Seacoast Banking Corporation of Florida

NASDAQ:SBCF

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the Seacoast First Quarter Earnings Conference Call. My name is James, and I will be your operator for today’s call. [Operator Instructions]

Before we begin, however, I have been asked to direct your attention to the statement contained at the end of the press release regarding forward-looking statements. Seacoast will be discussing issues that constitute forward-looking statements within the meaning of the Securities and Exchange Act, and our comments today are intended to be covered within the meaning of that act. Please note also this conference is being recorded.

I’d now like to turn the call over to Mr. Dennis Hudson, Chairman and CEO, Seacoast Bank. Mr. Hudson, you may begin.

[Dennis Hudson, Chairman and Chief Executive Officer]

Thank you, operator and thanks to all of you for joining us this morning. As we provide our comments, we’ll reference the first quarter 2020 earnings slide deck, which can be found at seacoastbanking.com.

With me this morning is Chuck Shaffer, our CFO and COO; Jeff Lee, Chief Digital Officer; Tracey Dexter, Corporate Controller; Jay Walker, Corporate Treasurer; and David Houdeshell, our Chief Credit Officer.

I’m going to start on Slide 4. I’d like to open the call by expressing my very sincere appreciation to the Seacoast team for their hard work over this last six weeks. Given the incredible challenge that came with COVID-19, our Seacoast associates have performed in an outstanding manner, showing their pride in the organization and delivering excellent support and appreciation for all of our customers. We’ve had a significant portion of our employee base from multiple disciplines within the company working 24/7 on the Paycheck Protection Program over the last four weeks. I’ve had many customers approach me and express their sincere gratitude for the service that Seacoast team has provided. And I just want all of you to know, I couldn’t be more proud of your effort and the results that you’re producing and the good work that you’re doing for our customers.

I will start by sharing some of the actions we’ve taken to respond to the health-related and economic implications of this crisis. We’ve approached this challenging environment knowing that we are uniquely prepared in four key ways. First, our business continuity program. As you know, we have a long history of operating in this state and it’s a state that’s prone to hurricanes and other weather events. As a result, we were able to quickly mobilize our business continuity program and adapt those activities to this unique challenge.

Our teams shifted to working remotely with minimal disruption with over 60% of our associates now working remotely. We implemented safety protocols for those whose work requires them to be physically present, like staggering shifts and distributing work over multiple sites. All of our branches have remained open to support our communities with lobby appointments and drive-through access. And we’re doing that safely with enhanced cleaning protocols and protective supplies for our staff.

The second way, we are uniquely prepared for this challenge is our proficiency and digital technologies. We have spent years as all of you know, investing in digital tools and capabilities. Our customers can transact online or through their mobile devices, our call centers are equipped with IVR and chat type features and our loan platforms are now fully digital. All of these investments have allowed us to deliver uninterrupted service for our customers and have allowed us to provide meaningful support quickly to connect our small business customers with the SBA’s PPP program.

During the first round, we processed about an 889 units for around $388 million in PPP loans with our teams working 24/7 over just 17 days. For round two, we’ve received over 2,000 applications and again have been working 24/7 to process these loans. We’ve made tremendous progress and we’ll continue to receive applications.

Third reason that I think we’re uniquely ready for this crisis is our relationship-based approach. Our communities have been affected in many ways. We have supported our customers with payment deferral programs, and by waiving fees to help them better manage through the financial implications of this period. We have a deep understanding of our communities and though none of us knows exactly how these circumstances are going to evolve. We will continue to manage credit decisions carefully and help support the economic recovery of our communities from a position of strength.

And forth and finally, our longstanding commitment to maintaining a fortress balance sheet and strong capital levels is proving to be extremely important, allowing us to safely navigate this pandemic and support our communities.

And before I turn over the call to Chuck, I thought I’d make a few comments about the outlook for Florida. New cases in Florida peaked quickly in early April and now appear to be headed down. And that’s even with significant increases we’re seeing in testing across the state. Hospitalizations in Florida have been much lower than many expected. And our hospital systems have handled the added case load much more easily than expected. Many of our hospitals are now actually facing layoff due to lower demand and are lobbying our Governor to allow resumption of elective surgeries, which I think is going to happen pretty quickly.

Overall, the experience of Florida has been far more muted than in other regions of the country. Florida’s population makes us, as all of you know, the third largest state in the country having surpassed New York in size a couple of years ago. We have three vibrant major metro areas, each with populations that range from 3 million to 6 million people. And our average age actually skews more towards the elderly population. And yet we rank among the lowest states in terms of COVID deaths per 100,000 people. If these trends hold, we are hopeful that Florida may be one of the earlier states to come back online for many of our businesses.

I’d now like to turn the call over to Chuck, who will provide a little more detail about our results in the first quarter, so Chuck.

[Chuck Shaffer]

Thank you, Denny. I would also like to express my sincere appreciation for the Seacoast team and their hard work on PPP. The actions taken by the Seacoast team over the last six weeks have truly been remarkable to watch. And I too couldn’t be more proud to work alongside this team helping our customers in this challenging environment. The teamwork 24/7 work effort and overall commitment to assisting customers. It’s been nothing short of remarkable.

Directing your attention now to first quarter results, we’ll turn to Slide 5. Net interest income increased $1.4 million sequentially. The net interest margin increased 9 basis points to 3.93%, excluding accretion on acquired loans, the net interest margin increased by 3 basis points. Quarter-over-quarter, the yield on loans increased 1 basis point and the yield on securities increased 13 basis points, primarily the result of high levels of pay downs in both portfolios. During the quarter, two agency CMBS securities prepaid resulting in accretion of $716,000 favorably impacting the security yield by 22 basis points and the net interest margin by 4 basis points.

The cost of deposits declined by 4 basis points and late in the quarter we aggressively reduced deposit rates. The full benefit of this action will be realized in the coming quarter. Also late in the quarter, we began strategically increasing brokered deposits to supplement our liquidity position, given the unknown impact of COVID-19 on business and economic conditions. Looking forward to the second quarter, the unfavorable impact of our margin from this conservative positioning will be partially offset by fees collected on PPP loans. And moving out beyond the second quarter, if the economic situation improves, we would expect the brokered and other wholesale funding to mature, which will benefit the margin. We remain cautious in guiding beyond these comments given the dynamic market conditions other than to say, we anticipate maintaining a prudent posture as circumstances warrant.

Moving forward one slide to Slide 6. Adjusted noninterest income was $14.7 million, an increase of $0.8 million or 6% from the previous quarter and grew $1.8 million or 14% from the prior year. Mortgage banking fees totaled $2.2 million, a record quarter reflecting a vibrant residential refinance market. And the first quarter of 2020 was also strong quarter for our wealth management teams with $44 million in new assets under management leading to a record $1.9 million in income and an increase of 28% year-over-year.

Looking forward to the second quarter, we expect mortgage banking volumes to continue to remain healthy, as a result of continued refinance activity. However, we do expect the company’s interchange income to be negatively impact by lower spin volume as the impact of stay at home orders have dampened consumer consumption.

Moving one slide forward to Slide 7. Adjusted noninterest expense totaled $41.5 million, which was in line with the prior quarter’s range of guidance, increasing $0.4 million compared to the prior year quarter. Salaries and employee benefits increased $7.4 million on a combined basis compared to the fourth quarter of 2019. $2.2 million of this was acquisition related and the remaining increase as a result of a successful recruitment strategy focused on bringing in seasoned bankers as well as the return of payroll taxes and 401k contribution expenses and the reactivation of incentive accruals all in line with the prior year seasonality. This quarter also included $0.3 million in bonuses for retail associates whose hard work supporting our branches and call center were awarded and they are keeping critical functions operating smoothly through the pandemic.

We saw an increase in legal expenses, data processing and marketing expenses during the quarter, mostly related to the acquisition of the First Bank of the Palm Beaches and total merger related charges across all categories were $4.6 million. For the second quarter of 2020, we are modeling adjusted noninterest expense to be approximately $43.5 million to $44.5 million, excluding the amortization of intangible assets was approximately $1.5 million per quarter. This guidance includes additional temporary staffing expenses associated with supporting increased resource demands for the PPP program and our call center.

Moving to Slide 8. I’d like to highlight our continued improvements in generating operating leverage with managed overhead and focused on growing revenue. The adjusted efficiency ratio increased sequentially to 54% in line with prior year seasonality and with the expected outcome of 401k payroll tax and other compensation expenses increasing during the first quarter of the year. We continued to sustain strict and proactive cost control discipline, while ensuring that we do not impede on revenue growth.

Turning now to Slide 9. Total new loan production was $323 million compared to $587 million in the prior quarter, reflecting the seasonally slower first quarter and an intentional slowing of originations late in the quarter, as the potential impact of COVID-19 on general economic conditions became apparent. The acquisition of the First Bank of the Palm Beaches added another $147 million, resulting in net loan growth in the quarter of 2.3% in growth year-over-year of 10%.

Seacoast began accepting applications from customers on Friday, April 3 for the Paycheck Protection Program established by the CARES Act. In the first round of funding, Seacoast is processed over 1,689 applications, provided over $388 million in funding to its customers. The average loan size was $228,000 and the average fee earned was 3.34%, generating an estimated $13 million in loan fees. As an SBA preferred lender, we’ll continue our focus on helping customers access the program in the second quarter.

Looking at our loan pipelines, our commercial pipeline was down 38% to $171 million at the end of the quarter, resulting from the intentional slowing of production due to deteriorating economic conditions associated with COVID-19. Given the uncertain outlook, we are focused on serving current strong relationships with liquidity, strong balance sheets and debt service coverage ratios that can support significant stress. In consumer, the pipeline is up 25% to $29 million. In the residential category, pipelines were up 128% to $87 million, reflecting the impact of a still vibrant refinance market. A significant majority of the residential mortgage volume will be sold in the secondary market.

Turning to Slide 10. We intend to continue to manage our credit exposures and our robust capital position prudently. We are confident that our established conservative posture entering this environment will serve us well. Our portfolio is broadly distributed across various asset classes with the larger portions of the portfolio being owner occupied commercial real estate representing 20% of the portfolio, stabilized income producing commercial real estate representing 26% and residential real estate making up 29% of the portfolio. Over 80% of our commercial portfolio is secured by real estate with borrowers that have meaningful equity in their investments and lower loan to values. The average loan-to-value for the commercial portfolio secured by real estate is 50%.

We have managed our portfolio to keep construction and land development loans and commercial real estate loans well below regulatory guidance. At March 31, that represented 32% and 181% of risk-based capital respectively. This is a conservative position and lower than most in our peer group. I’ll point out we have no exposure to syndications, no shared national credits and no mezzanine finance lending. Our loan portfolio is diverse and it’s broadly distributed across categories, with an average commercial loan size of $375,000.

Our consumer portfolio has an average credit score of 756. Our residential mortgage portfolio has an average credit score of 778, and our home equity line of credit portfolio has an average credit score of 771. The average LTV or loan-to-value of our home equity of credit portfolio is 59%, with 40% of that portfolio being in first lien position.

And turning to Slides 11 and 12, diversification across the industries and collateral types has been a critical tenant of our strategy. The largest exposure in our CRE and construction portfolio when aggregated is office building, representing only 13% of the portfolio. The average loan size in this office portfolio is $573,000 and the average loan-to-value is 59%. 60% of this portfolio is classified as owner occupied. This primarily includes medical, accounting, engineering, healthcare, veterinarians and other light-type professionals. The remaining 40% of this office portfolio is stabilized income producing investment properties.

Our second largest segment is retail real estate, representing 9% of total loans. The average loan size in our retail portfolio is $1.3 million and the average loan-to-value is 54%. Our restaurant exposure is limited only $45 million and it’s distributed amongst quick serve and full service restaurants, and our hospitality portfolio is only $115 million with an average loan size of $3.3 million. Both the restaurant and hospitality portfolios are primarily secured with real estate with an average loan-to-value of 55%.

The largest exposure in our commercial and financial category is holding companies owned by high net worth and ultra high net worth individuals for aircraft and marine vessels representing only 3% of the portfolio. The remainder is spread across multiple industries with no concentration above 2%. We have no direct exposure to the cruise line industry, casinos or the amusement park industries.

Turning to Slide 13. In the securities portfolio, the composition of the portfolio has remained relatively consistent over the past three years. Credit spreads increased sharply in March and the Federal Reserve stepped in to purchase bonds and multiple asset classes. Lack of liquidity in some asset classes including some of our CLOs has led to lower market values. Our CLO book has significant credit support and collateral and all our investment grade and comprise the broadly syndicated loans. The portfolio breakdown is 39% AAA, 49% AA and 12% A graded bonds. We believe the decline of market value is not credit related and expect these values to recover over the holding period as market liquidity returns.

Turning to Slide 14 and 15, deposits outstanding increased $303 million sequentially, including $174 million from the First Bank of the Palm Beaches acquisition. The cost of deposits was lowered by 4 basis points compared to the prior quarter and ended the quarter at 57 basis points. Non-interest bearing demand deposits represented 29% of the deposit franchise. And as a reminder, transaction accounts represent 50% of our deposit book. We believe our cost of deposits will continue to decline moving into the second quarter.

Turning to Slide 16 and 17, on January 1, 2020, we adopted the CECL methodology for estimating allowances for credit losses. The adoption resulted in an increase to the loans of $21.2 million and an additional reserve for unfunded commitments of $1.8 million. The after tax effect on retained earnings was a decrease of $16.9 million. The overall reserve estimate in March 31 is $85.4 million or 1.61% of total loans.

We’ll utilize the Moody’s baseline economic forecast as of March 31 and we also considered a more severe downturn would be a possibility. The baseline forecast assumed a V-shaped recovery with a profound drop in second quarter GDP and an unemployment rate of 8.7% in the second quarter, based on the shutdown of many businesses, then a strong recovery in the second half of the year with the unemployment rate of 6.5% exiting 2020.

We also looked at the more – we looked at the assumptions in the more severe scenarios and develop the adjustments to our estimate leading to further provisioning for the reasonable possibility that the characteristics of the downturn might be more unfavorable than the baseline scenario and could be sustained over more extended period. Obviously, the pandemic and its impact – the pandemic and its impact on the economy continued to evolve and the duration and severity of the effects are not fully yet known and the full benefit of the governmental support program still yet to be realized. The allowance coverage ratio could increase or decline as we move through the remainder of the year.

And turning to Slide 18. Asset quality trends in the first quarter remain strong with net charge-offs for the quarter under $1 million. Non-performing loans were down slightly. Classified and criticized assets increased minimally from 3% and 9% of risk-based capital due to the prior quarter to 3% and 11% of risk-based capital at March 31.

And turning to Slide 19, it shows our well managed imprudent liquidity position. Cash totaled $315 million, an increase of $190 million from December 31. And in March 31, 2020, the company had available unsecured lines of credit of $160 million and lines of credit under lendable collateral value of $1.2 billion.

Additionally, the company has securities and loans totaling $1.7 billion at March 31 that are available for collateral for potential borrowings. Brokered CDs total of $598 million with an average rate of 1.34% in a weighted average maturity of 90 days. Starting in mid-April, the Federal Reserve is offering term funding with a fixed rate of 35 basis points on pledge PPP loans. We expect to potentially utilize this program.

And turning to Slide 20. Our capital position remains strong. Our commitment is to maintaining a fortress balance sheet is served to generate strong capital levels and positions us for resilience in the current environment. Tangible book value for share was $14.42, an increase of 11% over the prior year, despite a dip this quarter, primarily the result of the adoption of CECL. The tangible common equity and tangible asset ratio was 10.7% at quarter end and has ranked amongst the highest in our peer group. The Tier 1 capital ratio was 15.5% and the total risk-based capital ratio was 16.5% of March 31, 2020. Each of these ratios increases quarter-over-quarter.

And to wrap up on Slide 21. Over the last three years, we have achieved the compounded annual growth rate, as I said, tangible book value of 11%. The quarter-over-quarter decline was the result of the adoption of CECL and the allowance build in Q1. Prior to the emergence of COVID-19, we are well on track to achieve our vision 2020 performance targets to exiting 2020 and had achieved the return on tangible assets and efficiency ratio targets in the prior quarters of 2019.

Changes in the outlook for the economy, as a result of COVID-19 will affect the achievement of these targets looking forward. Though, it is difficult to predict to what extent. We intend to – continue to carefully manage our operating efficiency, maintain our prudent credit oversight, and a robust capital position. Although the business and economic impacts of COVID-19 present challenges to the operating environment, we are confident that our established conservative posture entering this uncertain period will services the recovery progresses.

We look forward to your questions. I’ll turn the call back to Denny.

[Dennis Hudson, Chairman and Chief Executive Officer]

Thank you, Chuck. And Operator, we’d be pleased to take a few questions.

[Operator]

[Operator Instructions] And our first question comes from David Feaster [Raymond James].

[David Feaster, Raymond James]

Good morning, everybody. I just wanted to start on the PPP program. I appreciate the commentary on the number of applications that you’ve got in the second round. I suspect that those are smaller dollars. I guess, how do you think about the volumes potentially in the second round and then are you focused on existing clients only? Are you looking at this as an opportunity to acquire new customers? And then finally, how active that I think Palm Beaches or Freedom Bank had been in the program as well?

[Dennis Hudson, Chairman and Chief Executive Officer]

Thank you, David, happy to answer the question. In the second round, at least as of this morning, we processed over another 2,000 and have $147 million with the trend numbers. Our overall volume of applications has been right around 2,500, 2,600 applications. We think as long as the system holds today, we’ll likely get through that. We’ve been focused primarily on our current customer base. That was our objective here as we move through the PPP program and we wanted to take care of customers, take care of their needs before we thought about handling prospects. So at least, to-date, it’s been nothing. But it’s been a solely a focus on current customers. And obviously, First Bank of the Palm Beaches was part of the Seacoast program. So they were part of those numbers and have contributed. And everything, I’ve heard from the Freedom Bank team is, they’ve been heavily engaged and gotten through all their customers as well. And they’re doing a great job.

So we are incredibly proud of the Seacoast team. I think, we are very aggressive to reaching out to customers and the team has worked 24/7 through basically four weeks straight through the nights and weekends. And it’s been our number one priority to help get to this capital in the hands of our customers. And we’ve been proud to do it. And the team has performed marvelously.

[David Feaster, Raymond James]

That’s terrific. And are you able to use this program as a way to maybe drive additional wallet share, ask for more the relationship drives to deposits and I guess, as deposits continue to come in, especially with the PPP program and everything and it’s challenging loan backdrop, I guess. How do you think about utilizing excess liquidity and your just overall thoughts there?

[Dennis Hudson, Chairman and Chief Executive Officer]

Yes, I think just generally on liquidity, obviously, the environment is dynamic. And there’s a lot going on. So we’re going to be prudent and disciplined and execute a conservative approach to liquidity as we move through this period. We have built up liquidity on the balance sheet and that’s something we’ll carry. And if there becomes – the clarity starts to emerge on where this is headed. Obviously, some of that liquidity could be reverse back out of the balance sheet and invested in either investment securities or loans. But for now, we’re building liquidity and carefully watching the environment.

[Chuck Shaffer]

I think, we’ve done a really good job of building out what we think is a very prudent ladder of funding in that area. And we’ve done it in such a way where we can bring it back down fairly quickly. And so we’ll just have to see how this all plays out. But in the meantime, we thought it was really important to be very conservative when it came to – making sure we had the proper liquidity.

[David Feaster, Raymond James]

Okay. And then are you able to use the PPP program to drive additional wallet share with your clients and additional deposits or you get more of the whole relationship?

[Dennis Hudson, Chairman and Chief Executive Officer]

Our focus has been on existing customers and I think, I’ve received just tons of calls from existing customers around this issue and there’s been a lot of appreciation expressed for, what a great job our folks have done in responding to this. We think as we move forward, that could be a good possibility for us. I think it’s enabled us to strengthen our relationships. We have a very strong understanding of all of our clients and that’s allowed us to really strengthen those relationships and I think that’s absolutely right. As we move forward, we will consider depending on how those funds last whether we would accept applications from potential new clients.

[Chuck Shaffer]

And the only thing I’d add to that is I think this is provided unique environment for not only Seacoast but for community banks in general to show the value that we bring to customers as the relationships we have, the knowledge and understanding of our customers is far greater than large banks and the community banks have really been able to shine through this progress through this process.

[David Feaster, Raymond James]

Okay. That’s helpful. Last one from me. Just curious on the technology and the data analytics front, I guess, how has the data analytics helps you navigate this kind of environment? And secondarily, I guess with the increased digital adoption from your clients, has that allowed you to accelerate some efficiencies? Or created any other opportunities for you?

[Jeff Lee, Chief Digital Officer]

David, Jeff Lee. I’ll take that. I think the data side obviously very important to us as we got into to this event. I think having the deep understanding of the customers being able to analyze who we should proactively reach out to. How we rank order, who we’re reaching out to. You got to imagine a lot of volume we have to consider and how we stage that and the data is fundamental, whether it’s on the credit side or whether it’s on the customer analytics side. So that proved very important as we’re thinking about how to efficiently get through all that we had in front of us.

In terms of the digital adoption numbers, it’s been nothing short of astounding. All the work that we’ve done in that area and it’s really paid off in spades in this kind of event where we’ve remained close with our customers, even though our branches are only open for drive through and appointment only. But those digital channels have surged. We stayed close with customers. And so it’s really positioned us quite well, as we’re working through this thing.

[David Feaster, Raymond James]

Okay. Thanks guys.

[Operator]

Our next question is from Steve Moss [B. Riley FBR].

[Steve Moss, B. Riley FBR]

Good morning, guys. Just – as we think about business activity here going forward, I mean, obviously, you slowed production here, kind of just wondering any color in terms of just kind of what you’re thinking about loan balances in near term?

[Chuck Shaffer]

Yes. I think, our approach at the moment has been only to focus on current relationships and we’re taking care of current deeper relationships we have, where we have customers with the e-balance sheets, lots of liquidity and the ability to handle downside stress. And so given that, obviously, that’s going to slow sort of loan growth as we move forward, out beyond guidance of that, these hard to provide given the dynamic nature of the environment. But that’s, we’re obviously carefully watching the general economic backdrop and we’re remained prudent and disciplined as we move through this period.

[Steve Moss, B. Riley FBR]

I appreciate that. And then just going into a little bit here, in terms of the hotel, motel exposure, I know it’s small. But I was just wondering what are the loan-to-values there, debt service coverage and the same thing with your entire construction portfolio?

[Dennis Hudson, Chairman and Chief Executive Officer]

You want to take that one, David.

[David Houdeshell, Chief Credit Officer]

Sure. Yes, this is David Houdeshell. Thanks for the question. So there are hospitality exposures pretty conservative to begin with. Our loan-to-values when we go into these properties is typically around low-70%s. Today, our overall portfolio stands about 63% loan-to-value. On a debt service coverage basis, that’s really tough to say. In the near term, several of them are very strained with regard to overall performance. We have completed a stress test against every asset in the portfolio and they can whether pretty hefty annual downside stress and we’ll just see how long this cycle lasts and when they get back on their feet. We have been working with those customers on the PPP program and some other programs to help them with the assistance and we’re pretty – feeling pretty good about their performance and long-term prospects on the backside of this cycle.

[Chuck Shaffer]

Yes. And the one thing I’d add to that is given the low loan-to-values in that portfolio, both the restaurant and the hotel, those sponsors obviously have heavy investments in that and the majority of the – those loans are secured by real estate.

[Steve Moss, B. Riley FBR]

Okay, great. And I guess, do you – if you have the loan-to-values on restaurant, that’d be helpful. And then the $295 million in construction too, please?

[Dennis Hudson, Chairman and Chief Executive Officer]

Yes, the restaurant, David.

[David Houdeshell, Chief Credit Officer]

The overall portfolio for restaurants was in the – I don’t have them right in front of me. I just have the total blended hospitality book.

[Dennis Hudson, Chairman and Chief Executive Officer]

Yes. We’ll send it to you, Steve. And I’ll send you the construction as well. I don’t have that in front of me either. What I will mention to you, on the construction portfolio, its $295 million, obviously, well below regulatory guidance around concentrations to capital. And the largest category in that construction book is $89 million, which is actually, loans to individual residential borrowers for building homes. So even thought that $295 million, $89 million is not really necessarily commercial construction or even builder lines, it’s actually individual lines to construct home. So it’s a very conservative construction portfolio.

[Steve Moss, B. Riley FBR]

I appreciate that color. And then in terms of just funding costs here, interest bearing liabilities came down 8 bps, obviously pretty aggressive rate cuts here. I’m sorry, if I missed it, but just wondering just how much should we look for that bucket to decline here?

[Dennis Hudson, Chairman and Chief Executive Officer]

Yes. Gives and takes there’s probably the best thing to give you is, we brought in some additional wholesale and brokered funding to support liquidity given the environment. On the flip side, the cost of deposits will go down probably into the high 30’s as we move into the coming quarter. But there’ll be some puts and takes there around how much liquidity we keep on the balance sheet.

[Steve Moss, B. Riley FBR]

Okay. I appreciate all the color. Thank you very much guys.

[Operator]

Our next question is from Stephen Scouten [Piper Sandler].

[Stephen Scouten, Piper Sandler]

Hey guys. How you doing today?

[Chuck Shaffer]

Hey, Steve.

[Stephen Scouten, Piper Sandler]

Chuck, I know it’s hard to say and I know you don’t want to give any specific guidance per se, I don’t think. But in terms of how the NIM is performing, maybe relative to the guidance in the last K, I think it was down 1.5% with 100 basis point move. Can you talk maybe a little bit relative to that number, how you think you’re performing and give us an idea of when you think you can see the floor in your NIM, if you have any insight to that?

[Chuck Shaffer]

Yes. Probably the best guy to thank, obviously the NIM it has some pressure with the rates fall on 150 basis points and putting on some excess liquidity. I will mention that, 60% of our loan book is fixed and so that’s beneficial and that helps support as well as the cost of deposits. The other sort of variable there that’s going to play into this is how much of the PPP income gets recorded over the coming months. So it’s hard to get a sense of that because we don’t know if it’s going to be a four month window that that income gets recorded or a seven month window. But I think, NIM will move downward as we move forward. But how much downward it moves, it’s hard to judge given all the variability here that’s going on.

[Stephen Scouten, Piper Sandler]

Okay. And on the security book, I know that was up, I think 13 bps and you said some of that was on prepayments. Is that kind of a onetime jump or would you expect that to stay at similar level?

[Chuck Shaffer]

It was really driven off of the refinance activity in the underlying mortgage market, both commercial and mortgage. And I think we’ll continue to see higher refinance. Jay, do you have anything you’d add to that?

[Jay Walker, Corporate Treasurer]

Yes. Stephen, those were two agency CMBS securities that about a net $700,000 prepayment penalty/discount earned. So they’re kind of one offs, but you don’t typically don’t know what to expect there. Those are lumpy.

[Chuck Shaffer]

Yes. Given the falling rates in the underlying refinance market, potentially we’ll continue to see stuff like that come through and as well as it drove higher accretion on the loan book. And I’ll remind you that we have a pretty good size purchase discount that still exist in the loan book that if refinance activity remains strong, we would probably see some of that come through. But that also would be dependent on how much credit is available to commercial borrowers to refinance in this environment.

[Stephen Scouten, Piper Sandler]

Okay. And then thinking about loan growth expectations, you obviously give good data on the pipeline. I’m wondering what you expect to see trend wise, what you’re seeing from customers maybe in the month of April. And really if you even want to see any loan growth at this point in time or would you kind of tighten your boxes on underwriting just to keep loans from growing disproportionately in the near-term?

[Dennis Hudson, Chairman and Chief Executive Officer]

Yes, that’s a great question. And we’ll just have to carefully look at answering that question as we kind of rolled forward over the next couple of months.

[Chuck Shaffer]

Yes. What I would is we’re going to be very prudent and disciplined as we move through this period and very, very thoughtful. And that’s probably the best guidance we can give you at this point Stephen. We’re going to have to wait and see how things play out here over the coming quarters. But for now it’s a very conservative point of view.

[Stephen Scouten, Piper Sandler]

Okay. And then last thing, not a big delay. I think you mentioned maybe a two month potential delay in the Freedom Bank deal. Anything specific that’s driving that or just regulatory slowdown from approval.

[Chuck Shaffer]

We’re fully approved. It’s just the difficulty of trying to close a transaction with the operational teams being under work from home orders as well as the technology providers having the same constraints. So it’s more of a technical issue that’s causing the delay, just the amount of people available.

[Dennis Hudson, Chairman and Chief Executive Officer]

And you can just imagine, we’ve got more or less all hands on deck with a PPP program. A lot of those folks are the same folks that would be working on the integration teams. And as we looked forward, it was just very, very difficult to imagine how we could do both at the same time. And PPP program is obviously critical for our customers. And so that took priority over the acquisition.

[Stephen Scouten, Piper Sandler]

Yes. Makes a lot of sense. Thanks guys for all the information.

[Dennis Hudson, Chairman and Chief Executive Officer]

Thanks, Steve.

[Operator]

Our next question is Christian Marinac, [FIG Partners] I’m sorry, Christopher, apologize.

[Christopher Marinac, FIG Partners]

Hey guys. Good morning, Chris Marinac. Just wanted to ask the roadmap for the deferred assets and kind of how you see that playing out. Are there any new deferrals that are likely and then what’s the roadmap to how they kind of move on or even get to a classified criticized status?

[Dennis Hudson, Chairman and Chief Executive Officer]

David, do you want to talk about maybe how we decisioned things going on deferral?

[David Houdeshell, Chief Credit Officer]

Sure. Yes. So we have some certain criteria. We looked at our overall customer base but we had criteria for payment performance. So on general basis, they had to be current for the last 18 months of performance. So in good standing with the bank we would certainly ask customers to describe what type of strain they were incurring with regard to the COVID activities as well as just making some rational decisions based on performance capacity and granting them. We have granted deferrals to allow very strong good customers that are in certain business sectors that we’re taking a cautionary position early on in this cycle. We have seen deferrals paper down over the last several weeks, which I think is really driven by some of the more strain customers seeking the PPP program loans to help them through this difficult period of time.

So every customer, we’ve had a discussion, we had criteria. In some cases if they didn’t quite have good performance, we would ask for financial information, give that quick review before rendering our final decision. So we feel pretty good about the customer base that’s in that portfolio. And the deferral periods are anywhere from just a month or two to a full three or four months and more based on some of the criteria and the guidance that has come out from the regulators.

[Dennis Hudson, Chairman and Chief Executive Officer]

Only thing I would add is, we were pretty aggressive in reaching out to our customers. As you know, the analytics work that we’ve done really helps us identify customers that we think could be at risk and really based on the industry and the like. And so we were very – I think, strategic and really targeted our outbound work in a way that is designed to really increase our knowledge or about what’s really happening out there right at this moment from our customers. And just to reiterate, if you made a request, we had a really deep conversation with you about why this makes sense and so forth. So, we fully expect that as we get through the pandemic and conditions change and things open up, we’ll see all those loans come back online and so forth. Probably be dealing with a small subset of issues. And we’ll just deal with it as we get to it. But we’re pretty confident about that.

[Christopher Marinac, FIG Partners]

So that’s great. And I guess that implies that really if you did not qualify for a deferral that that’s already picked up and substantiated and special mentioned data for this quarter, right?

[Dennis Hudson, Chairman and Chief Executive Officer]

Yes, exactly right.

[Christopher Marinac, FIG Partners]

Okay. And then on what triggers any reversal of interest? I guess loans have to go non-accrual or become a TDR, which doesn’t sound like that’s a second quarter event. But I’m just curious if you think some of them might head that way or is that a low likelihood from what you can tell?

[Chuck Shaffer]

It’s low likelihood. Right now those are all on deferral. We expect them all to come back on making payments today. We’re accruing interest like we normally would. And unless something materializes between now and when they come back on deferral that has caused them to co-pass due and result in a grading change that would move them towards non-accrual. But we don’t expect that. And as David mentioned, that we were very proactive in reaching out to customers to help them access that program over a period of time.

And when you look at our overall book being as diverse as it is and is distributed as it is and not being in some of the higher risk asset classes, we feel good where we’re at during this period. And our reserve and CECL reflects a qualitative component roughly over – roughly 37 basis points on top of our quantitative component reflecting the risk above the baseline scenario. So that qualitative reserve in combination with capital PPP and the proactive work we did around deferrals, we think we are very well positioned given the environment we’re in.

[Christopher Marinac, FIG Partners]

Great. Thanks for all the background. And just one last clarification. Chuck, you mentioned the $147 million on round two. That’s a separate figure from what you did on around one, is that correct?

[Chuck Shaffer]

That’s correct.

[Christopher Marinac, FIG Partners]

Okay, great. Just want to clarify. Thanks for everything.

[Chuck Shaffer]

Thanks, Chris.

[Dennis Hudson, Chairman and Chief Executive Officer]

Thank you, Chris.

[Dennis Hudson, Chairman and Chief Executive Officer]

Operator, if we don’t have any further questions, I guess, just like to thank everybody for attending today. And we look forward to updating you next quarter.

[Operator]

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.