Q2 2020 F.N.B. Corp Earnings Call

Hello, and welcome to the F., a big corporations second quarter Twentytwenty earnings Conference call.

Participants will be in listen only mode.

Should you need assistance. Please go ahead specialists are pressing the starkey followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question. Your press Star then one and your Touchtone phone.

So your question. Please press Star then too.

Please note today's event is being recorded.

But actually covered or mass collateral manager of Investor Relations <unk>. Please go ahead.

Thank you good morning, everyone and welcome to our earnings call. This conference call that can be corporation in the reports filed with Securities Exchange Commission often contain forward looking statements and non-GAAP financial measures non-GAAP financial measures should be viewed in addition, do not as an alternative or reported results prepared in accordance with GAAP reconciliations of GAAP.

Non-GAAP operating Badgers to the most directly comparable GAAP financial measures are included in our presentation materials and our earnings release. Please refer to these non-GAAP and forward looking statement disclosures contained our earnings release related presentation materials and there are reports and registration statements filed with Securities Exchange Commission.

Warner Corporate website, a replay of this call will be available until July 24th in the webcast link will be posted to the about <unk> Investor Relations section of our corporate website I'll now turn the call would have been Italy, Germany presidency.

Good morning, everyone and welcome to our earnings call. Joining me today are been caliber each chief Financial Officer, Gary Guerrieri, Chief Credit Officer.

On today's call I will provide an overview of second quarter results and update you on FNB participation in the paycheck protection.

Jerry will discuss asset quality you provide further detailed our loan portfolio.

This will address our financial results upper relevant trend.

I will then provide an update our digital platform physical operation you finally discuss our organizations $250 million commitment.

In doing initiative to address economic and social in equity.

As a company and on a personal level.

The dirt significant challenges in change this year.

Our thoughts are with those who has been impacted by the pandemic.

And unrest in art.

I'm proud of our company has rallied in supporting our customers a neighborhood.

<unk>.

The resolve to work together to emerge stronger United.

Demand for success with future for all of our constituents.

FNB second quarter results increased significantly.

Operating earnings per share increased 63%.

Six now.

Included in an additional 17 million or four cents per share.

19 reserved field and for.

And P. PNR decreased to 130.

For revenue trends remain solid throughout a challenging interest rate environment with total revenues, increasing 6% annualized to 306.

In total assets growing nearly 3 billion to end June 38.

Compared to the first quarter loans and deposits increased 2.3 billion EUR 3.6 billion, EUR 10, and 15% respectively.

On a linked quarter basis double digit second quarter loan and deposit growth supported by organic commercial production.

Originating nearly 20000 PPP.

Totaling 2.6 billion.

Our fee based businesses performed exceptionally well with capital markets in mortgage banking, establishing revenue records 13, and 17 million respectively.

Our efficiency ratio.

3.7%.

Operating expenses, well control down 3% from the first quarter.

Even though there has been disruption across our footprint due to cobot, 19th we still see good commercial loan origination activity across most of them.

This is a testament to our teams who continue to serve our client meet their borrowing needs while dealing with the challenging operating.

Strengthen our balance sheet and ample liquidity enables definitely be to support our clients capital needs.

We continue to acquire consistent underwriting standard aligned with our strategy overall risk profile as we evaluate business opportunities.

Sure.

On a linked quarter basis total average loan increased 9% largely driven by growth in commercial loans a 14%.

Commercial line balances when compared to historical level contracting as we saw much lower mine utilization 36%.

The utilization rate.

Decreased as PPP funds were utilized to support working capital needs by many existing clients and economic activity decline during the period.

Commercial loan balances were also impacted by large corporate borrowers paying down bank credit facilities with increased liquidity in the bond.

Average deposits increased 11% is we had solid organic growth customer relationships.

Large inflow of deposits for PPP funding.

Permanent stimulus activities also.

As part of our business strategy.

We've been focused on reducing the level of wholesale borrowings by continuing to gain depositors and expand existing relationship.

As a result, you're able to fully eliminate our over like borrowing position, replacing it with customers.

Noninterest bearing deposits were up 2.1 billion for 33%.

Our quarter end.

Looking at June 30 spot balances our loan to deposit ratio was 92% including funded <unk>.

Positions us more favorably right.

Growing noninterest bearing deposits has been integral has been an integral part of our long term strategy and we consistently been able to grow organically through various interest rate environment.

Further strengthening our overall funding.

In fact transaction deposits have increased 4 billion for 20% from March 31, and now represent 85% of total deposit, which compares very favourably to 79% five years ago.

With the fed taking near term rate increases off the table.

There is opportunity to offset net interest income headwinds.

Continuing to reduce deposit costs.

We have stated previously continuing to grow our fee based businesses is essential to diversifying our revenue sources in the mitigate pressure on net interest income in an extended low rate environment.

Interest rate expectations, now, reflecting lower for longer.

It is important we continue to build on our recent success in capital markets mortgage banking wealth management insurance.

This quarter's record mortgage banking income of 17 million better reflects the fundamentals in the results without MSR impairment.

The mortgage banking business set a new production record.

869.

Turning to our participation in the Paycheck protection program I.

I would first like to recognize our teams for their support of our customers a community throughout these extraordinary circumstances. Our employees have worked tirelessly to ensure business has received critical funding during a time when regions within our footprint experienced extended shutdown, particularly in our metro market.

<unk>.

And when many borrowers turns from larger bank FNB to accommodate their needs.

As part of the PPP origination process each borrower opened in SMB accounts.

Which supports our efforts to bring in new household.

Looking ahead, we are optimistic that borrowers will be able to deploy these funds.

Businesses around the footprint.

As an organization, we leveraged our technology infrastructure and expertise already in place to quickly adapting to accommodate our customers in a challenging remote environment.

Coupled with significant financial aid.

And employee volunteerism in our communities our efforts to help tens of thousands of small businesses during endemic and supported the retention of hundreds of thousands of jobs.

From the beginning of the comment 90 crisis FNB has upheld upheld consistent volumes total transaction audit transaction.

By providing customers with a seamless transition from physical to online and mobile engagement.

This was made possible from the significant investment we committed to digital our digital and online platform over the last decade.

Back the appointment setting feature on our new website. They went live in January enabled FNB to continue serving clients safely in our branches throughout the price.

We grew from 26 monthly appointments in January to 2700 appointments city.

The rapid shift to remote services accelerated the enhancements to our digital strategy there were already underway.

Minimize disruption for our customers.

At the operating environment remains in a constant state of change we will continue.

Our innovative approach to better serve our customers.

I will now share some updates regarding our operations and leveraging.

The other with the uptick in online Whitman setting our websites decreased track our website increased traffic by millions of daily Bill visitors.

As we are deepening relationships with customers throughout our digital capabilities.

Also generating significant opportunities.

By synchronizing physical and digital customer experience, we can take customers you utilize a single product.

On the relationship to food products, such as savings credit card fraud, Vicki mortgage wealth management insurance.

At the ended the day it provides tremendous value to the customers have multiple product relationships within FNB on a single platform connected through digital capabilities.

Overall, the acceleration of digital and remote banking volume demonstrates our versatile integrated multi channel strategy.

Customers have been more active in SMB mobile and online channels with monthly average users up by 50000 in both categories compared to the average for 2019.

While our customer adoption rates for online and mobile and accelerate our customers have still expressed a strong desire to conduct business within our branches.

As an essential business is important rapidly to remain available and excess.

Our business continuity team in collaboration with other units, including data science human resources retail banking developed in monitoring system in which we can evaluate data related to the health care prices on a locational basis.

On July 32020, you'd reopen the majority of our branch lobbies customers adhering to the most stringent safety measures, including social distancing leaning fruitful.

We begin to move forward.

The next phase of operation.

With that I'll turn the call over to Gary to cover asset fall.

Thank you events and good morning, everyone.

The second quarter, our credit portfolio continued to perform and a satisfactory manner as the covered by the same level pandemic continues to evolve.

Our credit metrics have held ground in this challenging economic environment, which I will cover with you in greater detail on both the gap as well as a non-GAAP basis exclusive of our loan volume funded onto the BCC program.

I will also provide some updates on the status of our loan deferrals and the steps, we're taking to manage our mall, particularly those borrowers tied to kind of insensitive industries.

Let's now review the quarterly resolved.

The level of delinquency ended the second order at 92 basis points on a GAAP basis down 21, that's over the prior quarter as early stage delinquencies returns to more normalized levels.

When excluding PPP loan volume level of delinquency whatever ended the quarter at 1.2%.

In 11 Bips from the prior quarter.

Level of Npls, and Oreo totaled 72 basis points at June and eight basis point Anthony's linked Florida.

Non-GAAP level was 80 bips excluding PPP.

The migration was due primarily to if you previously rated credits that were further impacted by the current code environment that we proactively moves to nonaccrual during the quarter.

Our total Npls at June 48% of these borrowers continued to pay as agreed and our.

Net charge offs remained at a good level.

<unk> million for the quarter or 13 basis points annualized.

Holding in the year to date level of 12 basis points.

Provision expense totaled $30 million in the quarter, which includes additional build for macroeconomic conditions become the nice thing.

Posted on the Q1 economic driven bill our common related provision for the first half of the year total $55 million.

Our ending reserve stands at 1.4% and excluding PPP volume the non-GAAP, ending Hcl fell 1.54%, representing a 10 basis point increase over the prior quarter.

Okay, and NPL coverage of 215%.

When including the acquired unamortized loan discounts are coverage, excluding PPP volume is 1.87%.

Under the preliminary severely adverse scenario the current reserve position inclusive of unamortized loan discounts.

Over 70% of stress losses.

As the pandemic continues to pressure the global economy, our approach to managing the book in this covenant environment remains in line with what I communicated on last quarter's call.

We continue to conduct thorough borrower level. It is within our commercial block the Frac key performance indicators for those that operate economically sensitive industries.

Otherwise been impacted by the pandemic.

These ongoing targeted portfolio reviews.

Our credit James just quickly identify and proactively address emerging risks at the borrower industry or overall portfolio level.

Additionally, we continue to conduct a series of scenario analysis and stress test models under our existing allowance and this past Friday March as we work through this challenging environment.

As it relates to our borrowers requesting payment deferral.

10% of our loan portfolio, excluding PPP loans were approved during the initial department request.

I'm pleased to far much 98.4% work parent and in good standing prior to the pandemic.

Oh, the remaining 39 million.

12 million is already on non accrual.

Our request for initial deferrals are essentially nonexistent and we have always seen a small amount of second request for payment deferral at this time.

That said, we are carefully monitoring oxide in portfolio and remain vigilant to identify borrowers that could finish further pressure during uncertain economic conditions.

This approach allows us to quickly identify and manage risk in the portfolio, while still meeting the credit needs of our customer.

The composition of the portfolio remains diverse and well balanced across several product lines geographies and industries.

As shown on slide 10, our exposure to highly sensitive industries remains low at 3.8% of the total portfolio, which includes all borrowers operating in the travel and leisure Foodservices and energy space and the level of payment deferral granted to these borrowers remains at 38.

8%.

Additionally, we have been tracking our retail secured I already portfolio closely to assess the emerging challengers on this asset class as well as the nature of the tenants operations and insulation from certain economic strength as a central businesses.

Our weighted average LTV position in this book remains strong at 65%.

In summary, we continue to manage our credit portfolio through this difficult economic environment by drawing on our strong credit fundamentals in our risk management strategies, which we continue to enhance as the covert situation plays out.

Considering these challenges our portfolio isn't a satisfactory position entering the second half of the year.

Realizing the uncertainty on the economic environment as we looking ahead, we continue to draw on the strength of our experience banking teams to manage through this environment as we move into the latter half over the year.

I would like to recognize our teams for their tireless efforts as we continue to work through this challenging environment.

I'll now turn the call over to Vince Calibrations, our Chief financial Officer for his remarks.

Thanks, Gary good morning.

Today I'll review, the second quarter results and trends in our operating environment.

And discuss our capital management approach and competition.

I'll note that our tangible common equity levels entered the year strongest physician, we've had nearly two decades.

And we're comfortable with our current capital position.

Looking at slide five GAAP EPS for the second quarter 25 cents.

Putting five cents related to significant or outside items.

These included 17.1 million over 19 reserve build and 2 million Kobe 19 related expenses.

The TC ratio ended June 697, reflecting these items as well as a 52 basis point temporary impact for the 2.5 billion in net CPP loan balance at June Thirtyth.

Without the PTC balances Tc ratio would have been 749.

Additionally, our CDT what estimate ended the quarter at 9.4% compared to 9.1 at March 31st and 9.4 at the end of 2019.

At PTP loss carry a zero percent risk weighting for risk based capital purpose.

Pretax pre provision earnings increased to 130 million, providing more than adequate earnings power, we declared our third quarter dividend 12 cents earlier this week.

The dividend payout ratio of 48% in the second quarter.

Well below historical levels previous payout ratio.

As such our capital management approach in more detail later in my comments.

Turning to the balance sheet on slide 14, a key theme in the impact of 2.5 billion net.

Hi is 9.5% total loans and leases action.

He was the primary driver in the linked quarter average increase of 2.1 billion or 9% as well as strong organic activity across most of the commercial.

Our commercial line utilization ended June at 36%.

Historical levels down from the mid Fortys spot utilization rate at the end of the first quarter.

Really thought some customer borrowing activity shift over to PPP and our large corporate borrowers access to capital markets.

Thanks Seth.

Average consumer logs were essentially flat direct installment loans increased 65 million or 14% annualized.

Residential mortgage increased 6% annualized.

Two bright spots to continue to perform well.

The increases in direct installment mortgage loans were offset by continued decline.

Indirect auto and consumer line too long classic heavily affected by that.

Continuing down slide 14 average deposits increased 2.7 billion or 11%.

Linked quarter basis, led by 2.9 billion or 15% transaction deposit growth.

Transaction deposit equal, 85% total deposit.

Our managed decline in TV continue.

That's action deposit about benefited from stimulus programs.

Pp customer driven inflows.

Noninterest bearing interest bearing demand savings account balances.

Each increased significantly.

1.8 billion 854 million 226 million respectively.

Now focusing on the income statement on Fyfifteen.

Compared to the first quarter.

Just income totaled 228 million.

Decrease of 4.7 million or 2%.

Well it deposit growth, mostly offset the impact of lower rates.

The net interest margin narrow 26 basis points to 88, primarily driven by a full quarter impact the March action and lower the target fed funds range to zero 25 basis points.

Additionally, average one month LIBOR fell to 36 basis points from 141 in the prior quarter.

Total yield on average, earning assets declined 58 basis points the 354.

Reflecting lower yields on variable and adjustable rate loans due to lower interest rate environment and the impact of the PTC balance.

Total cost of funds decreased to 67 basis points from 101 as costs on interest bearing deposits for reduced 37 basis points.

Slide 16, and 17 provide details for noninterest income and expense compared to first quarter.

Noninterest income totaled 77.6 million, increasing 9.1 million or 13.3%.

Mortgage banking operations increased 17.6.

Reported basis.

Were 10.2 million, excluding MSR impairment 300000 7.7 million effective.

Mortgage production established a new quarterly record at 869 million.

Accretion 306 million or 55% from the prior quarter.

Contributions from North Carolina, and the mid Atlantic region.

Capital markets also set a new record of 12.5 billion.

Increasing 1.4 million or 12.6%.

The strong contributions from interest rate derivative activity across the footprint.

As expected service charges decreased 6.2 million.

2.5%.

Noticeably lower transaction volumes Kobe 19 environment.

Turning to slide 17, noninterest expense totaled 175.9 million.

Chris of 19 million or 9.7%.

Putting 2 million of expenses associated with over 19 second quarter 2020.

15.9 million outsized unusual or significant expenses.

All right in the first quarter.

On an operating basis expenses declined 5.1 million or 2.9%.

The first quarter of 2020, as we have realize lower variable expenses, such as travel and business development and increased Fas 91 benefits given the amount of loans originated in the second quarter.

Additionally, we recognized an impairment of 4.1 million from a second quarter renewable energy investment tax credit transaction.

Related tax credits were recognized during the quarter and the benefit income tax.

Efficiency ratio improved significantly 53.7% compared to 59%.

During the recent trends on slide 18 continue to observe Haley changes external factors.

Putting multiple aspects of potential economic recovery.

Changes in government programs and regulation changes over current programs.

Saying that we are providing our current directional outlook for the third quarter based on what we know today, which is subject to change as we all know.

We expect period end loans to increase most single digits from June Thirtyth.

Assuming no forgiveness of CPP volumes given the FDA is currently expected time for processing forgiveness application.

While we expect deposits declined second quarter 20 levels based on an expectation.

Customers increasing appointment of funds received through the government programs. We do expect to see continued organic growth in transactions thoughts.

We expect third quarter net interest income to reflect the full impact lower one month LIBOR rate variable rate loans.

Partially offset by a full quarter benefit of higher commercial loan balances.

Can you production cost of interest bearing deposits.

We expect positive trends in capital markets and mortgage banking.

Lower than the record levels this quarter.

We expect service charges to increase recent transaction volume trends continue.

We expect expenses to be stable up slightly from the second quarter.

Lastly, we expect the effective tax rate.

18%.

Full year 2020.

For the remainder of my comments I would like to discuss our risk based capital position.

Overall management philosophy, given the current environment getting on slide 20.

We continue to be very comfortable with our capital ratios as they stand today.

The benefit of entering this crisis position of strength.

As demonstrated in the new capital slides, we have added to the deck, we have ample internal capital generation.

Missions for all of our capital ratios in relation well capitalized thresholds.

For example for the total risk based capital ratio far below 11%.

Total capital would have to drop by $258 million.

7.9% total capital of 3.3 billion.

Our risk weighted assets that have to increase by 2.3 billion, which is 8.5% total risk weighted assets 27.5 billion.

The comment also that 258 million is an after tax dollars.

On top of our capital position, we have a conservative bias and how we build reserves, especially given the consistent underwriting philosophy, it's been in place for well over a decade.

With CDC, one of $2.6 billion allowance for credit losses of 365 million and remaining PCD discount of 77 million.

We have a substantial base available to absorb credit losses.

But that in context, our reserves plus remaining discount I previously acquired loans.

Our 62 quarters of net charge offs that averaged $7.1 million per quarter in the first for first half 2020.

This is before considering the 2.6 billion and CE T y.

Another way to look at this is relative to severely adverse charge offs in our last stress test.

Again, using 442 million in reserves plus remaining discount.

Cover, 75% 586 million in charge offs projected under the severely adverse scenario for nine quarter period.

To put the 586 in context that compares to 64 million over nine quarters using the first half of 2020 net charge offs or 9.2 times the current levels.

As far as dividend sustainability, we are governed by the federal reserve and Yossi safe.

Perfect perspective, we currently payout 39 million in common dividends.

2 million preferred dividends, our total a 41 million per quarter.

The fed fourth quarter test currently shows in excess of $153 million after paying out the third quarter dividends just to clarify.

From an LCC perspective, there are significant cushions to support to $46 million bank is projected to pay up to the holding company.

Report tests shows a cushion of 913 million relative to net under provided profit.

517 million relative to net profits for the current year combined with retained net profits for the prior two years.

I shouldn't above well capitalized levels, ranging from 228 basis points to 384 basis points.

In addition to looking at our capital position, it's important to consider PPNR generation.

Year to date PPNR of 236 million or that supports the incremental reserve build through the first six months of the year.

We generated ample capital to cover the preferred and common dividend.

Our cetone ratio was consistent where we ended 2019 at 9.4%.

Earlier this week, we announced our third quarter dividend of 12 cents.

Given the earnings level through the first half of 2020.

See there's capacity to continue to return capital to shareholders.

Overall, our capital management philosophy is grounded in a conservative and consistent underwriting and credit management philosophy throughout varying economic cycles.

Supplemented with robust comprehensive enterprise risk management.

Putting very active credit monitoring process.

With that I'll turn the call back to that.

Thanks, Vince looking in everything we manage through over the last few months. The efforts of our team has been nothing short of exceptional in assisting our clients in communities in which we serve.

Recent events highlighting persistent in equities in our country have affirmed our important mandate to support those who are vulnerable and traditionally underserved.

As an organization, we continue to place a strong emphasis on being inclusive and demonstrated by our recent $250 billion commitment to address economic social and equity in low moderate income and predominantly minority.

As we continue to deploy these investments our shareholders will benefit as we have continued to prudently manage risk liquidity and capital action to better position our company.

During the quarter FNB originated nearly 500 million paycheck protection program lung and low to moderate income and moral neighborhood assisting thousands of small businesses in employee.

Our success is a direct result of our bankers proactive outreach to over 100 organizations in nonprofit entities that work directly with these to be.

This is just an example of how committing our resources. This way leads to good business results.

I encourage everyone to learn more about our ongoing initiatives and commitment to diversity and inclusion due to links contained on slides within today's presentation.

As we look ahead to move into the next phase it will be 19 recovery.

We will continue to focus our response on four key pillars to meet the needs of each in markets did.

The pillars are employee protection and assistance.

Operational responsive preparedness.

Customer and community support.

In risk management and actions taken to preserve shareholder value given the extreme challenges presented.

Through these unprecedented condition our employees have consistently delivered a superior experience for us.

In June FNB was ranked among the best banks in Ohio, and North Carolina by Forbes and Advisory HQ respect.

Testament to the consistency of our customer centric culture across our.

The company was again named the top workplaces, northeastern Ohio for the sixth consecutive year by the Cleveland claim deal.

This recognition, which is based solely on employee feedback.

Joined the list of nearly 30, such awards received over the past decade.

All of this has been made possible by our dedicated employees.

In closing I would again like to thank my fellow team members.

They have demonstrated throughout this time exactly why may continue to be our most valuable assets.

Our dedication to cultivating superior culture directly translates into a better customer experience greater financial performance and higher returns for our shareholders with that I will turn the call over to the operator to open the call for questions.

Yes. Thank you well now begin the question and answer session.

Yes. Good question, you mean press Star then one on your Touchtone phone.

You guys Speakerphone, please pick up your hands up before pressing the case.

Try your question. Please press Star then so.

At this time, we'll pause momentarily to assemble roster.

And the first question comes from Casey Haire with Jefferies.

Hi, Thanks, Good morning, guys.

I'll start with a housekeeping question I've gotten this a lot.

So the purchase accounting Vince and the quarter.

Look going forward.

For the accretion was 13.2 million.

The.

Remaining discount from.

Approach there and May remember that was 17 million in the first quarter, so down a little bit, but still pretty good healthy level there.

Okay, Great and then Gary I'm I'm on the credit quality front so.

Yes, the deferrals, a 10% sounds like the the new requests have have dramatically slowed.

I believe you guys run a three month program.

So I mean, they should be either extending or going back to normal.

What is sort of based on your.

Indications, there and then and discussions we know what how do you expect to act that 10% the trend in the next quarter this quarter.

Hey casing in reference to that we didn't do 90 days.

And if it really got active in late April.

Mid mid to late April into mid.

June flattened out significantly there there was very small very small numbers of activity.

In June so what we did we had a of the significant number of our clients.

Made the April payment March was already made that made the April payment then we can to shove them further into the recovery. So at this point, we've only seen about 50.

Our show requests for second deferrals and about 250 on the retail side. So at this point, it's it's been very light.

The thought the bankers are working closely with those clients and talking with them on a regular basis, we do expect that to ramp up as we work through the rest of July and into into August and September.

A bit but at this point, it's very light.

Okay, but so.

So where do you expect do you expect that do you still expect those deferrals to stay at 10%.

When you guys reported October or do you expect a lot of them to go go back to normal.

Yes, we expect a lot of those deferrals to go back to normal payments.

And we'll report that going forward.

[music].

As a lot of those clients are not going to need a second deferral, it's going to be a significant number that will not needed from our perspective with this forward.

Okay, great and.

I think what you will see you will see.

Heavier deferrals for second request coming in the hotel space, and then that restaurant space.

As you know they have they have more pressure the other items that I'll mention to you again is.

Coming into.

The situation right Thats using the ended the year, 98.4% of these clients who took the deferrals or in perfectly good standing. So it was a very small number as mentioned in my report that works of working in the normal course of business naturally. This this.

Those impacted a lot of glides, a nomadic lives, we're preserving liquidity and being cautious.

But hopefully that answered the question for you go Holistically.

Yes, yes, thank you and so on the reserve build you guys had moderated this quarter just.

No when did you want when did you.

Forecast how late and.

How how late is different how recent as forecasted you used to build your reserve and you guys.

Given that the reserve build moderated this quarter do you feel like you have and then the deferrals are getting decent news there.

Do you feel like the reserve build the heavy lifting has been done or.

Yeah, I know, it's a tough question answer or changes every day, but.

Just given where deferrals are going and your lower reserve build it feels like you guys are.

The lifting is buying so just some color there.

On on the on the model first let me address that work for you first.

We continue to use a recessionary scenario case you.

Released in mid June.

With the average unemployment rate of 11% over the forecast horizon with annualized year over year GDP not turning positive until the middle half of 221.

So it's.

It's a fairly good recessionary scenario that we have yielded the model as it relates to the second part of the question.

With our focus.

And consistent view on on our underwriting and credit culture around the desire of asset classes that we want to put in the book as a position and mix of our portfolio.

I feel pretty confident that are that our book will generally outperformed during the cycle as it did in the last.

That said there is a significant amount of uncertainty as you mentioned in the economy.

At this point on the economy, if the economy deteriorates further from here the portfolio would have square inch higher levels of stretch.

Given our position and the performance to date our portfolio Mitch.

The smaller portfolios across higher asset.

Classes will continues to assess the positions around it isn't third quarter plays out.

A few additional comments you remember in Q1, we captured the March 27 forecast when others may not.

So we utilize that most recent been of information around our forecast of models at that point.

And during that first that we built a totally $55 million now through the first six months.

Also of note, we really essentially have no credit card student loan and a very small energy portfolio. Those are those are tough from a reserve standpoint during during this environmental we all know.

In addition, we had a pretty significant decline in line utilization indirect auto and some declines in the small business portfolio, which really threed up some up $10 million in additional reserves during the quarter for us so that that helped as well.

And finally, when you look at.

The the macroeconomic environment and looking at it from a static physician moving forward.

We're performance across our portfolio, we wouldn't expect much if any additional build from a macro economic forecasts perspective, and we'll continue to manage that accordingly based on how the economy evolves from there.

Excellent. Thanks.

Hey, I would just add if you looked at and I think we commented on this but yes. The reserve coverage. Excluding the TPP was the 154, we have $77 million of remaining discount on acquired loans at flats and diesel accounting. So if you that's available to absorb losses. So what 54 goes to 187.

As we had on our side, we have another $14 million in reserve for unfunded lines, which is another seven basis points or so so there's no. There is a good amount that we've added to the reserves since the end of year Gary's point.

Understood and.

And then so you just last one from maybe the total capital ratio I didn't see it in the release of the Dhaka, Let's just what was it at 630.

Total risk based capital ratio correct.

We did not.

Disclosed that yet casing, where we have each one at 9.4.

I will probably get that be able to get that by the end of the call I just don't have a handy okay. Thank you.

Thank you and the next question comes from Frank Schiraldi without Piper.

Good morning.

Good morning front.

Just on the a follow up on on credit.

You know as you guys point out if you look at the reserve ratio with the include the acquired book.

You know it seems to hold out well versus where peers are.

But you know if I if I.

Drill down into cat categories, no at first glance seems to be a bit a little bit thinner in some areas than I would've expected. So I just wonder if you could give maybe a little bit more detail or color around for example, the retail Cree book, a where I think reserves are still just under a 1%.

Yeah, one when you look at the portfolio Frank we have at this point very few problem credits in that book of we feel very good about our sponsors across that portfolio and we've really focused our underwriting.

In that book.

At higher cash flow streams and required debt service coverage is over the last few years due to the fact that some of it is retail focused as we've talked a little one of the things that we have in there is an extremely low level of delinquency today naturally going all the situation is.

Is fluid, but the delinquency in that book is 60 basis points.

It was very low levels of any any rated credit at this point. So that book has been very nicely underwritten from our perspective and as mentioned in my earlier comments, the ltvs across the or right at 65%, So we're well positioned and.

At this point, so really feel good about it.

And working with those clients what's happening.

This slide where we are seeing rental streams start to increase as the economy has opened up.

We will continue to keep an eye on that and as.

As we as we move forward, but hopefully we'll continue to see positive momentum there as well.

And how are you guys approaching.

Downgrades are deferrals pushing down.

Downgrades of credits to you know the classified.

Criticized.

Our the deferrals person that down the road or are you taking them as they come and just wondering if you feel like there could be as these deferrals come off a migration there that could drive further reserve builds.

During during the first rounds of the the credits that were insensitive industries were generally move.

Not much.

Other credits that were in a very strong position and we're being conservative those particular loves work move.

During during the second phase here every second deferral will require a one notch downgrade if not too.

In most instances to do a substandard rating. So we'll continue to work that portfolio in that fashion.

Address those ratings accordingly, based on the risk president and each one of those credit situation that Frank I will tell you going in the commercial portfolios feet commercial portfolio gearing Im not sure crossing over it.

Consumer, but there is very active management risk rating.

Reviews that go on perpetually so there's a very aggressive.

Management system in place to ensure that as we review financials and review credit Covenant compliance that the appropriate risk rating is assigned to those credits. So the migration on risk rating. If that's what you're asking is going on now I mean, it's been going on.

When these deferrals come in it may have been a little early right because the majority of the impact for our commercial customers based upon what I'm hearing was happening in April late March into April and May and then it kind of rebounded.

Back most of the industries have come back.

[music].

Well beyond where they were at the depth of April so that that's an ongoing process and we have a fairly rigorous process in place to the industry with Vince's point there Frank is a very good point I mean, we were.

We are known from a regulatory standpoint to be very aggressive from.

A risk rating touch standpoint every our focus is that every time, a bag or touches a credit no matter what it is whether its annual review to on whether its line of credit renewal time or whether it's a phone call.

We require them to assess the situation and downgrade risk on a month to month basis. So that proactive approach I think as has been in place for for many years.

Great. Thanks, and then just just a quick one on expenses if I could.

You guys gave some guide for for what to expect in the third quarter.

Do you is there you know if you could just give us a little bit of the puts and takes in terms of getting there from this quarter. I know you had the the tax credit would have increased.

Expenses this quarter.

So just trying to get a sense of you know if I look at a if I take out the covert related expense I guess I'm at like 174.

For the expense base in the quarter. So is that kind of where you're talking off of in terms of steady to slightly up.

Number and is that a good run rate maybe beyond Threeq, you give us an any sense there. Thanks.

Sure.

Yes on the slide we mentioned that we had the 4.1 million impairment and then going the other way because you didn't see much movement in that other non interest expense.

We had lower business development, we had lower Oreo Oreo at lower miscellaneous losses in this land so they kind of net out.

You can see it was 21 nine in the first quarter 21 item second quarter.

When you look forward to.

To the third quarter I mean, the comments that I made in my prepared remarks kind of in the mid.

Hey, one seventies.

Say kind of somewhere between 175.77 ish or so.

There is that includes commissions on mortgage activity, which has been very heavy so that comes through that line item.

We'll see some of that come through in third quarter. So.

It's really right around I think last quarter I use like a 178, I think we'd be south of that.

We came in at the 176 kind of on a on a total basis 174 like you said, so it's somewhere around there Frank one 175, 177, I kind of use as a run rate.

For the third quarter and.

In the fourth quarter were not really given any other direction there but.

There's nothing unusual rise horizon that at that.

Okay, great. Thank you.

Right.

Thank you and the next question comes from Michael Young with Suntrust.

Hey, good morning.

On a merger.

A quick follow up question to start just on credit.

Slide nine you guys present kind of your historical charge off peak rate going back to the last crisis, which obviously performed well through ex Florida.

Is that how did the right way to think about charge offs. This time around Gary do you feel comfortable with that or do you think that given kind of the severity of the shock bed and and potential linked to this crisis that could be worse. This time around.

Oh I feel similarly call for the.

Yes.

Michael around how the portfolio were performed through through a cycle such as this when you look at our models.

You know as as we mentioned in terms of the stress testing.

We are doing and although the models that were running across the portfolio.

And the build of $55 million during the first six months or the year.

If you would add if you would add that to normalized charge offs, you're you're lucky you got to charge offs on an annualized basis in the 45 basis point range or so as that stress level and the models are confirming that.

Feels to me quite quite good.

Naturally the economy has to stabilize at some point the volatility leads to move away, but at this point it feels good.

From that perspective.

Okay. So just to kind of put everything together I mean, if we took a charge off rates similar to that and then assumed kind of the macro conditions may be stabilized in terms of the Cecil.

Allowance outlook.

Then you would just be kind of accounting for downgrades and those charge offs that we can I already mentioned and that's kind of how we should think about credit provisioning going forward.

I would say that's appropriate.

And providing for growth but growth.

Sure, Yes, we're hoping for that I think we're hoping.

Yes [laughter].

And then maybe switching gears Vince just on the PPP loans in the fees associated with those was there any recognition of those fees on an accelerated amortization basis. This quarter and then what is your outlook for that on a go forward basis.

Yes, no I would say the forgiveness process hasn't started yet.

FDA still working on how they're going to receive for given this application so and we're ready for that once it comes but it's not you're not ready to be able to start that process. Yet. So so the the fee recognition came in will be just kind of the normal accretion fees over there and vast vast majority longer the two year terms, we had a handful with the five.

Five years, but.

So I guess with a one way to look at it is just the yields for the second quarter.

It was 315 3.15, which is the coupon plus.

Additional portion of the fee. So we don't have any acceleration coming in there yet.

And you really don't know, it's hard to predict I mean.

In our heads we have been kicking around maybe you get 15% forgiveness in Q4, you probably won't get any in the third quarter, just because of the you're not ready yet so and then they have 90 days have responded.

Pushes it out into the fourth quarter, So I guess for like.

Modeling purposes, we've been using 15% as an assumption in Q4.

And maybe get three quarters of it by the end of March and then maybe 90% by the end of June and then you have some tail and those are just reference points like nobody really knows but no. We do expect to get some level of forgiveness that will happen in fourth quarter, and then depending on the magnitude that fulsome that these forward.

So those are kind of the key points there ours PPV balance.

And in the third quarter I should just comment too so the average balances a billion nine.

The average balance in the third quarter being that kind of that 2.5 net.

What will have because you didn't have all throughout the second quarter.

The other thing I'll say this is vince to the output of pitch and for our.

The folks and.

Hey, incursion digital channels, we built out a fairly robust.

System for clients to offload the information into walk that walks them through the forgiveness process, which keeps changing and is fairly sophisticated but.

Very nice process, and then Gary Guerrieri hired.

Im of people and has assembled a team.

That will focus on acting as liaisons for clients to help facilitate.

The forgiveness process, so we're still hoping for.

An easier process on the smaller loans.

Being kicked around instantaneous forgiveness for under hundred 50 that would help tremendously, but we have systems in place.

To help facilitate the forgiveness for our clients.

The other thing I'll point out is when you look at the balances are our loan balances overall.

Our if you subtract out the PPP loans.

Be down slightly was a 1% I think one 100% overall.

It's kind of a hard equation to do because we have smaller clients you know if you look at the.

Dispersion of deployment of those PPP loans.

Relative size of our loans are smaller.

Typically those customers would borrow.

Through the PPP program pay down the working capital facilities right. Because there was the rate differentials fairly significant and then borrow back on their lines, but they have confidence that theyre going to be able to do that so I think it's a it's when we look at the transfer from PPP.

Our own revolver balances are lying balances small business customers that explains some of the decline and the portfolio. The overall activity across the company as I mentioned in my prepared comments was pretty good.

And there are still Financeable enterprises out there there are entities that.

We would certainly consider providing credit to and other other industries that are that are distressed and we don't play significantly as you can see from the the breakdown of the portfolio that we provided in our disclosures.

We're not very active a number of those areas. So.

I'm I'm, a little more optimistic about the activity moving forward.

First we haven't seen the fallout yet that will happen I.

I think from a perspective in the third fourth quarter.

So far.

It just looks okay for us.

Anyway, but share that with yet.

Some additional commentary.

Yeah. Thanks, Thanks for that additional color Vince.

And then just maybe last one for me just on the net interest margin on it looks like you guys still have some room to bring down the deposit funding costs from here could you maybe just talk about the timing in opportunity with that and then if there's any lingering roll down in loan yields from this point.

Well on the liability side, I mean, I think theres opportunity within the deposit.

Yes, I know, we've we've had significant deposit growth even outside of the PDP.

The growth relating to PPP balances coming on our demand deposits were up significantly we're trending up over the last few years. So that has continued.

I think there are opportunities there.

To bring down our overall cost.

And I, let Vince talk about the the asset side of the equation in terms of margins.

On the liability side, there is room for us to continue to improve.

Yes.

I was just couple of comments. So when you look at that performance for the quarter. So net interest income declined 4.7 million.

Given that we had 105 basis point reduction in one month, LIBOR 141, 36 basis points.

That's it that's a 22 million dollar reduction in interest income on a half billion.

When you look at the net decline given that 22.3, that's not a bad outcome there.

And then as I mentioned at the beginning of the call the.

Beat the accretion coming in a little bit lower 17th 13.

You had some impact is comparing the second quarter for that.

First quarter.

When you look at the 2 billion growth in average, earning assets largely funded with 1 billion eight noninterest bearing deposits that thats been.

Continuous growth, obviously has additional influx on the programs, but we've been growing deviated every year.

So when you look at the cost of the interest bearing deposits as we had on slide.

We're able to bring that down 37 basis points to help mitigate the impact on weibo. So yeah, we're able to offset a good chunk of that which is a positive. If you look at the kind of entry point into the third quarter on a spot basis cost of interest bearing deposits at 61 basis points.

The average for the quarter was 72. So you haven't 11 basis point kind of head start going into the third quarter and are still buckets of deposits that we're we've targeted and we're looking at it.

We expect to bring those rates thats more so.

Finally, some more some more impact there.

I think as far as that asset side of it I.

I mean by more than 18 basis points, so without the 16th applicable.

Well take a couple of basis points, but yes, I don't think there's anything unusual that would come through kind of third quarter versus second quarter.

Other than mix mix of loans that you put off so.

Nothing really kind of beyond that and the spreads have kind of and stable.

In recent months.

Okay. Thank you guys.

Thanks.

Thank you and the next question to some Baron Shah with Wells Fargo.

Hey, guys inside chaired here is there.

Good morning, So just a question I guess on the the reserve build so that $17 million of incremental.

Incremental build from the macro forecasts carry that just taking the model with the macro assumptions that you laid out and that's what's flowing through are there some qualitative overlays as some of those other items that you discussed that that offset what the model would otherwise have a spit out for the for the macro economic expectations.

The reserve.

It. It would include it would include some some overlays.

You know a railroad around our normal modeling process Jared.

It is inclusive of overlays.

And Qualitatives.

Okay.

Yeah, I guess, if we see.

The the macro model deteriorate in third quarter.

Should we assume that there's potentially some additional overlays that would offset just pure impact of that move or.

Or not necessarily.

You know it it's going to remain fluid I mean, I can't speculate on what the situation with the forward view is going to be at that point.

You know baseball based on where we are today.

We feel good about the position of the portfolio.

We'll continue to keep it on it managers as the macroeconomic environment changes.

Going forward.

Okay.

Vince on the earlier in your commentary you you'd mentioned something about evaluating business opportunities and.

As you know as you go forward can you give a little color around what that what that could look like.

Yeah, I mean, we there are certain areas for example, we just.

Fairly large.

Credit in the retail believe or not it's a developer that has.

Tenants, 99% occupied $25 million deal that.

And insurance company was looking to get out of retail exposure the loan to values, 55%. The debt service coverage is 2.2 times.

Our greater.

So there are transactions out there that you would do the tenant base is largely large investment grade banks, the others for banks and Outparcel.

On the property, so there and there's a grocery store that's very solid long term ways. I mean these are all long term leases there are opportunities to do business. I mean, we're just going to have to be extraordinarily selective on what we go. After we also recently won a large.

Facility for double a rated higher education institutions.

So there is still activity going on.

Billions of dollars and reserves. So we're just going to have to watch what we do and I know that our folks are very in tune with the appropriate opportunities to go after we have the capital and liquidity.

To continue to move forward and the conservative nature of our underwriting puts us in a position today to continue operate and we've said that all along that's our business model.

We're not as flashy during the expansion periods, but.

Pretty solid during the downturn.

I think that creates stability for lending.

Remark from our perspective.

And continues business activity so.

I'll tell you our employees not to.

I made prepared comments, but I'd say these people have worked countless hours during the PPP program managing the credit risk I could go on and on it on I mean, I'm. So impressed with what they've been able to do and our pipeline. If you look at our production over the last quarter.

Our production was pretty comparable to the previous work.

The post covet quarter that we were comparing to so again there they're not just sitting at home, which is what I was afraid was going to happen there, they're working very hard and my hats off.

Employees are passionate about their customers they care and.

They are very eager to make sure we get through this and get through it sound.

So there isn't a lot of activity.

So as we as we look forward, though that's the type of stuff, we should be assuming not yeah, not a bank M&A.

Is that correct.

This point I don't we've set the last three years focused not only this would be the appropriate time to focus on it we need the rights to ship here from an economic perspective, as a country and we need to get better feeling for what is going to happen I.

There's there's a lot of uncertainty as we move forward, but the one thing I'm certain about is the quality of the people that we have in our ability to manage through it.

We've proven it before during the same management team.

Yes.

Yes.

Many of the bankers are the same so I feel very confident that.

We're going to get through this and we'll be in a great position to decide what we want to view on the other end of it maybe M&A. After we're through this is a distinct possibility for us given the strength.

Of the company so I.

Well, we'll play that are down the road I think as we sit today.

The other thing I will mention Jared is we opened our PPP program up to non clients and our newer markets because we felt that some of the larger institutions were and capable of delivering and in the first round. The PPP. Our people originated $2.1 billion, we we were able to convert.

83% and fund 83% of the applications that we brought in most of the large banks run the low twentys or 30% range. So we brought over a lot of clients. Our prospects that are now clients that will lead to future opportunities for our bankers.

Because there now.

Part of the capital structure. These companies so I'm optimistic once we get through this about that as well there's at least 2000.

Middle market prospects that we now have.

Our relationship.

So.

We'll see how that all plays out down the road.

Very good execution by our employees and that's why we're where we are.

Great. Thanks.

Thank you and the next question comes from Russell Gunther with D.A. Davidson.

Hey, good morning, guys.

Russell.

Just a follow up on the deferral conversation earlier, so I understand.

Youre kind of holistic view on this exposure so yes, the 98% that occurred in good standing coming into the pandemic, but do you guys consider these customers to be higher risk given that they are in a forbearance program currently and if so is that accounted for in the in the current reserve.

Yes. The answer is yes, I mean, those many of those customers wrestle.

With with the onset of the pandemic and the shocks to the economy and the shock to everyone in the beauty business community.

A significant number of we're wanting to be cautious so some of them through their lines up our line or line draws went up to about 46, 47% they wanted to grab liquidity.

They look for deferrals, 75% flush of our commercial deferrals decided to pay the interest not take interest deferrals. So they pay the interest at their own volition.

The though the more compromised industries.

Took deferrals as we've talked about.

The books are relatively small.

You know hospital hotels observed.

Restaurants have been severely impacted I would expect those.

Clients and those industries to be taking second.

Deferral opportunities.

Due to due to the volatility in opening reopening closing bell of and what does the future looks like.

That all being said the the deferrals in the restaurant business has been remarkably low at I think it's about 32%.

That has.

Been quite surprising to us that it's not been.

So you know the risk ratings have been dealt with.

The risk ratings continue to be dealt with.

Second request will cause additional further downgrades and we feel that we have the appropriate risk classifications.

Across the credits in the portfolio at this point.

I appreciate that Gary and then.

Holidays, if I missed it but did you guys disclose where criticized and classified assets are this quarter.

I'm not sure I saw it in the release.

We did not but that should be in the.

Sure.

And just directionally can touch on whether there's a significant.

Alright, great they're up up moderately.

Okay. Thanks, Gary and then.

From a timing perspective on charge offs with whatever the magnitude.

Obviously, a lot of unknowns that stimulus forbearance, but I guess, just your assumptions around timing in terms of waiting we could see charge offs begin to start going up from.

Do you still had a very solid first half of the year.

Yes, I wouldn't I would tell you Russell that you're going to see that impact in Q4 and into 2021.

May see a little impact late in Q3, but I would tell your Q4 and into 20 to 41 would would be my view.

Okay. Thanks, Gary and then last one for me guys you provided some broad strokes on the PPNR guide for the third quarter and tightened up the expense range for us. So appreciate that.

I'm trying to tie it all together do you think.

You can maintain this level of of PPNR QQ based on the the puts and takes the that PPNR guide.

Well I think we give you all the drivers across all right. So.

Kind of given the moving parts there I think if it if you kind of go through some of that some of the elements.

Think about net interest income.

Thats right, we're going to have.

One month LIBOR today is at 18 basis points. So it averaged 36 in second quarter. So no could you bring that down in the five to 8.5 billion.

About 3.8 million a quarter of net interest income just from the LIBOR adjustment there okay.

And then you have the purchase accounting I mentioned was 13 I would still expected to be strong in the third quarter, probably a little bit lower than that but it's still kind of a good level I would expect so kind of the into double digits.

So that's an element to net interest income and ended the PPP lounge, you'll have the fall two and a half billion those are additive to net interest income and additive margin.

The longer they're funded with D.A., so and as I mentioned earlier, you know we're going to continue to work down the cost of the interest bearing deposit.

So that clearly we'll have a positive impact so but kind of net net net interest income I would expect we down a little bit.

The income should still be at a very strong level.

The guidance as I mentioned, there we would expect to service charges.

To bounce back off and they were running in a kind of 40% to 50% year over year decline for the transaction volumes and that's running more in the 20% to 25%.

So I would expect to see kind of that element in noninterest income.

Increased Tom I mean mortgage at 16.

$70 million indirectly hi, I wouldn't expect that to be as strong as that but I would expect that still kind of into double digits for sure and say theres lot of pipelines high there is lot activity continuing to go on and this is a busy time for that business and.

And then the capital markets piece.

Number.

Had a couple new records in a row I would expect that to be very strong again.

Third quarter I can't predict another record, but I expect very strong kind of relative to what's in there and that some of the other key businesses that were down the wealth and.

Barents businesses I would expect those kind of bounce back up so non interest income.

In total kind of will reflect all those other drivers.

This is a lot of moving parts in the service charges, we'll see how that plays out the recent movement, increasing the transaction still down, but it's not down as much would be helpful. And then the expense side as you know we manage expenses very closely as a company we own doing.

Expenses have been mcadam kind of on an operating core basis, they've been very very flat.

So I think that that will help.

Overall, so I mean, where the PPNR ends up net net I mean, we'll see I would still expect to be very strong.

I think when you look at.

Where it was for the first six months.

236 million on year to date based.

We'll be very strong again in the third quarter, so I'm not giving a number but trying to give you guys. All the different drivers and kind of understand what were what we're seeing and just what the outlook is from.

Okay.

No I got one.

I want to go back the Casey.

Question earlier, so the total risk based capital estimate would be about 11.9.

I think last quarter sliding here it was 11.6.

I will point sections eliminate the ended the year seven six at the end of March. So the estimate is 11 nine.

From where we will be at the end of June.

We did have tangible book value per share growth.

All right BB growth quarter.

Yes.

Well then thank you guys for Oh, the color on taken the PPNR question in for answering all my questions. Thank you.

Perfect. Thanks Russ.

Thank you and the next question comes from Collyn Gilbert with KBW.

Good morning, guys.

The long.

Quick.

So just starting to quickly then calories just a question on the on the Ppt impact. So in terms of the interest income contribution into Q related to PPP I think calculate maybe roughly 16 million can you just verify that and then also related to PTP, what's the op ex benefit was.

It's sort of alluded to it but from the deferred loan origination costs from PTC was also in the second quarter.

Sure.

That's a billion nine the total interest income on that for the quarter with basically $50 million.

For the quarter, So 315 yield tend to if you use those two pieces a billion now.

And then we'll have like I said, two and a half billion on average we would have since we're hoping you forgiveness yet in the third quarter. So.

And that through 15 includes accretion of the portion of the fees as I mentioned earlier and then the that the Fas 91 deferred origination cost went up by 3.7 million from the first quarter two second quarter, which is just driven by the PDP is obviously the biggest driver that so.

With that benefit helps on the expense side and then.

That's kind of comes in that your accretion comes in none of that is that the yield adjustment.

Well.

The fee, but obviously, there's a net positive.

The mining costs so.

It was the delta for the quarter 3.7.

Okay. Okay. That's helpful. And then just lastly, Gary great color on on on some of the credit moved especially with the retail theory. Just curious if you can give us a little bit maybe similar credit metrics within that the hotel book I mean, it's a small percent of the overall book I get it 100% or whatever but just looking at the right.

Third on that 1.5, SEC, just kind of where you have comfort like what about that book gives you comfort that that's the right reserve level.

Yes.

In terms of that portfolio of.

Followed when you look at when you look at the performance of is a significant chunk of that portfolio. You know in excess of $100 million are probably about 40 plus percent of it is what I would what I would call RSU core customers in that space.

We have never been a hotel lender other than so some very strong well heeled long tenure.

Hotel professionals, who have built up significant capital. So there's a there's a good chunk of that business or that is very very soon.

But the majority of the rest of it came from acquisitions.

You'll recall that the portfolio got up in excess of $530 million to $550 million post acquisition.

We have run it down to $350 million, we've not lend into the space for over four years at this point delinquencies on that book and naturally some of the weaker.

Weaker smaller hotels, you know, what I say that I'm talking about small mom and pop shops, which we got through some acquisitions warehouse surely by the.

By the government stimulus and the deferral programs, but delinquency is at 15 basis points.

And we've really the risk that portfolio over the last few years.

It is it going to withstand some losses absolutely.

No we understand that and we'll work through what we can with our clients and we will probably have some some increases in volatile assets in that book as well.

I would I would surely expect as we move forward.

Generally speaking I feel good about the position of as we've moved higher risk assets off the books and we'll have to deal with so.

Hopefully that helps division cologuard.

Yes, that's very helpful. Okay. That's all I had thanks, everyone.

Thanks.

Thank you and the next question some ready Preston Ms Stephens, Inc.

Hi, Good morning, guys. Thanks for sticking around so long answer all the questions.

Yeah.

So quick question could you remind me why the 77 million dollar PCD discount is in part of the reserve post Cecil.

Well, it's a discount on the loan portfolio. So when you go through the Cecil accounting it.

Most of the acquired loans into the loan balance.

Just a discount to get secreted and I mean, thats, just the way to kind of work.

It's basically whats marks that we had left on the acquired loan prior to see so.

Yes Force you had at basically will retain gains are remaining marks were left there because you couldn't bring that into income until the full with gone or very close to five stranded capital stranded that right.

Okay, alright, thanks for that the or the 154 reserve ratio ex TPP you know.

Cecil's supposed to be for expected lifetime losses. So just wondering if you give us a sense for what that sort of implies within your modeling for I guess near term peak MPS.

In terms in terms of peak MP is broadly I'm not going to sit here speculate on that so that's a difficult thing to do there's there's so much volatility in the environment.

When you when you look at where is this thing going I don't I don't think any less really no.

When you when you look.

When you look at the economy today, and where it's going I would tell you that you're going to see increases in NPS is as we work through this situation across the industry.

As far as that of giving throwing out a peak number I don't feel comfortable doing.

Okay.

All right and then I guess, maybe switching gears to PPP, just given the cost of servicing the Pvp loans and you know some of the I guess the longer timeline of working through forgiveness. You all considered selling these loans to a third party like we've seen some smaller banks do.

Yes, I mean, we receive calls on that and.

People, who want to buy I want to kind of get the all income for free so it really doesn't work I mean, we've looked at it.

For Us we think it's better to keep it on the balance sheet, just given the price points that people are talking about the hardest part was originated.

So once you originated I think you have it I.

It's it's going to lead to for US first of all it was beneficial to our clients so and they're very appreciative of it helps the loyalty I think for us to sell it at this point would not go overwhelmed.

And I again, we were able to build out an automated process that made it very efficient we wanted a few banks that had an end to end.

Digital process, we introduced bankers along the way.

Sales and bankers that interacting with clients, but they had a fully digitized process April is process to bring them on so.

The same is going to happen with forgiveness for us we.

Invested pretty heavily internally in the resources to be able to do that that's a differentiator for our company and we're going to have a very slick system that is online that permits.

Forgiveness.

Wants to clients through step by step on forgiveness enables them to offload documents digitally.

So we're able to do it a little more efficiently.

A smaller banks might struggle.

That have to outsource probably portions of that or maybe all of it.

So at that point, they may be looking to.

To get out from under the burden of processing.

Considering in most cases smaller banks it was a larger percentage of their.

Total assets.

Ross, it's it's a substantial portfolio of what we can manage it with the resources.

We have plus I mentioned that the thousands of.

Non customers that we were.

At relationships with our bankers have been calling on the called in and said Hey, I can't get my BP loan through my large.

Bank would you be willing to do it for us.

We accommodated those requests.

I will say something else to that I Didnt mention I mentioned in my prepared comments.

Our our folks reached out to 100 community groups in nonprofits and low to moderate income communities across our footprint, which was before it became an issue and we were able to originate a half a billion dollars in PPP loans and those low to moderate income in rural communities.

Where.

The job job retention is critically important so I'm very proud of what we did and I think we've done it a masterful job.

Underwriting them.

Ensuring that we have good quality borrowers on the other end and we're going to carry through.

Okay. Thanks for that anyone Thats aren't philosophy overall philosophy.

Alright, and then on the just going back to the margin no liquidity you had a pretty significant increasing cash $370 million are so just wanted to understand how much of that was driven by PPP. If any in sort of what you expect for cash balances.

Moving forward.

Yes, I know that influx of the deposits that we had which exceeded the loan deposit ratio coming down to 92 kind of captures all of that.

No as Vince mentioned in his remarks, we went from having overnight borrowings to investing that a few hundred million that you mentioned in there, which really isn't that big on our balance sheet and kind of just sit here today, that's running at about euro So no as a as deposits at some point, we'll get utilized that number will kind of flex up and down.

At that happens and then in the meantime, CPP such a big.

Driver to the numbers, we continue to add new relationships.

Alex and gaining business and.

Vince's point, 25% of the PPP customers or prospects. So we're not customers. So thats a pool of clients that were going to be actively NRT opened depository relationships with the bank because they needed to fund the loan some of them chose to move additional deposits over expand the relation.

Jeff.

So when you look at we actually tracked the PPP fundings, we have a system that we've put in place it's not 100% accurate. We developed it will be originating to watch outflows of funds migration of funds and what we've seen is an expansion in the number of accounts that we have with that.

For customers so the deposit balances in certain instances exceed the amount of CPP one on.

That's helped US I mean, if you look at the deposits overall were up.

Over the well over the amount of PPP balances and some of those balances wet and moved over to pay down existing debt.

So we're looking pretty good from a deposit perspective.

I mean, I feel pretty good about our our funding base in our ability to gain households.

And our teams are working to expand those relationships.

Thats in the midst of a pandemic so I think.

Social civil unrest I.

I think are like I said, our people have done tremendous job.

I couldn't be prouder.

All right great. That's it for me everyone. Thank you for the time. This morning, thanks for taking my questions.

Thank you very express it.

Thank you next question comes from William Wells with Raymond James.

Hey, guys I'll try to be quick one quick modeling question.

On the PPP based on the way. The rules are written today, what is your expectation up the percent of loans that will be forget it.

Well I think.

Total I would think that vast vast majority I will be forgiven I mean, it's got to be in the 90 no certainty.

Vince mentioned, the you're talking about an automatic forgiveness for loans below 150000, I'm not sure if thats going to and a half or an object.

Clears out I mean, our average I think it's under its 100 on under that averages 129 right. So.

Yes, I also think.

We did a pretty good job walling there you when you brought clients in.

There was an opportunity to walk them through what would be required for forgiveness and I think our folks based upon what we required there was a certification by the lender that weve required that they validated.

Certain pieces of information and had discussion that's why we had 1000, we activated osten bankers across multiple lines of business to interact with the client that will help in the forgiveness process.

Yes that will help us achieve a higher percentage of forgiven.

I would just look at recent at what I said earlier I mean, our assumption right now our estimate just based on.

Formed estimate was to get 15% in the fourth quarter have 75% a total forgiveness by the end margin than 90 by the end of June is kind of at least what we're thinking about.

Okay. Thank you very much and then one big question for you Vince D. In your prepared remarks, you gave some numbers that.

Suggest a pretty significant increase and utilization of the digital network with your customer base.

You guys have been pretty diligent and thoughtful about your branch network over the years and Youve slowly consolidated it I'm wondering if the increase in utilization of the digital network changes the way you might approach the the decisions around the branch network. It if you could talk about that and that step out.

Yes, I appreciate the question, it's a great question.

I think that obviously in this environment no theres been a let's say an accelerated educational process for clients, we had such a huge increase and adoption in those digital channels. We've always focused on the interface with the client we always believed that.

We what we can control because we're not.

We don't have unlimited budget was how.

Easy it is for a consumer to interact with us and that's really what we focused on the interface I think our our folks did an exceptional job with our website I'd recommend you haven't been on it go one and take a look at our website.

It's designed in a way, it's very easy and intuitive to purchase products and services or view educational content.

The the ability to put that out is going to make changes the educational process that took place through cobot 19 will certainly push users to that platform.

We had a patent process, we closed a lot of branches I mean, we've consolidated I don't even know the numbers, but generally 15 to 20 year over the last five years had been.

Consolidated some of it through M&A some of it opportunistically because of that.

The change in client preferences, I would expect that to continue but I will tell you that throughout this process a number of clients. It written me letter sent me email stop me on the Street and ask one of your lobby is going to be open.

Small business customers still like.

One of the branch and they want to go and make their deposits at the branch because in many instances they still use cash pointing currency and they need to to come in.

Appliance when they have issues like to stop in.

So I think it's going to be there was an article that S&P just did.

It did it.

Illustrated our concept branch I think there will be fewer branches. The design of the branch in how we deliver content on products and services will change, but there will always be a need there may be fewer of them and we're going to continue to look at that to drive efficiency. So our strategy was to invest in.

The front end system to invest in the ability to provide products and services in a comprehensive manner focusing on the interface.

And then making sure our branches or branch system is optimized.

And structured appropriately to accommodate conversation.

And that content, so anyway, that's I see that continuing that trend continuing.

All forward as with an opportunity to operate more efficiently.

As we move forward.

Anyway. Thank you.

Thank you very much for the question.

Thank you and the next question comes from Brian Martin with Janney Montgomery.

Hey, guys. Most of my stems back answer is yes. It's a couple of housekeeping just Vince I think you said on the service charge income you expect I know, it's down this quarter, but you didn't expect some bounce back perspective, I think you said it was like 40% down and now it's down it's only down 20% kind of that range is how to think about that.

Yes, yes, yes, Brian.

Okay. So much I got that right and then just what the accretion number.

I guess, just a timeframe we should think about.

Recovering that remaining whatever 77 million Vince I guess given that some of the.

Balanced I guess that didn't drop down this quarter just hill's most of that captured by maybe end of next year or is it going I guess this is that fair to think about that.

Yes, I mean, the vast majority would be.

No I'd say over the kind of the two years two to three years I would probably say probably reasonable.

By the end of next year.

Thank you have kind of.

Bulk of it kind of coming through I mean, it's a function of of prepayments to right. So yes.

More of the loans and up prepaying or go different.

Defiant government programs or something you'd have more of that that would come in but but I'd say.

Two to three year kind of timeframe right by reasonable.

Okay and then just the last one from me guys the impact of that CPP on margin I guess this quarter I guess, it's just in general I guess your comment on on that.

Yes, I mean, it's it's actually additive to the margin.

If you look at I mentioned in the yield at 315.

Yes.

Funding at with US basically deposits the three basis points. So you have a spread of about 312.

We do the math, it's now it adding 10 50 basis points.

I would say to the margins on that during that short period there. So.

It's going to be a function of how long those around part.

Thats coming through and how long, we havent funded with demand deposits right. So at some point the customers are going to start to use those funds.

Then your mix of how you're finding it will change but.

I can say for certain is what the second quarter impact wasn't it was a 312 spreads.

As you can see do the math, obviously additive to margin.

Yeah Okay.

Okay. That's helpful. Thanks, that's all I had.

Thank you.

Thank you.

As a last question on wed like to return the Florida management for any closing comments.

Well I'd like to thank everybody for the questions and surely appreciate the time.

As you've spent with us and the interest in FNB.

Please stay safe and look forward to meeting with you next quarter.

There.

Thank you.

In France has now concluded. Thank you for attending today's presentation may now disconnect your lines.