Good morning, welcome to the Origin Bancorp Inc. Q1 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Reigelman. Please go ahead.
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Good morning, and thank you for being with us. We issued our earnings press release yesterday afternoon, a copy of which is available on our website, along with the slide presentation that we will refer to during this presentation. Please refer to slide two of our slide presentation, which includes our safe harbor statements regarding forward-looking statements and the use of non-GAAP financial measures.
For those joining by phone, please note the slide presentation is available on our website at www.origin.bank. Please also note that our safe harbor statements are available on page six of our earnings release filed with the SEC yesterday. All comments made on today's call are subject to the safe harbor statements in our slide presentation and earnings release.
I'm joined this morning by Origin Bancorp's Chairman, President, and CEO, Drake Mills, our Chief Financial Officer, Stephen Brolly, President of Origin Bank, Lance Hall, our Chief Risk Officer, Jim Crotwell, and our Chief Credit and Banking Officer, Preston Moore. After the presentation, we'll be happy to address any questions you may have. At this time, the call is yours, Drake.
Thank you, Chris, and good morning. As you listened to our earnings calls in the past and had conversation with our team members, you know that at Origin, we talk about a company that is different, that is responsive, that is nimble. We are a company that delivers for our employees, our customers, communities, and shareholders, and prides itself on our culture.
Over the past month and a half, those claims and statements have been tested like never before, and our team has delivered. While we'll get into specifics of our Q1 numbers and the impact of the COVID-19 pandemic, I want to start off by noting how proud I am to lead an incredible organization with extraordinary people who, in these tough times, have not wavered in their commitment to our company, our culture, our customers, and our core values.
Across our company, there has been a can-do attitude, and because of that, our banking facilities remain open for drive-through business and scheduled appointments. Many of our people are working around the clock at home to continue to service our customers. We are helping small businesses with SBA loans, and we are actively working every day to meet the responsibility we have as a resource for our customers and our communities during this crisis.
Certainly, these are challenging times, and I don't want to diminish the challenges that our industry, our people, and our country have faced and will continue to face in coming months. I've seen what we can do when faced with such challenges, and I am confident in our ability to manage through these trying times.
Turning to the financial results on page three of our presentation, we ended the quarter with just over $6 billion in total assets. Net income for the quarter was $753,000, down $12.1 million for the linked quarter. The decline was driven by increase in provision expense of $16.2 million from the prior quarter.
Provision expense was elevated during the forecasting nature of CECL and the economic uncertainty surrounding the impact of COVID-19. Our pre-tax, pre-provision earnings for the quarter was $18.9 million, a 3% increase on a linked quarter and prior year quarter basis.
Diluted earnings per share was $0.03 per quarter, and our efficiency ratio continued to decline, ending the quarter at 65.7%, down 84 basis points from the linked quarter. I'll turn it over to Lance to provide more details on our COVID-19 response.
Thanks, Drake. There's a tremendous amount of focus within our organization. Our bankers understand that we have unprecedented opportunity to make a difference in the lives of our employees, clients, and in our communities. The state of Louisiana has experienced high per capita levels of positive COVID cases, but I wanted to put that into context.
At this time, the markets we serve across North Louisiana have not been impacted at the level of the New Orleans metro area and other parts of South Louisiana. We're also monitoring cases within our Texas and Mississippi markets on a daily basis.
You can see on slide five some of the steps we've taken over the past 45 days to respond to the pandemic. The health and safety of our employees and customers has been our top priority, and based on that, we took the step of activating our pandemic response plan.
As Drake mentioned, our drive-throughs remain open, and we are handling appointments on a one-on-one basis, as needed, throughout all our markets. We have also successfully managed our employees who are able to work remotely. One of our main goals throughout this process has been to consistently communicate internally and externally to our stakeholders.
Our bankers have done a great job staying in contact with our clients on a regular basis, and we also utilize email, our website, and social channels to effectively communicate. Another key step we took was establishing an internal SBA Paycheck Protection Program task force to work,
To prepare us for the increasing volume associated with delivering this program in a meaningful way to our clients and our communities. I expressed to our bankers that during these uncertain times, our reason for being was very clear.
It would be up to us and our industry to be the conduit to provide much-needed relief to our small businesses. From the onset of changing economic conditions, it has been our desire to be proactive in our approach to supporting our community. Our initial response came in the form of conversations our bankers were having with our clients related to forbearances.
Slide six provides a detail of how we have supported our clients during this pandemic, including a breakout of our COVID-19 related forbearances. Also, as guidance became available from the U.S. Treasury and the SBA related to the Paycheck Protection Program,
Our team responded quickly in delivering more than $480 million in loans to approximately 1,700 customers throughout our markets until the program's funds were fully exhausted. We estimate that approximately 39,000 employees of our clients will be positively impacted by the efforts of our bankers.
The way in which our team has responded during this time is a reflection of our core purpose and our underlying belief that we are trusted advisors. Our economy has seen a sudden and abrupt impact from the effects of the COVID-19 pandemic. We appreciate that our investors seek further clarity on the makeup of our loan portfolio. Slide seven speaks to the diversification within our credit book.
55% of our loan portfolio is comprised of C&I, owner-occupied construction and development, and owner-occupied commercial real estate, as well as our Mortgage Warehouse business, a testament to our commitment to the businesses that drive the economies within the communities we serve. I'll turn it over to Jim Crotwell, our Chief Risk Officer, to take a deeper dive into selected sectors of our portfolio.
Thanks, Lance. If you will turn your attention to slide eight, I will walk you through a deeper dive into the sectors of our loan portfolio that we believe are more sensitive to the COVID-19 effect on the economy, both in the near and intermediate future. The sectors we looked at total approximately 22% of our loan portfolio at quarter end and included healthcare, retail shopping, restaurants, transportation, energy, and hotels.
The first segment broken out is healthcare, which represents 8.5 % of the total portfolio at quarter end. We further broke down the portfolio and provided additional data on each subsector. For healthcare, we currently have total commitments of $431 million, with $382 million outstanding. The allowance allocated to the healthcare sector is $9 million, of which $5.8 million is attributed to assisted living.
Non-performing loans total $11.4 million at quarter end, of which $10.2 million was attributed to assisted living as well. I'd like to point out that the past dues as well as non-performing loans in the assisted living segment are primarily driven by a single relationship which has been previously disclosed. Excluding this one relationship, there were no past dues for the remainder of the assisted living segment.
In addition, the $1 million in non-performing loans in all other healthcare also represents a single relationship which has been previously reported and is the main contributor to the level of past dues for this segment within healthcare. On slide 10, we provide additional information on our retail shopping portion of our portfolio. This segment represents 4.7% of our loan portfolio, with 59% consisting of loans supported by national credit tenants.
The non-performing loans in the CRE retail store segments represents a single credit that was placed on non-accrual during the Q1 of this year. Overall debt service coverage ratios for the retail shopping sectors are sound at 1.41x , while overall loan to values are low at 36%. On slide 11, we have a snapshot of our restaurant sectors, which account for 3% of our loans held for investment.
You can see we have no past dues and no non-performing loans as of March 31st. Moving to slide 12, we provide information on transportation sector. We have broken down the sector into three subsectors, where you can see our exposure to the airline industry is just over $20 million.
The $4.9 million in non-performing loans in the airline subsector is a single relationship that has been non-performing for quite some time and is also the sole contributor to past dues in this subsector. On slide 13, we have a breakdown of our energy credits, which represent only 1.9% of our total portfolio. We have no direct exploration and production exposure in our energy portfolio.
As to the non-performing balance in energy services is comprised of one relationship that has been reduced from an exposure of over $40 million several years ago to the current remaining balance of only $2.3 million. Moving on to slide 14, our hotel portfolio. It totals 1.4% of loans held for investment and has historically performed well, as evidenced by no non-performing loans or past dues as of quarter end. The last thing I want to cover is on slide 15.
You can see over the last five quarters, several of our asset quality ratios are shown. They have either remained stable or improved over that time. At the end of March, our ratio of classified loans to total loans was at 1.67%.
Past due loans did increase to 1.14% at quarter end. Upon review of our past due loans, approximately $10 million were essentially administrative past dues, as our bankers were focused primarily on COVID-19 related forbearances and SBA loan requests.
These loans notwithstanding, quarter end past dues would have been less than 1%. At the bottom of the slide, we have some information on reserve for the quarter. You can see that our day one impact on CECL was just over $1.2 million. The economic situation in Q1 began to destabilize through the pandemic.
We adjusted our economic forecast, incorporating a sharp increase in unemployment and a decline in the overall U.S. economy during the year 2020, contributing to a $17.3 million increase in our reserve for the quarter. We will continue to evaluate any updated economic indicators or drivers as we move throughout the year.
While it's difficult to predict the long-term impact of COVID-19 as the situation is rapidly evolving, we continue to actively monitor the impact of COVID-19 on our business, employees, customers, and the general economy, both nationally and in the markets we serve. I'll turn it over to Stephen now.
Thanks, Jim. As we look at net interest income and NIM on slide 16, you can see our net interest income is down from a quarterly high in the Q3 of 2019, but $784,000 higher than in the prior year Q1 . Margin has compressed 36 basis points from the Q1 2019 to the Q1 2020.
The margin compression has been caused by our asset sensitive balance sheet. During the same time period, loan yields have declined 43 basis points from 5.28%-4.85%, and the cost of interest-bearing deposits and borrowings have declined 15 basis points from 1.20%-1.05%. You will notice that our cost of interest-bearing deposits and borrowings did not decline as much as cost of interest-bearing deposits during the most recent quarter.
This was due to the issuance of $70 million in subordinated debt during February, which bear an interest at 4.25% for the first five years. The next slide shows our asset sensitive profile quarter end and the mix of exposures to indexes as it pertains to loan yields. Approximately 44% of our loans are fixed at quarter end, which includes about $265 million of LIBOR ARMs that are not coming out of their initial fixed rate period until at least 2021.
Without that allocation of ARM loans, the fixed rate loans would account for 38% of the loan portfolio at quarter end. The percentage of variable rate loans has increased compared to December 31st, due primarily to the significant increase we saw in Mortgage Warehouse lines of credit in the quarter, which are all variable rate loans.
Aside from these changes, we are pretty well aligned with our prior quarter fixed loading mix of loans. On slide 18, our non-interest revenue was up from prior quarter and from the prior year Q1 . We continued to have about 20% of revenues in the non-interest lines. The biggest driver of the increase in non-interest income was insurance commissions and fees.
As we have mentioned before, this revenue is seasonal, and the Q1 typically has some larger contingent income and profit-sharing distributions. Mortgage banking revenue was down in the Q1 due to loss of value in MSRs.
Prepayments accelerated due to refinance activity. We saw an increase in gain on loans held for sale during the Q1 to partially offset some of the MSR write down. At March 31st, we had a robust mortgage funding pipeline, which we'll fund in the Q2.
I will briefly touch on expenses on slide 19. Expense management continues to be a focus of ours, as we have stated in the past. Non-interest expense came in just over $36 million for the quarter, down from the December quarter. Lance is going to take us through the deposit trends.
Thanks, Stephen. On slide 20 and 21, I want to talk about our deposit growth strategy. You can see our average deposits have grown by nearly $485 million in the last year, or over 12.5%. As we've talked in the past, Louisiana continues to supply low-cost deposits for our growth markets in Texas. As I look back over the last 18 months or so and I think about where we were from a deposit cost perspective in early 2019, the market for deposits was highly competitive.
The Federal Reserve cut rates in the Q3 , and we knew we had to quickly and aggressively address deposit costs due to our asset sensitivity. We ended the Q1 2020 with 95 basis points of total deposit cost, 24 basis points off our five-quarter high of 119 basis points.
In the top right of slide 21, we have a time deposit maturity schedule where you can see our time deposit book, which is about 17% of our total deposits, is really short. We're seeing time deposits right now at or below 1% in many of our markets, which should help us reduce our total time deposit cost of 188 basis points. Our big focus in cost reduction has been around non-maturity deposits.
From June 2019 to March 2020, our bankers have cut our run rate deposit cost contribution on nearly two-thirds of our deposits by over 40%. The majority of these cuts came in March, we should see a meaningful reduction in deposit costs in the Q2 due to these efforts. We also have some deposits that are indexed to markets that have yet to come down as drastically.
With the recent decline in market rates, we expect those to come down from mid 1% ranges to 50 basis points or less in the H1 of the Q2 . I'll turn it back over to Drake.
Thanks, Lance. On slide 22, you can see the detail on our current liquidity position during the Q1 and where we ended at March 31st. At quarter end, we had over $2.2 billion in primary and secondary liquidity sources available, and our cash on hand increased approximately $270 million, largely due to additional short-term Federal Home Loan Banks advances of $300 million.
We are confident in our liquidity position with sufficient availability to fund future loan growth. As we look at our capital trends on slide 23, I want to point out our increase in total capital on the top right of the page. This was driven by the $70 million sub debt offering at the bank level that we completed in February.
While we did repurchase our shares during the Q1 , we suspended buyback activity as we begin to develop a better understanding of the pandemic and the potential impact it could have on businesses in our economy. Heading into any type of downturn, capital comes front and center. We've worked hard to stay focused on maintaining healthy levels of capital, as evidenced by our recent sub-debt offering.
Our company is positioned well from a capital perspective, and we'll be very mindful of steps we take moving forward. Lastly, our strategic focus is on four primary areas. Number one is that the health and safety of our employees is paramount, and this has been our priority as this pandemic began.
Our bankers are on the front lines providing assistance to our customers and communities and will continue to take necessary steps to enable them to do their jobs safely and effectively.
Number two is the support we can provide to our customers and communities. As I said at the beginning of this call, our teams have had an incredible attitude and done an incredible job of providing support to our customers and communities.
This will be at the forefront of what we continue to do as a company. Our ability to deliver for our stakeholders during this time will strengthen our relationships and reputation in the markets we serve and pave the way for our countries and communities' recovery.
Our third focus is balance sheet protection. During the quarter, we took steps to enhance on-balance sheet liquidity and bolster our capital position. Historically, we've had sound asset quality management and is important now more than ever. Finally, expense management remains a top priority. This has been a major focus for us and is emphasized further during these times.
Our team will continue to be disciplined, and we'll look for ways to effectively manage our cost structure throughout the year. Based on where we are in this pandemic and the current economic situation, I would be misguided if I indicated we could model this out over the next few months.
We are watching developments on a daily basis and will respond as the situation progresses. I am confident in our company and our ability to manage through this situation. Our team has responded in incredible ways and will continue to represent the values and culture that have been with us for over a century. I'll open up for questions now.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.
I appreciate everyone taking the time today to be on the call, and I would like to ask for your patience, as our team is practicing social distancing, and it's important that our team stays healthy. We are in different locations. I will quarterback the call, take the majority of the questions, and from there, pinpoint those that can best answer your questions. I appreciate the patience with us tonight.
Our first question comes from Matt Olney with Stephens. Please go ahead.
Hey, great. Thanks. Good morning. First off, thanks for all the great details in the earnings release and slide deck. Some really good disclosures on your various asset classes. Appreciate all that data. I want to start on loan growth and try to get more details behind what drove the strong growth in the Q1 .
It looks like a lot of it was from mortgage. Even if I exclude the mortgage, still very strong growth. What else helped drive that growth in the Q1 ? I understand it's tough to have much of a crystal ball given the circumstances. What are your expectations around the balance sheet growth over the next few quarters? Thanks.
Matt, Mortgage Warehouse was $167 million of that growth. We actually had about $92 million in Houston. North Texas was about $50 million, Louisiana came in about $40 million, with Mississippi being flat. We saw a pretty robust pipeline across our footprint, that was really touched on all sectors. Outside of Mortgage Warehouse, it was like we had seen going through most of 2019 as we move forward.
Certainly, when you start thinking about underwriting credits today, the playing field has significantly shifted. We are focused on our customer base that we have today, those credits that we know extremely well. We also have a pipeline of clients and customers that we have worked with for a number of quarters, attempting to build business relationships with them.
We are getting some of those opportunities now, but again, we're looking at our concentrations, our areas of concern, staying away from some of those areas and really focusing on our core competencies, which we think is going to continue to drive decent loan growth overall.
Okay. That's helpful, Drake. One of the investor concerns is that we hear more recently is the footprint of Origin and the potential indirect impact of energy within your various markets. I think the perception is that from some investors is that all of Louisiana, all of Texas, have quite a bit of indirect exposure to energy. I'm curious how you would respond to the indirect impact to your various markets of concern.
Well, Matt, I want to start off with Louisiana, obviously, as we've promoted ourselves ever since we went public, that we're focused on the I-20 corridor in Louisiana, which we know very well, obviously been here for years. That economy has significantly shifted more to a technology, cyber-driven type of, I mean, economy, more so than energy.
Now, there is certainly still indirect concerns that we have in that market, but we're seeing this market hold up pretty good, as you can see with growth in Louisiana from not only loan, but deposit. From the deposit side, Louisiana is doing what it's done for years, low-cost deposit growth. As we shift our concerns, I think that the market that we are most concerned about is the Houston market, more so than the DFW.
For that reason, I'm going to ask Preston Moore to give us a little insight. Preston's a career-long Houstonian, has had significant success in those markets. Preston, if you would give them a little color on the concerns we have and the potential impact that energy has on the Houston market.
Thank you, Drake. Good morning, Matt.
Good morning.
I know you asked about indirect. I'm going to apologize. I'm going to start off with direct exposure, because obviously this is something we're closely monitoring. Excuse me. We feel very fortunate that our direct exposure is limited at 18.5% of total loans. We have a very experienced team here in Houston led by Carmen Jordan.
I think we have at least three lenders that I could think of with over 20+ years energy services experience, and then two more that have 15+ years. We have a very experienced team. We take a very conservative approach, both from a kind of a cash flow leverage standpoint, don't exceed 2.75x , and from a collateral standpoint.
As you saw from the slide deck, about 57% of our facilities are working capital. Finally, I would just say these are long-time relationships that have been through cycles before.
Several cases, we have good sponsors. A lot of cases, there's still access to capital, which is important. I would tell you here in Houston, there's a saying, what's the solution to $12 oil? The answer is $12 oil. It is an industry that over time does right itself. To get to your indirect question, yes, that is something we're also concerned about and monitoring.
We are looking at the spillover effect, how it might spill over into real estate, both residential and commercial. I would just tell you, the people that I talk to in the industry, rightly or wrong, are very focused on kind of the next six months, and there seems to be a fair amount of, I'll say, hope, I guess, at this point, that from a supply standpoint, that you would see the market addressed.
From a demand standpoint, that you would also start to see as economies come back and we get out from under these stay-at-home and stay-in-place orders, that you would see demand start to pick up, too. It is something we're monitoring closely. Turn it back to you, Drake.
Thank you, Preston. Matt, I would say that as we have always discussed, we're boutique in nature in private banking in Houston with long-term relationships. I think that's been the strength of us in the Houston market and DFW and the surrounding area. Very experienced teams that are dealing with customers they've dealt with for a number of years.
I think that when you look at that portfolio in North Texas, it's down the fairway from the standpoint of where our core competencies lie. Really pleased with the way multifamily's holding up in those markets, and overall, still think that the Dallas economy will continue as we get through this in the next six months to be one of the shining stars of our footprint.
As we go into Mississippi, obviously there we have a team that is steep in relationships that they bank for a number of years, similar to most of our markets. We again, feel very good about the diversification and lack of concerns that we have for some of the other areas of the portfolio, like we say. I would also like to discuss for just a second,
When you look at what we disclosed from the sectors that are concerning from a COVID-19 perspective, we went ahead and included healthcare, which was 8.5%, and transportation, which is 2.7%. If you look at the areas that I see most often discussed, hotels, energy, restaurant, and retail shopping, that's 11% of our portfolio, and it's well divided out through our footprint.
At this point, indirect exposure, I really like the way our balance sheet looks and feels at this point. Obviously, clarity is going to come in the Q2. We have stressed and tested and continue to look at those portfolios, and today, feel pretty decent about where we stand.
Okay. Thanks for the details, Drake. I guess my last question is just around the provision expense, obviously elevated in the Q1 , and we're seeing that across the board from all your peers, and the allowance levels had a nice jump in the Q1 .
Can you talk more about the assumptions that you used to justify the higher provision expense and where we stand today? Do you think it's reasonable to assume another significant provision expense in 2Q and a continued build to the allowance? Any commentary around that? Thanks.
Yeah. I'll answer part of that question, turn it over to Jim Crotwell, because Jim has done a significant amount, and very proud of Jim's work around those assumptions and what model base he used. As you can imagine, unbelievable amount of discussion and strategy around that.
I do feel that what we are attempting to accomplish is based on what we know through the Q1 and into the first couple of weeks of the Q2 , is to try to address the best we can and provide ourselves with adequate coverage. Certainly clarity, as I said earlier, is going to come in the Q2 , more so, and it would make sense that we could potentially see additional reserve after we get more clarity.
We certainly want to attempt to try to get that behind us and not drag this out through the balance of 2020. I would, at this point, expect that we would see additional reserve going into the Q2 . I don't know that I can sit here and say to the level we saw in the Q1 . Jim, if you wouldn't mind, please address the question as far as the assumptions and modeling.
Thank you, Drake. Good morning, Matt. Just to kind of start, as we indicated, we did increase our allowance about $17 million. The vast majority of that, over $16 million, was directly COVID related as we looked at our portfolio. In fact, the loss migration section of our allowance did not really change at all, which speaks to the soundness of our portfolio going into this pandemic.
That means it was really all in Q factors, and as we looked at any loans that were individually evaluated. We currently have about 35 pools in our model, and we do use third-party economic forecast as a significant driver in that allocation. I would say the primary third-party economic data we used was from Moody's Analytics, and we looked at the various scenarios.
Based on that review, I would summarize it this way, Matt, that we kind of lean toward that we will, believe, have a deeper recession in Q1 and Q2. Partial to modest rebound later this year in Q3, dependent upon how successful the opening up of America that Preston referred to earlier. As far as looking out beyond that, we really think that's going to be dependent upon how quickly we can get the economy back opened up.
Quite honestly, the possible recurrence of COVID-19 during the normal flu season. As far as some specifics of peak unemployment, we looked at 13% range in this quarter, in theQ2 of 2020. Peak to trough GDP could be down 6%-9%, then return to full employment really stretching out to 2023- 2025.
Once we ran those assumptions through our model, obviously all the economic assumptions were considered a major risk within the model. That drove the $17 million increase in the allowance, which was about a 45% increase in the overall allowance from our day one CECL calculation.
Okay, guys, thanks for the update. I appreciate it.
Thank you, Matt.
Our next question comes from William Wallace with Raymond James. Please go ahead.
Thank you. Morning, Drake.
Good morning, William.
I understand you had a 60th birthday this week. Happy birthday to you.
Yeah, I apologize. If I would've been running the question you asked, you would've definitely been included.
Thank you for that. I might just send you something on my own. We talked a little bit about the CECL assumptions. Since we were just on that and with Jim on the line, I'm kind of curious if you're kind of thinking a really kind of partial rebound and full unemployment not until 2023-2025.
If we start seeing losses elevating maybe in the Q4 or early next year, do you think that you'd actually be able to use your CECL reserves against those losses, or do you think you'd have to maintain the reserves where they are with unemployment remaining so high in your models? Is there a flipping point where you can use the reserves versus maintain them against losses?
William, from our discussions and strategies, it's certainly early on to try to build so we can use those reserves as we get more clarity around. It's tough to sit here and think about full unemployment 2023- 2025, and the impact that has on certain sectors.
We're fortunate that we're not as heavy consumer driven, credit card driven, those type of things, but I know the impact of the consumer buying power and how that impacts your portfolio. You look at some of those areas that are impacted directly through that, still feel very good about the portfolio makeup. I'm going to answer your question, William, as we're going to try to build through these quarters so we can utilize that reserve.
Okay. Thank you. All right, I have a few questions on net interest margin, and then I'll hop out and let somebody else ask questions. Let's kind of worry about PPP secondary. If I were to look at your Q1 net interest margin, and then based on the commentary around the March reduction in deposit prices, can you maybe help us get a sense of the amount of NIM pressure you would anticipate in the Q2 exclusive of the PPP program?
William, I want everyone to understand the way we're managing PPP is we've almost set up like a sub-bank out there that drives the asset and the funding mechanisms and the income and fee levels in that into the bank. Most of our calculations and modeling is going to be without PPP because we certainly plan to, if there's an opportunity, exit that as quickly as possible.
At this point, based on what we know, and I will say we're extremely active on the deposit side and also the floors perspective on loans as we go forward. At this point, I'm going to give you an idea that for every quarter cut, we see between four to 6 basis points NIM compression. That's obviously based on also the diminishing LIBOR.
We continue to model that out, think that we can hopefully have better luck as we're seeing early in this quarter, some active deposit strategies around there to reduce the impact of that overall. At this point, that's what we expect.
Okay. On the high end, that could be as much as 6 basis points x6 , you're saying for every 25 basis point cut. Is that what you mean?
That's correct.
By every cut? Okay.
That's correct.
Okay.
I knew that you would go to the high end instead of the low end on that.
Do you think you could beat the four basis point level with what you're doing on the deposit side? Let's assume that LIBOR doesn't hold up.
It's going to be extremely difficult, I would say that. Certainly, our teams are active. One thing that we do have to be concerned about through this process, we can get super aggressive, but there's also liquidity strategies as we move forward, and we certainly don't want to price ourselves out of seeing the deposit growth support the loan growth we have coming down the pipeline. That's what makes me pause about beating that 4 basis points per quarter.
Okay, thank you. On the PPP, are you funding that with the Fed facility?
At this point, we are not, but we plan once we wrap up the second round. At this point, we have, let's say, 500 loans in the pipeline. That represents about $58 million. That'll put us about, let's say, $525 million, $530 million in the deal at this point.
We have some Federal Home Loan Banks maturities coming up that are priced at 35 basis points. That puts us in outside of the dividend rebate that we get from utilizing Federal Home Loan Banks. We can offset that with PPLF, and I think that's the way we're going to drive it and fund it.
Okay. Thanks. Lastly, on the PPP, assuming you put these back to the SBA, the forgivable portion, are you going to run those fees through net interest income, or are you going to treat it as held for sale and run it through non-interest income?
A lot of discussion around that. What we're focused on right now, is getting this. You can imagine, we took a very aggressive approach day one on PPP. We went with the manual process. We have 130 people that have access into E-Tran. Excuse me, my mind went blank there for a minute. To E-Tran.
We've been very active in a manual process, and that's why we were successful the first round. All our people are focused on that. Once we get this behind us, Stephen, myself, Chase Anderson, the team's going to sit down and look at what the best route is for us to structure that for the benefit of it. I'm kind of thinking it's through margin, but we'll see what's best for us when we go through that process.
Okay, thanks. Just the last question, housekeeping. Stephen mentioned his remarks, the dollar amount of the MSR write down. I missed it. Could you repeat that?
Hey, Stephen, you want to handle that real quick?
Sure. We had a write down on the MSR. Hold on for one second. It was $2.4 million.
Okay, thank you very much. I'll step out and let somebody else ask questions. Appreciate it.
Our next question comes from Brady Gailey with KBW. Please go ahead.
Hey, thanks. Good morning, guys.
Morning, Brady.
Drake, you talk about expense management as one of the top four focuses right now. I know before we talked about expenses growing around 4% this year. Given the headwinds that are coming up on margin and elevated provision levels, how are you thinking about expense management now, and what do you think can be done on the expense side?
Brady, boy, I feel like I'm dancing around questions this morning, and I'm not. That's priority one for us right now, as you saw when I discussed the four strategic focuses. We are looking at every single thing we can do. Postponing any type of project, where even as the country opens back up, you won't see us from a travel standpoint or anything else.
I'm not going to sit here and say it can be flat, but we're certainly pushing towards that direction because we think that there's opportunities. We're even looking at things, how does the country come back together? What does it mean from a branch footprint standpoint and the utilization of those? Is there cost cutting opportunities there?
At this point, we feel like that could potentially be flat to up 2%, and certainly that's going to be dictated by the depth and severity of this as we move forward. My concern there is, and that's why I don't want to say, this is what I think we can do.
If we do get into a protracted situation and see credit deterioration, then certainly we're going to have collection expense, legal expense, and those type of things that can certainly drive up those numbers, and that's why I'm cautious at this point.
All right. That's helpful. Thanks for all the color on the slides. That was very helpful. You look on slide eight, you look at those six categories that make up 22%, which of those categories do you think will be most problematic for Origin as we go throughout the rest of the year?
You know what's interesting, we're breaking those down, and at this point, this is going to sound odd, we feel very good about our hotel and restaurant portfolio. Retail shopping, we feel pretty decent about at this point. Transportation, we need some clarity around that, especially from the standpoint of the overall portfolio on trucking versus, say, barge activity and that type of stuff.
Healthcare, especially assisted living, is probably where I would say, not healthcare overall, but assisted living, the portion of that is my concern at this point, how that holds up, because we have some of those properties that are ramping up. Are they going to continue to be able to ramp up, or are we going to see a stall there? At this point, the percentage of healthcare that is assisted living is my overall concern.
From an energy perspective. Assisted living, as you can see on page eight, nine, is 31% of that healthcare portfolio. The energy, at this point, because of the type of structure we have on those and the 57% that's operating lines, we feel pretty good about.
That is going to be an area of concern and how that holds up. Very good sponsors, Carmen Jordan and her team, very experienced, and feel that those relationships are in very good hands.
All right. Lastly for me, I know you raised the sub-debt not necessarily for buybacks, but more just to have some cash around in case you're successful at getting the M&A deal. Given the backdrop, is it safe to assume that M&A is on pause for you guys?
Absolutely. Certainly, are continuing to stay close to those relationships we have. We actually reached out and offered assistance on PPP for insiders and those type of things because we want to continue to grow those relationships. Boy, that's all at the table.
Look, I'll just say this, at this point, worrying about our own shop, I'm somewhat pleased that I didn't have two or three deals I had to deal with right now. For us, the sub-debt was timely. It certainly gives us a cushion and gives us some comfort that we can navigate through this.
Great. Thanks for the color, guys.
Our next question comes from Brad Milsaps with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Morning, Brad.
Would echo the comments on the disclosure. Really great. Thanks for all of that. Just a couple maybe follow-ups from me. Maybe just to follow up on the PPP Program, the reserve, and kind of the expense discussion.
Drake, as those origination fees roll in, would you maybe imagine allocating some of those either to higher expense accruals as you discussed, or possibly dropping some of those fees in the reserve? Have you guys kind of thought through any of that yet?
We are in discussions with that. Look, I'm going to tell you, we are going to take a small percentage of those fees, because obviously, incentives are off the tables and those type of things, but I'm going to take care of some of our employees that have worked overtime, and really I look at PPP as sustainability for these businesses.
They didn't work because they thought they were going to get incentives, but a small percentage of that is going to go to them. I do think that that's going to give us some firepower to bolster reserves and do some other things that we can offset some of the expenses.
Okay, great. Secondly, on the slide where you talk about the, I think it's slide six, where you've got the level of forbearance that you guys granted during the quarter. Can you talk a little bit more about that process, kind of how you worked with borrowers? Or was it more if they made the inbound call, you just went ahead and granted it, and then you're going to kind of reevaluate in 90 days?
Maybe as a follow-up to that, any sense for kind of the hit rate on the PPP loans versus those loans that went to forbearance? Did the PPP money get to those maybe most stressed borrowers? Did you have a sense of that yet? I can see the categories, just kind of curious if the actual PPP loans matched up with the guys that asked for forbearance.
Yeah. Listen, this would be, I feel like I'm hogging the call here. Lance Hall, our President and CEO of the bank, when I tell you this individual took plans and responded to these companies. We started early. Matter of fact, I had discussions with the Federal Reserve early on before any of this came out, about restructured debt and how they would handle that because we got busy early.
I will tell you that for me, there's as much a psychological aspect of this to managing these businesses and keeping them in the game versus giving up and filing bankruptcy. Early on, we got aggressive contacting our customers. Lance Hall and his team just did an awesome job.
I'm going to let Lance answer the question around forbearances and PPP and where that money, actually the direction it went. Lance?
Thanks, Drake. I think Drake said it right. One of the things we pride ourselves on is how close we are to our relationships. I think while it's a mutual conversation, and obviously we are taking inbound calls, I would say that we made a tremendous amount of outbound calls to really work with these clients. In a lot of ways, we see forbearance as preservation of portfolios. Drake made it right.
Drake has pounded to all of us the entire time the psychological effect on these clients to make sure that they understand the support that's behind them. We were aggressive on that. I think it turned out to be about 17% of our loan book. On your second question, I would say, I don't have a percentage, but I would say the vast majority of these clients also have PPP, obviously depending on their size.
I would say our clients have been incredibly well-supported, and I think the loyalty we're going to build on the back end is going to be tremendous. One of the things we take pride in, as we talked about the number of notes and we talked about, we really had our focus on the amount of employees of these businesses that we're supporting.
We talk a lot here about what our why is. The fact that we've been able to support over 49,000 employees of these businesses, it means a lot to us.
That's helpful. Maybe just a final question, I know it's probably still early, but do you guys have any early sense from the regulators that the forbearance might be granted beyond this initial 90 days? Just kind of curious if you have had any of those conversations and kind of what that outlook might be.
I'll say this, through 36 years, you've gone through cycles and you've dealt with regulators. I couldn't be more pleased and proud of our relationship with our regulators and the support and the attitude of our regulators.
Most of you don't know this, during the middle of this, we were in the process of a full-blown safe and soundness exam. We had the pleasure and the opportunity to be able to deal with our regulators on a daily and ongoing basis during the early steps of this process.
I found that, and there was even a comment to me, "Drake, your value of your company is going to be gauged on what you do for these businesses and how you keep them going." I felt that to be extremely supportive and the belief that another 90-day period and on, these regulators are wanting us to do what we have to do to keep this economy moving.
Great. Thank you, guys.
As a reminder, if you would like to ask a question, please press star then one.
Okay, well, I can't say how much I appreciate the support of our investors and our partners during this time, and I can assure you that we are focused on, as Lance and I sit here, our net worths are in this company and everything we have.
I can assure everyone out there that we are working diligently to make sure that we do the right things and we stay focused on what's best for this company moving forward. Thank you for your time, and I appreciate the relationship with each one of you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.