Categories Earnings Call Transcripts, Finance

Community Bank System Inc  (NYSE: CBU) Q1 2020 Earnings Call Transcript

CBU Earnings Call - Final Transcript

Community Bank System Inc  (CBU) Q1 2020 earnings call dated Apr. 20, 2020

Corporate Participants:

Mark E. Tryniski — President & Chief Executive Officer

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Joseph F. Serbun — Executive Vice President & Chief Credit Officer

Analysts:

Joseph Fenech — Hovde Group — Analyst

Alex Twerdahl — Piper Sandler — Analyst

Erik Zwick — Boenning & Scattergood, Inc. — Analyst

Russell Gunther — D.A. Davidson & Co. — Analyst

Collyn Gilbert — KBW — Analyst

Matthew Breese — Piper Jaffray — Analyst

William Wallace — Raymond James — Analyst

Presentation:

Operator

Welcome to the Community Bank System First Quarter 2020 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company’s Annual Report and Form 10-K filed with the Securities and Exchange Commission. Today’s call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.

Mark E. Tryniski — President & Chief Executive Officer

Thank you, Grant. Good morning, everyone, and thank you all for joining our first quarter conference call. In addition to Joe and I I’ve also asked Scott Kingsley and Joe Serbun to join us on the call this morning. This is clearly a different and challenging environment for all of us. Let me start with our COVID response. Early in March we mobilized a pandemic response team consisting of senior leadership across the company. Our initial focus was and continues to be the health, safety and well-being of our employers, employees, customers and communities. We began execution immediately by limiting travel and meetings, instituting safe time policies and enhancing cleaning protocols in all company facilities. Over the following week we closed branch lobbies, instituted work from home, separated our critical operating functions into multiple teams in different facilities, utilize shift work and instituted social distancing in all office spaces.

We’ve been operating with this environment for over a month, and although less efficient our operational cadence is quite stable. We’re prepared to continue as we are until such time it’s safe for our people to resume normalized operations. At this juncture, in New York and Vermont, the Governor’s stay at home orders extends through May 15. And in Pennsylvania that date is April 30. We will remain abreast to circumstances and react accordingly in the best interest of our employees, customers and communities. Also in March, we announced that Scott Kingsley, our Chief Operating Officer will be retiring from Community Bank System effective June 30, 2020. Scott served in that role for a year and a half after having served as Chief Financial Officer since 2004. Scott worked side-by-side with me for nearly 16 and the company will miss his energy, passion and talent.

At that same time we further announced the Joe Serbun was appointed to the role of Chief Banking Officer. Joe began his career with Community Bank in 2008 and previously served as Executive Vice President and Chief Credit Officer. Joe will continue to bring exceptional leadership to our company for the benefit of all our stakeholders. I will make only a few comments on Q1. It was pretty good. Absent the COVID-related allowance build, earnings were very strong. I think a couple of pennies better than last year’s quarter. The total loan book was down much less than seasonally expected and we had organic growth in commercial and deposit performance was also good in the quarter. Our nonbanking businesses had a great quarter. The pre-tax earnings of our wealth management business was up 12%. Benefits was up 9% and insurance was up 2%.

With respect to the acquisition of Steuben Trust Company that we announced in October, it is proceeding, albeit at a somewhat slower pace. We continue to be hopeful that we can close in the second quarter but have not yet received regulatory approval and remains uncertain around the ultimate impact of COVID-19. Joe will provide a little more color on the quarter. But there are obviously more significant matters to discuss. One of those I wanted to touch on was financial strength. In severe circumstances of economic and financial distress there is no substitute for earnings, liquidity, capital, asset quality, core deposits, and revenue diversification. When I look at the fundamental financial strength of our company, I’m highly confident we are as well prepared for whatever the future may bring as we possibly can be. Joe?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Thank you, Mark, and good morning everyone. As Mark noted, the earnings results for the first quarter of 2020 were solid in spite of challenges related to the COVID-19 crisis. The company recorded $0.76 in fully diluted GAAP earnings per share for the first quarter. Excluding a $0.01 per share for acquisition-related expenses fully diluted operating earnings per share were $0.77 for the quarter. These results were $0.04 per share lower than the first quarter of 2019 due largely to the COVID-19 crisis, and its related impacts on the company’s operations. In particular, the company reported $5.6 million in its provision for credit losses in the first quarter of 2020 reflective of expected credit losses due to rapidly deteriorating economic conditions. This amount exceeded the company’s net charge-offs in the quarter of $1.6 million or 9 basis points annualized by $4 million.

By comparison in the first quarter of 2019 the company reported $2.4 million in the provision for loan losses and net charge-offs of $2.6 million or 17 basis points annualized. In addition, the company’s net interest income was negatively impacted in the quarter due to the significant rapid decrease in short-term interest rates. During the first quarter of 2020, the company adopted the new CECL accounting standard. This resulted in a $1.4 million or 2.7% increase in the allowance for credit losses from $49.9 million prior to adoption to $51.3 million after adoption. Due largely to the expectation of increased credit losses due to the COVID-19 adverse impact on economic and business operating conditions, the company’s allowance for credit losses increased an additional $4.4 million or 8.6% at the end of the first quarter to $55.7 million.

The total increase in the allowance for credit losses was $5.8 million or 11.5% between December 31, 2019 and March 31, 2020. The allowance for credit losses to total loans outstanding at March 31, 2020 was 0.81%, which represented over eight times the company’s trailing 12 months net charge-offs. As Mark noted, we believe the company’s capital reserves, liquidity profile, diversified revenue streams, strong credit record and experienced management team leaves us well prepared to endure the impacts of the COVID-19 crisis. The company’s net tangible equity to net tangible assets ratio was 10.8% at March 31, 2020. This was up from 10% at the end of 2019 and 9.8% from one year earlier. Similarly, the Tier 1 leverage ratio was 11.1% at the end of the first quarter, which is over two times the well-capitalized regulatory standard of 5%.

During the first quarter of 2020, shareholders’ equity increased $121.4 million or 6.5%. This include a $19.3 million increase in retained earnings and a $93.7 million increase in accumulated other comprehensive income net of tax due primarily to an increase in the value of company’s available for sale investment securities. At December 31, 2019, the company’s Tier 1 risk-based capital ratio, total risk-based capital and common equity Tier 1 capital ratios were 17.2%, 18% and 16.1% respectively, reflective of the company’s lower risk asset base and high levels of regulatory capital. The company has an abundance of liquidity resources and is well-positioned to fund future balance sheet growth including its current loan pipeline, potential advances on undrawn lines of credit and pending Paycheck Protection Program loans.

The company’s funding base is largely comprised of low-cost core deposits at March 31, 2020, checking and savings accounts represent 68.5% of the company’s total deposit base. The company’s cash and cash equivalents net of float and reserves totaled $458.9 million at March 31. Total borrowing availability at the Federal Reserve Bank was $260.4 million and total borrowing capacity at the Federal Home Loan Bank was $1.83 billion. The available for sale investment security portfolio was valued at $3.14 billion, $1.5 billion of which was available for pledging if needed. In total, these sources of immediate liquidity exceeded $4 billion. We closed the first quarter of 2020 with total assets of $11.81 billion. This was up $398.7 million or 3.5% from the end of the linked fourth quarter of 2019 and up $892.5 million or 8.2% from one year earlier.

The increase in the quarter was largely due to a net inflow of deposits as seasonally anticipated. Year-over-year increases in total assets was driven by both third quarter 2019 acquisition of Kinderhook and organic growth. Average earning assets for the first quarter of 2020 of $10.04 billion was consistent with the fourth quarter of 2019 but up $664.1 million or 7.1% from one year prior due to both the Kinderhook transaction and organic growth. Average loan balances in the first quarter of 2020 were up $18.8 million or 0.3% when compared to the linked fourth quarter of 2019 and up $603 million or 9.6% when compared to the first quarter of 2019. On a linked quarter basis the average outstanding balances and business lending, consumer mortgage and consumer indirect portfolios were up slightly, but were offset in part by decreases in the consumer direct and home equity portfolios.

The increase in average loans outstanding on an annual quarter basis was driven by the Kinderhook acquisition as well as organic loan growth. Ending total loans were down on a linked-quarter comparative basis $24.5 million or 0.4% as seasonally anticipated. Exclusive of loans acquired in the Kinderhook transaction, ending total loans outstanding increased $174.1 million or 2.8% from a year prior. At March 31, 2020 the carrying value of the company’s investment securities portfolio was $3.19 billion. This includes net unrealized gains of $155.5 million, up from $33.1 million in net unrealized gains at the end of 2019 and $7.9 million in net unrealized gains a year earlier. The effective duration of the company’s investment securities portfolio was 3.6 years at March 31, 2020.

Average total deposits were up $651.5 million or 7.8% from the same quarter last year but down $45 million or 0.5% from a linked quarter basis. The increase year-over-year was driven by the acquisition of $568.1 million of deposit liabilities in the third quarter due to the Kinderhook transaction. The company’s average cost of deposits was 25 basis points in the first quarter of 2020, 1 basis point lower than the linked fourth quarter of 2019. The company reported total revenues of $148.7 million in the first quarter of 2020, an increase of $6.1 million or 4.3% over the prior year’s first quarter. Net interest income increased $3.2 million or 3.7% to $90.1 million due to a $664.1 million or 7.1% increase in average earnings assets between the periods offset in part by a 15 basis point decrease in net interest margin. Noninterest revenues increased $2.9 million, or 5.3%, between comparable quarters due to increases in banking and non-banking revenues offset in part by a small loss on equity securities.

Interest income and fees on loans increased $4.9 million or 6.6% over the comparable prior year quarter due to an increase in average total loans outstanding, offset by a 17 basis point decrease in average loan yield. As previously reported, the first quarter 2019 average loan yield was favorably impacted by 6 basis points due to $1 million in one-time loan fees. Interest income on investments decreased $0.5 million or 2.9% between the first quarter of 2019 and the first quarter of 2020. The tax equivalent average yield on investments including cash equivalents decreased from 2.58% in the first quarter of 2019 to 2.45% in the first quarter of 2020 reflective of lower interest rates. Interest expense was $1.1 million higher than previous year’s first quarter, driven by a 4 basis point increase in the cost on interest-bearing liabilities and a $446.1 million or 6.9% increase in average interest-bearing liability balances. Employee benefit services revenues for the first quarter of 2020 were $25.4 billion.

This represents a $1.3 million or 5.5% increase over the first quarter 2019 revenues. The improvement in revenues was driven by increases in plan administration, actuarial record-keeping fees as well as increases in employee benefit trust and transfer agent fees. The company recorded $8.1 million in insurance services revenues during the first quarter of 2020, a $0.2 million or 2.5% increase over the first quarter 2019 results due primarily to an increase in group medical and property and casualty insurance revenues. Wealth management revenues for the first quarter of 2020 were $7.1 million or $0.8 million or 12.4% higher than the first quarter of 2019 due to both acquired and organic growth. Banking noninterest revenues decreased $0.7 million due primarily to an increase in mortgage banking revenues.

During the first quarter of 2020 the company increased its commitment to sell secondary market eligible residential mortgage loans, which drove an increase in mortgage banking revenues from $0.2 million in the first quarter of 2019 to $0.9 million in the first quarter of 2020. The company reported $93.7 million in total operating expenses in the first quarter of 2020. This represents a $5 million or 5.7% increase in operating expenses over the first quarter of 2019. Salaries and employee benefits expense increased $4.9 million between comparable quarters reflective of the increased payroll costs associated with the third quarter 2019 Kinderhook acquisition, merit-related pay increases and an increase in employee benefits, including significantly higher medical costs. Total data processing and communication expenses increased $1 million or 10.8% between comparable annual quarters driven by higher payment processing and telecommunication costs.

Occupancy and equipment expenses increased $0.5 million or 4.4% between the periods due largely to increased costs associated with the Kinderhook acquisition. These increases were partially offset by a $0.5 million or 11.2% decrease in intangible asset amortization, as well as a $0.7 million or 6.4% decrease in other expenses. The effective tax rate for the first quarter of 2020 was 18.8%, up from 18.5% in the first quarter of 2019. The company recorded lower amounts of stock-based compensation tax benefits in the first quarter of 2020 as compared to the first quarter of 2019. Exclusive of stock-based compensation and tax benefits, the company’s effective tax rate was 20.9% in the first quarter of client money.

From a credit risk and lending perspective, the company has taken actions to identify and assess its COVID-19 related credit exposures based on asset class and borrower type. No specific COVID-19 related credit impairments were identified within the company’s investment securities portfolio during the first quarter of 2020. With respect to the company’s lending activities the company implemented a customer payment deferral program to assist both consumer and business partners that may be experiencing financial hardship due to COVID-19 related challenges. Through April 15, 2020 the company granted payment deferral request for up to three months for 3,274 consumer borrowers, 1,018 business borrowers representing $587.2 million of the company’s loan balances.

The company anticipates it will continue to receive COVID-19 financial hardship payment deferral request throughout the second quarter of 2020. At March 31, 2020 nonperforming loans increased to 0.46% of total loans. This compares to 0.39% of total loans outstanding in the first — at the end of the first quarter of 2019 and 0.35% at the end of the linked fourth quarter of 2019. The increase in nonperforming loans is largely attributable to a single line of credit that matured on December 31, 2019 with total outstanding balance of $9.9 million. Total delinquent loans, which includes nonperforming loans and loans 30 or more days delinquent to total loans outstanding was 1.11% at the end of the first quarter of 2020. This compares to 0.88% at the end of the first quarter of 2019 and 0.94% at the end of the linked quarter — fourth quarter of 2019.

The delinquency status for loans on payment deferment due to COVID-19 financial hardship were reported at March 31, 2020 based on their delinquency status at March 20 of 2020. The Steuben acquisition is scheduled to close later this quarter. However due to the COVID-19 crisis and pending regulatory approval the ultimate closing date may need to be adjusted. As a reminder, Steuben Trust is a 14 branch franchise operating in six county region of Western New York with total assets of approximately $560 million. Community Bank currently serves four of the counties within Steuben’s current footprint and the other two are contiguous to our markets. The company expects this acquisition to be approximately $0.08 to $0.09 per share accretive to its first full year of GAAP earnings and $0.09 to $0.10 per share accretive to cash earnings excluding one-time transaction costs.

Operationally, we will continue to adapt to the changing market conditions. In the immediate near term the company will remain focused on assuring the timely intermediation of deposit response, assisting borrowers that experience financial hardship with payment relief, closing and funding PPP and other loans and maintaining service standards in our financial services businesses. Based on the current market conditions, we believe certain aspects of the company’s operations would be more adversely impacted in the second quarter of 2020 than they were in the first quarter of 2020. Home and auto sales have slowed considerably, which has reduced the demand for new consumer mortgage and consumer installment loans. Although business lending activity increased in April, due largely to the PPP program, the effective yield on the PPP loans is significantly lower than the company’s first quarter average earning asset yields, which may negatively impact the company’s net interest margin in future periods.

Deposit and other banking fees including card related interchange revenues are expected to decrease due to declining levels of commerce. Higher levels of unemployment will impact our borrower’s ability to service debt, which may increase the level of expected loan losses potentially resulting in the company reporting significant provision for credit loss in the future periods. The company’s wealth management revenues will likely decrease in the second quarter consistent with a decrease in investment asset values, insurance services may be negatively impacted by lower sales activities. And although the company’s employee benefit service business is largely driven by participant head count levels its employee benefits trust operations would likely be negatively impacted by a decrease in underlying planned valuations.

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The company’s dividend capacity remained strong. Its full year 2019 dividend payout ratio was 47.5%. Accordingly, the company expects to continue to pay a quarterly dividend consistent with past practice. I will now lay the COVID-19 crisis that’s changed the near-term outlook for society in general, as well as expectations around economic conditions. First and foremost, we remain hopeful that the effective treatment is on the near-term horizon as it actually becomes widely available later at 2020. Like the disease, a specific acuity this crisis has on our employees and their families and our customers, communities and shareholders is highly uncertain. With that said we intend to support our stakeholders in a thoughtful, disciplined and compassionate manner and believe the company is well-prepared to endure its impacts. Thank you.

Now, I will turn it back over to Mark.

Mark E. Tryniski — President & Chief Executive Officer

Thank you, Joe. Before we open it up for questions, as I said in the opening, I asked Scott Kingsley to join us to say a few final words to the group that he had the opportunity to work so closely with over the past 16 years. Scott?

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thank you, Mark. To our investors and analysts, I want to take this opportunity to say thank you for your continued confidence and support of the company and myself over the past 16 years. Your engagement and effective challenge have been critical in our strategic decision-making and supportive of our continuous improvement objectives. As I prepare for my retirement from the company, I am both humbled by and proud of what our team has been able to accomplish and pleased to have been a small part of that. I’m also supremely confident in our team’s ability to continue to provide a differentiated level of customer community service and superior shareholder returns. Again thank you.

Mark E. Tryniski — President & Chief Executive Officer

Thank you, Scott. Thank you for 16 years of tremendous service to Community Bank System and on behalf of our entire organization we wish you and your family the very best for the future.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thank you, Mark.

Mark E. Tryniski — President & Chief Executive Officer

With that, Grant, I would now ask you to turn line over for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Joe Fenech with Hovde Group. Please go ahead.

Joseph Fenech — Hovde Group — Analyst

Group

Good morning, everyone.

Mark E. Tryniski — President & Chief Executive Officer

Good morning Joe.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Good morning Joe.

Joseph Fenech — Hovde Group — Analyst

Hey, guys. We’ve seen some other companies report just huge provisions here in the first quarter to build reserves. Some of them cited unemployment data and projections they used, I guess from as late as April 12. I know you guys generally are very conservative on credit. So I wouldn’t necessarily expect the same reserve bill, but just curious what metrics to use specifically to determine the reserve built in the first quarter. And given your comment in the release about — and on the call here about the increase in payment deferral request you expect in the second quarter, whether that means the big reserve build might be pushed out a quarter or two for you all or if you feel like you’re mostly accounted for that with this 1Q provision allocation?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Yeah, I’ll take that one Joe. As you know we adopted the CECL model in the first quarter and when you — the model is kind of comprised of really three significant components: the quantitative components, non-economic qualitative adjustments, and the economic qualitative adjustments. And in the economic qualitative adjustments we use forecasts provided by Moody’s and we use those forecasts. I think the update we used was through March 27. So effectively, that was the latest and greatest information we have from Moody’s. And so, we use that in our CECL model. I guess the best way to describe the economic forecasts is kind of the Nike swish kind of shape in a sense sort of significant drop-off in the second quarter with some recovery in later quarters.

And so that component of the model largely drove the adjustment in the first quarter. With respect to the second quarter, we’ll reevaluate the model, which will include also the economic qualitative factor adjustments but also we’re going to be evaluating sort of observed data with respect to delinquency and migration of risk ratings and those types of factors. So it’s possible that in the second quarter there will be additional reserve build based on the factors we’re observing in addition to changes in the economic outlook.

Joseph Fenech — Hovde Group — Analyst

Okay. That’s helpful. And then with respect to the decline in oil prices, you all in the 2015, 2016 cycle Mark, Scott again I remember having some tangential exposure. The lower oil prices there wound up being really no discernible impact to you as far as I can tell. But maybe just update us on what you consider your exposure to these record low oil prices.

Mark E. Tryniski — President & Chief Executive Officer

Yeah, I think we have Joe pretty limited at this juncture exposure mostly to the fracking industry but in Northeast Pennsylvania but I’ll let Joe Serbun comment further on.

Joseph F. Serbun — Executive Vice President & Chief Credit Officer

Yeah, Joe, our exposure as Mark said, not only to fracking but we had some pipeline contractors in the portfolio. Our overall exposure probably somewhere in the $40 million range and we monitor it. We monitor it quarterly. It’s a lot smaller, much — significantly smaller than it was back in ’16 and ’17 and the clients in the portfolio by and large are very [Indecipherable] and right now being the essentials, so they’re all working just — but we don’t have any concerns at the moment with respect to that portfolio.

Joseph Fenech — Hovde Group — Analyst

Okay. Thank you, Joe. And then on the outlook for M&A, you all were already an acquirer of choice in the market. I’d have to think the resiliency of the stock here through this makes you even more of an acquirer of choice. If one of your preferred target marking [Phonetic] during this period, would you feel confident enough to move forward and announce something during this time or is it just too much uncertainty at this point?

Mark E. Tryniski — President & Chief Executive Officer

I haven’t really given much thought to that hypothetical question. My initial answer would be that we would take a look at it. I think if you look at the financial strength of the company as I suggested and Joe talked about in a little more detail, I think we’re pretty well-positioned for whatever the future is going to bring here in terms of economic distress and ultimately potential credit losses. So clearly I think the valuation delta gives us potentially an opportunity. With that said, I would think most to our thinking about being sellers are not going to be thinking about it for some time. So I think we’re not going to see a whole lot of activity. But I think certainly if we have the opportunity to have a dialog with a high value partner right now, we certainly would entertain that.

Joseph Fenech — Hovde Group — Analyst

Okay. And on the Steuben trend, the pending deal that you have. It just sounds like, I mean, correct me if I’m wrong, it just sounds like more of a processing issue maybe, given everything the regulators and others have on their plate right now.

Mark E. Tryniski — President & Chief Executive Officer

Yes, it’s just, everything is moving slow as you know, Joe. We are — us, the Steuben folks, our core processor, everybody’s working remotely and that creates its own challenges and we’re trying to work through those. The regulators are working remotely so everything’s just moving slower. When we announced the transaction, I think we said we expect it to close in the second quarter. And as of right now we still are planning to do that. But clearly the future direction of COVID and the environment will dictate that potential.

Joseph Fenech — Hovde Group — Analyst

Okay. And then last one for me; Mark your fee businesses and the contribution there give you diversity, the earnings stream that not many of your peers have but the closure of the businesses really didn’t in occur until the middle of last — last month of the quarter, right, in March. Can you walk us through your initial thoughts on how you expect your various fee businesses to fair with what’s going on?

Mark E. Tryniski — President & Chief Executive Officer

Sure. I think the — I’ll start with the obvious, the wealth management business. I think that business will probably be down. We estimate somewhere in the 15% range in revenues the second quarter. The earnings probably won’t be down quite that much because there will be some offsets in terms of commissions and the like. But you’re probably talking a double-digit decline in the wealth business. I think the benefits business and insurance business will be slightly less impacted and we would expect a single-digit reduction in revenues and earnings in those businesses for the second quarter Joe.

Joseph Fenech — Hovde Group — Analyst

Okay. That’s it for me. Thanks. And then Scott, really enjoyed working with you and all the best.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thank you so much Joe.

Mark E. Tryniski — President & Chief Executive Officer

Thanks Joe.

Operator

Our next question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

Alex Twerdahl — Piper Sandler — Analyst

Hey, good morning guys.

Mark E. Tryniski — President & Chief Executive Officer

Good morning Alex.

Joseph F. Serbun — Executive Vice President & Chief Credit Officer

Good morning Alex.

Alex Twerdahl — Piper Sandler — Analyst

First off, Scott, congratulations on the great career. Good luck with your retirement and you’re certainly going to be missed.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thanks Alex.

Alex Twerdahl — Piper Sandler — Analyst

Wanted to start with the PPP program and just in terms of the fees that are expected from the $350-million-ish of loans. Are those going to be pretty much reflected in the second quarter? Are those going to be capitalized over the life of the loan? Kind of how should we think about sort of how those balances are actually going to impact the balance sheet?

Joseph F. Serbun — Executive Vice President & Chief Credit Officer

Yeah, it’s a good question, Alex. We intend to hold those for investment and therefore recognize to see over the life of the loan at this point. As the second round gets funded — this additional funding will continue to evaluate our strategy around that but at the current time we’re planning on holding those for investment.

Alex Twerdahl — Piper Sandler — Analyst

Okay. And would we — is there a way to sort of guesstimate with that and is it going to flow through fee income presumably or through the margin? And should we assume these are all kind of the 5% loans or is there a way to kind of clarify that a little bit more?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

No, it will come through the margin is how we will account for it. With respect to the weighted average fee, we’re not there yet relative to making that determination. But I think it was a 1%, 3% and 5% levels so it’s somewhere between those — in between those amounts but we don’t have that pinned down just yet. We will shortly though.

Alex Twerdahl — Piper Sandler — Analyst

Okay. And then in terms of the margin is there a way you can kind of help us get a little bit better sense for the moving parts in the margin? Obviously, you got some moving parts anyway seasonally in the second quarter, but just given the PPP program, expected durations of those loans, etc, plus other things in the balance sheet, how should we be thinking about the margin from here in the second quarter?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Yeah, that’s a very good question, Alex. With respect to the loan portfolio, if I can start there, we had a decrease in the prime rate kind of late in the first quarter. The full impact of that decrease has not been recognized, if you will, in the first quarter. So we’ll feel a little bit more impact on the loan yield side, just from the decrease in the short-term interest rates. As you mentioned also the PPP loans will go on at the lower effective yield. So the overall loan yields are expected to decrease. We threw a slide in the investor deck, which sort of shows the history of short-term interest rates as compared to our loan yields and we have effectively maintained loan yields above 4% through kind of the last 10 years or so. That will be a little bit more challenging with the PPP loans depending on the volume, so I would expect loan yields to drift down a bit in the second quarter. We have made some changes on the funding side relative to our cost structure.

If you recall going back to late 2015, our total cost of deposits was at 10 basis points or 11 basis points range. We’re sitting at 25 basis points now. I would not expect us to get back to 10 basis points or 11 basis points certainly in the short term because we’ve added the Kinderhook balances as well, and it’s just a little bit higher cost structure relative to our cost of deposits. I potentially could see in the second quarter the cost of deposits stripped out a few more basis points in the quarter. The investment securities yield at least in the, in the short term, I would expect to be maintained at kind of that 240 to 245 level and the cash equivalents that we’re carrying on the balance sheet at the end of the quarter it’s likely that they will be invested in the own portfolio. So I’d expect those to come down, which ultimately will help our margin outcome. So all of those things considered, I think it’s fair to assume a decrease in the margin by 5 basis points, 6 basis points, 7 basis points in the coming quarter.

Mark E. Tryniski — President & Chief Executive Officer

The only thing I would add Joe is, as it relates to the fees on the PPP loans, yes, we are going to amortize those as you suggested over the potential two-year period. When those things start getting forgiven, we will accelerate the recognition of the associated fees [Indecipherable]. So it’s going to get messy I think to make judgments forward looking about what the actual reported margin might be. I think looking at the expected fundamental margin related to the loans and the deposits is reasonably straightforward. But there is going to be a big variable here as it relates to the acceleration, which we would expect to see. As these things get forgiven and we accelerate the fees associated with them. So I’d just throw that out there as well for consideration.

Alex Twerdahl — Piper Sandler — Analyst

Okay, that’s helpful. And then just final for me, I was wondering if you can just kind of run down the hot button loans in the segments and just kind of quantify your exposure to things like lodging, restaurant, retail, CRE, things like that?

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Yeah, Alex, I’ll take that. So I’ll start on with retail. Retail trade represents about 4% of our total exposure. It’s about $260 million. Lodging, everyone’s interested in that represents about 3% of our exposure. Health and social services and social assistance is 2% of our exposure. Construction 2%, unfortunately our dairy farmers, which represents about 1% [Indecipherable] foodservice 1%; furniture stores — we pulled those out because we had a couple of large furniture stores and we pulled those out, that represents 1%; manufacturers, I think I said, they’re actually 2%. We pulled out casinos. As you probably know we do business with a couple of casinos here in Upstate New York so we pulled those out, that’s just less than 1%. And I guess transportation will be the last one which is just less than 1%. Those are our total loan outstandings.

Alex Twerdahl — Piper Sandler — Analyst

Great. That’s extremely helpful. Thank you. That’s all my questions for now.

Mark E. Tryniski — President & Chief Executive Officer

Thanks Alex.

Operator

Our next question comes from Erik Zwick with Boenning & Scattergood. Please go ahead.

Erik Zwick — Boenning & Scattergood, Inc. — Analyst

Good morning, guys.

Mark E. Tryniski — President & Chief Executive Officer

Good morning Erik.

Erik Zwick — Boenning & Scattergood, Inc. — Analyst

I think I’ll start with maybe a couple of follow-ups on the SBA PPP program. You noted that you approved just under 400 loans. I’m curious how that compares to the number of applications you received? And then secondly, since the program ran out of funding our late last week, have you continued to accept additional applications and do you think if the second round of funding comes through will you be able to process and fund all of those additional applications?

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

I’ll take that one. So it’s been hectic. It’s in test phase. So, yeah, the expectation is they’re going to appropriate additional dollars, hopefully upwards of $2.5 billion. We have continued to process or — rephrase, continued to validate the applications’ dollar request. So we’ll continue to do that with the expectation that there’s going to be additional funding come the middle of this week. Will we get through all of our applications? That’s the goal. And we’ve thrown a lot of people at it. We probably have somewhere around — rough numbers, 1,200 applications that we’re working through that did not get processed with the first go round. So the expectation is we’re working those. There’ll be additional funding. And we’ll take care of as many clients as we possibly can. It’s been a team effort. I can tell you that.

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Erik Zwick — Boenning & Scattergood, Inc. — Analyst

Great, that’s helpful. And then just to make sure I understand kind of switching to the current credit situation. If I look at that 90 days plus delinquent and still accruing bucket that increased from $5.4 million to $12.6 million. And you mentioned that delinquencies are reflected as of March 20. So am I right. Does that assume that there was kind of a pre-COVID increase in that bucket? And if so, what was the driver?

Mark E. Tryniski — President & Chief Executive Officer

Yeah. So we have we one credit — line of credit that has matured. So just shy of $10 million, part of a bigger relationship — total relationship, somewhere around $13 million, $14 million. But we have two loans that are current and line of credit that it is toward and we’re working with the client in an effort to renewal come up with a solution.

Well, it was pre-COVID. This was not — it’s not a result of C-19. The business with the way of retail certainly is going to be impacted post C-19. And it’s during the retail sector. Like I said, it’s a line of credit which was matured that we’re trying to do work with the client to get a solution and resolution on.

Erik Zwick — Boenning & Scattergood, Inc. — Analyst

And were you able to talk about the particular industry or retail that they serve?

Mark E. Tryniski — President & Chief Executive Officer

No, just this — in the retail sector.

Erik Zwick — Boenning & Scattergood, Inc. — Analyst

Great, thanks for taking my questions.

Mark E. Tryniski — President & Chief Executive Officer

Yeah.

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Thanks Erik.

Operator

Our next question comes from Russell Gunther with D.A. Davidson. Please go ahead.

Russell Gunther — D.A. Davidson & Co. — Analyst

Hey, good morning guys.

Mark E. Tryniski — President & Chief Executive Officer

Good morning, Russell.

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Good morning, Russell.

Russell Gunther — D.A. Davidson & Co. — Analyst

I just wanted to follow up on the exposures that you provided, I appreciate the color there. I just want to make sure it’s fair to have the right characterization. So this is an attempt to sort of ring fence or quantify your exposures that are most at risk in the near term from COVID-19. So just to confirm that please. And then if there are any material shift either way with Steuben or any of their exposure that would be worth calling out as well.

Mark E. Tryniski — President & Chief Executive Officer

So, so your commentary was correct. It’s sectors that we deem it would be mostly impacted both C-19 as a percentage of total — excuse me, total loan outstanding and we’ll continue to evaluate that as we — as you play this out one way. As an example, one way be added one way might be trial. With respect to Steuben portfolio you know, they have some exposure to a certain industry similar to ours that we have designated as higher risk, lodging they got a little bit and now they have a little bit of healthcare. I don’t see any evidence that it’s not that big of a portfolio, I don’t see anything that would be sufficient enough to move the needle, any one of these categories on holistic basis.

Russell Gunther — D.A. Davidson & Co. — Analyst

Okay, great. And then are there any portfolio characteristics that you could share, whether it’s a weighted average LTV, your debt service covering ratio to just help contextualize this a bit more?

Mark E. Tryniski — President & Chief Executive Officer

So that’s a little bit of a challenge, right. But our portfolios are rather seasoned and as a result of values, particularly the price values are dated in — they were determined given the economic times. So albeit necessarily to throw an LTV that would be — have any meaning. But what I would share with you is some of the guidelines or metrics that we underwrite against as an example, our loan to values target is anywhere between 70% and 75%, is that would we be able to go beyond that? Sure. But, our target is to come in at 70% and 75% of appraised value, but we typically underwrite with the 10% over 20% amortization and we typically come in with debt coverage somewhere between 1.1 times to 1.2 times. Those are kind of the things that we find right to try to do.

Do we have some, as I said, do we have some that might go beyond the supervisor limit of of 85%. We do reported, it’s not a very big bucket at all. So I hesitate to throw an LTV out there. I have to stick through a debt leverage also because I don’t think that they are necessarily meaningful at this point in time, given what’s going on in the economy, but we just have a sense of the way we underwrite of 75% or less 10-year term, 20-year and we like personal guarantees. So we get recourse, those kind of things that might have more value to…

Russell Gunther — D.A. Davidson & Co. — Analyst

No, that’s very helpful. I appreciate the reminder of those targets. And then I guess just stepping back, kind of a bigger picture an attempt to quantify what the potential loss rates we’ve seen C-19 could be and is it a useful exercise to think about a DFAST severe or materially adverse scenario? Is that, is that something you have contemplated performed internally from a stress testing perspective. Just curious as to your thoughts there.

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Yeah, well, Russell, we’re not at the size limits for DFAST. So we had started the DFAST process back in 2016 and 2017. Ultimately, there was a change in the regulation that excluded us from the DFAST process. With that said, the — I’ll call it the collective intelligence we gained through the DFAST process we used to run an internal capital stress test model and we do that on an annual basis, we just contemplate that one and includes a scenario, which is severely adverse, which takes our charge-off levels and a very sort of pessimistic outlook and applies a factor, multiple factor to those charge-off levels along with other assumptions relative to us, a really adverse scenario. And we, so we push the limits relative to that stress test and all instances we were able to maintain our regulatory capital levels well above the required regulatory capital standards and even our own internal capital standards, which are higher than the regulatory standards.

Russell Gunther — D.A. Davidson & Co. — Analyst

Got it. No, I think that’s very clear relative to the position of strength that you guys are operating in today. I guess I was just trying to get your thoughts around what’s the potential loss content would be and how you’re thinking about it from an order of magnitude perspective.

Mark E. Tryniski — President & Chief Executive Officer

Yeah. It’s Mark. That’s a really good question, we have actually spent a fair bit of time talking about that. I mean the real challenges, the focus initially was that you know, some of the commentary in inbound question, what’s your Lodging portfolio? The potential loss scenario has expanded way beyond lodging, I mean it’s a little bit of everything. I mean if you look at what Joe talked about some of those kind of what we would consider higher risk potentially credits in the business lending portfolio of $3 billion. We also have a $2.5 billion mortgage — residential mortgage portfolio. How is that going to be impacted when unemployment could potentially go to 20%.

How about the auto lending portfolio? That’s a $1 billion. What happens to that when unemployment is 20%? So I think the challenge around this is really just that there is so much uncertainty going forward as to what those — what that loss content is going to be. I think that if we, if we have any reason to think it’s going to be a lot higher than where we’ve kind of provided in our reserve. You look at our reserves, is what $55 million, we would have provided more, I think we’re prepared to do that when there is any level of kind of forward clarity or indication. Right now it’s just such a coin flip as to what the ultimate loss content is going to be really any portfolio, it’s not just commercial.

So it’s not a real challenge kind of an interesting exercise to go through, i.e., if you look back to the ’08-’09 prices. Our losses didn’t even blip, I don’t even think they were — able to standard deviation beyond what they historically had been, I think it could be a little different this time just because it’s a different no, it’s a different problem it’s going to be more widespread. It’s not necessarily just regional. So I would expect that there is potential for somewhat greater losses there was relative to the credit crisis in ’08-’09. But I think trying to determine an order of magnitude on that at this juncture just really, it’s really too soon and hopefully we’ll have a little bit better clarity as the second quarter unfolds and at least the phase-in of the return to normalization commences. And we get to see a little bit more evidence of what the future might hold and we’ll have a — I think better understanding then to make better informed judgments.

Russell Gunther — D.A. Davidson & Co. — Analyst

I really appreciate your comments there, guys in what’s a very challenging and fluid situation. So thank you for taking my questions. And Scott congratulations.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thanks so much.

Mark E. Tryniski — President & Chief Executive Officer

Thanks, Russell.

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Thanks.

Operator

Our next question comes from Collyn Gilbert with KBW. Please go ahead.

Collyn Gilbert — KBW — Analyst

Thanks, good morning everyone.

Mark E. Tryniski — President & Chief Executive Officer

Good morning, Collyn.

Collyn Gilbert — KBW — Analyst

Mark, thanks for that color on the unknowns. Obviously, we appreciate your position and then this is not easy. But if I could just dig in a little bit and making sure I understand kind of the movement within the reserve that occurred this quarter. So, Joe, I think you said $1.4 million of the increase in the reserve from the fourth quarter was related to CECL. And I thought that you all have said that the increases maybe be closer to $5 million in the past, is that correct? And then just wondering maybe what you ended up seeing, especially given what was going on, I would have thought that that would have been — the CECL component would have been certainly higher than maybe what you would have thought at the end of fourth quarter?

Mark E. Tryniski — President & Chief Executive Officer

Yeah. Collyn, we have given kind of a range of estimates in some of our previous discussions, and we had initially kind of in the third quarter to come out with a little bit of a higher expectation and as the fourth quarter obviously before COVID, we had kind of lowered our expectations as we refined our model came out with an estimate that would potentially be in the range it was very similar to our incurred loss model.

Ultimately, when we refined our estimate and came up with a final determination for the post adoption number, it was at $1.4 million higher than the 12/31 number. So effectively, we’re running an incurred loss model came up with $49.9 million running a CECL model which is a completely different, different model if you will, and came up with $51.3 million. So the net increase was $1.4 million due to the conversion. And then with respect to as the COVID crisis unfolded in front of us, we had to A, test our model right out of the gate. And we did that and we largely relied on the economic qualitative factor adjustments in our model to kind of give their forward looking expectations.

We observed data relative to delinquency and risk rating changes, really it wasn’t there at the end of the quarter and simply haven’t developed yet. We do expect, however, to see some developments on delinquency and risk ratings in the second quarter that will potentially create the need for additional reserves.

Collyn Gilbert — KBW — Analyst

Okay. Okay, that’s helpful. And then just to sort of frame maybe again what you sort of do now. So the deferral that came in this quarter, I think, it looks like $587 million in total. Did you have, are you setting aside or is your intention to set aside a reserve allocation for those deferrals with the expectation that maybe they could be challenged credits post COVID or how are you thinking about kind of the reserve on that $587 million, and then also in that slide deck you guys put out like that $1.5 billion of the potential exposure, just — and I know it’s hard to, if you said Mark like trying to gauge what the loss content is really a challenge, but just curious as to maybe what you think the reserve adds each of those two types of exposures could be roughly or how you’re thinking about it?

Mark E. Tryniski — President & Chief Executive Officer

Collyn, I mean that’s a very fair question and we’ve had similar dialogues internally about, do we have to adjust the reserve for some of the deferred payments and specific concentration risk over and above what our model would allow us to and — at this point, we redeemed it a little bit too speculative because quite frankly, we didn’t know — we don’t know the outcome, we still don’t know the outcome relative to how quickly life will resume but we are aware that we are going to need to evaluate that in the second quarter.

And with respect to the deferred payments, if we wind up with a second round of deferrals for a lot of these customers. We’re going to have to evaluate those for the overall risk associated with that second round of deferrals, but we did not make a separate adjustment in the first quarter for the deferrals. And keep in mind we also provided net deferral number through April 15, the facts were a little bit different on March 31st.

Collyn Gilbert — KBW — Analyst

Right, okay. It’s a good point. Okay. Okay. Okay, that’s helpful and then just on the — so let me just stick on the loan book, so you would indicated here again where you guys said with the exposure like the remaining availability within each of those segments. I guess through down the line, was there any accelerated lines drawn that happened in this quarter or you’ve seen happen post quarter end within some of these credits.

Mark E. Tryniski — President & Chief Executive Officer

Great. So it’s actually interestingly enough with very little movement going back almost nine quarters now. You could look at utilization of the lines over that nine quarters, and the high point was 54% — 53%, 54% and low point was 47%, 48% and we’re sitting right now at about 49% utilization. That’s all for the last nine quarters. So there really hasn’t been much — there hasn’t been any — you can’t really run on the lines. That said, we had one client who had the sizable line of credit to — elected to draw down on it, highly liquid from that. We didn’t, we didn’t need to draw at it, but did nonetheless. That will be the only outlier that took place very consistent will be like I said, over the last nine quarters.

Collyn Gilbert — KBW — Analyst

Interesting. Okay, that’s helpful. And then just on the expense side. So when you’re going into this. I think the guidance that you guys had offered last quarter was that [indecipherable] it would be like, I think you said $93 million, $94 million or so a quarter in opex. Is there anything COVID related that’s going to materially change kind of your expense outlook from that baseline?

Mark E. Tryniski — President & Chief Executive Officer

So there will be additional expenses related to COVID just for example, some of the cleaning activities and the like are increasing. The other side of that is there is less business travel and those types of expenses. So I think the net-net relative to COVID expense not really kind of effect too much the trajectory of our operating expenses.

Collyn Gilbert — KBW — Analyst

Okay, that’s helpful. And then Joe just a detail look like other opex dropped a fair bit this quarter, was there anything in there that was unusual that caused that and maybe the outlook for that line going forward?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

I would say nothing unusual in the quarter. I can get back to you on that specifically. But there was nothing that jumped out of me is unusual in the quarter.

Collyn Gilbert — KBW — Analyst

Okay.

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

We just had — we had some, a couple of quarters where we had some other expenses that we were kind of not anticipating we booked in to the quarter, and this is a more of a call it normalized quarter for us.

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Collyn Gilbert — KBW — Analyst

Okay, got it. And then just one final question on the PPP program. The — what percent of the applicants that you’re seeing are and approvals are current on CBU customers versus non-customers?

Mark E. Tryniski — President & Chief Executive Officer

All of them.

Collyn Gilbert — KBW — Analyst

All of them are your customers. Okay. Are you getting requests for non-customers or —

Mark E. Tryniski — President & Chief Executive Officer

We’ve had a few limited.

Collyn Gilbert — KBW — Analyst

Okay, got it. Okay, that’s all I had. I’ll leave it there. Thanks guys. And Scott, all the best to you in your retirement and hopefully you will be able to get out there and travel and enjoy post-COVID world.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thank you so much.

Mark E. Tryniski — President & Chief Executive Officer

Thanks Collyn.

Operator

Our next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

Matthew Breese — Piper Jaffray — Analyst

Good afternoon, everybody.

Mark E. Tryniski — President & Chief Executive Officer

Good morning, Matt.

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Good morning, Matt.

Matthew Breese — Piper Jaffray — Analyst

Just curious on the $587 million of loans that were granted deferral. What was the asset class breakdown of those loans? And was there any overlap between this bucket and the PPP bucket?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Just give me a moment. So the — couple of things. So first of all, the deferrals and PPP I guess not surprising, but percentage of deferrals and percentage of PPP adds, the majority of those came from the New York State and the percentage of PPP dollars. It’s not two-thirds by the way of both deferrals and PPP adds that came out of New York State and same thing with the percentage of PPP dollars as well as the percentage of deferrals also came about two-thirds of them came out of New York versus Pennsylvania.

Retail trade, lodging, manufacturing, construction and health care represented about 75% of the PPP activity. On the deferral side, Joe may have mentioned this earlier on the deferral side. Much of what we did were beyond on the consumer or the mortgage and UR much of what we were doing were 30 day of deferrals for P&I and as a result of people paying attention to the evening news came to realize pretty quickly, it wasn’t going to be over in 30 days, and so they are back at us again looking for some more, looking for some more deferral days, which we have and will continue to grant up to 90 days in total.

In the commercial world, early on, we were actually having some securities in getting just principal deferrals only and they are making interest payments. Again, as they watch the evening news, they came back at us and looked at us, asked us to do both principal and interest accruals, which we also accommodated. Yeah, I would say, and you probably all know this, but this was it in concert with our regulators you are well aware of the approach that we took with respect to the deferrals we have, for sure in PPP but deferrals and the duration that we were running back that we didn’t need to address risk rating. The fact that we need to worry about TDRs or debt restructures.

Matthew Breese — Piper Jaffray — Analyst

Right. And then maybe just one other measurement. As we think about the number of consumer and business deferrals. The 3200 and 1000 business customers, what percentage of both of those buckets in terms of total consumer really consumer accounts and total business accounts to those make up?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Could you clarify the question a bit, please?

Matthew Breese — Piper Jaffray — Analyst

I’m sorry. There wasn’t, yeah. As we think about the number of consumers that were granted deferrals, the 3274 and the business deferrals the 1218. What percentage of total consumer accounts did that make up, what percentage of total business accounts did that make up?

Mark E. Tryniski — President & Chief Executive Officer

Well, we have 40,000 installment loans, I couldn’t tell you the number of whole resi mortgage accounts we have, but we have got 40,000 installment loans, you probably have a similar number and commercial also too small business from account perspective. We might have upwards of 6,000 small business customers and you know — but I don’t have the specifics regarding —

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

It just seems to me, if you could, you could kind of get an answer in the sense of directionally today just by and I think the 3.8%, you’ve got there. The percentage of the portfolio outstanding. So we granted deferrals to 4% of the outstanding balance of our consumer mortgage portfolio. Right.

Matthew Breese — Piper Jaffray — Analyst

Right.

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Yeah, it’s probably about the same in terms of number of customers, I would say it’s probably the same for installments 2.7%. So we granted deferrals to probably about 3% of our installment customers.

Joseph Fenech — Hovde Group — Analyst

Absolutely, and worth mentioning that if you kind of come across there Matt, the consumer installed in the 2018 loans on an average balance basis of $16,000 loan in terms of granularity, jump up to consumer and home equity you’re just around $100,000 in mobile, wait that’s out. So to Mark’s point I think that’s going to be the same number of customers and outstandings, on the consumer side, because our average mortgage portfolio is about $100,000 mortgage. And our average outstanding auto loan or indirect auto loan is under 20 year.

Mark E. Tryniski — President & Chief Executive Officer

Yeah I think we were maybe a little bit surprised that the consumer request for deferral were greater just because of the acceleration of unemployment. So I think hopefully we take that potentially sign in our, in our markets, but that could also accelerate dramatically that could double or triple or more over the course of the next 60, 60 to 90 days as well, but I think we expected that it would be a little bit more of a race for deferrals on the consumer side than what we experienced.

Matthew Breese — Piper Jaffray — Analyst

Right. Right. Okay and then my last one, one point of conversation I’ve had is whether or not a — in this environment a bank is is better to be have a more rural footprint or more metropolitan footprint and I wanted to get your thoughts on whether or not you feel like the rural footprint you operate in is to your advantage in this environment or disadvantage.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Well, I think it’s, it’s certainly been a productive business model for us for a long time. I would say if you look at the disease itself and where the greatest areas of the impact are not just from a health perspective, but potentially also likely from an economic perspective is probably the more urban markets. So I would, I would say from where we sit right now and what we know it’s, we’re probably somewhat, it’s more advantageous right now to be in nonmetropolitan markets. And so I suspect that they’re going to open up faster, which should ultimately mean less economic impact in those markets and that may work to our advantage, possibly here going forward.

And then I would certainly say that our customers in those nonmetropolitan areas have certainly not enjoyed a lot of asset acceleration in terms of valuation change here consistent going into before we go into the last crisis, it’s not like the cost of housing is moving up 12% a year as most of our markets are 15% a year. So the underlying asset values are radically different than what they probably were when we underwritten.

Matthew Breese — Piper Jaffray — Analyst

Right, okay. Thank you, Scott. Best of luck. It’s been a real pleasure working with you over the years and I think we’ve all benefited from having as a resource. So, thank you and be well.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thank you so much.

Mark E. Tryniski — President & Chief Executive Officer

Thanks Matt.

Operator

Our next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace — Raymond James — Analyst

Thanks. Scott, I’ll echo Matt’s comments. And just thank you for all up over the years and wish you luck in the retirement.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Thanks, Scott.

William Wallace — Raymond James — Analyst

I wanted to just back up a little bit to PPP, you mentioned the accrual of the fees over the two-year life of the loan. Is there any reason why we wouldn’t expect that the very large majority of these loans wouldn’t be forgiven over the next 60 days.

Mark E. Tryniski — President & Chief Executive Officer

No, I don’t think we have any reason to believe that’s not true also and so it’s likely, which is why I just wanted to raise the point that if you’re thinking about the margin going forward. There is going to be a potentially material impact on the margin in the second quarter and possibly the third quarter as well. So that’s yeah, I mean we would hopefully the majority of these borrowers will get forgiven. And that means they’re spending the money for the right bank so that I would expect there is going to be a fairly sizable the acceleration.

The only thing that I question is the capacity of the SBA to actually process all of those forgiveness requests. That is, that is going to be interesting and so I think there is much risk there is anything we’ve seen in this program is just the SBA’s capacity to process all those requests because you can start in what probably seven weeks or so. The Bank is starting to require the processing of forgiveness and that’s going to be an interesting exercise in terms of the, the ability to update to turn those around timing.

William Wallace — Raymond James — Analyst

Yeah. Great. I’m sure it won’t be without these hiccups, just like the initial launch of the program itself. And in trying to kind of maybe get a sense of what is second round might look like for you guys, you mentioned I think 1200 applications are currently in process that were not closed before this ended. Can you give the dollar amount of those and then maybe give us a sense as to what percentage of the applications that you did process were approved?

Mark E. Tryniski — President & Chief Executive Officer

So I don’t know the specific dollar amount, but if you make the assumption that the, the average loan size which is based off of what we did approve was about $70,000. You can look at and come up with the — remaining for those who we haven’t processed. Well, could you repeat the first part of your question though?

William Wallace — Raymond James — Analyst

What percentage of the loans — of the applications that you did process were approved for the program?

Mark E. Tryniski — President & Chief Executive Officer

Well, we had very few — very few applicants that didn’t that get approved, very few.

William Wallace — Raymond James — Analyst

Okay, thank you. And then I’ll just ask one last question. We have — we haven’t talked about loan growth for a reason. I assume there’s probably not much new loans being put into the pipeline. Maybe there is a little bit of activity or maybe I’m completely wrong. I’m wondering if you could help us think about loan activity and then the rate of payoffs versus refis given that the non-bank lending sectors now shut down. So just trying to get a sense as what the portfolio might look like over the next say quarter or two.

Mark E. Tryniski — President & Chief Executive Officer

So the — yeah, you’re right. The installment portfolio — the installment portfolio, particularly the indirect portfolio, but the activity is not come to a screeching halt. But it is very slow as a result of the shutdown of doing maybe not all the car dealerships, so that’s low and will continue to be for a while net portfolio ones off in a pretty good clip, every single month, so we won’t be replace that. The resi mortgage portfolio, the pipeline there hanging in not that far off from where we were this time last year. So and given rates you take it be a little bit more active but it’s not at the moment.

And the refi — the refi business is a little bit more active than the purchase. And on the commercial side, we’re just working through the already committed and in progress funding of construction loans. There is not a lot of activity coming back into the pipeline at the moment,, it’s partly because of the economy, partly because of the distraction our people are focusing more on the PPPs and deferrals and everybody at the retail folks as well as the commercial folks. So I would I would suspect that outside of the growth that we will report as a result of the PPP loans but the core portfolios, are a little bit softer.

William Wallace — Raymond James — Analyst

And what about what’s coming due that normally you would expect might go to another financial institution. Are you guys refinancing that or you are finding that there is liquidity existing on some customer balance sheets already to pay off.

Mark E. Tryniski — President & Chief Executive Officer

Interesting. So those that we want to keep reflect we keep and those that we’ve looked at all of put off our balance sheet somebody else little less success that are doing it at the moment. So we have no choice but to work with the client and immediate the risk as best as we can. But there hasn’t been a lot of that — there hasn’t been a lot of that activity quite candidly, in the last 30 days. And lines of credits, typically don’t start to come up for extensions renewals till June, July, August. So, there’ll be more activity at that point in time.

William Wallace — Raymond James — Analyst

Okay, thank you for that.

Mark E. Tryniski — President & Chief Executive Officer

Yeah.

William Wallace — Raymond James — Analyst

Thanks, Wallace.

Operator

Our next question comes from Collyn Gilbert. Please go ahead.

Collyn Gilbert — KBW — Analyst

The call is getting long. Just two more quick follow-ups, do you have a number in terms of loans that have been asked for forbearance post 3/31?

Mark E. Tryniski — President & Chief Executive Officer

This is through April, so April — through April 15 which is in the deck that we had set out. So through April 15 there was 4292 loans that were deferred, $587 million.

Collyn Gilbert — KBW — Analyst

Okay, got it. That was — okay. Sorry, I should have seen that. And then just finally, there is another question kind of around the reserve. If we look back, I mean your loss content historically has been just basically non-existent. But yet, it looks like, I think your peak reserve kind of I hope around the crisis was — I mean, is there dynamics for that are occurring within the book that would point to you guys being able on this go around to carry a much, much lower reserve than when you keep at 140?

Joseph E. Sutaris — Executive Vice President & Chief Financial Officer

Collyn, that’s a good question. I mean looking forward, with the impacts of COVID that’s really a tough call at this point to determine what the, what the future reserves will hold. I know that I’ve looked at some reserves relative to our larger brethren, they do maintain a little higher total reserve, but they also have higher loss content. So we’re sitting at the 81 basis points right now as a percent of loans. It’s hard to determine at this point, how the COVID crisis will unfold and whether that means closer to one or it stays in its current — its current levels. So that is a very difficult question to answer at this point in time, given the facts that we have today.

Scott A. Kingsley — Executive Vice President & Chief Operating Officer

Joe, is it possible that some of the purchase loan accounting, contribute to that differentials? It’s possible, I mean it gets pretty complicated, but I think there is a possibility to debt that has had some impact over time.

Collyn Gilbert — KBW — Analyst

Yes, for sure, for sure. Okay. I will leave it there. Thank you, guys so much for your time.

Mark E. Tryniski — President & Chief Executive Officer

Thanks, Collyn.

Operator

This concludes our question-and-answer session. I’d like to turn the conference back over to Mark Tryniski for any closing remarks.

Mark E. Tryniski — President & Chief Executive Officer

Great, thank you, Grant. Lastly, we typically have many employees and Directors who listened in on this call. I just wanted to take the opportunity to thank every one of them for their understanding and their engagement and their support. It’s been a difficult and demanding time for all of us and we really have risen team to our status as the central. Most important I want to thank you for caring. Caring about our customers, our communities, our shareholders and each other. We are not in the banking business we are in the people business and I could not be more proud to work side-by-side every day with 3,000 colleagues that make Community Bank System, the organization that it is. Thank you all again for joining and be healthy, be safe and we will talk again next quarter. Thank you.

Operator

[Operator Closing Remarks]

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