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SmartFinancial, Inc. (NASDAQ:SMBK)
Q1 2020 Earnings Call
Apr 29, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, welcome to SmartFinancial First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Miller Welborn, Chairman. Please go ahead.

Miller Welborn -- Chairman

Thanks, Kate. Good morning and thanks for joining us today for our Q1 2020 earnings call. Joining me today are Billy Carroll, our CEO and President; Ron Gorczynski, our CFO; and Rhett Jordan, our Chief Credit Officer. Before we get started today, I'd like to refer all of you to Page 2 of our deck for the normal and customary disclaimers and forward-looking statements comments. Please take a minute to review these.

I'd also like to start today by just saying thanks, and that's not a tribute or cursory thanks, but a very sincere thanks to multiple groups of people. First, our team of associates here at SmartBank have put an incredible efforts over the last 60 days and it's appreciated; to our clients for their patience as we juggled hours of operation and a multitude of business challenges; and also to our shareholders and investors for your continued patience and confidence in this team here at SmartBank. To all of you, thank you, thank you, thank you.

Several highlights I'd like to touch on and then I'll turn this over to Billy to jump in some of the details. First, our net interest income for the quarter was up $1.5 million, strong interest income. Also, our earnings for the quarter were very strong. We're very proud of the earnings we have. Our loan growth, we had $99 million of originations this quarter for a net $54 million in organic loan growth, 11% annualized loan growth, strong for the quarter. We closed our progressive transaction on March 1, great to have that team on board. And finally, our asset quality remains very strong with NPAs at just 31 bps. We're poised to not just weather this storm, but to be stronger as a result of it and also to gain market share in the quarters ahead, as we have really helped a ton of businesses in our markets that other banks either didn't help or wouldn't help with this PPP process.

With that, I will turn it over to Billy to dig in.

Billy Carroll -- President & Chief Executive Officer

Thanks, Miller. I'll give some macro level color on the quarter and then I'm going to hand it over to Ron and then on to Rhett to take a deeper dive into both the financials and the portfolio. First, a very solid quarter for our Company with continued steady organic growth on top of closing our Progressive Financial Group deal, both of which will continue to benefit our financial metrics moving forward. The Progressive transaction is a great addition and solidifies our presence for us in the Upper Cumberland region in Middle Tennessee and provides great density addition between Knoxville and the Nashville MSAs. We'll be converting and rebranding this team in early May and are excited to get them integrated.

Obviously, the start to 2020 has been overshadowed by COVID-19 and our SmartFinancial team has really stepped up and handled this situation unbelievably well. Referencing Pages 5 and 6 of our slide deck, I'm not going to walk through all of this, but we thought it was important for you to see what we've been tackling over the last several weeks as this pandemic took shape. We've been handling this crisis with a great process coupled with a great passion for our clients, associates, and communities. There is some great detail on these slides, so please take an opportunity to review, but bottom line, we've handled this just as Miller and I and our Board and our shareholders would have expected, very, very well.

As with most of our peers, these last several weeks have been a lot about the Paycheck Protection or PPP loan production. Rhett will walk through this in a little more detail in a second, but unbelievable work from our team in this program producing over 1,600 loans totaling $239 million just in round one. We have viewed this program as a great opportunity to help our clients, our communities, and our Company, and we've excelled on all fronts. Looking at the round one pool of $350 billion, a bank our size would have had a fair share number somewhere around $50 million. We did almost 5 times that amount; just a phenomenal amount of hustle by our SmartBank team.

I'm going to transition now into a few numbers. First, as we reported, we had a $4.3 million net operating income quarter, which included about $2.5 million in COVID-related reserve build that Ron will speak to more in just a moment and a $2.7 million earnings quarter related to GAAP net income. That equates to $0.30 and $0.19 respectively per fully diluted share.

Transitioning into the deck, I'll touch on Slides 8 and 9. As we took the opportunity to prudently build the reserve with the uncertainty in our economic environment, I wanted to focus on Slide 8, our pre-tax pre-provision numbers for a better measure of our steady growth. As shown here, a really nice quarter-over-quarter trend and outside of the COVID-19-related reserve builds were right on track. Slide 9, you see margin holding really well, the spot rate cuts during the quarter, as well as flat efficiency ratio, as we look to get the Progressive integration done here within the next couple of months.

So all in all, results that we're really proud of, and I'm going to stop there and will turn it over to Ron for a dive into the financials and he'll hand it to Rhett to jump into portfolio and credit, and then I'll close with a few additional comments. So, Ron?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

All right. Thanks, Billy. Good morning, everyone. As Billy had mentioned, wow, what an eventful quarter. In the midst of all this chaos, our teams continued to remain focused on the Progressive acquisition and scheduled conversion next weekend. Let's start with Slide 10, balance sheet trends. As you can see, we have continued our steady ramp. Along with our legacy growth, the Progressive transaction provide us with $300 million in assets, approximately $190 million in loans and $270 million in deposits. Our tangible book value had increased 8% year-over-year. In comparison with the prior quarter and due to the acquisition, we did see a slight decrease in our tangible book value, which was modeled and anticipated, and we are looking forward to continue our offered movement in our book value.

Moving on to net interest income on Slide 11. We continue to have increases in our average earning assets and liabilities as our Company grows, which includes one month of Progressive. We've had another solid quarter of net interest income and net interest margin. Our net interest income for the current quarter was $22.7 million, an increase of $1.5 million from the prior linked quarter. Our tax equivalent net interest margin for the current quarter was 3.90% compared to point -- excuse me, compared to 3.84% for the prior linked quarter, a decline of 6 basis points.

Let me give you some color on some of the components. For our interest-earning assets, our yield on average loans was 5.35% for the current quarter compared to 5.36% for the fourth quarter. Loan yields, less accretion for the current quarter was 4.98% compared to 5.07% for the fourth quarter, a 9 basis point decrease. This decrease was primarily due to market competition and to a lesser extent, the Fed emergency rate cuts. Offsetting this decrease was the impact of accretion. Accretion for the current quarter totaled $1.8 million, an increase of $465,000 from the prior quarter and added over 8 basis points of yield to the loan portfolio. Accretion for the quarter was escalated due to the closing of a loan pool, which cause any remaining discounts within that pool to be immediately recognized. Currently, our loan portfolio consists of approximately 37% [Technical Issues] loans or slightly over $800 million, of which $640 million of these have floors. At the end of the quarter, we had over $400 million of these loans that have hit the floors. We will continue to experience a decline in loan yields as we move forward into the second quarter as we see the full effects of the March rate cuts, then expecting to see some stabilization after that. Our liquidity and investment portfolios have also experienced declining yields due to the current interest rate environment. This negatively impacted our margin 5 basis points to 6 basis points.

For our interest-bearing liabilities, our interest-bearing deposit costs decreased 19 basis points to 1.10% for the current quarter, and our overall total cost of deposits decreased 15 basis points to 0.91%.

During the quarter, we shifted $100 million out of broker deposits into more advantageous wholesale funding provided by the FHLB and the Fed discount window.

Overall, we still see opportunities for further rate reductions, largely in our time deposit portfolio. We have approximately 25% of our time deposits, both retail and brokered, maturing and repricing during the second quarter.

Given the movement in rates from the Fed cuts, our pricing committee did an awesome job in lowering our cost of funds in our money market and CD portfolios, and we should see our deposit cost trending further downward during the second quarter. Going forward, our forecasted margin for the second quarter is 3.55%, 3.60%, which includes an estimated 10 to 15 basis points of accretion.

Now, moving on to Slide 12, operating noninterest income. We had a great quarter for operating non-interest income. We experienced over 30% increase from the prior linked quarter and over 65% increase when compared to the first quarter of 2019. Our operating non-interest income to average assets reached 44 basis points, a nice increase from our prior quarter.

Some of the component highlights. Mortgage banking, as expected for Q1, has set all-time production levels of 584,000 due to the current low rate environment. We have a strong pipeline coming into Q2, but we may encounter some headwinds with the COVID-19 slowdown.

Our investment services income increased over 65% when compared to the prior quarter, primarily from strong production and benefiting from 2019 hiring that was done.

Our new arrival to non-interest income is insurance commissions. As part of the Progressive acquisition, we have acquired an insurance agency that services the footprint of Middle Tennessee. We are excited to have the opportunity to extend insurance offerings to our entire SmartBank footprint and look forward for this to be a meaningful, noninterest income component in the future. Going forward, our forecast for the second quarter is having noninterest income at 42 basis points of average assets or $3.1 million.

On Slide 13, you'll find our operating non-interest expenses. For the second time, I'll keep this slide at a high level. Our operating expenses have remained steady with some slight elevation during the current quarter, primarily from the Progressive acquisition and, to a lesser extent, overall growth of the company.

Additionally, when comparing to the prior quarter, be mindful that during the fourth quarter of 2019, we had various tax credits that were recorded and not repeated during this quarter. Going forward, we should see additional efficiencies after the second quarter from the completion of Progressive's core system conversion and integration into SmartBank. Overall, our non-interest expenses were in line with our internal expectations.

Going forward, our forecast for the second quarter is having non-interest expenses around $17.5 million to $18 million, with salary benefit expense approximately $10.8 million to $11 million.

Before we progress forward to the next slide, let's touch base on income taxes. During the current quarter, we took advantage of recognizing some NOL carry-forwards that were made available as part of the CARES Act legislation passed during March. These carry forwards were available from a few of our prior acquisitions.

For the quarter, our effective tax rate was 19.6%. Going forward, our forecast for the second quarter is for our effective tax rate to be in the 22%, 22.5% arena.

Our next Slide 14 gives details on our deposits. On the bar chart to the right, you'll see that our deposits have experienced overall steady growth with Progressive being the primary driver of growth for the current quarter. Deposits ended the quarter at $2.3 billion. Our deposit mix remained relatively stable with non-interest-bearing demand accounts making up over 80% of our deposits.

The lower left portion of this slide shows our cost of total deposits decreasing 15 basis points from the linked quarter and decreasing 19 basis points year-over-year. As I previously mentioned, we'll have opportunities to move our cost of deposits further downward.

With that said, I'm handing slides over to Rhett Jordan, our Chief Credit Officer, to go over loan and credit-related info. Rhett?

Rhett Jordan -- Executive Vice President, Chief Credit Officer

Thank you, Ron. Beginning on Slide 15, you will see that we finished the first quarter with a portfolio distribution profile that has been very consistent for several quarters. Our overall loan portfolio grew by approximately $242 million for the quarter. As Miller mentioned earlier, we realized $54 million in net loan growth, organically, with the remainder attributed to the completion of our acquisition of Progressive Savings Bank in Tennessee. Our loan mix stayed pretty consistent even after the merger, with approximately 80% of the portfolio in real estate secured loans further broken down as 22% in consumer real estate, 22% in owner-occupied commercial real estate and 37% in non-owner occupied commercial real estate assets.

We ended the quarter with CRE capital ratios of 87% and 274% in respective regulatory guidance segments, still very manageable, consistent with our positioning in recent years and well below the regulatory guidance levels.

Overall, a solid quarter performance led primarily by the merging in of a very complementary portfolio from Progressive Savings that help diversify our geography and improve the granularity of our portfolio with the post-merger average loan size of approximately $205,000.

Moving on to Slide number 16. As Billy mentioned earlier and as our counterparts throughout the industry will attest, the COVID-19 event has been a considerable challenge to manage through and has created significant disruption in the normal daily operations of many of our corporate and consumer clients, as well as our bank itself.

At the beginning of the event, our management team sat down with our regional credit and production leads and identified the segments of the portfolio we feel might be the most at-risk to this COVID-19 disaster. The result of that discussion identified five industry segments or subsets of our portfolio we felt were at the highest risk of impact, shown here on Slide 16. Representing approximately 18% of the portfolio, the typical operating profile businesses in these areas we felt presented considerable risk of both near term severity and longevity of recovery from this interruption, thus requiring some heightened focus over the next several weeks and months, to more closely monitor performance and expectations.

However, we still feel confident in our outlook. Because throughout the recovery cycle over the past several years, we have continued to maintain several key fundamentals in our portfolio management efforts, such as maintaining a diversified portfolio, both geographically and across segments, requiring hard upfront equity positions at origination in real estate transactions, strong market level leadership of both sales and credit with long-term market familiarity, conservatively structured loan transactions for term, amortization and covenant maintenance, and granular portfolio positions both regionally and whole bank with an average loan size of approximately $209,000.

We believe these key factors will make successfully managing through this event considerably more positive for our company. As we referenced earlier in the presentation, we proactively compiled a series of payment modification options that we made available to clients, very early in the lifecycle of this event, in an effort to provide us calming and effect on the near-term challenges as possible.

Our lending teams reached out to clients in these aforementioned segments, as well as other larger exposure relationships to offer words of encouragement and to let them know that SmartBank was here to help them in every way possible.

This allowed us to very early on, identify clients with direct impact of their business operations, as well as those who were beginning to see some negative impact and expecting things to worsen as the closings and stay-at-home orders expanded.

As you can see on Slide 17, as the closures mounted, across our primary three state footprint, the volume of request for payment assistance increased significantly. And by April 24, our number of accommodated transactions have grown to 629 with total balances outstanding of $509 million or roughly 21% of our total portfolio.

As expected, hospitality and foodservices' clients have led the way in modifications, representing approximately 5% and 3% of loan portfolio balances respectively.

We believe that our proactive assistance to our clients' early on, coupled with those portfolio management characteristics I mentioned previously, will assist us in working through this exposure position successfully.

The other component of the COVID-19 event that has utilized considerable resources and significant time and focus has been the implementation of the Paycheck Protection Program segment of the CARES Act. Knowing that everyone on the call is intimately familiar with that program and its purpose and intent, I won't bore you with another dissertation and just go into our bank's involvement in the program.

We viewed participation in the program as a significant opportunity to assist our clients, our community, and our company and shareholders. Looking at Slide 18, as of the completion of the first round of PPP funding commitments, SmartBank had processed and closed roughly 1,700 loan applications totaling $239 million. Of the applications we processed, our primary three-state footprint of Tennessee, Florida and Alabama, represented roughly 95% of total applications authorized. We processed 493 applicants combined across the five key impacted industry segments I mentioned earlier for just under 30% of the total applications.

Ironically, we processed at least one application in each of the 20 primary NAICS code description segments. The mix of the loan amounts generated approximately $9 million in fees to the bank. A very tiring yet rewarding experience for our team, and we began submitting another 500 plus applications on Monday, when the second phase of PPP funding commenced. We are continuing that process to-date and are cautiously optimistic we will get most of these applications submitted in the second phase.

Obviously, the COVID event has made predicting future credit metrics results challenging. But as you can see on Slide 19, through the end of the first quarter, our asset quality performance continued to track strong and positions us with a very sound base.

Our NPA ratio was 0.31% of total assets at quarter-end, up slightly from the Q4 2019 level, based primarily on the inclusion of other real estate assets acquired through the Progressive Savings merger, but still about half of peer set. Net charge-offs for the quarter were 0% and below peer as well.

Our allowance measured 0.63% at the end of Q1 2020. And coupled with our remaining fair value discounts on the acquired loan portfolio, which totaled about 1.3x our allowance balance, our quarter-end position provides us a very strong support to potential increases in credit risk metrics that may arise in the aftermath of the COVID event.

Now, I'm going to turn it back over to Ron to talk a little more about the reserve positioning. Ron?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Thanks, Rhett. Let's touch base on our reserve, Slide 20. There's much detail on this slide. We wanted to include some tabular information relating to our originated and acquired loans, as well as the corresponding allowance of discounts.

Just a reminder that we are on the incurred loss model. For the current quarter, our allowance for loan losses increased by $3.2 million or 31% from the prior linked quarter. This increase included an additional $2.5 million associated with the economic factors caused by the COVID-19 pandemic. Focusing on the bold right hand columns, our overall allowance of total loans increased to 0.63%, our overall discount to acquired loans was at 3.33%. And with the combination of the allowance of discounts, our overall coverage total loans is up 1.43%. We feel our coverage is at reasonable levels at March 31 and our allowance for loan losses is trending appropriately.

With all that said, we have recorded an appropriately sized provision this quarter and we expect to record similar amounts as or if needed going forward.

Moving on to Slide 21. This gives us current snapshot of our capital position. Over the last year, we continued to maintain a solid capital position. During 2019, we initiated our first quarterly dividend, and during the first quarter of 2020, we started repurchasing our company shares from the open market.

During the current quarter, our acquisition of Progressive had minimal impact on our capital ratios. Fast forward to today, as we took advantage of the share buyback opportunity, we are not currently active in buying back our shares at this point. We have also just declared another regular quarterly dividend to our shareholders.

As of March 31, 2020, our current capital position remained strong and well above the well capitalized benchmark. With our strong capital ratios, as well as our outstanding credit quality, we are well positioned to move forward into the COVID-19 environment.

Moving on to Slide 22, liquidity; we decided it was prudent to bolster our on-balance sheet liquidity by significantly increasing our cash positions and increasing our overall off-balance sheet funding sources. We also intend to fund the majority of the Payroll Protection Program loans with the Fed's PPPLF facility. We view this as an ideal funding match and provides relief for our regulatory leverage ratio.

And lastly, our earnings profile on Slide 23. Some good information here. Well, let's focus on the third bullet. Our overall revenues continued to increase quarter-over-quarter, year-over-year. We continue to provide sound building blocks as our company grows.

With that, I'll hand it back over to Billy.

Billy Carroll -- President & Chief Executive Officer

Thanks, Ron. I appreciate it. Guys, to summarize, another quality quarter for us. And as you heard Rhett discuss, we've got a really good handle on the portfolio. The team will closely monitor it, staying in contact with our clients as their economies all start to restart.

We feel good about our loan book, conservative LTVs, seasoned solid borrowers. The pace of the recovery will determine how that will play out -- how long we will need to play a little more deepens than we normally would. But that said, we will continue to evaluate opportunities in this environment.

One opportunity was, and we've touched on it a couple of times, the PPP opportunity was a tremendous one for us. Our quick response to the requests, not only from our clients but for a number of prospects that we had been quoting has been a real positive for us and should yield some great new relationships.

I can't tell you how proud I am of this team, hearing the comments from our clients, seeing social media post about how our hard work made the difference of whether they kept their staff on payroll. It's times like these when you solidify yourself as the bank in a marketed. And I think we did that in a big way in a bunch of hours.

Our company is positioned very well to handle the current environment and excel as our markets restart. So, I'll stop right there and we'll open it up for some questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Fitzsimmons from D.A. Davidson. Go ahead.

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

Hey, it's Kevin Fitzsimmons. Guys, how are you?

Billy Carroll -- President & Chief Executive Officer

We gather back, Kevin. How are you?

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

Good. So, listen, I appreciate all the detail and all the -- and I do acknowledge the different basis that some companies are using for measuring and calculating the reserve, right? There is some bigger companies using and adopting CECL. You guys are not subject to that and I don't blame you for not rushing in to do that. But I'm just curious about like, internally, your own thinking about this, whether given how folks are so focused on reserves and capital as opposed to earnings, did you really debate or wrestle with the subject of using more of your healthy pre-tax pre-provision income to bolster that reserve? Just recognizing that optically your reserve ratio looks low, right? You did make the point that when you take into account the purchase discount that takes it up to a certain level and that's just, I think a factor of how your company has been built up, right, with active M&A. But was that -- I'm just curious if there were a lot of -- was there a back and forth on whether to put a bigger qualitative factor in there, deploy more of that earnings to get that up as opposed to, I guess, the approach is more of like we're going to base it quarter-by-quarter going forward, based on what we see, more in the near term in front of us? Thanks.

Billy Carroll -- President & Chief Executive Officer

Yes. And Kevin, I'll take that and then I'll flip it over to Ron, let him give some colors. Yes, I mean, obviously there was a discussion around the COVID-related portion of that this last quarter. To me, and I think the consensus around their table was, obviously we want to recognize the fact that there is something going on, but there is still so much to be determined. And yes, we could have added more to it. But from our standpoint and Ron will get into the detail related our calculation in our qualitative factors, we felt like at this time what we did was prudent, obviously could have done more, obviously with the capacity, the income tailwinds that we're going to have throughout the remainder of the year, we'll have the ability to do more if needed. We just didn't feel like it was appropriate to overload in a time where we really don't know what the next month or two will hold.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

You have to be able to justify and back it up.

Billy Carroll -- President & Chief Executive Officer

Yes. And I think, Ron, you might speak just kind of the analysis piece of how we've measured it.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Yes. I mean, Kevin, we -- this was a challenging discussion. The incurred loss model was not meant to predict what had happened. CECL did. So, when we came to quarter-end, we were hamstrung strong by what do we report versus what we know is going to happen. We did take the opportunity to take advantage of more of the current unemployment GDP growth, inflation information and kind of what was going on in our forecast. But it was -- we had a healthy debate and obviously we expect our qualitative factors to increase through this quarter, not knowing where they're going to end by the end of the year. But I don't know if you need to know the pieces. I know you're familiar with the incurred loan-loss model. But yes, we had a very healthy debate on this topic.

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

And I guess the way we should look at it at the end of the day is you're just -- it's being kept in capital versus being transferred to the reserve, right? Which is effectively is what CECL does at this point in the cycle?

Billy Carroll -- President & Chief Executive Officer

Yeah. And what you're -- we're saying is, gosh, you look a lot more of the financials that I do, the ones I've looked at. It just different takes. I think for us, we -- at the end of the day, we feel strongly about our ability to manage our loan book through this especially with the guidance we've been giving, the ability we've had to do some things through the regulators to -- with some of these deferrals and interest onlys. And yeah, there's just so much uncertainty as to really how quickly the economy will restore. We just didn't think it was prudent to overload the reserve... here in this first pool.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

And we have -- those are thanks to the positive effects of the PPP money [Indecipherable] see.

Billy Carroll -- President & Chief Executive Officer

But to your point -- yeah, it's in capital and as we said, we should have a nice earnings tailwind this year with some of the fee income. We've been able to kind of anticipate accumulating through these programs. So, we've got the ability to add more as and when needed.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

And Kevin, just to finalize some of our comments on this is that we started with a lower base. Our credit quality and our historical losses are so low, even though we're not as a percent of portfolio similar to a lot of the banks, but we started from a much lower point. So we -- again, we feel comfortable on the amount we put in for this quarter.

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

No, that's a good point, Ron. That's a fair point. You guys mentioned a couple of times PPP is the way we should be thinking about this as the balances flow into average loans in second quarter, they flow out third quarter dilutive to the margin in second quarter. And then does the fee -- have you guys figured out whether -- are you going to have the fee come in through the margin most likely in the third quarter maybe into fourth quarter? Is that how you see it playing out?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Yeah. What we're look at Kevin is I think we will -- it will definitely go through the margin and probably more practical, it's probably going to be a fourth quarter event. I think the overloaded with SBA and everything else, we're kind of looking -- I think fourth quarter is probably more appropriate than third at this point.

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

Okay. And Ron, real quick, I think you had said the margin guidance for second quarter is 3.55% to 3.60%. Can you -- what's the core margin versus contribution to -- oh, did you say 10 basis points [Phonetic] to 15 basis points [Phonetic] of accretion?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

10 basis points [Phonetic] to 15 basis points [Phonetic], yes. Yes, sir.

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

Is included in there?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Yes, it is.

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

Got it. Okay. Thank you, guys.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Thanks, Kevin.

Billy Carroll -- President & Chief Executive Officer

Thanks, Kevin.

Operator

Our next question is from Feddie Strickland from Janney Montgomery Scott. Go ahead.

Feddie Strickland -- Janney Montgomery Scott -- Analyst

Good morning, guys.

Billy Carroll -- President & Chief Executive Officer

Good morning, Feddie.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Good morning, Feddie.

Feddie Strickland -- Janney Montgomery Scott -- Analyst

Just curious how did deferrals transition out into full pass rated credits and deteriorate to criticize. I guess we guys need to see to make that move, are you going to be looking at a lot of these deferrals at June 30? Will we see more reevaluation in third quarter? Just kind of wondering what the timing on that is. I know there is some regulatory guidance there too, but if you could just elaborate.

Billy Carroll -- President & Chief Executive Officer

Rhett, you want to jump in on that one?

Rhett Jordan -- Executive Vice President, Chief Credit Officer

Sure, I'd happy to. Feddie, we basically took the approach of clients that requested modifications due to the COVID event. The way our internal risk rating alignment is set up, we have a watch category that we really have specifically in position for, what we call, short-term events of atypical type transactions that maybe create some, I guess, question as to future credit risk. And so, we've taken the position as each client that we have talked with has requested a modification. We placed those into our watch category for purposes of tracking and that we are implementing a program with our relationship managers and our regional credit teams basically to all clients that have requested modifications -- commercial clients that is, to basically do a monthly check in and we'll be updating some information at the account level and then reviewing that in our monthly credit management team meetings.

Feddie Strickland -- Janney Montgomery Scott -- Analyst

Got you. That's helpful. And just one more from me. Just thinking about the new business opportunities, I know you guys said PPP led to some of that. Is there any more color you can give on that? Is some of that coming from frustration, maybe some customers who went to big banks and weren't able to get any traction with them on PPP? Is that driving some of the new customer relationships? Just wonder if you can give little more color on that as well.

Billy Carroll -- President & Chief Executive Officer

Yeah, that's exactly it. We -- this was really just a great opportunity for us on a number of those fronts. So like I said, there's a lot of the larger banks, in particular, just really struggled to get a lot of clients into a pipeline early. And so, our team, Greg Davis, our Chief Lender, put together an outstanding process that mobilized a team of about 25 of our staff members that just started working right out of the gate. And so, we were able to confidently go and get people into our pipeline. So where they may have ran into a wall or didn't have a -- couldn't get contacted at one of the larger banks, we were able to say, yes, we would take that application and that really continued on for that 10-day process during round one and we were very successful. We were able to get really all of our clients that had completed packages through and around one plus a number of these prospects and have done the same thing in round two. It's funny just while we were sitting, I got an email that came in from a Knoxville CPA that we were helping a client of theirs yesterday and got them into the pipeline, got them processed. And just a [Indecipherable] me about thanks so much, can't believe how quick you all worked to get these things handled. From now on, I'm referring all of our clients to SmartBank. So, it's really just that type of information that we're getting really across the whole footprint.

So, I think a lot of it is -- and it's probably -- I think I know a lot of banks did a good job with this program. I just think we really took advantage of it as an opportunity to show how we can do business and I think it will pay some nice dividend.

Miller Welborn -- Chairman

Yeah, I think it's a perfect big example of what a good community bank can and should do. Great way for us to show our markets a bank is big enough to make a difference, but small enough to give that personal service. And our guys were not afraid to work 24/7 and push these through. They weren't going home at five o'clock, six o'clock, seven o'clock, eight o'clock at night and it will reap dividends for us down the road.

Rhett Jordan -- Executive Vice President, Chief Credit Officer

We got quite a few of our non-client applicants in our market areas came from referrals from our clients that we had helped. So it goes a long way as well getting that vote of confidence from the customers of our bank that we took care of them in such a fine way that they referred those that weren't banking with us at the time.

Feddie Strickland -- Janney Montgomery Scott -- Analyst

Got it. No, that's great. Thanks for the color, guys, and appreciate you taking my questions.

Billy Carroll -- President & Chief Executive Officer

Thanks.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Thanks.

Operator

[Operator Instructions] Our next question is from Joe Fenech from Hovde Group. Go ahead.

Joe Fenech -- Hovde Group -- Analyst

Good morning, guys.

Billy Carroll -- President & Chief Executive Officer

Hey, Joe.

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Good morning, Joe.

Joe Fenech -- Hovde Group -- Analyst

Hey, Billy, just -- and Miller, I guess -- well, everybody, just on PPP, I know you just kind of touched on it again. The banks I've seen, they seem to have been all over this. Most of them have like a relative, either fintech or technological or digital advantage or they were very active with the SBA previously as a preferred lender. You're saying it was more of a quicker response and an ability to mobilize more quickly. Was that it or were there other aspects to this that really drove the results? Just trying to kind of get a handle on it because it is just such an outlier in terms of the success you guys have had compared to other banks really of any size.

Billy Carroll -- President & Chief Executive Officer

Joe, I'll tell you. We were -- we've done some -- we're an SBA-preferred lender. We have not -- we've done a fair amount of that work. We did not have the automated online systems. I'll tell you, our work is just flat hustle, that's it. I mean, our -- if their folks jumped on this team of 25, worked 15 plus hour a day for 10 straight days. I mean, I think we took Easter Sunday off. I think that was it. And...

Rhett Jordan -- Executive Vice President, Chief Credit Officer

Some took Easter Sunday off, not all.

Billy Carroll -- President & Chief Executive Officer

Greg stayed in it, but I'll tell you, it -- just hustle really was the difference in that and just really working our tails off to get those things through.

Rhett Jordan -- Executive Vice President, Chief Credit Officer

Yeah, I'm not going to talk against any of the fintech, because we obviously love fintech, but we looked at a couple of those and did some analysis and just decided to put together an internal program and bust our tails and it's just downright hustle.

Billy Carroll -- President & Chief Executive Officer

We weren't -- Joe, we weren't looking to really -- we wanted to keep this and we did, we kept it within our market. We kept in with our client base. We didn't really lever it to go outside of our zone. We use this to help our clients and then to also help some folks that we wanted to be our clients, and that's really where we put 100% of the focus. This round two is well -- we've really used this round. I had a number of relationships and some friends with some -- in non-profit groups here in our East Tennessee region that a lot of smaller non-profits, they just couldn't figure out how to get into the pipeline in the first round and they -- I had a couple of those folks reached out to me, that word spread. I think you picked up 30 or 40 really quality small non-profits here in East Tennessee that we got into a pipeline.

So, we're also trying to build a lot of community goodwill on this and help on some of these businesses and non-profits. It just didn't have a mechanism to try to help them to. So, a lot smaller, a lot more granular in the second round, but I think we're probably building a lot of goodwill here in the second round as well.

Joe Fenech -- Hovde Group -- Analyst

Okay. That's helpful. And then, guys is there a simpler way to think about the PPP impact. Roughly a 3% net yield on the overall balance, then a fair way to model it is to maybe assume that roughly 3/4 of the balance is forgiven, which means it's brought into income. I know that's -- whatever you say is not necessarily I'm going to take as a prediction. From our standpoint, though, is that kind of a fair way to model at this point?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Yes, we're kind of looking at it. Yes, 3% spare, I think we're -- I'm not sure we'll get to 75%. We're kind of looking at 70%. So, you're right there. So, yes, I think that is fair, but maybe 70%. Again, I don't know if we'll hit that 75% mark, but we'll see.

Joe Fenech -- Hovde Group -- Analyst

Okay. And then last one from me. On the provision, for what it's worth, what you all did seems largely consistent to me with the others that haven't adopted CECL. So, not sure there's a valid comparison at all with larger banks that have adopted CECL and the size provisioning they took.

So, I guess -- so with these deferrals in the guidance from the regulators though, we're hearing it could be extended beyond the initial phase here. So, you all might not see and all the other non-CECL adopters might not see problem assets and/or into the problem stage until late this year. So, specifically, can you give us some help on what are the key factors you'll kind of be looking to that will guide your reserve building over the course of this year?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Yes, we use the national -- first we look at the national economic forecast. As I said, inflation, GDP growth, unemployment, that's going to be the fast-moving one. They're all rated -- there is a nominal -- an aggregate rate we used for those. And then we compare it to our local forecast to make sure they're in line. If there's any deltas, we will take care of that. And then, we jump into our loan portfolio specifics, whether it's a concentration loan to value changes, any type of -- again, loan deterioration and some of the regulator -- if there is any other regulation factors that come into play.

So, those are just a few of the components we use, but it's not one item that's going to drive our allowance. It's just a homogeneous amount of other qualitative factors that are rated.

So, it will obviously, next quarter it will go up, our qualitative factors, the amount of reserve. Now, where it goes from there, I guess it's meant to be seen.

Joe Fenech -- Hovde Group -- Analyst

Okay. And what was the date, Ron, roughly, where you had to cut off to determine the key factors for the first quarter?

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Yes, we did use 3/31. We probably got into a little bit of April. Like, our unemployment rate that we use was 5.1%, a little bit higher. So, really slightly right after the end of the quarter because we had to close up and go forward. I think the national -- I don't even know where the national unemployment rate is today. It's probably north of that, but -- so I would say week after -- first week of April.

Joe Fenech -- Hovde Group -- Analyst

Okay, got it. Thank you.

Miller Welborn -- Chairman

Thanks, Joe.

Operator

At this time, we have no more questions, so it concludes our question-and-answer session. I would now like to turn the conference back over to Miller Welborn, for closing remarks.

Miller Welborn -- Chairman

Thanks, again, Kate. We appreciate you joining today, I will say. And again, what great energy we have as a team, lots of effort in all our departments. We're continuing to be engaged and involved, not only with our clients but helping a ton of small businesses in our market. And I can't even emphasize enough a point Ron made earlier about tangible book value growing 8% year-over-year. We feel like that's very strong.

We will continue as a team and as a Board to work and strengthen this company every day. That's not most days or some days, but every day. We're going to get up in the morning and make this bank stronger and we appreciate you joining us today and talk to you soon.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Miller Welborn -- Chairman

Billy Carroll -- President & Chief Executive Officer

Ron Gorczynski -- Executive Vice President, Chief Financial Officer

Rhett Jordan -- Executive Vice President, Chief Credit Officer

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

Feddie Strickland -- Janney Montgomery Scott -- Analyst

Joe Fenech -- Hovde Group -- Analyst

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