SB Financial Group Inc (SBFG) 2020 Q3 法說會逐字稿

Good morning, everyone, and welcome to the SB Financial Third Quarter 2020 Conference Call and Webcast. I would like to inform you that this conference call is being recorded. (Operator Instructions) We will begin with remarks by management and then open the conference up to the investment community for questions and answers.

I would now like to turn the conference call over to [Sarah Mykus] with SB Financial. Ma'am, please go ahead.

Good morning, everyone. I would like to remind you that this conference call is being broadcast live over the internet. And will be archived and available on our website at ir.yourstatebank.com.

Joining me today are Mark Klein, Chairman, President and CEO; Anthony Cosentino, Chief Financial Officer; Ernesto Gaytan, Chief Technology Innovation and Operations Officer; and Jon Gathman, Senior Lending Officer.

This call may contain forward-looking statements regarding SB Financial's performance, anticipated plans, operational results and objectives. Forward-looking statements are based on management's expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied on our call today.

We have identified a number of different factors within the forward-looking statements at the end of our earnings release, which you are encouraged to review. SB Financial undertakes no obligation to update any forward-looking statement except as required by law after the date of this call.

In addition to the financial results presented in accordance with GAAP, this call will also contain certain non-GAAP financial measures. A reconciliation GAAP to non-GAAP measures is included in our earnings release.

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

Thank you, [Sarah]. Good morning, everyone. Welcome to our third quarter 2020 conference call and webcast. Great to have you all with us. We continue the recovery of this quarter in many areas of our operation. We saw our loan pipeline rebuild, client liquidity stabilized, forbearances dissipate and the Edon operations integrated in the State Bank. All the while, the flat yield curve and low long-term rates continue to drive our mortgage volume leading to record net income.

Highlights for this quarter, including a $325,000 per tax mortgage servicing right recapture, include net income of $5.3 million, up $1.5 million or 40% increase over the prior year quarter, and when adjusted for those non-GAAP impairment issues, net income was $5 million, up 33%.

Adjusted return on average assets, 164 basis points, up from the prior year quarter of 144. Pretax pre-provision ROA for the quarter was 2.74%, up 89 basis points or 45% from the prior year.

Net interest income of $9.3 million, up 2.2% from the prior year as our 6% reduction in interest income was more than offset by the 37% reduction in interest expense. This, coupled with controlled noninterest expense, delivered positive operating leverage in the quarter of 1.9x.

Loan balances from the linked quarter declined $16 million, which reduced our year-over-year growth to over $62 million or 7.6%. Included in that were PPP balances of $82 million and Edon acquisition loan balances of $16 million. Excluding those items, year-over-year loan balances were down $35 million.

Deposits increased $166 million or approximately 20% year-over-year. Again, Edon balances of $54 million and retention of PPP funding in our business DDAs have increased well beyond our core levels. Expenses were up $1.8 million due to higher mortgage commissions, increase in our title insurance business and a full quarter of operational expense from the Edon acquisition.

Mortgage origination volume increased to $200 million, up over $42 million or 27% year-over-year. Asset quality metrics were a bit elevated from the prior year, although our level of 60 basis points of nonperforming assets remains strong. We set aside this quarter, $1.8 million in provisions, all of which were related to COVID-19 future reserves. And finally, client loan deferrals were down substantially from the linked quarter with the number and dollar of loans in forbearance status down 60%.

As you recall, our 5 key initiatives we've touched on every quarter remain revenue diversity, more scale for efficiency, more scale and more scope as well as operational efficiency and asset quality.

First, revenue diversity. This quarter, mortgage volume and loan sale gains were up from the prior year, 27% on volume and 224% on gains. Noninterest income increased to $10.4 million from the prior year quarter of just $5.4 million, which includes a mortgage servicing impairment recovery as I mentioned of $325,000.

Adjusting for that impact, noninterest income was up from the prior year by $4.7 million or 88%. Noninterest income to total revenue increased to 53%, well above our traditional average of 35% to 40%. Our current mortgage pipeline continues to be near capacity with currently 325 loans in process for over $78 million. We are on pace to deliver our largest mortgage production era ever, with total volume likely now to exceed $650 million.

Peak Title had another strong quarter with revenue up 29% from the prior year quarter and for the year, up 91%. We remain focused on expanding the scope of Peak's business not only with State Bank, but our outside client banks throughout our Tri-state region as well. In the coming quarters, we intend to improve our percentage of higher revenue commercial title insurance policy business versus lower revenue, higher volume, title opinions to drive performance higher.

Our Indianapolis mortgage loan operation and office continued to gain market share during the quarter as we originated over $12 million of volume. Thus far in 2020, we have originated now $35 million compared to just $4 million we produced over the same period last year. Our servicing portfolio in this newer market now reflects 143 households for over 28 million.

Wealth management assets under our care continued to rebound over the prior year-end with overall market improvement of $6 million, new sales of $20 million and new contributions of over $11 million, leading to $522 million and total assets under management or a net increase of $22 million. Pandemic has certainly revealed unique challenges in this business line. But as we mentioned last quarter, we're committed to engaging each of our new 700 PPP clients in the coming months with potential wealth solutions.

Secondly, more scale. Loan growth continued to be under pressure in the quarter as our markets slowly reopened from the coronavirus shutdown. Our $62.5 million in growth from the prior year is elevated due to our PPP loans and the loans we acquired from the Edon acquisition.

As we adjust growth for these items year-over-year, our loan balances would fall on a core basis, as I mentioned, by $35 million. Interesting to note over $19 million would be related to loan payoffs due to several companies selling their company.

That said, our expectations to grow loan balances organically in the fourth quarter and on into 2021 remains strong. In fact, our current loan pipeline today rests at approximately $31 million.

Our deposit base expanded to $1.01 billion, up $166 million or 20%. Included in that growth is $54 million in Edon deposits, and our estimate now that 50% of the PPP loan funding remains in our clients' operating accounts. We expect these funds to gradually dissipate through the final quarter of the year and on into 2021.

And finally, we continue to express interest in strategic partnerships opportunistically that can add scale and improve returns. As of October, we have successfully integrated the Edon transaction in the State Bank with positive impact to our client base.

Third is our strategy to develop deeper relationships, more scope. We continue to monitor and assist all of these 700 clients that we extended PPP loans to in the second quarter. One of the key initiatives from our PPP client acquisition strategy was and is to expand these relationships and develop long-term partnerships.

To date, we have added over 100 new deposit accounts from these clients, new clients, and we continue to call on each of them for additional banking services. In fact, beyond PPP cross-sales, we have identified now over 1,000 referrals to our business partners through the third quarter that have led to over $71 million in additional business across all business lines in our entire company.

Expanding our reach into the household to increase our share of wallet remains a critical ingredient to our growth strategy. We are excited to now include the opportunity to expand our presence in each of Edon's 1,400 households.

While the pandemic has made in-person outreach, certainly more difficult, we are contacting our clients every day via phone, text, e-mails to discover new opportunities to expand relationships. We embrace customized communication channels with each of our clients. Additionally, we are in the midst of converting our CRM system to one that will provide a more dynamic view of not only the entire client relationship but, more importantly, one that will identify potential new opportunities as well.

Fourth is operational excellence. The transition to a more normal residential purchase market continued in the third quarter. We originated 49% of our volume from purchase transactions or approximately $99 million compared to 35% or $79 million the prior quarter.

With this trend expected to continue, we have focused our efforts on improving closing times and ensuring that our pipelines remain at or very near our capacity. In other words, optimizing our underwriting process and closing and loan sale capacity. As a result of our success, our servicing portfolio now stands at over 8,500 loans with principal balances of approximately $1.29 billion.

Expense levels were up from the prior year quarter, but we improved our operating leverage to 1.9x, as I mentioned, due to our revenue growth. For the full year, expenses and revenues were impacted by the servicing rights impairment and the Edon merger cost. When we adjust for these non-GAAP items, going forward, our operating leverage for the year improves from a reported 1.3 to the 1.9x, as I mentioned. We continue to examine all of the expense control initiatives that we put in place earlier this year.

And finally, fifth and final key initiative is asset quality. At quarter end, we had 204 loans in forbearance for a total dollar amount of approximately $81 million, which was down by 306 loans and $114 million from the linked quarter or 59%. Included in the totals were $42 million of sold mortgage loans, which reduces our on-balance sheet exposure to just $38 million, which was down $115 million or 75% from the linked quarter.

These trends are encouraging. However, we still have concerns regarding certain segments of our portfolio as we still see some weakness in our hotel restaurant and elder care exposures. We feel strongly that our prudent underwriting process over the past decade, will continue to deliver a stable loan portfolio. However, should unexpected stress surface, we have made provisions to bolster our loan loss allocation and provision.

This quarter, we increased our provision expense to $1.8 million and, for the year now, $3.7 million. Our loan loss reserve is now nearly $12 million, and the reserve ratio is up 30 basis points from the prior year to 1.33%. If you adjust the PPP balances out, our reserve would increase to 1.47%.

The coverage of nonperforming loans now stands at 164% and remains above median of our peer group. Charge-offs for the quarter were just $21,000, and year-to-date, our loan charge-off ratio was slightly above historical levels at 10 basis points or 662,000. We feel our approach to build our reserve and stay ahead of market stress, if you will, will bode well for quarters and operating performance.

Before I turn the call over to Tony, I do want to make note of our dividend announcement this past week, up to $0.105 per share, which is up 11% from the prior year and up 5% from the linked quarter. We do continue to assess our capital strategies to fund balance sheet growth as we prudently return capital to our stockholders via our common stock buyback currently in place and will be in place throughout 2020.

Now I'd like to have Tony give us a few more details on our quarterly performance. Tony?

Thanks, Mark, and good morning, everyone. For the quarter, we had net income of $5.3 million or $0.69 per diluted share. As Mark noted, earnings were impacted by $300,000 recapture of our prior mortgage servicing rights impairment. And absent that item, net income would have been $5 million, up $1.2 million, which is a 32.7% increase.

Quarterly highlights include total operating revenue, up 36.4% from the prior year and up 34.2% when we adjust for the OMSR recapture. Operating expense was up 19.3% from the prior year. Loan sales delivered gains of $8.2 million from mortgage, small business in agriculture, which are up $5.2 million from the prior year. Margin revenue, up 2.2% as our reductions in funding costs from Edon and some other activities offset the 6% reduction in interest income we experienced.

As we break down further the third quarter income statement, starting with margin. As I said, net interest income was up 2.2% from the prior year and up 4.4% to the linked quarter. Average loan yield for the quarter of 4.51% decreased by 64 basis points from the prior year. Overall earning asset yield was down 102 basis points than the prior year.

Clearly, the PPP loans depressing loan yield as well as the higher levels of cash balances we continue to experience in the quarter. As our clients' PPP fundings are utilized in the coming quarter, and beyond, cash levels will naturally decrease and we're starting to see some improvement in our loan pipelines.

On the funding side, as expected, we again reduced the cost of our interest-bearing liabilities from the prior year. For the quarter, the rate on our interest-bearing liabilities was 75 basis points, which is down from the prior year by 58 basis points and down from the linked quarter by 14 basis points. Net interest margin at 3.41% was down 52 basis points for the prior year as the impact of PPP, excess cash and Edon were headwinds to our margin.

Total interest expense costs are down by 38% for the prior year and down 10% from the linked quarter. We continue to look for opportunities to improve margin in the coming quarters with an expanded loan pipeline, further declines in funding costs and higher loan origination fees.

Total noninterest income of $10.4 million was up $5.1 million or 94% from the prior year, reflecting the higher mortgage origination volume. As we said, we did have a $3 million servicing rights recapture. Adjusting for that recapture, noninterest income would have been up $4.7 million or 88%.

Our Title Agency had a very strong quarter, closing a large number of transactions and delivering revenue of $500,000, which was up 29% from the third quarter of 2019. Third quarter mortgage production was strong at $200 million and gain on sale yields continued at a record pace.

The shift to purchase volume from refinance continued in the third quarter, and total gains on sale came in at $8.9 million, which was 4.9% on our sold volume of $166 million. The focus and change we made several years ago to hedge our pipeline and become more aggressive in secondary paved the way for these higher-than-expected gain numbers. Our servicing portfolio of $1.29 billion provided revenue for the quarter of $814,000 and is on pace to deliver $3.2 million in total revenue in 2020.

Market value of our servicing rights improved slightly this past quarter as our calculated fair value of 66 basis points was down 25 from the prior year but up 1 basis point from the linked quarter and did result in a 300,000 recapture.

At September 30, our mortgage servicing rights were $8.5 million, which is down 18% for the third quarter of 2019, but up 4% from the linked quarter. Our total impairment that remains is currently $4.2 million.

Operating expenses this quarter were $11.3 million, which is up $1.8 million or 19% from the prior year, but down 3% compared to the linked quarter. The higher level of mortgage volume drove compensation higher. As we look at the year, operating expense is up $5.2 million or 19%. However, if we normalize for similar mortgage volume, Peak Title and the merger costs, the year-to-date growth is $2.7 million or 10%.

As we turn to the balance sheet, loan outstandings at September 30 stood at $886 million, which was 72.7% of the total assets of the company. We had loan growth of $62 million and asset growth of $175 million from the prior year. PPP loans of $82 million and Edon loans of $15 million have inflated our year-over-year growth levels. Adjusting for these 2 factors, loan volume -- loan balances declined from the prior year by $35 million as our loan pipelines contracted due to the pandemic.

Deposit levels are up $166 million or 19.6% from the prior year as clients are maintaining higher levels of liquidity. And in addition, a large percentage of our dispersed PPP loans have been retained in our clients' operating accounts. The Edon acquisition, as we've discussed, added $54 million in deposits.

Looking at capital, we finished the quarter at $141.3 million, which is up $7.1 million or 5.3% from the prior year, and our equity-to-asset ratio stands at 11.6% or 12.4% when we exclude the PPP balances. On a per-share basis, tangible book value is up $0.74 per share from the third quarter of 2019 or 4.9%. We continue to buy back our shares, and under our new buyback authorization, we've repurchased nearly 100,000 shares to date with pricing averaging 90% of tangible book value.

Total nonperforming assets of $7.3 million or 60 basis points are up $2.7 million from the prior year, but down $400,000 in the linked quarter. Included in our numbers are $800,000 in accruing restructured credits. These restructured credits elevated our nonperforming levels by 7 basis points. And absent these accruing restructured credits, our total nonperforming asset ratio would reduce to 53 basis points.

We continue to monitor the at-risk segments of our loan portfolio and the improvement in forbearance volume as a positive trend in our asset quality. As Mark previously mentioned, provision expense for the quarter was $1.8 million, up from both the prior year and the linked quarter.

Our absolute level of loan loss allowance of $11.8 million is up from the prior year by 39%. And our allowance to total loans percentage has increased from 1.03% as September 30, '19, to 1.33% currently. And when we exclude the PPP loans, the allowance percentage rises to 1.47%.

On a year-to-date basis, net income of $9.6 million is up $1 million or 11.3% from the prior year, with adjusted net income of $12.9 million, up $3.2 million or 33%. On a pretax pre-provision comparison, year-to-date GAAP earnings are up $4.4 million or 40%. And when we adjust for the OMSR and merger cost, these earnings were up $7.2 million or 58%.

Now I'd like to turn the call back over to Mark.

Thank you, Tony. Clearly, a very good quarter financially as we continue to manage the complexities of the pandemic while assisting our current clients and prospecting in new ways for new ones.

In addition to our solid financial results, we achieved several additional milestones in the quarter. First and foremost, we completed the operational and system integration, as we've discussed with our Edon operation and those Edon clients. It was a tremendous team effort that enabled us to add nearly 4,000 loan and deposit accounts with $73 million in combined balances to our existing infrastructure.

The Edon team has done a great job in ensuring a smooth transition for our new clients and offering new products to those clients. As a result, we have increased deposits by now over $4 million since the merger announcement back in February.

Our 2, 120-plus year old brands are and will remain client-centric as we focus on client needs and community care to improve performance. Also, we recently relocated our office in Wauseon to a more visible central business district. This improved exposure will enhance our ability to remain relevant in one of our key ag markets.

And finally, we are pleased to report the recent opening of our newest location in the heart of Downtown Findlay, a market we know well. We intend to leverage our new office in one of Ohio's best regions to drive and grow private client group and our wealth management business line.

Now I'll turn the call back over to [Sarah] for questions.

Thank you. We are now ready for our first question.

(Operator Instructions) Our first question today comes from Brian Martin from Janney Montgomery.

Say could you guys just start maybe just a little bit? Obviously, 2 really strong quarters here on the mortgage side. Just your outlook on maybe fourth quarter and kind of big picture next year. I mean, obviously, Tony, the gain on sale was really strong this quarter. So just based on what you guys did on the pricing side and hedging side just kind of curious how you're thinking about that on the production next year in the coming quarters here.

Just a couple of comments, Brian. Tony can clean it up. But at a high level, we're committed to the business line. We brought one of our executives into the business line to give some more depth and bench strength. David Homoelle is a regional president in Columbus, who's now overseeing that business line. And he certainly has a clear vision for driving that volume on up -- above that $600 million and $700 million annual range.

And so that, in addition to tracking and lifting out a team in Northeast Indiana we're looking at and then also doing the same thing in the Indy market, where we're now gaining a little bit of traction. So I hope that we've set the bar now higher than where we've been before. And with our new management in that business line as well as additional focus on Northeast Indiana and Central Indiana, we can continue to do volume that we've seen here in this year.

And fourth quarter appears to be very strong as well. As you mentioned, a pretty strong pipeline. And again, optimizing all those operational pieces that enables us to price and keep that pipeline full so that we're using our talent, 100% plus.

So Tony, I know you've got some thoughts on some numbers of fourth quarter.

Yes, Brian, I think we saw kind of Q3 be down $40-ish million from Q2 in terms of maybe an 80% level. And I think as we look at the pipeline today, we're probably on that same kind of 70% to 80% pace of Q3. So somewhere in that $150 million to $160 million range is what the pipeline looks like as Q4 as we see some seasonality.

I think we're not naive that 2020 has been a very unique year, and competition has kind of allowed pricing to be at a premium level throughout this year. And we certainly feel like we've taken extreme advantage of that pricing. We think pricing will probably get a little bit more competitive. We already see some more players getting into the market and competition for MLOs and underwriters is getting higher and more competitive.

But we're still, as Mark indicated, very engaged in the business. And I don't know that we've come to a realization yet of what our expectation is for 2021. Do I think we can do $650 million? We certainly have the capacity. Is the marketplace there? Who knows. And I think we'll know more about that soon.

Well and final comment, Brian, as we've talked with our staff, the variable is not the number. I mean, the way we plan is that we choose a number of what we think we're capable of and then we go build the plan around the number. So it's not a matter of saying, here's all we can do. We say, here's what we need to do and then build the plan around that, just like we've done for the last 10 years.

So that's going to require some more producers, and Northeast Indiana and Central Indiana as well as Columbus is going to be where that's going to happen. So my expectation would be that we continue to shove the business line on up the curve to higher numbers all while the economy recovers and the yield curve steepens and commercial then takes over with NIM.

Got you. Okay. Now that's helpful hearing about the Northeast Indiana and a little bit more depth in Indy will certainly help in the production next year. So -- okay. Help us just -- Tony, you mentioned or Mark, the loan pipeline looks like it's picked up a little bit. But just, I guess, relative to payoffs and whatnot, just how you're thinking about the loan -- the commercial loan book as you go forward here? And just what your -- what demand looks like with some costs just surrounding the pandemic here?

Yes, Brian, this is Jon Gathman. Just quickly to address that. Yes, we've seen the pipeline build considerably here over the last couple of months. As you pointed out and as we talked in the transcript that we took some payoffs on some businesses that sold a large conglomerate. So there really wasn't much we could do about that.

And probably an unforeseen event in the pandemic as some of those business owners decided to sell their businesses, and there wasn't going to be a whole lot better time given where the market was for them to sell, given everything else going on in the world and just eliminate some of those other concerns.

That said, our pipeline remains strong, notwithstanding the second quarter largely because of the PPP and the pandemic. Our pipeline remains strong in the third quarter and the fourth quarter. We've seen a nice uptick in a variety of businesses and a variety of regions. It's pretty diverse in terms of where it's coming from and geographically and in loan type. So pretty pleased that $31 million is probably a conservative number. We're optimistic that we'll do a little bit better than that here in the remainder of 2020 and heading into 2021.

Got you. And the payoffs, Jon, I guess, is there any change in what you're seeing on that? I know they're hard to tell, but any change in that, as you would think for the next couple of quarters?

Yes. Brian, I think we saw most of that happen here in the late second, early third quarter and we haven't really seen much of anything happen since then. I think most of those businesses, again, call it what you will, but I think the pandemic hastened some of those decisions. And as that has now sort of seeded in, a lot of the businesses that we're going to sell have already sold, and some of our other customers that may have considered that have moved on and moved into growth mode.

So I think we have seen that slow here as we've entered the fourth quarter. And I'd -- not to say we won't see any, but I think we'll return to our normal pace here in the fourth quarter and beyond 2021.

And Jon, I think we would also agree that several of the businesses that we financed, we've been on the other side of the coin. They've been -- they've sold, and we were the bank there ready to help the people that bought the company. So what's good on one side is not so good on the other side, but we've been the benefactor in some of those acquisitions.

Yes, absolutely. And that's a fair amount of our current pipeline as we speak. That's a great point.

And Brian, I might add just one other thing that conversely helped us a little bit on NIM is that several of those companies that sold were fairly large PPP borrowers, and when those were paid off as part of the transaction, then we were able to accelerate those fees that we were holding. So that actually boost a little bit of our margin this quarter.

Got you. Because I was going to ask Tony or whomever, Jon. The PPP, where does that stand today as far as forgiveness? And just if you can remind me the remaining unearned fees that you expect to collect today, how much of it is left to be booked into the P&L?

Tony can help me with the exact number. But in terms of where we are with PPP, we just started accepting applications Monday formally. We had accepted some before that. But formally, we've put a number of communications out to our clients about how that process will work.

As you're aware, Brian, Congress passed, some guidance -- or SBA rather, some guidance on how that will work on $50,000 or less, which is a little -- right around half of our total PPP portfolio in terms of numbers, not dollars, it's a very small dollar amount.

But since we have just started and the SBA has finally started moving on some of them, my anticipation would be, we'll see very little of that, some, but very little of that in the fourth quarter here of 2020 and probably the vast majority, if not 100% of it, will hit in 2021, just because we have 60 days to work through those and then SBA has another 90 days to decision them. So I think the time line will prove out to be more effective 2021.

And our total number, Tony, was way around...

Yes. We had initial booking of $3.1 million. We've taken about $600,000 through the first, call it, 4, 5 months of that. So we have $2.5 million unamortized left on our books.

And as Jon said, we'll probably be very similar to Q3 and Q4 as we had the normal amortization and we might have a few payoffs. And if all things go where we think, then the bulk of that will probably be realized by April 15, '21, I would suspect.

Okay. And the amount that was in the third quarter, Tony, was about how much, just whether it be either the unearned fee or just the total benefit to NII from PPP, including the loan interest?

Yes. So Q2 was about $400,000, and that boosted by 50% in Q3 to about $600,000. So we've taken $1 million between the fee amortization and the 1% interest through the end of September.

Got it. Okay, perfect. And just the last couple. Just the -- you talked about using the -- obviously, with credit quality, still really strong and the mortgage earnings, taking some of that and putting it in reserves for the potential risk of a pandemic. And I guess, is your expectation or -- and the fact that the deferrals are down that you can still build the reserve a bit more as you go to the final quarter of the year here to boost it even further? Or I guess, is your sense that the reserve build is largely done now from the pandemic, given kind of the trends you're seeing in credit?

Just a couple of high-level comments. Jon can pint on this one, but just at a high level, Brian, I have always been a vocal proponent of building reserve when you're making the money. And of course, some of our models don't allow us to put money away if you don't have any losses, well, this year has taking care of a little bit of that.

But that said, we think we've got a pretty strong portfolio and short of -- Jon, one of our larger losses, if you take one of our -- 1 credit out of the loss piece, I think it would be like, I don't know, like 1 basis point or something, but we want to continue to build it, and I think we're getting enough to where we need to have it.

And I think it'll -- as I mentioned in the webcast, Brian, I think it will bode well for subsequent quarters. As we see this pandemic play out and the asset quality, we think we have actually emerging.

But Jon, I know you got some thoughts on all that.

Well, I would just say, I mean, there's no accounting for what a prolonged pandemic and/or more closures would do. And that's probably -- that is exactly why we are building our reserve. That said, our current situation, I agree with Mark, that we believe strongly that we've prepared our borrowers in terms of borrowing structures and the types of borrowers we brought in that can survive some of these issues that they're currently in. And you look at our hotel portfolio, for example, we have some pretty well-heeled borrowers in there with a fair amount of cash. So we think that will help them in the short run.

So absent something else happening in the pandemic world, which again, is why we're putting money aside, we think our asset quality is going to hold in there about current levels and maybe slight elevation with some credits. But a lot of those borrowers have already entered into the repayment structure are operating and doing presumably well.

And Brian, just to follow up on that, I just participated in the Federal Reserve conference call. And there's a fair amount of latitude that they're certainly giving everyone, particularly as it comes to hotels because we've got operators, as Jon said, they're very liquid. But if you're willing to offer forbearance, I mean, they're generally willing to take it.

But we could have a stood firm and said we're not going to do it anymore, and I think we would be fine, which would have decreased our loans under forbearance if we would have done that, but we didn't. We've accommodated. They've given us the -- Federal Reserve has given us the latitude in that arena, so we've kind of taken it. But we could have decreased our balances even more if we would have stood and said, no, this is it, 2 of them is it.

But I do know that they've proclaimed, the Federal Reserve, that going even up to a full year in that industry has been witnessed and merited. We're not there yet, but we're still pretty bullish on the liquidity and the clients that we have in those hospitality arenas.

Got you. Okay. And then the last 2 for me was just the -- was there any change, It doesn't sound as though, but when you look at the criticized and classified, so kind of any change in trends in the special mention in classified this quarter? I know you talked about some of the hotels and elder care, just not sure how they're performing. If you're seeing any migration on those or any trends of note?

In the -- well, for 2021, holistically, we saw 1 credit migrate earlier this year that had nothing to do with pandemic, that's right around $1.8 million. We did see an elder care facility that probably has been severely impacted by the pandemic, but that's a fairly small balance net. We carry a USD guarantee in that loan and we feel pretty good about the prospects of that. Again, not a huge balance. But really, no, most of our increase in second and third quarter has been brought on by nonpandemic-related issues that we feel like we have appropriately addressed in every case.

Okay. So there was a bit of -- there was some increase in the special mention in classified from 2Q to 3Q, nothing significant is what it sounds like, Jon?

Yes, it really comes down to 3 credits, Brian. But again, 2 of them nonpandemic-related, 1 pandemic-related but 3 large commercial credits probably drove the number as much as anything.

Got you. Okay. And then just the last one for me was just on your outlook for just kind of the margin and liquidity and just how you're thinking about that. It sounded as though you're pretty optimistic, Tony, with regard to bringing the deposits down a bit more and maybe holding the asset side with maybe a few more loan fees, but just any more commentary would be appreciated.

Yes. I think that summarizes it very well. I mean, I think we've all been surprised, blown away by the amount of liquidity by our consumer clients. I mean, the amount of liquidity in cash out there and what the majority of customers are doing is leaving it in the bank. They're not spending money on boats or cars or those kinds of things. Now that may change, we don't know. But we've seen the bulk of our CD maturities and customers looking at that and just happy to roll it over and put it in a money market or a savings account and just sitting on the sidelines and waiting.

And our decision tree has been -- how comfortable are we that the loan pipelines are going to improve enough that we can sit on cash for a little bit longer or should we go into the bond market and make some long term investments. We've taken a little bit of that off the table, but we still are fairly convinced that our loan pipelines are real, and we've got confidence that they're going to come back to us in fourth quarter and into '21. So if we have to take a temporary blip on a little bit more cash, we're happy to do that.

(Operator Instructions) And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to the management team for any closing remarks.

Thanks, Jamie. Once again, thanks for joining us. We certainly look forward to talking with you again in January as we report our fourth quarter of 2020 as well as overall year-end results. Thanks for joining. Goodbye.

And ladies and gentlemen, with that, we'll conclude today's conference. We do thank you for attending. You may now disconnect your lines.