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Bryn Mawr Bank Corp (NASDAQ:BMTC)
Q2 2020 Earnings Call
Jul 21, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Bryn Mawr Bank Corporation's Second Quarter 2020 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Mike Harrington, Chief Financial Officer. Please go ahead.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Thank you, Aileen, and thanks everyone for joining us today. I hope you had a chance to review our most recent earnings release and presentation. Both of these documents are available on our website at bmt.com in the Investor Relations section. We will be referring to the presentation during this conference call. On the call with me today are Frank Leto, President and CEO and Liam Brickley, Chief Credit Officer.

Before we begin, please be advised that during this conference call, management may make forward-looking statements, which are not based on historical facts. Please refer to the disclaimer labelled forward-looking statements and safe harbor in our earnings release and presentation for more information regarding what constitutes a forward-looking statement.

All forward-looking statements discussed during this call are based on management's current beliefs and assumptions and speak only as of the date and time they are made. The Corporation does not undertake to update forward-looking statements. For a more complete discussion of the assumptions, risks, and uncertainties related to our business, you're encouraged to review our filings with the Securities and Exchange Commission located on our website.

I would now like to turn the call over to Frank.

Frank Leto -- President and Chief Executive Officer

Thanks, Mike. And I'd like to thank you all for joining our earnings call today.

The last several months have redefined how an organization operates. We've all had to change our perspective in every facet of our lives while adapting to this new normal. The current environment has been one of the most challenging our organization has ever faced in our more than 130 years in business, but our resilience is one of which I am profoundly proud. Our employees continue to rise to new challenges each day brings, and I'm confident in our team's ability to overcome the obstacles we face.

We continue to believe investing in our people, processes, and technology are the hallmarks of a successful and sustainable company. This has become more evident in the current operating environment and the results of those investments bore fruit in Q2. Our recent results are a sign of the skills, resiliency, and nimble responses from our team.

During the second quarter, our net income of $15 million or $0.75 of diluted earnings per share. The second quarter included several notable items as detailed in our earnings release, along with an 8-K filed on June 29, 2020. One example of our ability to move quickly was the sale of the PPP portfolio to the loan source. Starting in the early part of the second quarter, we originated and funded almost 1,800 loans, totalling approximately $300 million. After thoughtful review and consideration, we decided it was in the best interest of the organization and our clients to sell this portfolio in the same quarter.

While the sale generated non-interest income of $2.4 million, in addition to the fee income which we accreted through the margin, we determined that further investments would be required if we were to manage the loan forgiveness, and service the portfolio internally. In our opinion, the operational risk associated with this activity, together with the constantly evolving parameters of the PPP program, outweighed the benefits of managing the forgiveness and servicing process in-house, and led to our decision to sell the portfolio.

We also disclosed plans for optimizing our real estate footprint and operational efficiency. For well more than a year, BMT's been working on a comprehensive facility and staffing strategy, with the intent of optimizing both our front and back office space, to better serve our clients and to structure a staffing model to deliver our services more efficiently and effectively. Near the end stage of this planning for these changes, the pandemic hit and provided new and important real-time information about our ability to serve our clients in a remote operating environment.

With this information, we modified and in some cases accelerated our strategy. As previously disclosed, we plan to exit approximately 33,000 square feet of office space, both owned and leased, which we expect to be completed by the end of this year. Additionally and consistent with our focus on better processes and use of technology, we identified efficiencies, which resulted in the decision to eliminate 25 enterprisewide positions. We did not make these decisions lately. However, we firmly believe [Technical Issues] to make BMT stronger and better positioned for the future.

Finally, we unwound BMT Investment Advisors. This entity was established to provide investment management services to the BMT multi-cap fund, the mutual fund that was liquidated in the second quarter. With the liquidation of the mutual fund, the advisor was no longer required. The cost related to this action of $2.2 million will be recouped in the form of expense reduction, little over two years.

While we navigate the current world we live in, we're mindful to keep our customers, employees, and communities close to every decision we make. We work hard every day to ensure our stakeholders are safe, have access to all the resources they need, and aware of all the services BMT has to offer. We continue to adapt the needs of our customers by ensuring that the solutions and services we offer help them in this dynamic environment. Part of our success, no doubt, is attributable to the investments we've made in technology. An example of this investment, consistent with the strategic framework depicted here, was improving our digital experience by partnering with nCino in the automation of our deposit account openings. As depicted in the slide, deposit account applications increased 300% from March through April, and remained at elevated levels in May. This increase in openings were enabled by our nCino online account opening solution, which we deployed in the fourth quarter of 2019. Also depicted are statistics related to mobile banking where we saw usage increase by 25%.

These advancements to our technology platform continue today, as we are moving forward on multiple fronts to automate processes, leverage nCino's capabilities, and transition our systems to the cloud, all with the objective of getting more efficient and improving our customer experience and reducing our operating risk.

Also depicted on this page is our paper usage, which dropped two-thirds over the last three months. While the cost saving might be not material, the fact that we've been able to effectively operate the business while reducing paper usage is just another example of the operational and cultural transformation taking place at Bryn Mawr, as we adopt and adapt our work environment processes to this new environment. This too is part of our broader ESG strategy, to further help reduce use of natural resources, as is a reduction in our carbon footprint by having a significant percentage of our employees working from home.

Finally, our Board of Directors approved a $0.27 per share dividend. I'm very proud that this is our 111th consecutive quarterly dividend.

With that, I'd like to ask Mike now to discuss some of our second quarter results. Mike?

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Thank you, Frank.

For the second quarter 2020, we posted GAAP net income of $15 million or $0.75 per diluted share. The main drivers for the quarter included strong fee income as a result of the PPP loan sale as well as solid results from our wealth and capital markets teams. Also driving the results was a lower provision compared to the linked quarter and solid expense control. On a core basis, net income was $15.4 million or $0.77 per diluted share.

Our core net income during the second quarter excludes the gain on sale of the PPP loans, BMT Investment Advisors wind down cost, and severance associated with the staff reduction. Net interest income increased 2.9% from the first quarter. While interest income on loans and leases were lower as loan yields declined, a methodical approach on deposit pricing saw interest expense related to deposits decrease over 40%. Tax equivalent net interest margin decreased from 3.38% to 3.22% quarter-over-quarter.

The main contributors to the decline included a decrease in the loan yields and an increase in cash held throughout the quarter. With the sale of the PPP loans, our cash position is substantially higher as of the end of the quarter and is likely to remain so in the near term, which is expected to put pressure on the net interest margin. The provision for the second quarter was $4.3 million. This additional provision was required to account for a change to our estimates related to the timing of peak unemployment. As we continue to operate through this uncertain economic cycle, the quantitative and qualitative factors pertaining to the CECL methodology, may cause volatility in our provision from quarter to quarter. Further, as discussed on our last earnings call, unemployment is the key driver of future losses in our CECL model. Given the extreme uncertainty related to the economic environment and the possibility for unemployment expectations to change, our provision will likely follow an uncertain path. Non-interest income increased 24% quarter-over-quarter. While the PPP sale had a sizable impact on this increase, our wealth and capital market segments also had good quarters.

I would also note that our wealth revenue excludes a substantial portion of the tax service fees we typically earn in the second quarter. The recognition of these fees was delayed due to the extension of tax filing -- due to the extension of the tax filing deadline, and will be earned in the third quarter. Adjusted non-interest expense, as detailed on the last page of our earnings release, removed certain non-interest expense items. Such items excluded from the second quarter include: amortization of intangibles; BMT Investment Advisors wind down cost; and severance associated with staff reductions.

Compared to the first quarter, adjusted non-interest expenses were down $2.4 million and reflected in our lower efficiency ratio. As Frank mentioned earlier, we've spent considerable time reviewing all aspects of the business. The expected exit of the 33,000 square feet of office space to occur by year end, will have approximately annual recurring pre-tax cost benefit of $1 million. Regarding the elimination of positions noted earlier, we estimate the annual recurring pre-tax benefit to be $2.2 million.

Additional opportunities to improve efficiencies are likely to be realized as we execute our strategy in a post-COVID world. These areas of opportunity are expected to include further decreases in occupancy cost, as well as the realization of the efficiencies associated with our technology plan.

Part of the the increase in our cash flow inflates to deposits growing over 12% from the prior quarter. Leveraging this growth in deposits, we lowered our interest bearing deposit costs from 1.08% in the first quarter to 0.61% in the second quarter. We remain vigilant to the market pricing and client behaviour, and believe that maintaining robust liquidity is essential in the current environment. As noted earlier, cash holdings may be elevated in the short term as opportunities to invest our excess liquidity are limited. Capital at both the Bank and Corporation at the holding company remains well above the levels needed to be deemed well capitalized. We've spent considerable time and effort stressing our capital position under varying degrees of severity, leveraging both internal and external resources. We believe, we have a good idea of the possible loss outcomes and resultant capital levels under these various scenarios, and are well positioned as we enter the second half of this year.

Consistent with our feelings related to our capital position, we increased our dividend modestly as noted earlier. The Company has ample liquidity at the holding company to both support the Bank as a source of strength, and pay future dividends.

As you'll note on Slide 8, asset quality was fairly stable in the second quarter, with net charge-offs falling modestly from the prior quarter. Provision for credit losses was noticeably lower due to the implementation of CECL during the first quarter, following the economic downturn.

Slide 9 is an update from the previous quarter, which depicts a transition from the incurred loss model to CECL on January 1, 2020, followed by the impact of our allowance from the economic downturn up until the end of the first quarter. Change from the first quarter to the second quarter was less dramatic with allowance for credit losses on loans and leases increasing approximately $900,000.

I'll now turn the call over to our Chief Credit Officer, Liam Brickley, who will provide additional commentary on the Bank's loan portfolio.

Liam Brickley -- Senior Vice President, Chief Credit Officer

Thanks, Mike.

As indicated on Slide 10, our portfolio did not change significantly from the first quarter and remains diversified across borrower and property types. We're spending considerable time working alongside our borrowers, specifically those who are more susceptible to the current environment. We're an experienced commercial real estate lender, which is a category that comprises a significant portion of our overall portfolio.

At the end of the second quarter, 27% of our pre-nonowner-occupied portfolio was in deferral. Since that time, this amount has been gradually declining, with the bulk expected to come out of its initial deferral plan in August. However, depending on circumstances and at our election, a portion of these loan deferrals may be extended for an additional 90 days.

As mentioned, during the first quarter earnings call, our leasing portfolio is more vulnerable to downturns in this economy. We've remained conservative as we approach this portfolio, which is evident in the nearly 6% provision on total exposure. Approximately 18% of the lease portfolio is in deferral. The average resume payment date for these loans is coming this week.

As we transition to Slide 11, we can see a more detailed analysis of our commercial real estate portfolio. The underlying metrics of these segments have not changed materially from the first quarter. However, we have made several adjustments to our internal loan risk ratings. Again, we're taking a conservative approach in our methodology. This is most apparent in the hospitality sector where 73% of our total loans are rated substandards. We believe this action is prudent and we rate each loan according to the underlying fundamentals, along with current market data and market conditions.

While we believe these portfolios will hold up well in the current environment, we are taking a conservative approach now in how we view them. Our trends around lines of credit usage have been positive over the last quarter and year-to-date. Since the end of the first quarter, our line of credit usage actually decreased 10% or $79 million.

On slide 12, we outline the detailed schedule of loan deferrals by customer segment. At the end of the second quarter, approximately 21% of the total portfolio was in the deferral program. Over the past few weeks, we have seen this percentage gradually decline and anticipate that this will continue as many of these loans come out of their initial 90-day deferral term. However, as previously mentioned, at our discretion, we may extend some of the deferral periods for select clients, based on certain underlying factors. In the second quarter earnings release, we included new information as it pertains to classified and criticized loans. A trend chart depicts this data on Slide 12. As we continue to conduct thorough reviews of the entire portfolio, we've initiated several downgrades, primarily in our hospitality credits, which is evident in the sharp increase quarter-over-quarter. We believe that taking a proactive approach is vital to address the concerns in this current environment, and warrants frequent analysis of our portfolio. We believe volatility will persist for some time, but are confident in our team's ability to address the issues accordingly.

With that, we'll turn it back to Frank.

Frank Leto -- President and Chief Executive Officer

Thanks, Liam, and thanks, Mike. At this point, we'll open up the call to questions, operator, if you have any questions in the queue.

Questions and Answers:

Operator

[Operator Instructions] Our first question today comes from Casey Whitman with Piper Sandler.

Casey Orr Whitman -- Piper Sandler -- Analyst

Good morning.

Frank Leto -- President and Chief Executive Officer

Good morning, Casey.

Michael Perito -- KBW -- Analyst

Morning.

Casey Orr Whitman -- Piper Sandler -- Analyst

Good morning. I guess I'd start just with all the expense initiatives you discussed. Can we expect the incremental impact to flow right to the bottom line or do you expect to reinvest to, say, it's elsewhere?

Frank Leto -- President and Chief Executive Officer

Mike, let me start and then you can jump right in on this.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Yeah.

Frank Leto -- President and Chief Executive Officer

Thanks. Casey, obviously you know Bryn Mawr, and we're continuously investing in the enterprise. I don't know that we have specific earmarked dollars that we're going to use of the savings at this point in time. I think most of it will drop to our bottom line, but understand we've never worried about investing some money today for the pay off later on. And I think, you see that in the evidence of this quarter, our investments in technology over the last few years, our investments in our personnel over the last few years, and our investments in our process improvement have really paid off.

So, Mike, I don't know you want to add something to that, if that helps?

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Yeah, just timing -- the real estate since that won't be executed till the end of the year. The real estate benefit won't happen until 2021. You should see immediate impact from this staffing changes that we made and immediate impact from the wind down of the Investment Advisor.

Casey Orr Whitman -- Piper Sandler -- Analyst

Got it. Thank you.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Got it? Okay.

Casey Orr Whitman -- Piper Sandler -- Analyst

Yes. Yes. Okay, fine. Liam, let me turn to you. Maybe just a little bit more color on the hospitality book. Is that almost all hotels and can you give us some information as to where that book is primary located? Is it all on market to which hotel chains? And then, would it be safe to say that the majority of the hospitality book was on deferral at quarter end, at least? Thanks.

Liam Brickley -- Senior Vice President, Chief Credit Officer

Yes. We've a modest exposure to the hospitality sector. The bulk of it are flagged hotels in in our primary trade area, Southeast Pennsylvania, New Jersey, Delaware, and as far south as Ocean City, Maryland. The vast majority of that exposure was in deferral in Q2. And we're having conversations literally this week, next week on the next round of deferrals, and beginning to see some positive movement. These are all just -- we are a recourse lender, so 100% of this exposure is supported by sponsors, who have historically supported their properties. The decision to downgrade the vast majority of the exposure was strictly a response to the cash flow impact of COVID and occupancy rates declining rapidly. And until such time, as we've have visibility on what a sustained recovery looks like, we think those ratings are appropriate.

Casey Orr Whitman -- Piper Sandler -- Analyst

Got it. Thank you.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Casey, can I say one -- Casey, I'll just add one thing to Liam's comments, which is that the CECL building of the reserve happened first. So, there's some timing here too, like if this would have all sequenced at the same time, you would have seen these loans become classified or downgraded appropriately based on the current conditions we're dealing with, that would have coincided with the build of the allowance. So that building allowance happened first, and then this follows. There's a natural migration of assets into these categories which is reflected in the allowance itself. That's why the allowance has been built. So, we view these two things as being very consistent.

Casey Orr Whitman -- Piper Sandler -- Analyst

Understood. Thank you.

Operator

Our next question comes from Michael Perito with KBW.

Michael Perito -- KBW -- Analyst

Hey, good morning guys. Thanks for taking my questions.

Frank Leto -- President and Chief Executive Officer

Morning, Mike.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Morning.

Michael Perito -- KBW -- Analyst

I just want to really quickly clarify on the expense, just can you guys just repeat the -- I heard the $1 million for the office and the $2.2 million from the FTE reduction. Can you just repeat the expected savings from the BMT Advisor wind down and just confirm that those are all targeted annual savings figures.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Right. That latter, yes, they're targeted annual investment advisor savings is about another $1 million and change. So, that's the earn back period there is about two years.

Michael Perito -- KBW -- Analyst

Okay.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Again, that will begin in this quarter we're in now, Mike, that and the staff.

Michael Perito -- KBW -- Analyst

And the FTE reductions?

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Yeah.

Michael Perito -- KBW -- Analyst

Okay. And then on the credit side, to your comment, like about how kind of that states the natural next step after the reserve bill. But I guess technically on -- just trying to understand on what these loans mostly on deferral. I mean, you guys had the ability to not migrate these loans yet, correct? But you guys just chose to do it viewing it as kind of the natural course of where these loans are at, given the uncertainty right now.

Liam Brickley -- Senior Vice President, Chief Credit Officer

Yeah, it's Liam. That's correct. Your internal risk ratings are always at management's discretion. And we felt the lack of revenue visibility in those hospitality credits warranted a downgrade of the risk rating, again until such time as we get clarity. To Mike's point, when we initiated our CECL transition in the end of Q1, we were at the early days of the COVID event. We assumed that with the spike in unemployment, we would see material stress, but we didn't have granular information on individual borrower performance at the end of the first quarter.

With our portfolio reviews, we've much more visibility at a loan-by-loan basis into the book and decided that it was prudent to downgrade those assets, just based on current trading conditions. There is -- as you can see in our delinquency and payments stats, with the deferral program, no one -- we've seen no material change in our payment patterns outside of the deferral program. So, it was entirely our option to downgrade this.

Michael Perito -- KBW -- Analyst

Okay. And I guess, at what point do -- I mean, I guess you can't ever [Phonetic] make the total assumptions on total case-by-case basis, but presumably at some point, there'll be some challenges with some of these businesses and I guess, as you guys are thinking about -- it sounds like you have a review coming up in a couple of weeks on deferral renewals, but how do you guys thinking about when there could actually come to a point where there might be some writedowns or some special asset actions needed to kind of work through these credits. I mean, how do you guys -- I guess at what point just the deferral and kind of the bad cash flow change from just being criticized or kind of special mention to actually requiring action as you guys see it today?

Liam Brickley -- Senior Vice President, Chief Credit Officer

Well, to paraphrase Jaime Diamond's quote last week, we don't know what we don't know. We know that this is an unprecedented economic event and how it plays out is entirely opaque right now. The impact of the various stimulus packages as well as these deferral packages has clearly given everybody time to make assessments and to our borrowers making their own assessments of the business models, us to make assessments in the portfolio. But assuming no other changes, all the deferral activity rolls out of the banking industry at the end of Q3 and into Q4. So, it's reasonable to say that we'll have better visibility at that point in time. Again, as to our specific book, as a recourse lender, even at the property level if there were some stressors, we've a track record with folks who have supported their properties. How that plays out over the next period of time, again, we'll know more later.

Michael Perito -- KBW -- Analyst

Thanks.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

And that's -- only thing I'll add to that, Mike, is that we've run outside the whole credit management process Liam's describing and -- what we're doing there, then we've run -- and we have run CECL, and we've made some assumptions, both -- we've done it from a quantitative standpoint, then we've got qualitative overlays in there, sorts of our thinking around all this -- all this -- everything you're hearing is all discussed internally. And then, we've stressed this in a pretty dramatic fashion and that's the point I was making around capital is we've taken a stressed environment that we're in now, and double down on that to see, OK, well what happens, what type of loss exposure do we have, and that -- that was the statement we're making around capital that I made is a function of all that work as well. So just appreciate that and factor then your thinking in terms of like corporation and where we stand right now, yeah.

Michael Perito -- KBW -- Analyst

Helpful. And then, I will have you guys two more quick ones, if I can. Just one, you guys outlined some expense outlook items which were helpful, but on the non-interest income side, the wealth AUM expanded a little, just any thoughts Frank or Mike on kind of what the outlook might look like on some of the fee businesses as we move forward here?

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Sure. You want me take that, Frank?

Frank Leto -- President and Chief Executive Officer

Well, yeah. I mean, go ahead, Mike. I'll add anything to you. Go ahead.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Yeah. I mean the wealth, as I mentioned in the prepared remarks, a lot of the normal -- we usually get a spike if you look back in time and if you are from the -- those that are familiar with the pattern of wealth revenue, typically, the second quarter is one of our better quarters, barring big market changes because of the tax service fees we collect. Those got pushed out to the third quarter and then we finished the quarter very strongly from an AUM perspective. There was a market rally here. So, that $630,000 [Phonetic] number, those dollars, the fees are reflect -- will be reflected in Q3.

So, those are two positive things from supporting -- supporting non-interest income and the other thing I throw in is that, wealth business continues to have its own -- is growing. They grew on -- besides just a rebound in the market in Q2, had net positive cash flows in the legacy business, and then our Delaware -- the business, the Bryn Mawr Trust Delaware Corp business continues to grow at a rapid pace, lot of assets moving out of high tax states into Delaware.

So -- and then, on the capital market side, that's just a function of loan activity, and I think that's -- Q3 is usually the slowest quarter and it's really dependent. A lot of that's dependent on loan closing, so -- but we're very pleased with where that organization sitting and they're starting to build some other capabilities that should offset maybe if loan closings aren't where we expect, should offset some of that FX in particular and trade finance, which are really starting to get some traction in those two areas.

Frank, did you want to add anything?

Frank Leto -- President and Chief Executive Officer

Yeah, let me just add -- I want to just add real quickly. I mean, Mike, back to the last crisis. I mean, this is when we doubled down on wealth, and the fruits of that have paid off, obviously, dramatically. I think, Jen has -- is in the final throes of her strategic plan. Obviously, a little bit -- went to sideways a little bit this year just because of the crisis, but I would say that a lot of the investments she made prior to this are really paying off.

And generally speaking, when we hit these difficult times and I think you'd see the news when these large banks start to [Technical Issues]. It is a customer service issue generally and that's where we're showing, that's where we step in. And I know Jen has -- is in the throes of a pretty involved marketing plan going forward to try to take advantage of some of the disruption in the market. I think she was also a very integral involved in the process improvement and some of the reductions that we had through the second quarter. So, I think she is well positioned to move forward on both the wealth and the insurance fronts.

I think Mike's comments about capital markets are spot on there. So, I just wanted to add that a little bit of color.

Michael Perito -- KBW -- Analyst

Helpful. Excuse me. Helpful, thank you guys. And then, just lastly, can you just give us an update. I know that on the nCino front, you guys are rolling out quite a few products. Just where you guys are in that? And then, just any thoughts, Frank, on kind of what's next from a technology perspective? I mean, it seems like you guys kind of have some stuff in the budget already which is why most of the other cost savings are flowing to the bottom line. So I'm just curious what some of those items are as we move forward?

Frank Leto -- President and Chief Executive Officer

Well, we're in the throes of nCino project. It's been a multi-year project for us. While we're talking here, I'm knocking all over my wooden desk about how lucky we were to get the deposit piece completed when we did and that was really integral to us being able to handle seamlessly, really, the PPP origination process and the opening of accounts around that. So, we see the fruits of that.

Throughout the balance of the year and into the first quarter, it looks like will be completed probably by the end of Q1 2021 with the other transformations and -- excuse me, consumer small business and then of course, really the big aspect of this is commercial lending piece, and that's why, we're pushing that back. We had to push it back a little bit on the timing just to make sure our commercial lenders have enough focus going into the latter part of this year on the credit side.

So, that is -- that's a big focus for us. Of course, we always have a lot of things in the works. We have a lot of projects. We have pretty detailed -- Adam Bonanno, our Chief Technology Officer, has really developed I think a very detailed strategic plan for technology for us. In conjunction with all of our business lines and we're really -- I think Adam's really reacting to the needs of the businesses, and what's going to make us more efficient, what's going to make the customer experience better in any way we possibly can.

So, there are some things on the forefront. I mean, I think if you're getting at or we're going to have some major multi-million dollar spend, I don't know we have -- other than what we are already looking at, I don't think we have any kind of major like an nCino-like project. I think, Adam's really focused on getting us into the cloud and getting a lot of that off of our backs so to speak and pushing it out there, but it's really this digital transformation.

This whole -- this is -- like I said, it's a whole strategic plan around technology and around the digital experience at the bank, and it's ongoing. And look, you've followed us long enough, Mike, to know this started back in 2015. So, it is a process. It's not a one and done. It's an ongoing process, and I think that's the only way to do it. I mean, we had to get our foundations in place, which we did early, like I say 2015, 2016. That paid off really well for us. That allowed us to do a lot of what we're doing today, but it's a continuous process to improve our technology and the experience with technology.

Michael Perito -- KBW -- Analyst

All right. Thank you, guys. Sorry, I know I had quite a few questions, but I appreciate the color. Thanks.

Operator

Our next question comes from Christopher Marinac with Janney Montgomery Scott.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Thanks. Good morning. Just want to go back to the classified and criticized assets. So, what has to change for you to put a bigger reserve against those? I mean, are you comfortable that you've got that properly marked within the reserve. I just want to understand kind of what has to change to change the reserve allocation there?

Liam Brickley -- Senior Vice President, Chief Credit Officer

We believe we are -- we are appropriately reserved now. And to have a material change in our reserve allocation for those specific assets going forward, we would have to make a determination that the values are permanently impaired. And obviously, the transitory nature of the current crisis, it's pretty hard to figure out the terminal values until we get into something that looks like a normalized recovery. The only thing that would accelerate any of those discussions would be a hardcore payment default if a counterparty, basically, was unable to maintain the debt service. And again, at the current time, we don't see that on the horizon.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Okay, great, that's very helpful. And then, is there any major revenue change to the unit that you disbanded in the quarter? You may have mentioned that earlier, I just may have missed it.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

No, no. We just -- we had some costs related to the wind down of the advisor and the mutual fund, and we'll -- again we know that we've recouped that in two years.

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Sounds great, Mike. Thank you, Frank. Thank you, both. Appreciate it.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Okay.

Frank Leto -- President and Chief Executive Officer

Thanks, Chris.

Operator

[Operator Instructions] Our next question comes from Matthew Breese with Stephens.

Matt Breese -- Stephens Inc. -- Analyst

Hey, good morning.

Frank Leto -- President and Chief Executive Officer

Morning, Matt.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Morning.

Matt Breese -- Stephens Inc. -- Analyst

Just real quick on the -- on the total deferral balances now, what portion is paying interest only or on partial payment plans versus deferring the entire thing, principal and interest?

Frank Leto -- President and Chief Executive Officer

Mike, from a disclosure perspective...

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Yeah, it's a good point. We don't -- we haven't disclosed that information, Matt. So, don't know if we -- Liam might have it. I don't have that in front of me, that break down.

Liam Brickley -- Senior Vice President, Chief Credit Officer

I've a breakdown, Mike, if it's OK to talk about broadly?

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Go ahead.

Liam Brickley -- Senior Vice President, Chief Credit Officer

And that is roughly 65% of the transactions in deferral are on a total payment deferral with the other 35% on either a principal only -- excuse me, paying us interest-only or we're maintaining sufficient payments to meet their swap -- to meet their swap obligations. So, roughly 65-35 split between IO and total payment deferral.

Matt Breese -- Stephens Inc. -- Analyst

Okay. And what's the total amount of accrued interest tied to deferrals at this point? Meaning, if deferrals were to go to NPL, what would have to be backed out of NII from the deferrals?

Liam Brickley -- Senior Vice President, Chief Credit Officer

I don't have that.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

[Speech Overlap] Yeah, that's probably a little -- a lot more than we're -- we got to line this up with our public disclosure as well, so...

Matt Breese -- Stephens Inc. -- Analyst

Okay.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Yeah.

Matt Breese -- Stephens Inc. -- Analyst

And then, going back to Chris' question, just on the reserves versus the hospitality portfolio and retail portfolio as well. Could you just give us some insight, apart from the LTVs being very healthy? As you look at the borrowers there, are there other sources of payment or other levels of comfort you have on those portfolios where you would get repaid?

Liam Brickley -- Senior Vice President, Chief Credit Officer

Well, globally speaking, the strength of our sponsors, we look at their global position in the aggregate, we look at their liquidity, and we look at their concentration by asset class and property. As I mentioned previously, historically our sponsors have supported their property through the last downturn with the -- with significant demonstrations of strength where needed. And it's something we obviously monitor and are doing deep dives constantly looking -- looking at both our borrowers at a property-level and our sponsors on a global cash flow level and that's how we make our assessment just to risk ratings and future appetite with these guys.

Matt Breese -- Stephens Inc. -- Analyst

Understood. Okay. And then, Frank, you had mentioned the back office optimization, obviously 33,000 square feet. You also mentioned taking a look at the front office side of the business. At some point in the near or medium term future, should we expect branch optimization, branch closures, and expense saves from that avenue?

Frank Leto -- President and Chief Executive Officer

Well, Chris. Yeah, I mean, yes. I think we -- that's part of our overall view of real estate. And I think, it's public now that we actually exited a lease the end of next month for a branch that we acquired a number of years ago, that just really didn't fit the strategy anymore and we continue to look at each branch. And I think, now that we have this new model that we're going to operate and it's going to give us a real opportunity to look at branches and who is doing what, where, and that will give us some opportunity in the future.

I mean, do we have very specific plans at this way? Not anything definite, but we're going to look at each one of our branches as time goes on and try to make some decisions there, just as we've looked at some of our office space. I don't think any differently -- we're not gonna approach it any differently.

Matt Breese -- Stephens Inc. -- Analyst

Yeah. Sorry for hopping around a little bit. You covered quite a bit in the opening comments. The next one is just on capital and the dividend. Should we take this quarter's, the $0.27 dividend, the increase, should we take that as a step in the right direction versus last quarter's message which felt a little bit like a take a wait and see approach on the capital front and the dividend front?

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

You want me to...

Frank Leto -- President and Chief Executive Officer

Go ahead, Mike.

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

I'll take a shot at that answer, which is, I wouldn't -- I mean in this environment, I wouldn't read too much into a penny increase. I mean, we're never in doubt. I hope that we're going to pay our dividend in this quarter, and increasing at a penny was debated internally. We looked at the analysis we've done around capital adequacy and liquidity at the holding company and at one penny -- at $0.01 dividend, it's a very small amount of dollars from a cash flow perspective and from a capital perspective.

So, we thought it was important to increase the dividend and demonstrate that we feel good about where we're at, but I wouldn't read too much into it about us trying to predict the future because I think all of us on the phone are still very wary and very concerned about what might transpire here. We just don't have a lot of -- we don't have the data we need to make predictions about the future. So, we're -- it's not the -- the $800,000 change of extra capital we're paying back to shareholders wasn't a material amount in the context of what might come and we're very well capitalized and felt like we're in a good position, but again we're not trying to -- I'm not trying to make a statement around what the future is going to bring.

Matt Breese -- Stephens Inc. -- Analyst

Understood. Got it, OK. And then, just the last one, at this point, has the majority of the floating and variable rate loan book repriced and what should we expect on the NIM front over the near to medium term?

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Yeah, I think -- a lot of that book is a very short term repricing profile. So, you saw that reprice downward in the quarter following the market indices. And as I noted in my prepared remarks, just the fact that we're holding a lot of cash is -- is going to have -- just holding a lot of cash can put pressure on the NIM.

Matt Breese -- Stephens Inc. -- Analyst

Understood. Okay, that's all I had. I appreciate taking my questions. Thank you.

Frank Leto -- President and Chief Executive Officer

Thanks.

Operator

This concludes our question-and-answer session. And I would like to turn the call back over to Frank Leto, for any closing remarks.

Frank Leto -- President and Chief Executive Officer

Thank you, and thank you everybody for joining us today in these really uncertain times. And while we can't forecast the future, I think our investments in people, in process and technology and our historic focus on credit quality positions as well in this environment, and what you have to come. We look forward to talking to you in the future. And again, thanks for your -- all being shareholders of the Bank. Thank you.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Michael W. Harrington -- Executive Vice President and Chief Financial Officer

Frank Leto -- President and Chief Executive Officer

Liam Brickley -- Senior Vice President, Chief Credit Officer

Casey Orr Whitman -- Piper Sandler -- Analyst

Michael Perito -- KBW -- Analyst

Christopher Marinac -- Janney Montgomery Scott LLC -- Analyst

Matt Breese -- Stephens Inc. -- Analyst

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