Amerant Bancorp Inc.

Good morning, ladies and gentlemen, and welcome to the Enron Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host. Ms. Laura Raffi, Investor Relations Officer. Thank you. Ma'am, please go ahead.

Thank you, Operator. Good morning to everyone on the call, and thank you for joining us to review Ameren Bancorp's second quarter 2020 results. With me this morning are Miller Wilson, Chief Executive Officer, Carlos Zafiriola, Chief Financial Officer, Miguel Palacios, Chief Business Officer, and T.L. Fisher, Credit Risk Manager. Before we begin, note that the company's press release, comments made on today's call, and responses to your questions contain forward-looking statements. The company's business and operations are subject to a variety of risks and uncertainties, many of which are beyond its control, and consequently, actual results may differ materially from those expressed or implied. Please refer to the cautionary notices regarding forward-looking statements in the company's press release. For a more complete description of these and other possible risks, please refer to the company's annual report on Form 10-K for the year ended December 31st, 2019, and the company's quarterly report on Form 10-Q for the quarter ended March 31st, 2020, as well as the subsequent filings with the SEC, which you can access these filings on the SEC's website. Please note that Amaranth has no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances, or changes in expectations, except as required by law. You should also note that the company's press release, earnings presentation, and today's call include references to certain adjusted financial measures, also known as non-GAAP financial measures. This refers to Appendix 1 of the company's earnings presentation for a reconciliation of each non-financial measure to its most comparable gap financial measure. I will now turn the call over to Mr. Wildman.

Good morning, and thank you for joining Ameren's second quarter 2020 earnings call. Today, I will begin by discussing how Ameren continues to navigate the current environment, including an update around the initiatives put in place to mitigate the impact of the COVID-19 pandemic and our second quarter highlights. Carlos will then review our financial performance for the quarter in further detail. After our prepared remarks, Carlos, Miguel, Kiel, and I will answer questions. As I said last quarter, the safety of our employees and customers is our number one priority. our business continuity plan remains in place, and as a result, we have been able to seamlessly serve customers and keep our employees, customers, and communities safe. As the number of COVID-19 cases has increased in the communities where we operate, we are diligently following our business continuity plan and are taking a cautious and phased approach as Ameren employees begin to return to the office. Specifically, employees are only returning to the office voluntarily at a capacity of not more than 25% at any given time, except our New York LPO, which is capped at 50%. Our DCP continues to successfully support approximately 86% of our employees with remote work capabilities. Regarding our banking centers, we have returned to regular business hours. That said, the entire Amaranth team is following strict government safety guidelines as our goal continues to be to provide customers with the service they have come to expect while maintaining a safe environment. Additionally, Amaranth continues to provide customized loan payment relief options to customers impacted by the COVID-19 pandemic. in accordance with regulatory guidelines, including interest-only payments and forbearance options. At the end of the second quarter, loans outstanding which have been modified under these programs totaled $1.1 billion. Modified loans on which the interest-only and or forbearance period had expired totaled $519.5 million. or 46% of total modified loans. As of July 17th, modified loans totaling $164.9 million had scheduled payments due. The company collected payments due on $136.9 million of these loans through this date. Modified loans totaling $354.6 million of payments due by July 31st. Ameren also continued to participate in the Paycheck Protection Program, or PPP. As of June 30th, we had received approval for over 2,000 loans totaling $218.6 million. Over 90% of these loans were under $350,000 each. which translates into approximately 26,000 jobs saved. We're extremely proud of Ameren's contribution. Looking ahead, we will continue to provide relief while closely monitoring the company's credit and liquidity risks. The Executive Management Committee has taken an even more active role in this monitoring process. We have tightened our credit underwriting practices and significantly increased the frequency of loan portfolio reviews. Together, these actions will ensure Amaranth's credit quality is closely managed amidst these unusual and highly unpredictable circumstances. Please turn to our second quarter highlights on slide four. Despite COVID-19-related headwinds, I am proud of the entire Ameren team for continuing to push forward and execute our relationship-focused strategy. In the second quarter, we recorded a loan loss provision of $48.6 million compared to a provision of $22.0 million in the first quarter and a release of $1.4 million in the year-ago period. Carlos will discuss the drivers of this provision in more detail shortly. As a result of this provision, we're reporting a net loss of $15.3 million compared to net income of $3.4 million in the first quarter and net income of $12.9 million in the three months ended June 30 of 2019. Lower interest income also contributed to this net loss. which was partially offset by lower non-interest expenses. It is worth highlighting that even though our loan loss provision has increased significantly, our operating income, which excludes the provision for income tax, the provision for loan losses or reversals, and net gains on security sales, increased to $21.6 million, up 53.9% year-over-year, and up 29.7% quarter-over-quarter. Also in the quarter, our broker-dealer, Ameren Investments, successfully participated in the distribution of the senior notes, which, among other factors, contributed to stronger year-over-year non-interest income. The investments team, also launched Amarant Investments Mobile, an application that facilitates customers' engagement with their Amarant investment accounts. This application further supports our relationship-focused strategy as well as our digital transformation. Please turn to slide five. As I mentioned, we had a net loss of $15.3 million compared to net income of 3.4 million in the first quarter of 2020, and net income of 12.9 million reported in the three months ended June 30th, 2019, largely due to the higher provision for loan losses. The adjusted net loss, which excludes restructuring expenses, was 14.2 million compared to adjusted net income of 3.7 million in the first quarter, and $15.0 million reported in the three months ended June 30, 2019. Our return on assets was a negative 0.75%, or a negative 0.7 on an adjusted basis, and our loss per share was $0.37, or $0.34 on an as-adjusted basis. Total loans as of June 30th were $5.9 billion, an increase of 3.6% compared to the first quarter. This increase was largely driven by the PPP loans granted in the quarter and partially offset by declines in other loan originations attributable to the lack of business activity resulting from the COVID-19 pandemic and the more stringent credit underwriting guidelines currently in place. Funds from these PPP loans also drove total deposits, which were $6.0 billion as of June 30th, up 3.1% from the prior quarter. The funds small business customers had not fully utilized totaled $132.7 million at the end of the quarter. Additionally, we were pleased to see our foreign deposits increased by 3.5 million, or 0.1%, compared to the prior quarter. We are optimistic and hope this improvement will continue. Shareholders' equity was $830.2 million as of June 30, a decrease of 1.3% compared to the prior quarter. This decrease in stockholders' equity is mainly the result of the company's net loss in the second quarter partially offset by higher valuations of the company's debt securities available for sale attributable to the decline in market interest rates in the same period. I will now hand over the call to Carlos.

Thank you, Miller. Turning to slide six, I would like to discuss the investment portfolio. Our second quarter investment securities balance was $1.7 billion down from the $1.8 billion at the end of the first quarter 2020 and relatively flat year over year. During the second quarter, prepayments on mortgage-related securities stabilized following a surge in expected prepayments during the first quarter. Still, we continue to focus decreasing floating rate investments given the current interest rate environment. As of the end of the second quarter, floating rate investments represented 17% of our portfolio, down from 18% a year ago. In the quarter, we center our attention on purchasing higher yielding corporate debts, primarily in the subordinated FI sector, to minimize the cost of our senior debt issues, while maintaining the duration of our portfolio. Turning to slide seven, we provide an overview of our loan portfolio in the second quarter. At the end of the second quarter, total loans were $5.9 billion, up 3.6% compared to the first quarter of 2020, and up 2.2% compared to December 2019. As Miller mentioned previously, these increases were largely a result of the PPP loans originated during the quarter, and partially upset by declines in other loan originations attributable to the current economic environment and more stringent credit guidelines as a result of the pandemics. Loan production in the second quarter centered on the PPP loans to small businesses. As mentioned earlier, as of June 30, 2020, Ameren had received approval and funded over 2,000 loans and more than 219 through this program. Beyond PPP loans, real estate loans were also up quarter over quarter and year over year due to increases in jumbo mortgages within our single-family residential portfolios. going to slide number eight, we see the credit quality of the portfolio. We recorded a provision for loan losses of $48.6 million during the second quarter of 2020, up from a $22 million provision recorded in the first quarter of 2020, and a release of $1.4 million in the second quarter of 2019. This provision includes two key drivers. First, We attribute 20.2 million estimated losses reflecting deterioration in macroeconomic environment as a result of the impact of COVID-19 across multiple impacted sectors. And second, the increase in provision includes 28.2 million due to low portfolio deterioration reflected in down rates and specific reserve requirements. Of this amount, 20 million is related to a Miami-based coffee trader that unexpectedly announced liquidation plans early this month. The borrower had an outstanding indebtedness of $39.8 million as of June 30, 2020, under a revolver line credit. We have placed the loan in non-accrual status, downgraded to substandard, and we're working to recover as much as possible through the liquidation proceedings. However, the outcome of this process is still uncertain. We continue to model estimated losses to provide us with a comfortable coverage ratio under the existing difficult macroeconomic environment as a result of the ongoing pandemic. Our ratio of allowance for loan losses to total loans increased 75 basic points compared to the prior quarter, ending at 2.04%. Next, non-performing assets increased 43.9 million, quarter over quarter, and 44.6 million compared to the year-ago period. totaling $77.3 million at the end of the second quarter 2020. The ratio of non-performing assets to total assets was 95 basic points, up 54 basic points from both first quarter 2020 and second quarter 2019. From this increase, 49 basic points resulted from the loan up to the coffee trader being placed in the non-accrual status. I would like to discuss our loan portfolio more broadly in light of the current COVID-19 market environment. Approximately 42% of our outstanding loan portfolio is tied to industries potentially more vulnerable to the challenging dynamics created by the pandemic. 67% of these exposures are secured with real estate collateral. I would like to note that our CRE portfolio remains well diversified with no significant property type, regional or tenant concentration. This portfolio has a low loan-to-value, healthy debt service coverage ratios, and a 42% is represented by top tier CRE customers. We are encouraged by the recent pace of recovery efforts across the country, and while cautious, expect our retail portfolio to be well-positioned as the country begins phases of reopening. Ameren's retail portfolio is primarily made up of highly trafficked locations, including grocery, anchor, shopping centers, and service-oriented neighborhood shopping centers, many of which are essential business or included in the earliest reopening phases. Finally, we remain committed to the communities we serve, particularly during these difficult times. To support our customers, and as Miller mentioned previously, we continue to offer customized loan payments relief in accordance with regulatory guidelines including interest-only payments and forbearance options. While it's difficult to forecast the impact of COVID-19 on our credit quality, we are proactively monitoring all our credit practices, as well as individual exposures per business line and geography. As a result of these solid practices, Ameren credit quality remains sound and our reserve coverage is strong. Turning to slide nine, we can observe that in general, yield of our assets trended down, following the performance of an asset-sensitive balance sheet. You can see that our loan yield decreased 54 basic points compared to the first quarter 2020. This was largely due to the impact of the Federal Reserve emergency rate cost in March 2020. We were able to minimize the decrease in yield resulting from lower rates in the investment portfolio to only nine basic points, quarter over quarter, through the purchase of higher yielding securities as previously mentioned. Going to slide 10, I would like to provide some color around Amaran's wholesale funding strategies. In the second quarter, we continue to implement wholesale funding strategies focused on managing the current low interest rate environment. At the beginning of the quarter, we modified maturities on 420 million fixed rate FHLB advances, representing 2.4 million of cost savings for the rest of the 2020. Also, as mentioned before, we completed a 60 million offering senior notes of a coupon of five and three quarters, which provided the company with a new source of funding as we continue to navigate the COVID-19 pandemic. Looking ahead, we will continue to actively leverage opportunities in the wholesale market to decrease funding costs as we manage through the current and future market environment. Moving to slide 11, total deposits at the end of the second quarter were $6 billion, up 3.1% quarter over quarter. This increase was largely driven by the funds of the Triple P loans originated during the second quarter 2020. which small business customers have not fully utilized. Diesel News funds total $133 million as of June 30. Additionally, higher deposits in the second quarter of 2020 include $56 million growth in reciprocal deposits compared to the first quarter of 2020, which we offered to certain customers who wanted to make their deposits fully eligible for FDIC insurance. Domestic deposits, excluding online deposit growth and unused PPP-related deposits, increased 24.5 million in the second quarter of 2020, up approximately 0.8% from the first quarter of 2020. This increase was mainly driven by the continuous successful execution of our relationship-centric strategy. Foreign deposits, which include deposits from customers in Venezuela and other countries, increased 3.5 million or 0.1% compared to the prior quarter. While customers in Venezuela continue to use their deposits to cover living expenses, the annualized decline rate of foreign deposits reversed in the second quarter, showing an increase in deposits equivalent to 0.1% or 0.5% annualized, compared to the annualized decline of 7.1% during the first quarter of 2020. We attribute this increase to the combination of our team's improved customer service and sales efforts capturing more share of wallet with the lower pace of economic activity in Venezuela as a result of the COVID-19 pandemic. Finally, broker deposits declined 59% or 9.1% quarter over quarter. On a final note, our cost of interest-bearing deposits was down 24 basic points in the second quarter of 2020 compared to the first quarter. This is a result of our efforts to proactively reprice CDs, relationship money markets, and peer products. Turning to our P&L on the slide 12, second quarter 2020 net interest income was $46.3 million, down almost 6% from the first quarter, and down almost 14% from the second quarter of 2019. The quarter-over-quarter decrease was driven by assets having repriced faster than liabilities following the emergency rate costs enacted by the Federal Reserve. This quarter, labor rates closely tracked the Federal Reserve costs in terms of magnitude, which led to a larger impact on our interest income than in previous quarters. This resulted in lower origination and repricing rates across our portfolios. Partially offsetting the decrease were higher loan volumes resulting from our active participation in the Triple P program. The year-over-year decrease was driven by Federal Reserve tree cuts to the benchmark rates in 2019 in addition to the two emergency cuts in March this year. These cuts in a decline yields of our interest earning assets. This decline was partially offset by actions that I just mentioned as well as lower interest expenses due to the trust-referred securities we redeemed last quarter. The net interest margin for the second quarter 2020 was 2.44%, representing a decrease of 21 basic points from the prior quarter and 48 basic points compared to the second quarter of 2019. Looking ahead to the balance, of the year, we continue to anticipate our net interest income and net interest margin to be pressured largely as a result of the low interest rate environment and uncertain economic conditions caused by the COVID-19. Despite a slight increase in foreign deposits reported during Q2, we expect this low-cost funding to continue to run off, which will pressure our NIN. As we did in the previous quarter, We continue to implement actions to partially offset these headwinds, including proactively cutting rates on deposits, relationship money markets, and other top pricing rates that we pay to customers. Leveraging opportunities for lower costs, including FHOB and broker CDs. As you remember, we modified 420 million. Continuing to maximize high-yield investments, evidence disquadred by the purchase of high yield corporate securities, actively implementing and managing flow rates in our credit portfolio, which has begun this year, and provide higher than average spreads, and working to further reduce asset sensitivity, which I will discuss shortly. We remain focused on implementing these actions and evaluating others to help us to navigate through the current environment. Now, turning to slide 13, Non-interest income in the second quarter was $19.8 million, down 9.8% quarter over quarter and up almost 40% year over year. The quarter over quarter decline in non-interest income was largely driven by a lower net gain on sale of investments. We recognize a $7.5 million net gain on the sale of 30-year Treasury securities compared to a $9.2 million gain in the first quarter. We purchased a portfolio of 30-year Treasury securities last quarter to offset higher than expected prepayment rates on mortgage-related securities in an increasingly lower interest rate environment. We sold off this portfolio as the anticipated prepayment speed stabilized. These gains, together with our efforts to reduce funding costs, have helped us to compensate for the impact on interest-earning assets. Additionally, deposits and other service fees deep lower as service charges and wide transfer fees continue to decline due to the implementation of Zelle and the slowdown of economic activity due to the pandemic. Also, this quarter, we have no credit card referral fees which are received annually during the first quarter. Partially offsetting this decline was an increase in the derivative income due to restored customer activity. Our broker-dealer's participation in the distribution of the senior notes demonstrated our investment platform capabilities for additional revenue generation, as well as excellent team of professionals who helped create momentum during the sales process. This activity, as well as higher customer trading volumes in the current volatile market, resulted in increased brokerage fees compared to the previous quarter. We are prepared to continue serving our investment clients in this environment, and the addition of the remote capabilities can help us to accelerate our work here. The 40% year-over-year increase was due to similar drivers as those associated with the quarter in addition to credit card fee income due to the closing of our international credit card program and the absence of professional service previously provided to our former parents and its affiliates. Ameren's assets under management and custody decreased 71.5 million to 1.72 billion in the second quarter of 2020 from 1.79 billion in the second quarter of 2019. The decrease is largely due to COVID headwinds. Partially upset by account growth as Ameren sales team continue to execute our relationship centric strategy and new customer relationship balances brought in by the acquisition of Elan Bank and Trust. We plan to continue growing at Ameren investment platform to take advantage of this asset to generate additional fee income. Moving to slide 14, Second quarter non-interest expenses was $36.7 million, down 18% quarter-over-quarter and down 30.6% year-over-year. This quarter-over-quarter decrease is largely due to the deferral of direct costs associated with the origination of PPP loans that Miller discussed earlier in the story. These costs are deferred and amortized over the term of the related loans as adjustments to interest income in accordance with generally accepted accounting principles and consisted of $7.8 million of salaries and other employee benefits and $0.7 million of other operating expenses. Partially offsetting this decline was an increase in professional and other services fees due to our ongoing digital efforts. The year-over-year decline was largely the result of lowered salaries and employee benefit expenses following our 2018 and 2019 staff reductions, in addition to increasing deferred costs associated with the origination of the PPP loans. The absence of rebranding costs last year related to our transformation efforts also contributed to this decrease. Looking to the remainder of 2020, we continue to focus in cost reduction strategies that entails physical space and key vendor analysis. On slide 15, second quarter adjusted non-interest expenses was 35.4 million down 20% quarter over quarter and down 29% year over year. Adjusted non-interest expenses decreased quarter over quarter as non-interest expenses were meaningfully lowered due to the reason I just discussed. In the second quarter, we had a restructuring expense of $1.3 million attributed to the ongoing transformation compared to $0.4 million last quarter. This quarter cost included $1 million in digital transformation expenses as we move forward with the implementation stage of Salesforce and Encino and staff reduction costs of about $0.4 million. We remain committed to the implementation of initiatives that create efficiencies. We're moving forward with the closure of two banking centers and we're renegotiating the termination of these leases as a result of these actions. Restructuring expenses decreases 52% year-over-year in the second quarter due to the absence of rebranding costs related to the prior year transformation efforts. While we have reduced our staff by 1.7% since the second quarter of 2018, we have not made any staffing changes in response to COVID. Moving on to next slide, number 16, as we have said in prior quarters and throughout this call, Amaran continues to be sensitive to interest rate as over half of our loan portfolio has floating rate structures or matures within a year. Our team is working hard to reduce asset sensitivity in the increasingly low interest rate environment. We continue to implement floor rates in the loan portfolio and actively manage the investment portfolio in order to improve our needs. In line with this, and as previously mentioned, we sold off approximately $60 million of notional interior treasury securities and purchased higher-yielding corporate debt, mainly in the FI subordinated notes. We continue to be on the lookout for to leverage opportunities to purchase higher-yield, longer-duration investments. Now, I will hand it over back to Miller to conclude our prepared remarks.

Thank you, Carlos. Moving on to our last slide, we continue to execute on our goal to drive shareholder value. We remain focused on generating profitability, core deposit and loan growth, as well as maintaining credit quality. as we navigate through the economic turmoil created by the COVID-19 pandemic. In the current low-interest environment, we also plan to lean more on the careful management of our non-interest expenses and expansion of our non-interest income to drive growth in our bottom line. Looking ahead, we will continue to focus on proactively assessing our loan portfolio in order to preserve asset quality. In addition, we will be actively prioritizing the preservation of capital. With this close monitoring of all aspects of our business, we will ensure that despite these unprecedented times, Ameren emerges stronger than before. We look forward to continuing to support our communities through the COVID-19 pandemic. The entire Ameren team is heads down and pressing ahead on finding solutions for customers, whether it's a customized loan payment relief option or a new PPP loan. We have dedicated additional employees to these efforts and will continue to be hyper-focused on meeting customers' needs during this time. I know I speak for the entire Amaranth team when I say we're truly proud to be providing solutions and helping our communities during this time. With that, we'll be happy to take your questions. Operator, please open the line for Q&A.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, press the hand key. Your first question is from Michael Rose of Raymond James. Your line is open.

Hey, good morning, everyone. Hope you're well.

Yes, Michael. How are you?

Good. Good. Just wanted to start with expenses. So on a core basis, if I back those items up that you called out and then add back the $7.8 million, looks like we're at a run rate of about $43 million. It's a good expense control. Is that a good base in which to build off? And maybe can you talk about some of the expense reduction efforts? I know you mentioned the branch. Those two branches you're going to close. Can you – give us a sense for kind of what expenses could look like over the next quarter or two. Thanks.

So, hi, Mike. How are you? So, in terms of the recent reduction that you noticed on the second quarter, so primarily it's driven by the PPP origination. As we mentioned on the call, there was about $8 million that were deferred. over the life of the loans. And of course, the fee income associated with this loan will also be amortized. So that definitely doesn't represent a structural change on the cost structure of the bank. So that will definitely come back at a rate of about a million a quarter until we reach the two years anniversary of the loans. However, forgiveness or acceleration of these loans definitely bring back those costs faster as well as the fee income. So I wouldn't take it as a structural change. We still keep our target of being close to the 48 on a quarterly basis. This quarter we spent about a million on the digital transformation, but we expect that to catch up during the third and fourth quarter of the year. Remember that during the first quarter, we under-expand on that specific item. So, progressively, the normalized cost structure should be closer to the number that we provided below before, roughly 48 to $49 million.

Okay. That's helpful. And then, you know, I noticed that the foreign deposits, you know, the other foreign deposits were up, but the Venezuelan deposits were We're still down, but obviously slower than we've seen. Can you talk about, you know, what drove the other foreign deposits, you know, higher, and then if this is a good run rate for at least in the near-term attrition for the Venezuelan deposits? Thanks.

Hi, Michael. It's Miguel. Definitely the changes on customer service and payment platform has helped retain those international deposits. And we started at the beginning of the year a referral program, also visiting other countries, in particular Colombia, where a lot of Venezuelans moved there. So we are capturing the same nature of the policies, and we're expanding our relationship abroad. and that has stabilized significant the previous deposit decay has stabilized significant and we are taking relationship which is very important and also it has been compensated by commercial international accounts where we continue to have very good relationship and those are impacted very positive the trend.

Okay, I appreciate the call and then maybe finally for me just on the margin, Obviously, this is a step down this quarter, given the rate sensitivity. Should we expect some modest compression on our core basis X PPP impact as we move into the third quarter? And do you have a sense for how much that might be? Thanks.

Expectation on the impact of the mean should be – roughly close to the 10 basic points extra. So it should be between the range of the 230 to 240 more or less. We ended up 244. But remember, there is still several time deposits that we need to reprice for the remainder portion of the year. Those time deposits, definitely they came at rates of 2019 and some of them 2018, which were definitely higher than the prevailing rates that we have in the market as of now. So you would expect that that definitely will help the cost of funds progressively. So I would say that we should be able to stabilize mean between the 230 to 240, more or less. Okay. I appreciate all the color. Thanks.

Your next question is from Michael Young of SunTrust. Your line is open.

Hey, good morning. Thanks for the question. I wanted to just start on the credit side, you know, with the relationship that you guys identified and announced previously and the additional deterioration. Can you, you know, just provide any details around how that relationship was identified as a problem and then how, you know, kind of the resolution efforts are going?

this point hi mike it's miguel uh this is a relationship that has been in the books for more than 15 years uh it has been monitored at least 20 times during those years we did about a billion dollars in constant self-liquidation transactions on an average of between 300 to 400 000 and Since the pandemic started, we started, as you know, we started monitoring our portfolio. And we had constant communication with all our customers, in particular with these customers. We had communication in March and in April and in June. We were provided financial statements for December and March. That did not require any forbearance. And we received payments through the month of May and June. Definitely, it was an impact because non-information of the liquidation process was given to us. We knew about this on a search with other companies that are in the same sector. So definitely we have not had any contact with the company nor the liquidator, only with the liquidator through our legal counter. So we're still monitoring the situation. And by no means there was a sign on any weakness nor in our process, nor on conversation with the company.

It was kind of a digital event. It was fine until it gets there.

Yep.

Okay. So have you conducted any sort of review as a result of this of kind of the rest of the portfolio, or are there any other relationships that kind of would mirror this relationship in terms of, you know, what they do on an operating basis?

Yes, we definitely, not in particular because of this situation, we have reviewed between risk credit and the business, we have reviewed almost 100% of the top 20 portfolio, almost 65% of the overall credit portfolio. In particular, in the credit commodities sector, we have a small presence. Utilization has dropped significantly. Those relationships are mainly on the scrap metal and some proteins. They are under ABL with participation or with a lead bank that has expertise on those commodity traders. The ABL transaction are not relying on inventory. The majority are trade secure and all insured, sorry, and also based on account receivables with annual audits every year or twice a year monitored by availability. So we don't foresee any issues. We have received financial information from at least until April and May. And we are constantly reviewing those credits. And today the exposure is around $80 million.

Okay. And, you know, I guess just with the specifically identified relationship, you know, what happened from a process standpoint that allowed them to, you know, end up in that big of a net loss position?

We are on the review with the legal. We have not determined the cost of the issue. As I mentioned, we received financial information up to March. We received payment on through May and June. The last communication with them was typical answer related to a slow down sale due to COVID, but there was no specific reason. And like I said, we have not been able to talk to the management of the company, basically because of the type of liquidation that they decided to go through. And it's important to mention that this company has went through a previous volatility in commodity prices in the past, in the 2011 coffee prices, 2014 droughts. So there was no indication that this company was not going to be able to sustain or weather this situation and was supported by the financial performance that we were receiving.

Okay. And, you know, I guess aside from that, did you guys provide an amount of loans that are currently in some state of deferral or forbearance and any breakdown on that by category?

So, as provided in the documents, we have approximately, I mean, from what is left, And I've mentioned there's about 500 million that expire. and that we have, those that were due, we have received almost everything, or they have resumed payment for almost everything that we do. There is another 300 million that are coming due, or payment needs to be resumed by the end of this month, and we, based on conversations we have with the customers, and the improvement that we have seen in some of the and occupancy levels, we believe that that's not gonna be an issue. From what is left, we have about 12% of the real estate portfolio will still be in one type of forbearance. And then from the commercial, another 10%. So we think that that this number will be reduced from the 20% that we see there to about 8 or 9% of the portfolio. And then as the equation progresses and things, reopenings are happening, We believe that that number should improve. We have seen that many of the customers have used the first 90 days as liquidity management for the prevention, and we have seen that in the second extension they have not need for those phones.

I guess that's a very important point because if you look at the trend of the forbearances, after reporting in the first quarter $1.1 billion, it went to $500 now in the second quarter. And most of what we discussed in the first quarter was that we identified that most of our customers were using this type of arrangements to preserve liquidity. And now it's kind of that is consistent with the performance that we're seeing, that now we just have $500 million still under forbearance.

Okay. That's all for me. Thanks. Thank you, Michael.

Your next question is from Brady Gailey from KBW. Your line is open.

Hey, thanks.

Good morning. Morning, Brady.

I was wondering about your ability to further reduce the cost of deposits. The cost of deposits was down in the second quarter, but it's still relatively high versus peers at over 90 basis points. How rapidly do you think you can get that down, and how low do you think you can get on the cost of deposits from here?

Okay, that's a good question. So there are one immediate action that we're working and actually has been a work in progress since Q1, which was the progressive repricing of our high-cost time deposits. So we have changed our table rate several times since the Fed Fund dropped significantly in March. And now we continue to do so. So based on the repricing schedule that we have on the time deposits, which is roughly between 300 to 400 million from now to the end of the year, there should be an opportunity to reprice those time deposits to let's call it between 0.5 to 0.75 basic points. and that will definitely create an opportunity for cost savings. Additionally to that, we're evaluating our premium products like the relationship money market, which is roughly $400 million in balances that cost us roughly 1%, that also being a review for further drops. So that combination between the actions that we can take in those premium products plus the repricing of time deposit, you will definitely see a potential savings coming into the interest expenses.

All right. That's helpful. So, you know, I know a lot has changed from when you guys went public. You know, we have the pandemic. Rates are now at zero. It's harder to grow loans. But A lot of what we talked about on the IPO Roadshow was this profitability improvement story. So you've had several things go against you. But as you look at the opportunity you have on the expense side to reduce expenses as a way to increase profitability, is that something you're considering, further reducing the expense base from here?

Definitely. That's a working process that we have been working for about two years now. We have several strategies that constantly evaluate our cost structure, not only headcount, but physical space. As we disclosed today, there are two branches that are being closed. So there is multiple efforts being done throughout the whole balance sheet to identify what areas are subject to have more drops in the cost structure. We continue to do so. So, as I said, from physical space to implementation of technology to create more efficiencies and increase productivity, we are working on that day by day. And, of course, efficiency impacted by the drop in the mean, doesn't definitely play in our favor. But it's a working process, and rest assured that we're working on that.

Okay. And then just finally for me, back to the loan modifications. So I read in the press release you're at $1.1 billion as of June the 30th. So what you're saying is as of now that number has dropped to $500 million. Is that correct?

That's correct. The 1.1 is loans that we have approved forbearance, or they were under forbearance, and those are the ones that are outstanding. Those are the loans that we provided forbearance, and they are still outstanding. But out of that, we have already received payment, or we expect to receive payment, and some that have expired the forbearance period, and whatever is left is the 500 that we mentioned.

Better to say, about 600 million out of the 1.1, they expire their forbearance period, and they are coming and due for payments. Some of them are ready to resume payment as of July 17th. Some of them are due for payment before July 31st.

And it's a constant communication with the customers, and customers are not required in the extension. There are some that Since the beginning, we're 480 days, so we'll still be there. But definitely, if the trend continues like that, it's a good sign. And also, we're monitoring the situation of each of the regions where we are.

All right. Got it. Thank you.

I'm shoving no further questions at this time. I would now like to turn the conference back to you, Mr. Wilson.

Thank you for joining our second quarter earnings conference call. As we manage through the unknowns of the current COVID environment, we intend to continue to implement mitigation strategies that ensure long-term success for the benefit of all our stakeholders. We look forward to continuing to communicate with you regarding our progress in the quarters ahead. Thank you again for your time today. We will now disconnect.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.