Amerant Bancorp Inc. (NYSE:AMTB) Q2 2020 Earnings Conference Call July 24, 2020 9:30 AM ET

Company Participants

Laura Rossi - Investor Relations Officer
Millar Wilson - Chief Executive Officer
Carlos Iafigliola - Chief Financial Officer
Miguel Palacios - Chief Business Officer
Thiel Fischer - Credit Risk Manager

Conference Call Participants

Michael Rose - Raymond James
Michael Young - SunTrust
Brady Gailey - KBW

Operator

Good morning, ladies and gentlemen, and welcome to the Amerant Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call.

I would now like to hand the conference over to your host, Ms. Laura Rossi, Investor Relations Officer. Thank you. Ma'am, please go ahead, ma'am.

Laura Rossi

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 up 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 note 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 the subsequent filings with the SEC, which you can access these findings on the SEC's Web site.

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 know 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 reconcilication of its non-financial measures to it's most comparable GAAP financial measure.

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

Millar Wilson

Good morning, and thank you for joining Amerant's Second Quarter 2020 earnings call. Today, I'll 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 number one priority. Our business continuity plan remains in place. And as a result, we have been able to seamlessly serve customers and keep our employees, customers and communities safe. As the number of COVID-19 cases has increased in the communities where we operate, we are diligently following our business continuity plan and are taking a cautious and safe 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 LTO, 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 from which the interest only and/or forbearance period had expired, totaled $519.5 million or 46% of total modified loans. As of July 17th, modified loans totaling $164.9 million had scheduled payments due. The company collected payments due on $136.9 million of these loans through this day. Modified loans totaling $354.6 million have payments due by July 31st. Amerant also continue to participate in the Paycheck Protection Program or PPP. As of June 30th, we have 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 save. We're 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 is 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 million in the first quarter, and a release of $1.4 million in the year ago period. Carlos will discuss the drivers of this provision in more detail shortly. As a result of this provision, we're reporting a net loss of $15.3 million compared to net income $3.4 million in the first quarter, and net income of $12.9 million in the three months ended June 30, 2019. Lower interest income also contributed to this net loss, which was partially offset by lower non-interest expenses.

It is worth highlighting that even though our loan loss provision has increased significantly, our operating income, which excludes the provision for income tax, the provision for loan losses or reversals and net gains on security sales, increased to $21.6 million, up 53.9% year-over-year and up 29.7% quarter-over-quarter. Also, in the quarter, our broker dealer Amerant Investments successfully participated in the distribution of the senior notes, which, among other factors, contributed to stronger year-over-year non interest income. The investments team also launched Amerant Investments Mobile, an application that facilitates customers’ engagement with our Amerant Investments 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 compared to net income of $3.4 million in the first quarter of 2020, and net income of $12.9 million reported in the three months ended June 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 million reported in the three months ended June 30, 2019. Our return on assets was a negative 0.75% or a negative 0.7% on an adjusted basis, and our loss per share was $0.37 or $0.34 on an as adjusted basis.

Total loans as of June 30th were $5.9 billion, an increase of 3.6% compared to the first quarter. This increase was largely driven by the PPP loans granted in the quarter, and partially offset by declines in other loan originations attributable to the lack of business activities, resulting from the COVID-19 pandemic and the more stringent credit underwriting guidelines currently in place. Funds from these PPP loan also drove total deposits, which were $6 billion as of June 30th, up 3.1% from the prior quarter. The funds small business customers had not fully utilized, totaled $132.7 million at the end of the quarter. Additionally, we were pleased to see our foreign deposits increase by $3.5 million or 0.1% compared to the prior quarter. We're optimistic and hope this improvement will continue.

Shareholders' equity was $830.2 million as of June 30th, 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.

Carlos Iafigliola

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 on mortgage related securities have stabilized following a surge in expected prepayment during the first quarter. Still, we continue to focus decreasing floating rate investments, given the current interest rate environment. As of the end of the second quarter, floating rate investments represented 17% of our portfolio, down from 18% a year ago. In the quarter, we center our attention on purchasing higher yielding corporate debts, primarily in the subordinated FI sector, to minimize the cost of our senior debt 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 result of the PPP loans originated during the quarter and partially offset by declines in other loan originations, attributable to the current economic environment and more stringent credit guidelines as a result of the pandemic.

Loan production in the second quarter centered 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 number 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 $22 million provision recorded in the first quarter of 2020 and a re-lease of $1.4 million in the second quarter of 2019. This provision includes two key drivers. First, we attribute $20.2 million estimated losses reflecting deterioration in macroeconomic environment as a result of the impact of COVID-19 across multiple impacted sectors. And second, the increase in provision includes $28.2 million due to 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 revolver line of credit. We have placed the loan in non-accural 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, non-performing assets increased $43.9 million quarter-over-quarter and $44.6 million compared to the year ago period, totaling $77.3 million at the end of the second quarter 2020. The ratio of non-performing assets to total assets was 95 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 non-accural status.

I'd like to discuss our loan portfolio more broadly in light of the current COVID-19 market environment. Approximately 42% of our outstanding loan portfolio is tied to industries potentially more vulnerable to the challenging dynamics created by the pandemic. 67% of these exposures are secured with real estate collateral. I would like to note that our CRE portfolio remains well diversified with no significant property type regional or tenant concentration. This portfolio has a low loan to value healthy debt service coverage ratios, and 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 anchored 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 customized loan payments relief in accordance with regulatory guidance, including interest only payments and forbearance options. While its 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 for business line and geography. As a result of these solid practices, Amerant credit quality remain some 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 $60 million offering senior notes of a coupon of five and three quarters, which provided the company with a new source of funding as we continue to navigate the COVID-19 pandemic. Looking ahead, we will continue to actively leverage opportunities in the wholesale market to decrease funding costs as we manage through the current and future market environment.

Moving to Slide 11, total deposits at the end of the second quarter were $6 billion, up 3.1% quarter-over-quarter. This increase was largely driven by the funds of the PPP loans originated during the second quarter 2020, which small business customers have not fully utilized. These [new] funds totaled $133 million as of June 30th. Additionally, higher deposits in the second quarter of 2020 includes $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 unused PPP related deposits, increased $24.5 million in the second quarter of 2020, of approximately 0.8% for 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 due 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 for 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 by certain liabilities following the emergency rate cut enacted by the Federal Reserve. This quarter LIBOR rates closely track the Federal Reserve cost in terms of magnitude, which lead to a larger impact on our interest income done in previous quarter.

This resulted in lower origination and repricing rates across our portfolio. 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 two cuts to the benchmark rates in 2019 in addition to the two emergency costs in March this year these costs in a declined yields of our interest earning asset. This decline was partially offset by actions that I just mentioned, as well as lower interest expenses due to the trust preferred securities we redeemed last quarter. The net interest margin for the second quarter of 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 money markets and other top pricing rates that we pay to customers.

Leveraging opportunities for lower costs, 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 provide higher than average spreads and working to further reduce asset sensitivity, which I will discuss shortly. We remain focused on implementing these actions on evaluating in order to help us to navigate through the current environment.

Now, turning to Slide 13, non-interest in the second quarter was $19.8 million, down 9.8% quarter-over-quarter and up almost 40% year-over-year. The quarter-over-quarter decline in non-interest income was largely driven by a lower net gain on sale of investments. We recognized a $7.5 million net gain on the sale of 30 year treasury securities comfort 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 we 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 continue 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 helped to create momentum during the sales process. This activity, as well as higher customer credit bonds in the current volatile market, resulted in increased brokerage fees compared to the previous quarter.

We are preferred 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 teams continue to execute our relationship centric strategy on 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 non-interest expenses was $36.7 million, down 18% quarter-over-quarter and down 30.6% year-over-year. This quarter-over-quarter decrease is largely due to the deferral of direct costs associated with the origination of PPP loans that Millar discussed earlier in this call. These costs are deferred and amortized over the term of their 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 costs last year related to our transformation efforts also contributed to this decrease. Looking to the remainder of 2020, we continue to focus in cost reduction strategies that entails physical state and key vendor analysis.

On Slide 15, second quarter adjusted non-interest expenses was $35.4 million, down 20% quarter-over-quarter and down 29% year-over-year. Adjusted non-interest expenses decreased quarter-over-quarter as non-interest expenses were meaningfully 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 two banking centers and we're 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% in the second quarter of 2018, we have not made any staffing changes in response to COVID.

Moving on to the next Slide number 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 flow 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 in 30-year treasury securities approaches 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.

Millar Wilson

Thank you, Carlos. Moving on to our last slide, we continue to execute on our goal to drive shareholder value. We remain focused on generating profitability, core deposit and loan growth, as well as maintaining credit quality as we navigate through the economic turmoil created by the COVID-19 pandemic. In the current low interest environment, we also plan to lean more on the careful management of our non-interest expenses and expansion of our non-interest income to drive growth in our bottom-line.

Looking ahead, we will continue to focus on proactively assessing our loan portfolio in order to preserve asset quality. In addition, we will be actively prioritizing the preservation of capital. With this close monitoring of all aspects of our business, we will ensure that despite these unprecedented times, 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 auction or a new PPP loan. We have dedicated additional employees to these efforts and will continue to be hyper focused on meeting customers’ needs during these times. I know I speak for the entire Amerant team when I say we're truly proud to be providing solutions and helping our communities during this time.

With that, we'll be happy to take your questions. Operator, please open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Michael Rose from Raymond James. Your line is open.

Michael Rose

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 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, a few branches you're going to close. Can you give us a sense for kind of what expenses could look like over the next quarter or two? Thanks.

Millar Wilson

So in terms of the reason reduction that you noticed on the second quarter, so primarily its driven by the PPP origination. As we mentioned on the call, there was about $8 million that were deferred over the life of the loans. And of course, the fee income associated with this loan will also be amortized. So that definitely doesn't represent a structural change on the cost structure of the bank. So that will definitely come back at a rate of about a million a quarter until we reach the two years anniversary of the loans. However, forgiveness or acceleration of the 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 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 under spend on that specific item. So progressively, the normalized cost structure should be closer to the number that we provided before roughly $48 million to $49 million.

Michael Rose

And then I noticed that 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? Thanks.

Miguel Palacios

The changes on customer service and payments platform has helped to retain those international deposits. And we started at the beginning of the year reserve program also visiting other countries, in particular Colombia, where a lot of Venezuelans moved there. So, we are capturing the same nature of deposit and we are expanding our relationship abroad, and that has stabilized significant the previous deposit decay as it 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.

Michael Rose

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 4 basis ex-PPP impact as we move into the third quarter? And do you have a sense for how much that might be? Thanks.

Miguel Palacios

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

Operator

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

Michael Young

I wanted to maybe just start on the credit side with the relationship that you guys identified and announced previously and 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?

Miguel Palacios

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

Definitely, it was an impact, because non-information of the liquidation process was given to us. We knew about this on a search with older companies that are in the sector. So definitely, we have not had any contact with the company nor the liquidator, only with liquidator through our legal counter. So we’re still monitoring the situation. And by no means, there was a sign on any weakness nor in our process, nor on conversation with the company.

Millar Wilson

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

Michael Young

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?

Miguel Palacios

Yes, we definite -- not in particular, because of the situation we have the review with between risk, credit and the business. We have review 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 ABT transaction are not relying on inventory, the majority are trade secure and all ensure sorry, and also based on account receivables with an outage every year or twice a year monitor by availability. So, we don't foresee any issues. We have received financial information from at least until April and May and we are constantly reviewing those credit and today, the exposure is around $80 million.

Michael Young

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

Miguel Palacios

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 in sales due to COVID but there was no specific reason. And like I said, we have not being able to talk to the management of the company basically because of the type of liquidation that they decided to go through.

And it's important to mention that this company has went through a previous volatility and commodity prices in the past in the 2011 of the crisis, 2014 drought. So there is no indication that this company was not going to be able to do sustain or weather this situation and what reported by the financial performance that we were receiving.

Michael Young

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

Miguel Palacios

So as provided in the documents, we have approximately, I mean, from what is left and I've mentioned there's about $500 million that expired and that we have those that were due, we have received almost everything and/or they have resumed payment of almost everything that we do. There's another $300 million that are coming due and payment mid to resume by the end of this month and we, based on conversations we've had with the customers in the region, 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 have about 12% of the real estate portfolio. We’re 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 are, 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 liquidity management for the prevention. And we have seen that in the second extension, they have not need for that, those one.

Millar Wilson

I guess that 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, you went to 500 million now in the second quarter. And most of what we discuss 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 tat is consistent with the performance that we're seeing that now we just have 500 million stiil under forbearance.

Operator

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

Brady Gailey

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 that 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?

Millar Wilson

So there is one immediate action that we're working and actually it 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 rates several times since the fed fund drops significantly in March and now, we continue to do so. So, based on the repricing schedule that we have on the time deposits, which is roughly between $300 million to $400 million for now through the end of the year, there should be an opportunity to reprice those time deposits to, let's call it, between 0.5 basis points 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 review 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.

Brady Gailey

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

Millar Wilson

Definitely, that's a work in process that we have been working for about two years now. We have several strategies that constantly evaluate our cost structure, not only headcount but physical space. As we disclosed today, there are two brunches 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 through 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.

Brady Gailey

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

Carlos Iafigliola

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're 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 $500 million that we mentioned.

Millar Wilson

Better to say about $600 million out of the $1.1 billion, they expired their forbearance period, and they are coming in due for payments. Some of them already received payments as of July 17th, some of them are due for payment before July 31st.

Miguel Palacios

And it's a constant communication with the customer. And customers are now requiring the extension. There are some that since the beginning were 480 days. So we’ll still be there. But definitely if the trend continue like that it’s a good sign and also we're monitoring the situation of each of the regions where we are.

Operator

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

Millar 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.

Operator

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