about this.
We did certainly talk about it earlier last month in one of our investor presentations where the reality is that the migration discussion is more of a second half of 2020 as you start to really truly assess the longer-term impact of the pandemic on those individual credits and the structures that you might need to put in place to bridge that gap. We think it's all pretty manageable at this point in time based on the dialogue that I'm having with our relationship managers and portfolio managers. I do expect to see some migration in risk rating across the board, across our risk rating spectrum in the second half of the year.
Catherine, it's John. I know there's so much detail, it's really kind of hard to find a theme, so I'll do my best to encapsulate some of that for you. When we filed the intra-quarter 8-K back in late June, the guidance that we gave it really wasn't guidance, it was just a statement of where we were. It looked like something a little better than 50% were going to return to normal payment, and that was early. That number got up to where it looked more like two-thirds a few weeks later, and now is two-thirds to 75%. The trajectory of our expectations in return to normal payment has certainly gotten better over the course of time. That said, it's not done.
August 10th is the last big tranche of deferral maturities, so we will have been through all of those initial 90-day deferrals by the second week of August. Then by the second week of September, we would have passed 30 days on all of the return to pay deferral dispositions. When Chris says through the end of the second half, there are prescriptive times where I think we'll have a lot more information around sort of what those themes turn out to be. The purpose of giving all the details in slides 10 through 16 was to provide the market as much detail as we have to support and explain the reason we're maybe a little bit more optimistic than we were a few weeks ago. Time will tell, right?
We've got a long way to go, I think, as an industry to know really what the pandemic impact is going to be. Those will be the broad themes that may be helpful for you.
That's when the Gulf South Conference kicks off, it will be helpful for us because maybe.
Yeah, the timing virtual though it may be. Yeah. Virtual though it may be, timing's good. That's right.
Within that, did you provide in the deck, and I apologize if I didn't see it, the update for watchlist loans? Was there a big change in watchlist credits quarter-over-quarter?
I think we gave the commercial criticized numbers back on slide eight and nine is the NPL change and the criticized change.
For the different sectors that we're calling out.
Yeah. It's broken probably for the last time between energy and non-energy.
Okay. In terms of watch, was there a big inflow to at least to watch?
Yeah, we didn't really disclose all of that, but clearly we are pretty actively monitoring all of our credits. Like I indicated, there has been some migration. Some of the migration that we are seeing is kind of pre-COVID normal stuff that you would see, and some of it is categorical. What I would say is that we did move in Q1 all of our RBL and midstream credits into watch categories. You're actually going to see probably a net reduction in watch as a result of the loan sale. It's a pretty active and fluid process.
Yeah. I think by definition, if it's deferred, we're watching it, right?
Yeah. Makes sense, okay. Then one last small question is just on PPP. Do you have the dollar amount of PPP fees that we saw this quarter?
How much PPP? Say it one more time.
The dollar amount of PPP fees we saw this quarter.
Okay.
That is easy is taking the 4% effective yield over the balances.
Fees only about $13 million.
13? Okay, great. All right. That's all I got. Thank you.
Thank you.
Our next question comes from Christopher Marinac with Janney Montgomery Scott. Your line is now open.
Thanks so much. John and team, I wanted to circle back to kind of pre-pandemic when there was a real game plan to hire and spend and kind of be very competitive at an important time when one of your competitors was leaving. Just kind of curious where that is today. I know there's been a lot that's transpired since January and last year when that announcement happened. Is there still a hiring that can happen as well as sort of new business generation that is in the near term?
This is John. Thanks, Chris, for the question. It's nice to talk about revenue. It's fun. We have hired one team. We won't get into where the team came from with some good early progress made. That said, it seems like it was four or five years ago, we actually had that conversation. Much has happened since then. I think it would be safe to say, and I'll break it apart. We have a number of technology initiatives that while they're about a quarter behind where we earlier thought they would be because we directed all the resources to support the automated solutions for PPP funding and forgiveness. Those are back on the track about a quarter behind, and those will make a meaningful difference both in effectiveness and efficiency in the sales process as we get through the end of the year into 2021.
That has continued, and we talked about that pre-pandemic. Secondly, we are absolutely in the market to hire good talent in those more granular parts of the loan and balance sheet. Should those opportunities come up, we'll certainly pursue them. I think what we're saying is we would look for workforce efficiency in areas that are not revenue diminishing, and we are willing and have the appetite and capacity to add resources that'll make a meaningful, positive difference in revenue.
Great. That's helpful. Is there any shift in expenses as a result of that? Can that kind of work in your, kind of what you are expecting on spending?
You mean in both those two items I just mentioned?
Right.
By this time, I thought we'd probably be able to talk a lot more about that, but so much has changed and there's so much volatility that at this point, I think we need to let kind of Pandemic related expenses settle some, and then we'll talk more about those impacts as we get later in the year when things settle down, and we'll do it in terms of 2021 versus 2020.
Okay. That's fine. I understand. Thank you for the color for everything this evening.
You bet. Thank you for asking the question.
I'm showing no further questions in queue at this time. I'd like to turn the call back to Mr. Hairston for closing remarks.
Thanks everyone for your attention late in the day. Liz, thank you for moderating the call. Everyone, have a great week.
Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.