Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Reliant Bancorp, Inc. (NASDAQ:RBNC)
Q1 2020 Earnings Call
Apr 28, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, and welcome to Reliant Bancorp's first-quarter 2020 earnings conference call. Today's call is being recorded. Hosting the call today with Reliant Bancorp is DeVan Ard Jr., chairman, president, and CEO. He is joined by Dan Dellinger, Reliant Bancorp's chief financial officer; and Alan Mims, Reliant Bancorp's chief credit officer, who will be available during the question-and-answer session.

Please note Reliant Bancorp's press release and this afternoon's presentation slides are available on the investor relations page of the company's website at www.reliantbank.com. [Operator instructions] During this presentation, members of the Reliant Bancorp management may make comments which constitute forward-looking statements within the meaning of and subject to the protections afforded by the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results and the performance or achievements of Reliant Bancorp to differ materially from any results, performance or achievements expressed or implied by such forward-looking statements. Many of such risks, uncertainties and other factors are beyond Reliant Bancorp's ability to control or predict, and listeners are cautioned not to place undue reliance on such forward-looking statements.

Because such statements speak only as of date of this presentation, a more detailed description of these and other risks, uncertainties and factors are contained in Reliant Bancorp's public filings with the Securities and Exchange Commission, including in its most recent annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K. Except as otherwise required by applicable law, Reliant Bancorp disclaims any obligation to update or revise any forward-looking statements made during this presentation, whether as a result of new information, future events or otherwise. I would also refer you to Pages 1 and 2 of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures and other information. I would like to now turn the presentation over to DeVan Ard Jr., Reliant Bancorp's chairman, president and CEO.

DeVan Ard Jr.

Well, good afternoon, everybody, and thanks for joining us for our first-quarter earnings call. I want to begin by extending my heartfelt hope and best wishes for a speedy recovery to all those impacted either directly or indirectly by the COVID-19 virus. The public health crisis created by COVID-19 has become a financial crisis as safe at home orders have closed many segments of our economy. We believe the financial strength of our company and the talent and experience of our team will enable us to help those in need in the immediate term to effectively aid in the longer-term recovery of our economy.

We also believe in Nashville's resilience. The fundamentals that have made Nashville and Middle Tennessee one of the country's best places to live and work are still in place and will be a driving force for growth in the months ahead. Our focus over the past several weeks has been on doing everything necessary to respond to the challenges of the COVID-19 pandemic. As a provider of essential services, we've remained open throughout the pandemic, although with a different service model.

To protect the health and well-being of our employees, the lobbies of our banking centers are closed, and our customers are primarily being served through drive-up windows or through one of our digital channels. Employees with the ability to do so, approximately 40% of our workforce, are currently working from their homes. And although the challenges created by the pandemic are complex, our plan to manage through this period is simple. First, we'll focus on our customers.

That means continuing to extend credit and to serve as a trusted financial advisor to our clients. It also means actively participating in the SBA's Paycheck Protection Program and helping our business customers navigate the application process. We are also committed to working with customers who are struggling as a result of the pandemic to modify loan terms to defer payments until the economy begins to recover. Second, we will grow and preserve capital and liquidity.

Capital and liquidity is the lifeblood of banks and must be strong for us to continue extending credit to our customers. To that end, our board of directors has suspended repurchasing shares until we can better evaluate the impact of COVID-19 pandemic will have on our business. We do anticipate paying our quarterly dividend. Third, we'll aggressively manage noninterest expense.

We have implemented a hiring freeze for most positions, suspended all nonessential travel and delayed planned capital projects. Expense control, though, will be balanced so that we do not impact our ability to provide excellent customer service or put our employees' health at risk. And then finally, we'll do what's right. We place the well-being of our employees and customers first and continue to honor our charitable commitments and seek out opportunities to partner with and support nonprofit organizations in their efforts to serve our community.

Now turning to our financial performance. I'm proud to report that our team navigated the challenges presented by the first quarter to deliver excellent results, which are summarized on Page 4 of our presentation. Net interest margin expanded by 15 basis points to 3.61%, driven by stable loan yields and a 25-basis point decline in the cost of interest-bearing deposits. We also continued to optimize our earning asset mix, increasing loans held for investment to 81% of average earning assets.

Net interest income was a record $17.1 million for the quarter, a result of a higher net interest margin and the contribution of Community Bank & Trust. Our team of bankers produced $150 million in new loans, a 29% increase over the same quarter in 2019 at a weighted average rate of 4.7%. And asset quality metrics are superior. Nonperforming assets declined to 0.19% of total assets.

Loans past due 30 days or more were 0.12% of total loans. Net charge-offs remain low and criticized loans as a percent of total loans declined. Additionally, we carried no ORE at March 31. We closed the previously announced acquisition of Community Bank & Trust and successfully converted their core system and, on April 1, closed the First Advantage Bank acquisition.

That conversion is on track and scheduled to take place in May. Together, the acquisitions added almost $1 billion in assets to our company, and more details for each can be found on Page 5 of our presentation. I want to conclude my opening remarks by emphasizing how proud I am of our team and their commitment and dedication to each other and our customers during a time of extreme uncertainty. Our relationship banking model is ideally suited to assisting our customers in navigating the current economic climate.

And our commitment to superior asset quality and strong capital and liquidity levels will enable us to continue meeting the credit needs of our clients. Now I'd like to turn the call over to Dan Dellinger for a detailed look at our financial results. Dan?

Dan Dellinger -- Chief Financial Officer

Thanks, DeVan, and good afternoon, everyone. I will begin on the right side of Page 4 of our earnings presentation. The company recorded a net loss attributable to common shareholders of $215,000 or a negative $0.02 per diluted common share during the first quarter of 2020. Results were impacted by $4.2 million of merger-related expense and a $2 million provision for loan loss, with $2 million directly related to changes in our qualitative factors from the COVID-19 pandemic.

When the merger expenses are excluded, adjusted net income available to common shareholders becomes $2.9 million or $0.25 per common diluted share. When the additional provision and merger expenses are excluded, net income available to common shareholders becomes $4.5 million or $0.37 per diluted common share. And lastly, taking merger expenses, the total provision taken during the quarter and removing net charge-offs results in a net income available to common shareholders of $4.9 million or $0.41 per common diluted share. A couple of other items of note on our financial results table.

NIM widened 15 basis points during quarter over quarter to 3.61%, driven by the stabilization of our loan yield, the continued decline of our funding costs and our continued progress in optimizing the mix of our earning assets. Core NIM, which excludes purchase accounting and the tax benefit from our community development loans, increased 24 basis points quarter over quarter to 3.47% and back to the levels we experienced in the first quarter of 2019. Tangible book value was $14.44, a decline of $0.98 per share to the linked quarter. I will provide more detail on the decline later in my presentation.

Moving to Page 6. The core bank, which excludes results from Reliant mortgage ventures, generated $16.8 million of net interest income, a $2.5 million or 17% linked-quarter increase. The increase in net interest income was primarily driven by a $245 million linked-quarter increase in average loans held for investment and a 15-basis point improvement to our margin, which can be attributed to the proactive steps we've taken over the past year to improving our earning asset mix and maintaining short durations on our wholesale deposits. Let's look at both of those items in more detail.

Average loans held for investment increased by $245 million over the linked quarter. Loans acquired in the CBT acquisition accounted for $174 million of growth, and organic growth accounted for $71 million. The strong growth we experienced in our loan portfolio, coupled with strategic reduction to the bond portfolio, have had a material effect on our earning asset mix. At March 31, 2020, average loans comprised 81.3% of average earning assets, up from 78.3% at December 31, 2019, and 77.7% at March 31, 2019.

As I noted earlier, our ability to quickly respond to pricing changes in the secondary market were a critical element in the decrease in our cost of interest-bearing liabilities, which declined 25 basis points and with our overall cost of funds declining by 13 basis points. Reductions in customer deposit costs also occurred mostly due to low-cost deposits acquired through the CBT acquisition. On the asset side, the yield on loans held for investment remained stable over the linked quarter, and other earning asset yields remain stable. Variable rate loans reaching floors also had a positive influence on the loan yields.

Moving to the right side of Page 6. Core adjusted noninterest expense, which excludes merger and mortgage company expenses, increased $2 million or 19% to the linked quarter. The addition of CBT personnel and branches accounted for about $700,000 of the increase. We do expect this to decrease in the second quarter as staffing levels decrease post conversion and one of their branches was closed and merged into a Reliant branch in the same market.

Salaries and benefits also reflected general increases for employee raises, staff additions and higher payroll taxes. The other noninterest expense category was primarily driven by the increase in the -- was primarily driven by the amortization of the intangibles associated with the CBT merger. On Page 7, we present a new performance measure providing insight in pre-tax, pre-provision income for the current and previous two quarters. This measure also excludes merger expenses incurred during those quarters.

First-quarter pre-tax, pre-provision core income was $6 million, which is down 9% to the linked quarter and up 40% over the same quarter prior year. Adjusted core pre-tax, pre-provision income was up 13% to the linked quarter and 44% to the same quarter prior year. Total revenue was up 8% to the linked quarter and 25% to the same quarter prior year. Core noninterest expense was up 19% to both the linked quarter and the same quarter prior year.

As mentioned earlier, the cost savings from the CBT acquisition are expected to be fully phased-in by the end of 2020. Turning to Page 8. Deposits continue to trend toward -- trend upward, aided by $212 million from the acquisition of CBT. We ended the quarter at $1.7 billion of deposits and have grown at a compounded annual growth rate of 28.4% since 2015.

Moving to the right side of the page. As mentioned earlier, we continue driving down the cost and relative volume of wholesale deposits. Turning to Page 9. Our loan growth trend remained solid.

At the end of the first quarter, loans held for investment were $1.6 billion, a compounded annual growth rate of 31.4% since 2015. Loans acquired from CBT comprised $174 million of a quarter-over-quarter loan growth of $210 million. Core loan yield increased seven basis points quarter over quarter, with total yield declining by four basis points as the impact of purchase accounting accretion and tax credits declined. Turning to Page 10.

As DeVan mentioned in his opening remarks, our company has built on a foundation of strong capital reserves and access to significant, cost-effective, off-balance sheet liquidity. As you can see, those statements remain true as we enter the second quarter of 2020. Let's move on to Page 11. I want to focus on tangible book value per share.

As noted, it declined $0.98 to $14.44 at March 31. The decline in the TBVPS can be primarily attributed to three factors. Accumulated other comprehensive income declined by $6 million on a linked-quarter basis, accounting for $0.51 of the decline in the TBVPS. The change in AOCI resulted from declining interest rates, which increased the loss in our deposit portfolio hedged by $5 million.

And market disruption related to the COVID-19 pandemic, which temporarily increased the spreads on the municipal bond portfolio and reduced our unrealized gain on the portfolio by $1 billion. The fair value of municipal portfolio did recover somewhat in April as government intervention and municipal bond market calmed investors and brought spreads back in line. Second, the $215,000 first-quarter net loss attributable to common shareholders and a $1.2 million dividend resulted in a $1.3 million decline in retained earnings, accounting for $0.12 or 12.2% of decline in tangible book value. Finally, the acquisition of CBT created 4.56% book value dilution.

However, this compares favorably to the 5.92% dilution we modeled. I want to conclude my remarks this afternoon by joining DeVan in welcoming the team from First Advantage Bank to the Reliant family. I'm very excited about the opportunities this combination provides our company. I will turn the presentation over to our chief credit officer, Alan Mims, for his perspective on our loan portfolio and credit metrics heading into the second quarter.

Alan?

Alan Mims -- Chief Credit Officer

Thanks, Dan, and good afternoon, everyone. I'll begin my comments on Page 12 of the presentation. I'm pleased to report our superior credit metrics continued through the first quarter. Nonperforming assets continued to decline, both in dollars and as a percentage of total assets, ending at 0.19% for the quarter.

We continue to aggressively monitor our portfolio through past due management and address problems as soon as identified. Moreover, we ended the quarter with no other real estate on the books as a result of aggressive marketing of those properties. For the quarter, we prudently moved to strengthen our allowance position through our normal provisioning process and with an eye to events arising as a result of the COVID-19 pandemic. Our loan losses increased to 0.09% annualized for the first quarter as we removed some longer-term issues that are close to resolution.

It should be noted that we continue to compute our allowance level based on the incurred loss methodology. The provision to cover loan growth and losses for the first quarter was $900,000. To address economic concerns related to COVID-19, we also provided an additional $2 million primarily to address weakening in national and local economic conditions under what we believe to be an incremental approach to responding to the crisis. As we develop new and updated data, we will assess that and respond accordingly.

With this provision level, the allowance reached 0.93% of total loans held for investment. When unaccreted purchase discounts are considered, total reserves for credit loss becomes 1.22%. For informational purposes, we've included Slides 15 to 17 for segments we believe represent increased risks during the COVID-19 pandemic. We included details of our hospitality, restaurant and manufactured housing portfolios to highlight the strengths in each.

Please note, however, the manufactured housing portfolio was not included in our 3/31 results as the First Advantage merger was not completed at that time. Finally, I'd like to address our efforts to provide much-needed assistance to our customers during this unprecedented time. As you will note on Page 18 of the presentation, we've provided payment relief to almost 20% of our portfolio in terms of dollar amount, either in principal deferment or full payment deferrals for a 90-day period. All deferrals were subject to final approval by either our chief lending officer or myself to ensure compliance with regulatory and accounting guidance recently issued.

We've also been very active in the Paycheck Protection Program. To date, we have completed and funded 139 applications for $35.5 million. For the second round of funding, we have 528 applications that are currently being entered into the SBA E-Tran system for another $48.4 million. New applications continue to come in as well.

We believe these actions will put our customers in their best positions to get back to business as the economy begins to open. Thanks, and I will now turn the presentation back over to DeVan for his closing remarks.

DeVan Ard Jr.

Thanks, Alan. I want to conclude my comments this afternoon by reviewing our strategy for 2020. And although it's been adapted to manage through the challenges of the COVID-19 pandemic, most of which are still unfolding, we're not planning to just play defense. First, we'll continue our commitment to organic loan growth and improving our funding mix within our existing footprint.

That includes leveraging the new markets we entered through the Community Bank and First Advantage mergers. We expect loan growth to slow in the coming months, but we believe that the relationships our bankers have built will allow us to make sound, profitable loans. Second, despite suspending new hiring, acquiring talent that has the ability to make an immediate impact on revenue will always be a priority for us. And we believe the scale we have built with our company and our culture is a key to attracting high-performing individuals.

Third, the current pandemic has illustrated in a significant way the need to understand the ways our customers want to interact with us. Prudent investment in building out our digital platform to be more efficient and to attract and retain customers will continue. And then finally, though we are not currently engaged in any M&A discussions, we anticipate opportunities will arise over the next few quarters. Whether whole bank or assisted M&A, we feel like we're in a position to pursue deals that meet our acquisition criteria.

As we embark on a new quarter and the challenges that the COVID-19 pandemic presents, I'm confident in the future of our company. I also believe in our team of exceptional bankers and know that temporary challenges will not keep us from achieving the collective goals we've established. Operator, that concludes my remarks this afternoon, and we're ready to take questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] And one moment, please, for the first question. And the first question we have is from the line of Stephen Scouten with Piper Sandler. Please proceed with your question.

DeVan Ard Jr.

Hi, Stephen.

Stephen Scouten -- Piper Sandler -- Analyst

Hey, good afternoon, everyone.

DeVan Ard Jr.

Good morning -- good afternoon.

Stephen Scouten -- Piper Sandler -- Analyst

Thanks. I'm curious just where -- if you guys could give us an update on final numbers around FABK and where the final credit mark shook out relative to your initial expectations and kind of what all this does to tangible book value dilution as you calculate it today if you have that.

DeVan Ard Jr.

We don't really have the final number yet, Stephen. You probably remember, we modeled, I think -- on the general portfolio, we modeled a 2% credit mark and a 3% credit mark on the manufactured housing portfolio, which gave us, I think, a blended mark of 2.3%. We're working through with Mercer today updating that mark. I think it's still reasonable based on what I can see in their portfolio.

In each of the portfolios, I don't see, at this point anyway, any significant adjustment. But it will probably be a few weeks before we get a final number back on the credit mark. Anything you want to add to that, Dan?

Dan Dellinger -- Chief Financial Officer

Yes. Tyler, just a couple of...

DeVan Ard Jr.

Stephen.

Dan Dellinger -- Chief Financial Officer

Steve, I'm sorry. Stephen, I'm sorry. I hope that didn't insult you. The interest rate mark is going to be interesting.

As you well know, the manufactured housing piece is a high-yielding portfolio. And as a result of the decreases that we've experienced, it's going to be significantly -- the premium is going to be significantly higher on that portfolio than what it was when we initially modeled it. We did run or did an additional run based on 12/31 data. But again, that was before interest rates declined.

And so we've got two components that we're really focused on. One component, as DeVan mentioned, is the credit mark, which given the current economic situation, Alan, and he can provide more color on this, is doing a deeper dive into that portfolio, the manufactured housing portfolio. And then as I mentioned, the interest rate component. Although the manufactured housing portfolio as a percentage of their total loans is not any higher than what it was at the time we modeled it, I still believe that the yield effect was going to be greater.

Stephen Scouten -- Piper Sandler -- Analyst

OK. That's helpful. That's helpful. Never an insult to be compared to Tyler.

Don't worry about that. Curious if you could give us an idea on the pro forma NIM coming out of 2Q. I mean, I know there's still a lot to happen through the quarter. But just kind of as you've gotten the deal closed, if you have any updated guidance on where you think the NIM can kind of shake out here on the first quarter combined and maybe when you think it can bottom if we're not already there.

DeVan Ard Jr.

Yeah. I mean, Stephen, I think what you're asking is for some guidance into the second quarter, and I think we've got -- we've probably got some room for some additional NIM improvement in the second quarter. Just looking at First Advantage, if I look at their loan yields through March -- and so this wouldn't be the first quarter. This would just be the month of March, kind of coming into the close of our deal.

They were running at somewhere around 5.60% on the loan yield side. Their interest-bearing deposit costs were a little high, I think, 1.49%. So what you see in the in the loan yield side, of course, is the impact of the manufactured housing portfolio. We think we've got some ability over this quarter, the second quarter, to continue to lower deposit cost in their portfolio.

That has trended down. And we think the loan yield probably will stay out of the First Advantage portfolio anyway, will stay about where it is. So I'm expecting to see some expansion of our NIM in the second quarter. Don't know whether we'd get another 15 basis points, but we will see an increase in our NIM based on trends that we see in the second quarter.

Dan Dellinger -- Chief Financial Officer

A couple of things I'll add to that, Stephen. One is we made some adjustments to our customer deposit accounts or products effective April 1, which will have a positive impact in the second quarter. First Advantage followed suit on that immediately prior to the end of the quarter. That will help drive down the cost of deposits as well.

And then secondly, as you know, we've got still a pretty good slug of wholesale deposits. We've been mixing it between, really, the State of Tennessee and the Federal Home Loan Bank advances. We found Federal Home Loan Bank adjusted almost immediately as the emergency rate cuts were put into place. It took the brokered market several weeks to adjust, and then it took the State of Tennessee about two weeks.

So we still see some opportunities there to reduce the cost of funds and as well as what we -- the measures that we've taken with respect to our customer deposits. And as DeVan mentioned on the loan yield side, we've done some modeling, and we do expect some positive influence from their loan portfolio. Their margins for the first quarter is about 4.23%. So that's going to get better for us.

Although relatively speaking, the portfolio is -- doesn't have a huge influence on our yields, but it still has a nice probably seven to 10 basis points increase in our overall loan book.

Stephen Scouten -- Piper Sandler -- Analyst

OK. That's really helpful. And seven to 10 basis points just on the loan yields, you said.

Dan Dellinger -- Chief Financial Officer

Yes.

Stephen Scouten -- Piper Sandler -- Analyst

OK. And then just one last one for me. I was kind of surprised to see that only 6% of the manufactured housing loans were in deferral currently. Would you expect that number to rise? And why do you think it was so low? Is that because it's more of an inbound call versus you guys doing outbound calling like on the commercial loan portfolio?

DeVan Ard Jr.

I don't know that, whether it's inbound or outbound had any influence on it. My experience is people are -- when they're stressed on payments, they're going to give you a call. We've got 3,500 customers that have manufactured housing loans, so it'd be kind of tough to do a big outbound call. We've been very sensitive.

We've got a great team in Knoxville that handles this portfolio all the way from origination through to collection, and they're very close to their customers. I think we've just got a good book of business. Will it rise? I do suspect that we'll see some increase, Stephen, but I don't think it's going to be significant. I mean these are all very well underwritten loans.

And I just -- I think we'll continue to see the performance at a pretty good level. But yes, I mean, I think depending on how this pandemic continues to unfold, we'll probably see an uptick in that. I don't think it will be anything significant. Most of the people who've lost their jobs have already lost them and have had the opportunity to call in and talk to us about deferral.

Stephen Scouten -- Piper Sandler -- Analyst

OK. Thanks, guys. Appreciate the call. Thank you.

Operator

And the next question comes from the line of Kevin Fitzsimmons with D.A. Davidson. Please proceed with your question.

DeVan Ard Jr.

Hey, Kevin.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Hey, guys. How are you?

DeVan Ard Jr.

I'm good. How are you today?

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

I'm doing well. I'm doing well. A lot of my questions have been taken care of just in your comments, but one thing I wanted to ask about on the deferrals, DeVan, is kind of how you take a step back in how you look at those. I've heard some banks point to the fact that it's been a fairly modest percentage.

And I've had some banks very non-apologetically point that it's a high percentage and point out that that's by design, that they're really being aggressive in reaching out to the customers in that better to get a hold of them sooner and get engaged and have dialogues. So where do you draw that line between trying to manage that percentage if these are just potential future credit problems but also trying to get out there quickly given the current outlook from the regulators on helping out the customers?

DeVan Ard Jr.

Sure, Kevin. I'm going to let Alan take that. He and our chief loan officer, John Wilson, have been very close to this. And I think we've developed a pretty good process for how we're handling deferrals.

But Alan, do you want to make some comments?

Alan Mims -- Chief Credit Officer

Sure, Kevin. In some of our portfolios, hospitality and the restaurant, particularly, we reached out proactively to those customers because we knew kind of where things were headed just to make sure that we didn't have any problems that came up with those on the front end. But we've talked with all of those customers in those two business segments and talked with them about what their possible cash flow needs were, where they were from a liquidity standpoint, what they thought from a current outlook and when they thought they would get back to business. And in many of those cases, we've either done an interest-only -- or deferral to interest-only or, in several cases, full payment deferrals.

But we've talked to all of them, trying to make sure that we understood where they were, what their needs were. And all of these deferrals that we granted have all been on a 90-day basis. We felt like that things would start turning around, that the economies would begin to open back up again earlier rather than later. And we didn't want to put off these deferrals out to six months.

Now we will reconsider if that comes around. But anecdotally, I've seen there's a Holiday Inn behind our office. And I've noticed just over the past several days that there are a number more cars in the parking lot. So I hope that that means that people are starting to get away and get out and that we'll see a return sooner rather than later.

But we'll continue to talk with these customers, our hospitality customers. We talk with them fairly regularly to see what they're seeing and what is going on with them. And so we maintain close contact with all of these in our restaurants as well and hope that we'll see those getting back into business as well.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Great. And just one quick follow-up on the subject of capital. I appreciate the detail on what was driving tangible book, Dan. But DeVan, your comments about maybe looking out, nothing in the works now but maybe possibly M&A opportunities.

Do you need that TCE ratio to build back up to a certain level, or is that a secondary figure for you guys? Do you pay more attention to other ratios that are higher priority right now?

DeVan Ard Jr.

Yes. No, we pay very close attention to that, and I would certainly want to see that build back up. I don't think you'll see us doing anything if we do it. And I want to be really clear that there's nothing going on right now.

My comments are really made more to the idea that I don't think we ought to be just totally strict in how we look at opportunities because I do think there'll be some out there. Probably won't see us doing anything that requires a lot of cash and -- or any cash maybe. But when we have an opportunity to do something that we think is good for our company and our shareholders longer term, I don't want to be in a blind to it either. But right now, as we're sitting here talking today, I would consider us more in a pause mode for M&A but still available to talk, and I think that just makes sense.

We've been very acquisitive. And if you look at our track record with the last three that we've done, I think they've all exceeded our expectations within our market. Have been relatively easy to integrate and be able to leverage the additional scale we've gotten from them. So you've got to at least be available.

And there are a lot of banks in the geography that we operate in that are probably thinking about options themselves right now. I mean, it's a challenging operating environment, so we're going to be available to talk. And if it turns out to be something that's good for us, good for our shareholders, yes, we'll consider it.

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

OK. Great, DeVan. Thank you.

DeVan Ard Jr.

Thank you, Kevin.

Operator

And the next question comes from the line of Catherine Mealor with KBW. Please proceed with your question.

Catherine Mealor -- KBW -- Analyst

Most of the questions were asked. I wanted to ask a little bit about the reserve. And I know it's hard to forecast at this point just given the economic uncertainty. But just wanted to kind of get inside of your head right now and just think about how you're thinking about reserve builds from here.

You're clearly still working under the incurred loss model. So different from the CECL builds that we've been seeing from some of your larger peers. But can you just kind of talk about what are some of the factors that went into your kind of organic build that you did this quarter and then how you're thinking about -- what are some data points that you're looking for over the next couple of quarters as you continue to build the reserve? Thanks.

DeVan Ard Jr.

Sure. I'm going to let Alan take that, Catherine.

Alan Mims -- Chief Credit Officer

Catherine, what we thought about as we were getting into our computations for the end of the quarter was kind of how much we had in changes to local and national economic pressures with unemployment that has continued to rise. We also looked at levels of concentration that we might have in various segments of our portfolio. And we felt like that, while those national and local economic factors would need some heightened adjustment through our qualitative factors, we didn't feel like going too far in without a whole lot of data that would back that up. We feel like that this area will -- because of the way the economy seems to work, that we'll see the economy pick up pretty quickly here when things start opening back up.

And so we wanted to take the approach that we would provide some because I think there are some additional concerns economically. I think we'll see some -- probably some weakening in some areas of our portfolio, so we wanted to recognize that. But we didn't want to go and just throw some extraordinarily large number at it and really not have any kind of backing for that, so we'll continue to watch for those. If the unemployment rates still continue to go up, especially in our local area, which has been some of the lowest unemployment in the nation, if those start turning back down pretty quick, then I think that's going to indicate to us that our economy will start picking up pretty quickly.

We've maintained a good bit of contact with our larger builders in the one-to-four family construction segment of our portfolio. And they are all very positive about where they are. They've had sales levels that have remained fairly in line with historical levels. They've not had a lot of fallout or washes out in their presold contracts.

They have been up a little bit by maybe 10% to 15%, nothing that's got them too concerned at this point. We think that the lower interest rates and once people get back to working, that the lower interest rates are going to actually be beneficial for the housing market in this area. So we do see some bright spots. And so all of that went into our consideration when we were coming up with a final reserve level to make sure that we had something in place that we thought would represent some of the additional risk in the portfolio but not knee-jerk reaction to what was going on at that point.

DeVan Ard Jr.

And Catherine, I'm just -- I'll just add, too. And I know you guys are all aware of this, but I've never seen anything like what happened in mid-March when, basically, the economy in a lot of segments just stopped. We don't really know, and I don't think anybody knows exactly what to expect. I think a big part of the answer to your question, frankly, is how quickly we come out of a kind of a restart of the economy.

It looks like that's starting to go on now. What does that mean? Do we get V? Do we get a U, or do we get an L? But nobody knows. And so we try to take a pretty close look at some of the higher-risk segments of the portfolio. And as we've talked about before, our loan portfolio is all -- it's all built on relationships in our markets.

We don't have any SNCs. We don't do any out-of-market lending other than projects to customers that are in our markets. And so we're really close to our customers. We know them really well.

And all you got to do is take a look at one of the segments that I think a lot of people consider very high risk, and that's hospitality. It's high-risk today because people just aren't staying in hotels right now. But if you look at -- if we kind of carve up and peel back in that portfolio, I mean, we've got some really strong operators with liquidity. Average loan-to-value in that portfolio is about 55%.

And although we have been asked by quite a few of them for a deferral, not all of them. And some of them have said we're just going to continue to pay because we've got good liquidity, so that's one that we'll obviously watch very closely. And depending on the kind of the length and the depth of the pandemic and the impact it has on the economy, we'll make adjustments if we need to. But I do think the first-quarter provision is very balanced and very measured, and we'll look at it again.

As we get closer to the second quarter, I think we'll have a lot more data, a lot more anecdotal information from our customers to be able to make a better decision on at the end of the second quarter. But I think the tactic we took in the first quarter was the right one.

Catherine Mealor -- KBW -- Analyst

That's great. That's really helpful color. And maybe just a follow-up on CECL. I think you had originally talked about adopting CECL in the beginning of '21.

Is that still your intention? Or just given kind of where we sit today, maybe you can, I guess, push it to '23 if you'd like to. Would you consider that?

DeVan Ard Jr.

We'll do it in 2023. Actually, we're going to push it out as far as we can in hopes that it goes away.

Dan Dellinger -- Chief Financial Officer

We're hoping it's going to die on the vine, Cath.

DeVan Ard Jr.

It will be 2023.

Catherine Mealor -- KBW -- Analyst

In '23. OK. That's great. All right.

Awesome. Thank you so much.

DeVan Ard Jr.

Thanks, Catherine.

Dan Dellinger -- Chief Financial Officer

Thanks, Catherine.

Operator

And the next question comes from the line of Joe Fenech with the Hovde Group. Please proceed with your question.

DeVan Ard Jr.

Hey, Joe.

Joe Fenech -- Hovde Group -- Analyst

Hey, guys. How are you doing? How are you?

Dan Dellinger -- Chief Financial Officer

I'm well, sir. How are you?

DeVan Ard Jr.

Did you change firms, Joe?

Joe Fenech -- Hovde Group -- Analyst

Good. That's also the same. Close enough on the firm name. Can you update us, guys, on the upcoming schedule of maturities to your CD book? From what I remember, I think the legacy Reliant book, DeVan, has some significant maturities with some relatively higher rates coming up over the rest of this year.

Is that right?

DeVan Ard Jr.

Yes. So Joe, what we've got right now in the second quarter, we've got about $350 million that is maturing, and that's at an average -- weighted average rate of 1.04%. That's a little misleading because there are some big numbers in there with some of our State of Tennessee deposits that are already priced fairly low. But we've still got a lot of promotional CDs from a year or so ago due at a 2.5% level.

So we believe in the second quarter, we can still move that number down probably 10, 15 basis points, and then it gets a little bit more compelling in the third quarter. We got $162 million maturing at 2.13%, which I know we'll be able to lop about one point off of, maybe more than that, and then $138 million in the fourth quarter at 2.04%. So quite a bit, our CD portfolio is fairly short term and quite a bit maturing over the next three quarters.

Joe Fenech -- Hovde Group -- Analyst

OK. And then, guys, the hit to OCI in the first quarter, you mentioned some recovery in municipal debt markets, I guess, so far in April. Roughly how much of the $0.51 hit that you mentioned was the disruption in the municipal piece? Was there anything else that was materially disrupted? And can you roughly quantify how much of that has been recovered from what's happened in the market since the start of April?

Dan Dellinger -- Chief Financial Officer

Yes, I can. Joe, this is Dan. First, the $5 million of that, as I mentioned, was the hedges that we got about $160 million in hedges today. About $150 million of that is funding hedges.

So that swung quite a bit, probably, I would say, mainly as a result of the rate declines, but there's probably some disruptions in that market, too. I haven't gotten an update recently. I'll be getting an update within the next few days on those hedges to really see what the impact or improvement, hopefully, has been since the end of the quarter. And then on the bond side, that's fully recovered at this point.

Once those spreads recover, the bond portfolio recover. Now we never had a loss in the portfolio except when the markets first froze. But subsequent to that, at March 31, we had about roughly a $9 million gain in the portfolio. And today, it's over $11 million.

Today, it's over $11 million.

Joe Fenech -- Hovde Group -- Analyst

But $2 million of that's tax. It wasn't the base...

Dan Dellinger -- Chief Financial Officer

Yes. Yes.

Joe Fenech -- Hovde Group -- Analyst

OK. OK. And then, guys, I think you did...

Dan Dellinger -- Chief Financial Officer

I'll know more about that in -- go ahead.

Joe Fenech -- Hovde Group -- Analyst

Sounds good, Dan. Thanks. And then, DeVan, I think you did $35 million of PPP loans in the first round. Any early expectations? Do you expect to be more active in the second round or just about the same? Or how are things looking there?

DeVan Ard Jr.

Probably more in the second round, depending on how much funding is available. I'm going to let Alan give you the current numbers because this is something we're working very closely with our customers on just really day in, day out. Alan, did you have an update?

Alan Mims -- Chief Credit Officer

Yes, Joe. For the second round, we have 528 applications that have been verified and are in the process of being input. We've got a fairly large team, that's inputting those, and they're going around the clock. Since it opened up, we have put 236 applications in.

We've got SBA approval on those thus far. I'm not sure what the dollar amount of that is. But we continue to work really hard, getting those. We have a total of about $48 million that's being input.

And with the large amount of applications, obviously, the average loan size is smaller. So we think there'll be some increase in the level of fees as well because a lot more of these will be in the bands with the larger fee generation as well. So as long as the money holds up and the SBA system doesn't crash again, we think that we'll be fairly successful in uploading all of these into the system. So we're working as feverishly as we can to get those in place.

Joe Fenech -- Hovde Group -- Analyst

Good. Thanks, guys.

DeVan Ard Jr.

Thanks, Joe.

Operator

And the next question comes from the line of Feddie Strickland with Janney Montgomery Scott. Please proceed with your question.

DeVan Ard Jr.

Hey, Feddie, how are you?

Feddie Strickland -- Janney Montgomery Scott LLC -- Analyst

Hey, how are you doing, guys?

DeVan Ard Jr.

I'm good.

Feddie Strickland -- Janney Montgomery Scott LLC -- Analyst

How are you all?

DeVan Ard Jr.

Good. Face mask and gloves on.

Feddie Strickland -- Janney Montgomery Scott LLC -- Analyst

Yeah, exactly. Here in Atlanta, we all have the masks. But anyway, I was just wondering how much more business share do you think you can move from some of the bigger banks in the Nashville MSA? Do you still kind of see an opportunity there? Maybe some of them get missed in the midst of the crisis. And is there any additional opportunity there?

DeVan Ard Jr.

Yes, there probably is, Feddie. We've been pretty wrapped up in this response to the PPP loans. I can tell you that I know personally of a number of different instances where I've gotten a call from somebody who is a customer of Wells Fargo, who's a customer of Bank of America, some of the other larger banks, and they're just getting -- basically getting shut out of the PPP program. And if they're not customers of ours, we're not going to do the loan unless we get their relationships, so there's certainly opportunities there.

I don't know that I can quantify it right now. But I'll also tell you, because I lived through the last recession here in Nashville in -- the banks that were still active in making loans, banks that had good asset quality, good capital were certainly able to win business away from the larger banks who kind of look at things on a national basis. And if for some reason, they don't like construction loans anymore, they don't do construction loans anywhere. And to the extent that that unfolds over the next quarter or two, yes, I do think we'll have an opportunity to pick up some new business.

There's also some well-publicized M&A going on right now in Nashville and -- not us but some other banks. And we've already seen the ability to capture some of that business, so yes, I think it will be out there. I just don't know that I could quantify it. If I was going to give you an idea of what I thought loan growth would be between now and the end of the year, we were running at a fairly nice clip in the first quarter and had budgeted somewhere around 14% for the year.

And I would say we'd probably come in somewhere around 4%, 5% for the year, so that's a reflection of the slowdown in the economy. And even though we've got -- still got a fairly healthy pipeline, I do expect to see growth much more muted over the next two or three quarters as we kind of work through some of the problems out there.

Feddie Strickland -- Janney Montgomery Scott LLC -- Analyst

That's perfect. Appreciate it, guys. Thanks for the question.

Operator

And the final question comes from the line of Tyler Stafford with Stephens. Please proceed with your question.

DeVan Ard Jr.

Hey, Tyler, how are you today?

Tyler Stafford -- Stephens Inc. -- Analyst

Hey, guys. Good afternoon. Thanks for taking the questions. Hey, I wanted to touch on capital first.

And DeVan, can you just talk about the capital level that you're focused on and feel appropriate -- is appropriate in this environment?

DeVan Ard Jr.

Yes. I'll probably let Dan talk a little bit about capital and follow up if I need to.

Dan Dellinger -- Chief Financial Officer

So as we talked about, AOCI had a significant impact on our TCE ratio, tangible book at the end of the quarter. I expect to see some recovery in that this quarter. That said, we've constantly said that we'd like to manage somewhere between 8.5% and 9.5% TCE. I think that's still the goal.

Our tier 1 leverage was about 10.60% for the quarter, and our risk-based was over 13%, so I feel comfortable with those levels. Now that said, when we modeled the FABK acquisition, we modeled about a 7.5% dilution. We're not going to have that, I don't think, based on the conversations that we had with Stephen earlier mainly because, as we talked about, the change in the interest rates between when we initially modeled it and today and then as we dig deeper into the MH portfolio to understand the credit quality of that portfolio. So all that to say that there will still be some potential dilutive effect from FABK, although I don't think it's going to be much.

And then I suspect some recovery in the AOCI this quarter. So that should continue to build up our TCE ratio.

DeVan Ard Jr.

Tyler, I mean, all that said, I mean, I think our number for TCE that we're really comfortable with is that 9% number. That's where we'd like to be.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. And the equity that you issued to FABK, was that as of the stock price for May -- or excuse me, April 1 the low-$10 range?

Dan Dellinger -- Chief Financial Officer

Yes.

DeVan Ard Jr.

It was.

Dan Dellinger -- Chief Financial Officer

Yes, it was.

DeVan Ard Jr.

We didn't adjust the price, didn't adjust it.

Dan Dellinger -- Chief Financial Officer

So yes, you may recall, we dropped below their price. If that gives you any indication of kind of the situation that it put us in, potentially, it could be a bargain purchase.

Tyler Stafford -- Stephens Inc. -- Analyst

Well, that's where I was going, if you guys took a bargain purchase gain with the deal at close.

Dan Dellinger -- Chief Financial Officer

Well, we haven't booked anything yet. We're still working on the marks, but it's definitely a possibility.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. And then just lastly for me is around the mortgage business. And I guess maybe simply put, if there was a quarter that I thought you guys were going to turn a profit on this business, it would have been this quarter just given some of the volume tailwinds. And I know we talked about it the last couple of quarters of you thought maybe 4Q, and that did not happen.

But can you just talk about kind of updated thoughts around kind of net profitability out of the mortgage business in this environment?

DeVan Ard Jr.

Sure. I'll try to address it. I mean, we had what was looking like a pretty good first quarter with originations being up. I mean, it was really across the board.

Our corresponding originations were up, retail. And if you look at our held-for-sale balance at the end of the quarter, you see it was up significantly. We just ran into a situation at the end of the quarter where the capital markets kind of froze up and we couldn't sell, especially the correspondent loans, at a normal premium. So we held them on our books through quarter-end, kind of waiting for the market to recover.

And that is in the process of taking place now, but that really restricted sales of loans in the first quarter, and that had an impact on our profitability.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. All right. Thanks.

Operator

And there are no further questions at this time. I will now turn the presentation back to the speakers.

DeVan Ard Jr.

OK. Thank you. Listen, folks, thanks for joining us today. Apologies again for having to reschedule our call this morning.

Certainly didn't anticipate our provider having an issue with their network, and I hope it didn't put too many of you out. I appreciate you joining us and look forward to hearing from you individually and seeing you as a group at the end of the next quarter. That's it. Operator, we'll be adjourned.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

DeVan Ard Jr.

Dan Dellinger -- Chief Financial Officer

Alan Mims -- Chief Credit Officer

Stephen Scouten -- Piper Sandler -- Analyst

Kevin Fitzsimmons -- D.A. Davidson -- Analyst

Catherine Mealor -- KBW -- Analyst

Joe Fenech -- Hovde Group -- Analyst

Feddie Strickland -- Janney Montgomery Scott LLC -- Analyst

Tyler Stafford -- Stephens Inc. -- Analyst

More RBNC analysis

All earnings call transcripts