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Howard Bancorp (NASDAQ:HBMD)
Q3 2020 Earnings Call
Oct 29, 2020, 3:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Howard Bancorp Third Quarter 2020 Financial Results Conference Call. May name is Diego, and I will be your operator today. [Operator Instructions].

I will now turn it over to Robert L. Carpenter, Executive Vice President and Chief Financial Officer of Howard Bancorp. Mr. Carpenter, you may begin.

Robert Kunisch -- President and Chief Operating Officer

Thank you. Good morning. I would like to begin by thanking everyone for joining the call this morning. Again, my name is Bob Carpenter, and I am the Chief Financial Officer here at Howard Bancorp. Before we begin the presentation, I'd like to simply remind everyone that some of the comments made during this call would be considered forward-looking statements. In the interest of time, instead of reading through all of those warnings, I would direct everyone to page two of our earnings presentation. Our Form 10-K for the fiscal year 2019, our quarterly reports on Form 10-Q and our current reports on Form 8-K, all identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning.

The company does not undertake the process to update any forward-looking statements as a result of new information or future events or recent developments. Our periodic reports are available from the company, either online or on the company's website or via the SEC's website. I would like to remind everyone that while we think our prospects for continued growth and performance are good, and we have to keep in mind the COVID-19-related challenges, it is our policy not to establish with the markets any earnings, margin or balance sheet guidance.

With that said, I now would like to introduce Mary Ann, the Chairman and CEO of Howard Bancorp.

Mary Scully -- Chairman and Chief Executive Officer

Thanks, Bob. And I would add my thanks to Bob's for -- everybody's presence on this call today. I'm going to very quickly go through the investment value thesis on page four, which you're all familiar with, to comment on how some of these are playing out, as you will hear for the rest of our presentation. We are, as Rob Kunisch, our President and COO will describe, seeing the positioning in the market as the largest locally owned bank headquartered in Baltimore and now the third largest state headquartered bank beginning to play out in pipelines and even in our commercial loan balances as of today. We're very focused on PPN. Our growth, along with the additions to all, as we noted in the earnings release, preserving and growing capital through PPNR is the top priority right now at Howard Bank. We believe that we have some tailwinds that are helping us offset some of the incredible pressures in the market. Our outsized participation in PPP will continue to enhance EPS, although it does put pressure on the margin.

The margin compression is mitigated at Howard Bank by our funding costs continuing to drop faster than portfolio loan yields and reaching an all-time low at this point in time. Our fixed rate loan portfolio helps to protect against that margin compression as well. And we do continue to add to the allowance to acknowledge the economic uncertainty in a very unusual economy. Our asset quality is holding up very well, looking not only at lagging indicators, but also at the leading indicator of loan deferrals, which were down to 4.3%. And we continue to show no significant concentration in either individual customer exposures and/or any of the highly impacted industries. We remain very well capitalized. We're seeing TBV continue to grow. And obviously, we have strong liquidity, although that liquidity also placed some pressure on the margin. The Maryland economy continues to do well. I'd remind everybody, 70% of our economy remained open throughout. To the extent that construction, for example, was never shut down and was always viewed as an essential industry, that's helped both the economy and the bank. 100% of the economy has been opened since Labor Day.

Our unemployment rate continues to be much lower than the national rate and the best among a number of states in our strong region. We are suffering from some level of pandemic fatigue. We are seeing some statewide COVID trends worsening and those have been shown on page five, but I would note that we remain well below any sort of national averages, and we have a state government that has done an excellent job of managing this and managing expectations in terms of the need to continue to modify behaviors without any expectation that there will be significant shutdowns looming. Internally, we're seeing our branches still operating successfully. We're beginning to see our card transaction volumes go up, particularly commercial transactions. And year-to-date 2020, we're only trailing 2019 by 2.3%. We are also continuing to focus on strategic priorities, strategic initiatives and are making increased investments in digitalization. Online account opening has been alive for a little over six months.

We have presently joined the Zelle family of banks. We are in the midst of a significant digital banking online banking upgrade. We have recently partnered with a fintech firm to provide more robust information to allow each business line to have boards to ensure that decisions in a changing environment are being made based on data. We have an updated website coming in 2021 and and we are focused very strongly on AI and RPA initiatives to increase productivity in a number of our back office and risk management areas. The headquarters in the regional commercial staff is still continuing to operate largely in a work-from-home environment, and we anticipate that, that will continue for some period of time.

I'm now going to turn it back over to Bob to discuss specific quarterly highlights that are in the presentation and were also noted in the earnings release.

Robert Carpenter -- Executive Vice President and Chief Financial Officer

Yes, thank you. Just a couple of quick highlights are worthy of mentioning. Just briefly on reported earnings, just to remind everyone on the call today that we did incur a goodwill impairment charge in the second quarter. That's why our reported earnings are significantly improved over Q2 of this year. As we talk about the third quarter of 2020, it's what I'd call [Indecipherable] we've had no unusual items that we want to [Indecipherable] different presentation for what we call our core earnings. So let's focus on our core earnings for a moment, which, again, excludes the impact of certain unusual items like goodwill impairment charges. It takes out the impact of [Indecipherable] lease banking activities from last year. And so where we are at $7.7 million was our T&, R. Again, that's one of the line items we're focusing on, were down slightly from the second quarter of this year and up a bit from same quarter last year. In terms of -- and so if we look at that number for a moment, I think the one item that stands out is our operating expenses where -- our noninterest expenses were up in third quarter versus second quarter. We had a few items that -- well, we had one item we certainly expect.

And we knew that the large amount of deferred costs associated with the PPP loans, deferred origination cost was not going to repeat in Q3. And that had about $230,000 impact. We did have an increase in our FDIC assessment rate, which was unfortunately impacted by the goodwill impairment charge and one of the financial ratios that is used in that particular calculation. So that was one of the items that unfortunately drove some of the cost increase in Q3. And then finally, we did have some increases in staff costs, not in terms of pure people per se, but in healthcare costs. And again, one of the -- we did establish an accrual for some PTL benefits, pay time loss benefits that have a carryover feature that we gave to our employees as part of the challenges of dealing with COVID. So when we turn that into EPS, it's a $0.25 core EPS, just a [$0.05] increase from last quarter, down $0.01 from the same quarter last year. So that's pretty much how I would describe our financial highlights for Q3 relative to the other two quarters.

I'll turn it over to Rob.

Robert Kunisch -- President and Chief Operating Officer

Thanks, Bob. If we look at slide 10, it highlights our participation in the SBA Paycheck protection program. We've talked a lot about the success that we've had with this program and highlighted the fact that we've received approval for 100% of our customers who approved and qualified. Given the recent guidance from the SBA on the simplified application, about 50% of our borrowers' loans will be forgiven using this streamlined process. Consistent with our approach from the beginning that we wanted to be the first to obtain the needed loans for our customers, we now want to be the first to work with our customers to exit them from this program. To date, we've applied in -- for forgiveness for 30 of our borrowers totaling $17.5 million, and we received three approvals for $134,000 for forgiveness. We're finalizing the review of $15 million in completed applications and that $52 million in the queue. Like we've said from the beginning, it's our goal to exit this program as quickly as possible.

Flipping at the page and looking at our loan portfolio composition. Our loan portfolio is well diversified with no meaningful concentration in any loan type, nor as you'll see later any heavy concentration in heavily impacted industries as a result of COVID. The decrease in loan outstandings is a result of commercial credit line utilization being down and the reduction in the residential portfolio. The reduction in residential portfolio is due to the refinance activity due to low interest rates and the low line utilization is due to the amount of stimulus money currently and liquidity in the market in addition to our customer performance. If you look at our commercial line utilization, on slide 12, you'll see that it bottomed out in July at 35% and is now starting to make its way back toward normal trends. We anticipate about $60 million in loan growth as line utilization reapproaches normal levels. As we sit here today, I can say that through the end of October, we have closed the gap on the loan growth, and we're now flat quarter over where we stand today.

So with that, I'd like to ask Randy Jones to talk about our credit culture and asset quality.

Thomas Jones -- Executive Vice President and Chief Credit Officer

Sure. Good morning. On slide 13, we just put in as a reminder, some of our pillars of our credit culture, which we believe will continue to serve us well very challenging times. On slide 14, you'll see our -- some of our asset quality trends, which continue to hold up. Nonperformer delinquency and classified loans all remain fairly stable or declining. We have seen an increase in our special mention rated credits over the last two quarters. Those have been concentrated in a handful of highly impacted customers, including four restaurants, a hotel and one operating company. three of those remain on deferral to deferrals had ended, and they've resumed payments and one did not request a deferral. Slide 15 shows some of our metrics around our allowance as a percentage of loans and nonperformers. Bob will talk a little bit later about our continued allowance build. Loan deferrals on slide 16 show we peaked out earlier this year in April, when this activity was heightened and a lot of companies were shut down around very curtailed businesses. We've seen those deferrals continue to decline over several periods, including -- even into the most recent period after quarter end.

We've only had one customer to date that we've entered into a long-term deferral agreement with, and that was for a principal only -- principal deferral a long-term arrangement with a local heavily impacted business. We are working with a handful of other clients on resolving longer-term deferral requests. Loan deferrals again on 17 show the kind of account for the numbers that have ended and new ones that have come on by categories. We're only down to a handful of consumer deferrals. Most of those were 60 days and evolve resumed. Slide 18 shows our potentially highly impacted loan sectors. We're finding this to hold true with we compare with our risk rating migration. Although we don't have a lot of exposure and some identified industries, the ones that we do have, including hotels, restaurants. You can see both their balances as well as the deferral balances correlated with that as well as the SBA PPP fund into those certain sectors. Among the highly impacted businesses, hotels, we only have a handful of those. Most of them are fairly well positioned with good operators. No conference reliance are dependent on travel. A couple of them are impacted more heavily than others, but most of them have shown some recovery from the low points earlier in the year. Restaurants and caters a handful of larger loans in that category that in terms of the total portfolio is fairly spread out. But we are seeing some impact with a couple of those. Nursing and residential care, only a handful of loans in this category that are -- we're not seeing much impact yet with them.

Bob will now cover the increase in allowance that we did for the current quarter.

Robert Carpenter -- Executive Vice President and Chief Financial Officer

Thank you, Randy. And as we've mentioned on previous calls, our allowance build thus far this year in 2020 has been solely through the use of our qualitative factors. Again, what we've seen is through the -- through each of the quarters this year, our historical rolling average 8-quarter loss rate, which we use as one of the cornerstones of the quantitative part of our allowance modeling has, in fact, continued to decrease from 29 basis points on average at the end of last year to 25 basis points at the end of March, 20 basis points end of June and now 19 basis points here at the end of Q3. We've had no specific allocation of the allowance in 2020. So again, it's been solely a build through qualitative factors. We have now built the allowance from 60 basis points of loans at the end of the year 2019 to 1.05% or a 45 basis point increase at September 30. Now again, the September 30 number is excluding our PPP loans. If we were to include the PPP loans, it would be 94 basis points. But the key is it's been an allowance build of 45 basis points on our portfolio loans, nine basis points quarter-over-quarter. As we look ahead, and I think I've said this in the past, our opportunity to continue to build the allowance to qualitative factors is diminishing. Absent the economy is taking a turn for the worse. I think that a lot of the allowance build through qualitative factors is going to slow dramatically as we move forward.

As we [Indecipherable] into the future, there certainly has to be some expectation of further risk rating downgrades and eventually potential charge-offs. I want to talk next about our capital position, and we try to emphasize in the midst of the current economic environment, capital is extremely important. The bank maintains capital regulatory capital ratio is well in the success of capitalized. These ratios continue to grow. Our Tier one -- our common equity Tier one up to 11.78% of total regulatory capital [14 25]. We also -- as we look at book value and tangible book value per share, we continue to see the build from our tangible book value per share. Obviously, our book value per share was -- dropped in Q2 as a result of the goodwill impairment charge. Liquidly, again, as Mary Ann mentioned, liquidity is -- it's strong. We continue to look at building our sources of tension funding sources. We, like most banks, build a lot of on-balance sheet liquidity as events were unfolding in the first quarter. We worked to reduce reduce or eliminate some of that. We still have some residual effect of some of the high rate institutional CDs that we used to fund some of that. And we have about $50 million of, what I call, high rates, institutional CDs that will be rolling off between now and the end of the first quarter of 2021, which we'll have about 10 basis impact on that particular cost of funds, not our overall customers, but that particular [Indecipherable] So let's move right into a discussion around net interest income and net interest margin.

And again, we see our margin did decline in Q3 by about seven basis points. And again, we have the PPP impact. So the PPP impacted our margin by roughly nine basis points in the third quarter compared to seven basis points in Q2. The other element of [Indecipherable] margin is our fair value marks, which, frankly, have been fairly steady, when we look at the quarter three -- Q3 of 2020 versus Q2 of 2020 and Q3 2019. So the marks had an impact of 14 basis points on our loan yield in Q3, 10 basis points on our NIM. The graph on the right-hand side of page 23 shows some of the elements of this on net interest margin. Portfolio loan yield, again, that excludes our PPP loans, which [Indecipherable] same period last year. Driven obviously by the lower rate environment we've experienced. As Mary Ann mentioned early on, we do have a nice portion of our portfolio is at fixed rate loans, which certainly buffers some of that downward trend in terms of the loan yield. The other earning asset number on this graph, pretty dramatic, 3.16% in the same quarter last year to 1.97% this year. So that's the investment portfolio. That's the impact of the PPP loans, and that's also our liquidity cash that we keep at Federal Reserve. You see the nice drop in our interest and cost of interest-bearing liabilities over that 5-quarter trend as well as our total deposits. Now as we look to the what's going to happen in the future, we certainly see -- we've done a lot on the deposit pricing. Side, the piece that hasn't -- we haven't seen the full effect of the lower rate environment is our customer CD portfolio. And that portfolio had a weighted average yield of 1.30% at the end.

And as higher rate CDs mature and replace lower rates, we expect we'll see a pretty significant drop in that particular component of our cost of funds, as we move through not only the end of the year but into -- but throughout next year. One of the things we mentioned in the earnings release was we embarked on a leverage strategy in Q3. We grew the investment portfolio by approximately $100 million. That did have a six to seven basis point impact on our net interest margin in Q3 when we look at it in comparison to Q2. Our graph on page 24, just really dramatizes what we're seeing in terms of some of the -- what's happening in the market rate environment in terms of [Indecipherable] one month LIBOR, and we have to send our portfolio rates and deposit rates over that same period of time.

I'll turn it back to Rob on our deposit base.

Robert Kunisch -- President and Chief Operating Officer

Thanks, Bob. On slide 25, you'll note that we continue to see our noninterest deposit build despite the liquidity in the market from stimulus funds being utilized. This is a result of onboarding several new deposit only commercial customers not only maintain high balances but also utilize our vast array of treasury management products. We are also seeing good growth across the board on all no or low interest rate retail accounts. Deposit gathering continues to be a focus of ours because we have a very strong pipeline of loans that we expect to close in the third -- in the fourth quarter and in Q1 2021 and having a low-cost of deposits is a priority to help fund those. So page 26, and we're talking about the growth and opportunities that exist in our markets. In August, we began to see our commercial pipeline grow, both within our current market and from the contiguous market in Greater Washington, D.C. We've seen a number of resumes from qualified commercial lenders from a number of different banks. These lenders have either been told they're going to be let go or just unhappy with existing events occurring at their existing companies. We're going to capitalize on the opportunity by adding additional lenders to our existing teams as well as focus on the greater Washington market.

The Greater Washington market is a mere 20 miles away, and it exhibits similar economic conditions that we experienced here in Baltimore. We put an additional focus on noninterest income by leveraging our treasury management products. We're expanding our product and service offerings and by partnering with fintech, we are focused on bringing more granularity to both our loan and deposit portfolios. We are fortunate to have large borrowers and deposits. But when these loans pay off, where their funding is delayed, it creates a choppiness in our numbers. We are doing so by expanding our marine lending program. We got lucky with the timing relative to COVID and demand for boat financing. As mentioned earlier, we started to correspondent banking program to acquire jumbo mortgage to help offset the runoff within our residential portfolio. We've established relationships with three mortgage companies currently. We're expanding our business banking platform with a focus on loans of less than $3 million, and we're implementing a consumer home loan improvement program. We are confident that these initiatives will increase not only the granularity of our portfolio, but also enhance the yield and drive more noninterest income for the bank.

So in summary, I'd like to turn it back to Mary Ann.

Mary Scully -- Chairman and Chief Executive Officer

So what I'm going to try to do is to just summarize on some of the themes that you've heard today. Number one, we do believe that we have a very strong brand position and have always believed that it would begin to show its ability to be leveraged in a down cycle as out-of-state banks begin to make credit decisions based on makes codes rather than on individual knowledge of owners and their businesses. We have an outsized opportunity to leverage some very unusual opportunities as a result of consolidation and disruption in the D.C. market. And as Rob indicated, that's a very tactical initiative with a number of resumes being reviewed and a couple of offers being made. We are continuing, however, to focus on funding with transaction accounts. We believe that with the projections for a longer, lower interest rate environment that our ability to fund ourselves as close to zero as possible will not only provide us with a financial advantage that is the purest indication of having a full relationship and those relationships tend to be stickier and longer lasting. We are selectively, as Rob also indicated, growing certain higher-yielding portfolio loans.

It does not take away from the fact that our strategy is mostly to be an organization focused on developing commercial relationships, driven by our knowledge of certain places in the community, but it does provide us an opportunity to selectively pick higher yields that are consistent with our underwriting standards, whether that be marine, whether that be home improvement or whether that's simply being stabilizing our residential mortgage portfolio. We are very focused on executing what we believe are some noninterest income opportunities. And we are committed to keeping expenses flat except for the expansion in the D.C. market. And to go back to the beginning and reinforce a number of the points that Bob made and a number of the points that were made in the earnings release, we are always focused on capital management, and we'll continue to be focused on that for the foreseeable future.

So with that, I'm going to turn it back over to each of you to ask any questions that you might have.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Catherine Mealor with KBW.

Catherine Mealor -- KBW -- Analyst

I wanted to maybe start with just your outlook for growth. You talked a little bit about what drove the lower balances this quarter. But what are you thinking prepared growth rate is to assume in this environment?

Robert Kunisch -- President and Chief Operating Officer

Catherine, it's Rob Kunisch Rob Kenny. So as I mentioned during our presentation, in August, we started to see a real buildup in our pipeline across all of our -- against all of our business segments. Most of its takeaways from other banks in the market. And so where we sit today, we now are flat on loans compared to where we were at Q2. We expect a number of these loans that we have in the pipeline at this time to get into the finish line. Appraisals, these days are a little bit delayed and title work is a little bit delayed. I would expect to have a pretty strong fourth quarter in terms of our loan growth.

Mary Scully -- Chairman and Chief Executive Officer

Catherine, a little bit -- Catherine, it's Mary Ann. If you look out a little bit further than that, I think that we're seeing very good signs, both in our commercial real estate opportunities in the core Baltimore market, also in some affectations of line usage beginning to go up, one of the data measurements that we very much focused on is some correlation between low line usage, higher deposit liquidity and PPP receipt of funds, and we're seeing some of those previously borrowing customers begin to work down their liquidity as they see some improvements in the economy and begin to look at building up inventory and receivables again. So you've got those sorts of tailwinds in the core market that would lead us to bleed something in the normal mid to high single-digit range in the core portfolio. I think that the wildcard is how big is the team in Greater Washington and then what does that do to add to that, say, 5% to 7% expectation in the core market. But it would be some add that we'll no better, I think, in the fourth quarter as we see exactly how successful we are and how large the team is.

Catherine Mealor -- KBW -- Analyst

And maybe on that note, how do we think about expenses as you build that team? And then as we maybe back out some of the moving -- I know there's a couple of onetime items from this quarter that we need to back out, but maybe an expense guide within that would be helpful.

Mary Scully -- Chairman and Chief Executive Officer

So what we're finding Catherine, not unexpectedly. I mean we've all worked in the Washington market before it's a more expensive market in which to operate from a people perspective. So I think that we could easily be looking at something in the $1 million range from a core salary perspective, and then you add your healthcare benefits onto that. The good news is that because of what's happening in the market right now, from an office rental perspective and from the proximity that we have in two of our core Baltimore markets, both County and Howard County, or, if you will, gateways to greater Washington. They behave macroeconomically and demographically, to some extent, more like a Greater Washington market than a traditional Baltimore market. Those have always been core markets for us. And there are a number of people in the country that actually believe they're part of Greater Washington, but they're actually the greater Baltimore SMSA. So the proximity that those markets have in terms of the ability for people to work out of those markets, combined with what we believe will be some very significant inexpensive rental opportunities for any sort of loan production offers/commercial branch that we put into that market means that we won't have the normal kinds of occupancy cost. So it will be mostly salaries.

Catherine Mealor -- KBW -- Analyst

Great. Okay. That makes sense. And maybe one small nit question about, if I may, just on the accretable yield. Do you have that number for this quarter versus last?

Robert Carpenter -- Executive Vice President and Chief Financial Officer

Yes. The impact on the loan yield, you mean? Or...

Catherine Mealor -- KBW -- Analyst

Yes. Dollars or yield, either way?

Robert Carpenter -- Executive Vice President and Chief Financial Officer

Yes. It impacted our loan yield by -- it was a positive 14 basis point impact in Q3, and that was up slightly from Q2 where it was 12 basis points.

Operator

Our next question comes from Brody Preston with Stephens.

Brody Preston -- Stephens -- Analyst

I just wanted to -- Mary Ann, you talked about the utilization rate. And it's nice to see it's moving steadily higher through July and into September. But the C&I balances, I guess, were relatively flattish from the linked quarter despite that. And so I just wanted to get a sense for -- if there were pay downs or anything like that?

Robert Kunisch -- President and Chief Operating Officer

So Brody, you had the line utilization, obviously, is somehow. And we brought on a number of new commercial clients during the quarter. Most of the commercial clients that we're bringing on at this time is that we bring them on with committed lines of credit at this time, they're sitting on large deposit accounts today like our existing customer base.

Brody Preston -- Stephens -- Analyst

Okay. Okay.

Mary Scully -- Chairman and Chief Executive Officer

Brody, just to clarify, we did not see attrition in that portfolio. I think it was just an absence of growth. And again, something that is reversing itself from what had been a low point, as you see on that one utilization slide. It's actually a low point in July. And we're pretty much even in the C&I portfolio back to where we were prior to the beginning of the quarter.

Brody Preston -- Stephens -- Analyst

Okay. And then just -- you mentioned the pipeline. I just wanted to -- I'm sorry if I may have missed it, but just what's driving sort of the stronger pipelines into the fourth quarter? Is there anything specific?

Robert Kunisch -- President and Chief Operating Officer

It's really across all asset classes. But I would say, obviously, it's larger CRE deals that are either coming out of the permanent market with a maturity. We're seeing some land development opportunities from some very strong developers who are taking advantage of the market in terms of interest rates and their ability to execute on projects right now. So I would say it's more heavily slated in dollar amounts toward CRE. But in terms of number of opportunities, I would say it's more slated toward the business banking group and the commercial group.

Brody Preston -- Stephens -- Analyst

Okay. Great. And then just on the deferrals, it's nice to see the move down. I was wanted to get a better sense for maybe the breakdown between second and first and within that deferred book. And then where you sort of see the deferred loan portfolio trending throughout the fourth quarter?

Robert Kunisch -- President and Chief Operating Officer

Yes. Our deferral plan from the start was keeping everything as short-term as possible. So we did a combination of generally six months or less deferrals on the first request and is kind of a wait and see how the rest of the year went. So the distinction being -- some people ask for a two month deferral and then ask for another month of deferral and then now have resumed. So the second and first request, in my mind, aren't as key as much as how many of these have asked to go beyond what we deem the short term, and that's the six months. We're working with a couple of borrowers right now on longer terms, but right now, to date, we've only entered into one agreement for very heavily impacted local nonprofit. And that's only a principal deferral, they are going to be paying interest. So in terms of the approaching of that six month period, it's a relatively light number of credits that have done that. We continue to see each month as payments resume, these numbers drop. But that's going to be countered by a handful of heavily impacted businesses. I believe, we'll end up with a core set of loans on deferral after year-end, a handful. And they're all in the spaces that I would anticipate to be heavily impacted.

Brody Preston -- Stephens -- Analyst

Okay. And just two more quick ones for me. The NPAs is nice to see those move lower. Was that a -- was there an OREO sale that sort of drove that? Or is there anything specific?

Robert Carpenter -- Executive Vice President and Chief Financial Officer

We did have a small area sale. I think that balance dropped by about $1 million quarter-over-quarter. And then we had I think it was a note sale of a nonperforming resi mortgage that we got out of a no loss on that way. So that was a nice drop and just a resolution would have nonperforming loan in particular.

Brody Preston -- Stephens -- Analyst

Okay. Yes, great. Because it was nice to see the allowance moved to more than 100% of the NPLS. And so I guess the last one for me is I noticed you put a put a slide or put some numbers in there around the classified and criticized loans. Just wanted to get a sense for your expectation as we move forward into 4Q and 1Q that percentage continues to steadily decline. But we have seen a number of other banks downgrade loans and increase criticized and classifieds across the industry this quarter. And so I just want to get a sense for if you think you'll see any of that in the fourth quarter, if that's more of a first quarter event?

Robert Kunisch -- President and Chief Operating Officer

We've been very proactive about downgrading and resetting our risk assessments on borrowers, especially ones now that are talking to us about the longer-term deferrals. I well know there's a bull point on there that does show our increase in special mention assets over the last two quarters, and those are all in that space and that heavily impacted and we anticipate to be heavily impacted. We're seeing some progress with a couple of those. So I would anticipate possibly those improving. Countered by -- we continue to have discussions daily with people and what their assessments of the future are. So I think if I had to project that a couple of quarters, we'd see that number probably slightly increase.

Operator

[Operator Instructions] Our next question comes from Joe Gladue with Alden Securities.

Joe Gladue -- Alden Securities -- Analyst

I just wanted to, I guess, get a little bit better picture of how the PPP loans or given this process works. You said that you have gotten some approvals on a handful of the loan forgiveness applications, and you've made a number of others. Have they -- have there been any second, fourth with the SBA asking for further questions on some of the applications or sending things back? Or has it been pretty just straightforward, submit the application and get the answer?

Thomas Jones -- Executive Vice President and Chief Credit Officer

Yes. So we -- this is Randy Jones. We have a process in place. We have a portal where our customers are able to apply, put all their documentation in, have a review process going on here at the bank. We've put a handful into the forgiveness portal with the SBA. To date, we've had one question come back in terms of, can you give us some more information? Or we would like to see all the documentation on it, and we sent that in and haven't heard any responses after all that. The good news is we were pretty stringent on the front end of this process in terms of our underwriting for these PPP loans. We didn't just push through requests. We were actually reviewing the documentation on the front end. So I think that should serve us better on the back end because we believe these are all supported. The good news -- another piece of good news is at the time when a lot of these loans were in inception, it was shorter periods of time. Those have been extended by the Cares Act. So this should only lead to get better results with our forgiveness.

Joe Gladue -- Alden Securities -- Analyst

All right. Just one other question, I guess, on the expenses. You noted in the press release a number of things that were causing the higher personnel expenses. And just wondering if any of those might be something that won't continue for long, particularly, I guess I'm talking about the additional time-off accruals. I would imagine those accruals would last through the fourth quarter, but is that something that could go away starting with 2021?

Robert Carpenter -- Executive Vice President and Chief Financial Officer

Yes. Our thinking on that particular accrual is that we will continue to build that accrual in the fourth quarter. I've seen some preliminary numbers. It's likely to be a smaller number in Q4 than it was in Q3 based on expected carryover. Our view of that is that this is the first time that we've offered a carryover feature, and we think it was appropriate given the COVID environment. So our thinking is that if we continue that going forward, that there will be a very minor adjustment to that accrued liability every year, but it would be a fairly de minimis adjustment. And then as far as -- I'm sorry, I'm with my mask here. As far as some of the other items that we mentioned. We do expect that -- and although I your question may have been specifically. The FDIC assessment that, unfortunately, will follow true for the four quarters until that goodwill impairment charge drops out of the 12-month -- the cumulative 12-month -- rolling 12-month earnings that the FDIC uses in one of their financial ratios to modify the assessment rate. So that's kind of thinking on that particular item.

Joe Gladue -- Alden Securities -- Analyst

Okay. That's helpful. And -- OK. Go ahead.

Robert Carpenter -- Executive Vice President and Chief Financial Officer

I was just going to say, the healthcare, we think that we've -- as we've looked at our healthcare loss rates, we think that, that's -- we've caught that up to where it needs to be. I don't expect any further adjustment on that in Q4.

Operator

There appears to be no additional questions at this time. I'll turn it back to management for closing remarks.

Mary Scully -- Chairman and Chief Executive Officer

We want to just thank everybody again. We appreciate that you have a lot of competing priorities at this particular time of year during earnings season. And we're always grateful for anybody that has the opportunity and takes the time to listen to the more full story, one that you can't gather just from the earnings release or the filed presentation as well. We remind everybody that we are always open to answering any other questions on a one-on-one basis. We care what you think. So we appreciate that opportunity as well, should you avail your. But thanks, everybody, and be safe.

Operator

[Operator Closing Remarks].

Duration: 47 minutes

Call participants:

Robert Kunisch -- President and Chief Operating Officer

Mary Scully -- Chairman and Chief Executive Officer

Robert Carpenter -- Executive Vice President and Chief Financial Officer

Thomas Jones -- Executive Vice President and Chief Credit Officer

Catherine Mealor -- KBW -- Analyst

Brody Preston -- Stephens -- Analyst

Joe Gladue -- Alden Securities -- Analyst

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