Amerant Bancorp Inc (AMTB) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Amerant Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Ms. Laura Rossi, 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 Amerant Bancorp's Second Quarter 2020 Results. With me this morning are Millar Wilson, Chief Executive Officer; Carlos Iafigliola, Chief Financial Officer; Miguel Palacios, Chief Business Officer; and Thiel Fischer, 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 31, 2019, and the company's quarterly report on Form 10-Q for the quarter ended March 31, 2020, as well as to subsequent filings with the SEC, which you can access these filings on the SEC's website.

Please note that Amerant 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. Please refer to Appendix 1 of the company's earnings presentation for a reconciliation of each nonfinancial measure to its most comparable GAAP financial measure.

I will now turn the call over to Mr. Wilson.

Good morning, and thank you for joining Amerant's Second Quarter 2020 Earnings Call. Today, I will begin by discussing how Amerant 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, Thiel and I will answer questions.

As I said last quarter, the safety of our employees and customers is our #1 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 Amerant 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 BCP 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 Amerant 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, Amerant 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, total $519.5 million or 46% of total modified loans. As of July 17, 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 31.

Amerant also continued to participate in the Paycheck Protection Program, or PPP. As of June 30, 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 are extremely proud of Amerant'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 Amerant's credit quality as closely managed amidst these unusual and highly unpredictable circumstances.

Please turn to our second quarter highlights on Slide 4. Despite COVID-19-related headwinds, I'm proud of the entire Amerant 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 are 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 3 months ended June 30, 2019.

Lower interest income also contributed to this net loss, which was partially offset by lower noninterest 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 securities 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, Amerant Investments, successfully participated in the distribution of the senior notes, which, among other factors, contributed to stronger year-over-year noninterest income. The investments' team also launched Amerant Investments mobile, an application that facilitates customers' engagement with our Amerant investment accounts. This application further supports our relationship-focused strategy as well as our digital transformation.

Please turn to Slide 5. 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 3 months ended June 30, 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 3 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 30 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 30, up 3.1% from the prior quarter. The fund 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, Millar. Turning to Slide 6. 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 of mortgage-related securities stabilized, following a surge in expected prepayments during the first quarter. Still, we continue to focus decrease in 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 issuance, while maintaining the duration of our portfolio.

Turning to Slide 7, 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 Millar mentioned previously, these increases were largely a result of the PPP loans originated during the quarter and partially offset by declines in other loan originations, attributable to the current economic environment, a more stringent credit guidelines as a result of the pandemic.

Loan production in the second quarter center on the PPP loans to small businesses. As mentioned earlier, as of June 30, 2020, Amerant 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 portfolio.

Going to Slide #8, 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 2 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 loan portfolio deterioration, reflected in downgrades 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 of credit. We have placed a loan in nonaccrual 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 basis points compared to the prior quarter, ending at 2.04%.

Next, nonperforming 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 nonperforming assets to total assets was 95 basis points, up 54 basis points from both, first quarter 2020 and second quarter 2019. (From this increase, 49 basis points resulted from the loan up to the Coffee Trader being placed in the nonaccrual 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 industry 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 not 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. Amerant's retail portfolio is primarily made up of highly traffic locations, including grocery, anchor shopping centers and service-oriented neighborhood shopping centers, many of which are essential business or included in the early reopening phases.

Finally, we remain committed to the communities we serve, particularly during these difficult times. To support our customers, and as Millar mentioned previously, we continue to offer a customized loan payment 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, Amerant credit quality remains sound, and our reserve coverage is strong.

Turning to Slide 9. We can observe that in general, (geopower) assets trended down, following the performance of an asset-sensitive balance sheet. You can see that our loan yield decreased 54 basis points compared to the first quarter 2020. This was largely due to the impact of the Federal reserve emergency rate cuts in March 2020. We were able to minimize the decreasing yield, resulting from lower rates in the investment portfolio to only 9 basis 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 Amerant'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 offer in senior notes of a coupon of 5.75%, 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 PPP loans originated during the second quarter 2020, which small business customers have not fully utilized. (These are new) funds totaled $133 million as of June 30. Additional, higher deposits in the second quarter of 2020 include $56 million growth in reciprocal deposits compared to the first quarter 2020, which we offer to certain customers who wanted to make their deposits fully eligible for FDIC insurance.

Domestic deposits, excluding online deposit growth and (on used) BBB-related deposits, increased $24.5 million in the second quarter of 2020, up approximately 0.8% from the first quarter 2020. This increase was mainly driven by the continued 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 basis 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 tier 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 cuts enacted by the Federal Reserve. This quarter, LIBOR rates closely tracked the Federal Reserve cuts in terms of magnitude, which led to a larger impact on our interest income than in previous quarter. 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 PPP program.

The year-over-year decrease was driven by Federal Reserve 3 cuts to the benchmark rates in 2019 in addition to the 2 emergency cuts in March this year. This caused in a decline yield 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-preferred securities we've redeemed last quarter.

The net interest margin for the second quarter 2020 was 2.44%, representing a decrease of 21 basis points from the prior quarter and 48 basis 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 condition 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 NIM.

As we did in the previous quarter, we continue to implement actions to partially offset these headwinds, including proactively cutting rates on deposits, relationship-only markets and other top pricing rates that we pay to customers, leveraging opportunities for lower cost, including FHLB and broker CDs. As you remember, we modified $420 million. Continuing to maximize high-yield investments evidenced this quarter by the purchase of high-yield corporate securities, actively implementing and managing flow rates in our credit portfolio, which has begun this year and provides 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 order to help us to navigate through the current environment.

Now turning to Slide 13. Noninterest 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 noninterest income was largely driven by a lower net gain on sale of investments. We recognized 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 dip lower as service charges and wire transfer fees continued to decline due to the implementation of Zelle and the slowdown of economic activity due to the pandemic.

Also this quarter, we had 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-dealers 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 help 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 parent and its affiliates.

Amerant'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 offset by account growth as Amerant sales team continued to execute our relationship-centric strategy and new customer relationship balances brought in by the acquisition of Elant Bank and Trust. We plan to continue growing at Amerant investment platform to take advantage of this asset to generate additional fee income.

Moving to Slide 14. Second quarter noninterest 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 the direct cost associated with the origination of PPP loans that Millar discussed earlier on this call. 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 lower salaries and employee benefit expenses, following our 2018 and 2019 staff reductions in addition to the increase in deferred costs associated with the origination of the PPP loans. The absence of rebranding cost last year related to our transformation efforts also contributed to this decrease.

Looking to the remainder of 2020, we continue to focus on cost reduction strategies that entails physical space and key vendor analysis.

On Slide 15, second quarter adjusted noninterest expenses was $35.4 million, down 20% quarter-over-quarter and down 29% year-over-year. Adjusted noninterest expenses decreased quarter-over-quarter as noninterest expenses were meaningfully lower 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 costs included $1 million in digital transformation expenses as we move forward with implementation stage of Salesforce and nCino 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 2 banking centers, and we are renegotiating the termination of these leases as a result of these actions.

Restructuring expenses decreased 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 2019, we have not made any staffing changes in response to COVID.

Moving on to next slide, #16. As we have said in prior quarters and throughout this call, Amerant 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 NIM.

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 look up to leverage opportunities to purchase higher-yield, longer-duration investments.

Now I will hand it over back to Millar to conclude our prepared remarks.

Thank you, Carlos. Moving on to our last slide. We continue to execute on our goals to drive shareholder value. We remain focused on generating profitability for 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 noninterest expenses and expansion of our noninterest 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, Amerant emerges stronger than before.

Moreover, we look forward to continuing to support our communities through the COVID-19 pandemic. The entire Amerant 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 we'll continue to be hyper-focused on meeting customers' needs during this time.

I know I speak for the entire Amerant team when I say, we are 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.

(Operator Instructions) Your first question is from Michael Rose of Raymond James.

Just wanted to start with expenses. So on a core basis, if I back those items out that you called out and then add back the $7.8 million . Looks like we're at a run rate of about $43 million, so 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 -- the 2 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 2?

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 these loans would 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 $1 million a quarter until we reach the 2 years anniversary of the loans. However, forgiveness or acceleration of these loans will 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 million on a quarter -- on a quarterly basis. This quarter, we spent about $1 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 underspent on that specific item. So progressively, the normalized cost structure should be closer to the number that we provided below -- before, roughly $48 million to $49 million.

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

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, refer program also visiting other countries, in particular, Colombia, where a lot of Venezuelans move there.

So we are capturing the same nature of deposits, and we're expanding our relationship abroad, and that has stabilized significantly the previous deposit decay, has stabilized significant, and we are deep in 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 color. And then maybe finally for me, just on the margin. Obviously, the step down this quarter, given the rate sensitivity. Should we expect some modest compression on our 4 basis ex PPP impact as we move into the third quarter? And do you have a sense for how much that might be?

Expectation on the impact of the NIM should be roughly close to the 10 basis points extra. So it should be between the range of the 2.30% to 2.40% more or less. We ended at 2.44%. 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 a rate of 2019, 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 NIM between the 2.30% to 2.40%, more or less.

Your next question is from Michael Young of SunTrust.

Wanted to maybe just start on the credit side. With the relationship that you guys identified and announced previously in the additional deterioration. Can you just provide any details around how that relationship was identified as a problem? And then how kind of the resolution efforts are going at this point?

Mike, it's Miguel. This is a relationship that has been in the books for more than 15 years. It has been monitored at least 20 times during those years. We did about $1 billion in constant self-liquidation transaction on an average of between $300,000 to $400,000. And since the pandemic started, we started -- as you know, we started monitoring our portfolio. When we had constant communication with all our customers, in particular, with this customer, we had communication in March and in April and in June. We will provide a financial statement for December and March that did not require any forbearance. And we received payment through the month of May and June.

Definitely, it was an impact because noninformation 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 liquor through our legal counter. So we're still monitoring the situation. And by no mean, there was a sign on any weakness nor in our process, nor in the -- on conversation with the company.

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

Yes.

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 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 20 portfolio, almost 65% of the overall credit portfolio. In particular, in the credit commodities sector we have a small presence. Utilization has dropped significant. 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 transactions are not reliant on inventory. The majority are trade secure and -- insured, sorry, and also based on account receivables with annual outage every year or twice a year, monitored by availability. So we don't foresee any issue. We have received financial information from at least until April and May. And we are constantly reviewing those credit. And today, the exposure is around $80 million.

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

We are on the review with the legal. We have not determined the cause 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 slowdown on sales 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 to the -- 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 crisis, in 2014 [routes] . so there was no indication that this company was not going to be able to sustain -- whether this situation and was supported by the financial performance that we were receiving.

Okay. And 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 document, we have approximately -- I mean from what is left, and I've mentioned, there's about $500 million that expired. And that we have those that were due, we have received almost everything or they have resumed payment or everything that we due. There is another $300 million that are coming due payment need to resume 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 collections and occupancy levels, we believe that, that's not going to be an issue.

From what is left, we will -- 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 this number will be reduced from the 20% that we see there to about 8% or 9% of the portfolio.

And then as the situation progresses and things -- reopenings are happening, we believe that, that number should improve. We have seen that many of the customers have used it first 90 days as decrease the management for the prevention. And we have seen that in the second extension. They have not -- need for that -- those loans.

I guess that's a very important point because, one, if you look at the trend of the forbearances, after reporting on the first quarter, $1.1 billion. It went to $500 million 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.

Your next question is from Brady Gailey from KBW.

So 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 is 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 federal -- since the fed fund dropped significantly in March and now we continue to do so. So you -- based on the repricing schedule that we have on the time deposits, which it's roughly between $300 million to $400 million for 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 basis points. And that would 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 reviewed for further drops. So that combination between the actions that we can take in those premium products plus the repricing of time deposits, you will definitely see a potential savings coming into the interest expenses.

All right. That's helpful. So I know a lot has changed from when you guys went public. We have the pandemic rates are now at 0, it's harder to grow loans. But a lot of what we've talked about, on the IPO roadshow, is 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 work in process that we have been working for about 2 years now. We have several strategies that constantly evaluate our cost structure, not only headcount but physical space. As we disclosed today, there are 2 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 an 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 NIM. So that doesn't definitely play in our favor. But it's a work in 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 30. So what you're saying is, as of now, that number has dropped to $500 million, is that correct?

Yes, that's correct. The $1.1 billion is loans that we have approved for -- or they were under forbearance, and they are -- 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 in forbearance period. And whatever is left, is the $500 million that we mentioned.

Better to say, about $600 million out of the $1.1 billion. They expire there forbearance period, and they are coming and due for payments. Some of them already resume payment as of July 17, some of them are due for payment before July 31.

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

I'm showing 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.