Q2 2020 First Financial Bancorp Earnings Call
Good day and welcome to the first financial second quarter 2020 earnings conference call in webcast.
All participants will be in listen only mode. So do you need assistance basic My conference specialist I pressing the star keep followed by zero.
After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Scott Crawley Corporate controller. Please go ahead.
Thanks Melissa.
Good morning, everyone and thank you for joining us on todays conference call to discuss first financial Bancorp's second quarter and year to date 2020 financial results.
Just spending on todays call, we Archie Brown, President and Chief Executive Officer, Jamie Anderson, Chief Financial Officer, and fill Harris Chief Credit Officer.
The press release, we issued yesterday any accompanying slide presentation are available on our website Www Dot bank. It first dot com under the Investor Relations section.
Well make reference to the slides containing the accompanying presentation during today's call.
Additionally, please refer to the forward looking statements disclosure contained in the second quarter 2020 earnings release as well as our FCC filings for a full discussion of the company's risk factors.
Information, we will provide today is accurate June thirtyth 2020, and we will not be updating any forward looking statements to reflect facts or circumstances. After this call.
I'll now turn the call overarching brown.
Thank you Scott good morning, everyone and thank you for joining us on today's call.
Yesterday afternoon, we announced our financial results for the second quarter.
We're very pleased with our performance, especially when considering the unique circumstances in which we were operating related to covert 19.
Consistent with the broader industry our results continue to be substantially influenced by the endemic.
Net interest income fee income.
And most significantly provision expense.
Our second quarter performance demonstrated continued strength and resilience in our businesses despite the challenging backdrop.
Marked our 119 consecutive quarter profitability.
Highlights included adjusted earnings of 40 cents per share a 1% return on average assets.
13.4% workforce, 7% return on average tangible common equity.
57% efficiency ratio when adjusted to remove non recurring items.
Second quarter was our highest core fee income quarter on record.
Our mortgage division had a sensational quarter.
As the hard work of our team combined with historic low interest rates to drive and almost 500% increase in mortgage banking revenue.
16.7 million.
Core banking trends for loans and deposits were significantly influenced by the HX protection program.
During the quarter, we secured SPJ approval for approximately 7000 loans totaling $913 million.
Additionally, increased liquidity in the financial system across both businesses that consumer client segments.
Attributed to the strong deposit growth.
Our banking teams are seeing a return to sales momentum across many of our business lines.
The mortgage team continues to see a very high volume of refinances in purchases with rates at an all time low.
Sales activity also has been strong for checking growth consumer loan originations and wealth.
All teams are embracing the virtual remote solutions leveraged a greater degree during the height of endemic.
These are all encouraging signs of our new normal power new normal is do longer restraining activity.
<unk> expenses were lower in the quarter as we limited discretionary spending and implemented additional hiring controls.
Credit trends remain stable, however, forecasted credit deterioration over the latter part of the year drove elevated provision levels in the quarter.
We are pleased and appreciative of the incredible work our associates during the quarter.
As can be seen on slide 19 are guiding principles and managing this crisis continue to be prioritizing associate and client safety.
Preserving the continuity of our business assisting our communities and ensuring the safety and soundness of our company.
Over the last several months, we successfully implemented our endemic management plan with more than 50% of our associates working remotely.
And our branches operating with close lobbies for most of the quarter.
We properly reviewed our client service model is shifted to utilizing technology and new and innovative ways.
Our associates went above and beyond to provide essential services and assist customers at critical moments.
Our teams work evenings, and weekends processing and funding $913 million and PPP loans.
Customer deferrals totaling over $2 billion in loan balances.
And historic levels, a fee waivers in mortgage applications.
At this time over 60% of our banking center lobbies are fully open with the remainder servicing clients by appointment.
Physical staffing levels in our office buildings is currently limited to 25% of normal capacity, mostly on a volunteer basis.
With the remainder of the staff continuing to work remotely we continually monitor conditions in our markets and banking centers. In addition to guidance provided by local and state governments with regard to safely returning to the workplace and opening our branch locations to customers.
Overall I continue to be extremely pleased with our ability to quickly adapt to the challenging environment.
And function at a high level.
I'll now turn the call over to Jamie to discuss the details of our second quarter results and then after Jamie's discussion I'll wrap up with some comments on the specific areas of focus within our loan portfolio.
And provide some forward looking commentary Jamie.
Thank you our T. and good morning, everyone.
Slides four and five provide a summary of our second quarter 2020 performance.
Overall, we were pleased with second quarter results as the company's operating performance remained solid with elevated fee income and an efficiency ratio that surpassed our expectations.
Although we were encouraged by our relative performance the pandemic continue to produce meaningful headwinds.
Despite stable credit metrics, we recorded $20.2 million a provision expense during the quarter.
And we believe our current reserve positions us to effectively manage credit deterioration in the back half of the year.
Our capital remains strong and regulatory ratios remain in excess of both internal and regulatory targets.
We believe that our balance sheet as well position and our core fundamentals should allow us to maintain these levels for the foreseeable future.
As expected our net interest margin declined 33 basis points on an FTD basis compared to the prior quarter as asset yields were negatively impacted by lower interest rates. However, we were able to partially offset the impact by prudently managing funding costs.
Fee income was the highlight of the quarter and one of the main drivers of our financial results.
Mortgage banking was particularly strong increasing 13.8 million compared for the first quarter, while foreign exchange wealth management and client derivative income were in line with our expectations.
This elevated fee income along with a relatively flat expense base resulted in another quarter with a sub 60% efficiency ratio.
We also believe we are well positioned from a regulatory capital standpoint, as both total and tier one capital ratios improved on a linked quarter basis.
Total capital increased 159 basis points bolstered by the $150 million sub debt issuance at the beginning of the quarter.
Additionally, our tangible common equity ratio declined 16 basis points in the second quarter. However, the increase in assets due to PPP loans accounted for 53 basis points of deterioration and absent this impact GC expanded 37 basis points during the period.
To eight point, 16%.
Slide six reconciles our GAAP earnings to adjusted earnings highlighting items that we believe are important to understanding our quarterly performance.
Adjusted net income was $39 million or 40 cents per share for the quarter, which excludes 700000 of cobot 19 related costs and $1.5 million of other nonrecurring items, such as branch consolidation costs.
As shown on slide seven these adjusted earnings equate to a return on average assets of 1% and a return on average tangible common equity of 13.5%.
Our 56.1% adjusted efficiency ratio remained strong and reflects our diligent approach to expense management.
Turning to slide eight and nine net interest margin on a fully tax equivalent basis was 3.44% for the second quarter.
The 33 basis point decline was primarily related to lower asset yields which were impacted by the full quarter of lower interest rates and the normalization of LIBOR.
Asset yields in mix negatively impacted the net interest margin by 57 basis points during the quarter due to the lower rates. This was partially offset by lower funding costs, which positively impacted the margin by 26 basis points during the quarter.
In addition, it's worth noting that our participation in the paycheck protection program resulted in three basis points of margin dilution during the period.
The impact of the recent fed actions are further shown on slide nine a declining interest rates caused the yield the yield on loans declined by 79 basis points, while the investment yield dropped seven basis points due to lower reinvestment rates.
In response to these declining yields we aggressively lowered our cost of deposits 24 basis points during the quarter.
Slide 10 depicts our current loan mix and balance changes compared to the linked quarter end of period loan balances increased $874 million, which was primarily driven by PPP loans.
The remainder of the portfolio was relatively unchanged from the first quarter.
Archie will provide further commentary regarding particular areas of focus in the loan portfolio later in the presentation.
Slide 11 shows the mix of our deposit base as well as a progression of average deposits from the linked quarter.
Total average deposit balances grew $1.5 billion during the second quarter, driven by large increases in noninterest bearing deposits and brokered Cds.
All other categories of deposits grew as well with the exception of higher cost retail Cds.
We attribute the majority of our deposit growth to customers retaining stimulus checks and PPP funding as well as an increase in the consumer savings rate.
As I previously mentioned, we were encouraged with our ability to successfully manage deposit costs, resulting in a 24 basis point reduction to 40 basis points.
We will continue to monitor deposit pricing over the coming months and make any necessary adjustments based on market conditions and our funding needs.
Slide 12 highlights our noninterest income for the quarter second quarter fee income was our highest since 2011 and was driven by a significant increase in mortgage banking income while foreign exchange income wealth management fees and client derivative income all met.
Or surpassed internal expectations.
Noninterest expense for the quarter as shown on slide 13.
Overall expenses were relatively flat compared to the first quarter and more in line with our expectations.
Noninterest expenses included 700000 of Cobot 19 related costs and approximately $1.5 million of other cost not expected to recur such as branch consolidation costs.
In addition, we incurred 800000.
Of incremental expenses related to the paycheck protection program during the quarter.
Next I will turn your attention to slide 14, which discusses our allowance for credit losses and related provision expense for the quarter.
Our second quarter model resulted in total Hcl, which includes both funded and unfunded reserve of $175 million and $20 million in total provision for credit losses.
The model utilize the Moody's baseline economic forecasts.
Released at the end of June.
Similar to the first quarter, it's worth noting that the majority of provision expense related to related to the expected economic impact from Cowen 19.
As shown on slide 15 credit metrics were once again fairly benign as we had $3.1 million of net charge off for the period and relatively flat nonperforming and classified asset levels.
Net charge offs were 12 basis points as a percentage of loans, which is relatively in line with recent historic levels. Despite the slight increase compared to the first quarter. When we had net recoveries.
While our credit metrics don't reflect must stress at the current time, we do expect some deterioration in the back half the year as deferrals expire and we continue to manage the pandemic.
As such we believe our current reserve levels adequately positioned the balance sheet based on the current economic models.
Finally, as shown on slide 16, and 17 capital ratios remain strong and are in excess of regulatory minimums.
Total in tier one capital ratios each increased during the second quarter in all ratios continue to exceed internal targets.
Our tangible common equity ratio declined by 16 basis points. During the period. However, as I appears previously mentioned this was driven by 53 basis points of dilution from PPP loans in the denominator.
We are not foresee any near term changes to the common dividend. However, we will continue to evaluate various capital actions as the economic impact of the pivot pandemic develops.
Ill now turn it back over to our team for commentary related to particular areas of focus and our outlook in light of the current operating environment Archie.
Jamie.
Given the continued economic circumstances related to commit 19.
We have updated slides 21 through 25 to highlight specific areas of focus within our loan portfolio.
As mentioned earlier slide 22 highlights are just a patient in the PPP.
At this point the program remains available to customers, but recent demand is low.
We are waiting final guidance from DSG before proceeding with launching our forgiveness efforts.
Our first round of payment deferrals is expiring and most will occur in July and August.
Slide 23% picks our franchise portfolio.
Of which we had $296 million or 64%.
Thats secured round 190 day payment deferrals.
$157 million of these deferrals have returned to making full principal and interest payments.
And another 84 million have been granted a second deferral.
As discussed last quarter, the primary or area of stress within this portfolio is expected to be in the sit down restaurant category.
That's can be seen on slide slide 24.
Our hotel portfolio will likely require additional payment relief given continued low occupancy rates.
$370 million were 90% of the portfolio secured initial and 90 day payment deferrals.
And we expect the majority of these deferrals to be extended.
Lastly on slide 25.
$507 million were 61% of our retail IC every portfolio secured round one deferrals, but.
But it's too early to evaluate how many will need a second round.
Given the uncertain operating environment, we're continuing with a more limited forward looking guidance this quarter.
Slide 26 shows the key factors that we expect to impact our performance moving forward.
Loan growth is expected to be in the low single digits, excluding the transitory impact of the PPP program.
Core deposits are expected to remain elevated in the near term.
And gradually decline with the eventual spending of TPP and stimulus dollars and outflows of additional customer liquidity.
The net interest margin is expected to be positively impacted by the timing of TPP forgiveness pay offs.
And the associated accelerated recognition.
We expect some modest pressure going forward, excluding PPP impacts.
The full impact of lower rate environment, as realize and purchase accounting declines.
Turning to economic conditions and expectations over the near term indicate higher credit losses for the back of 2020 back half of 2020.
Therefore, we expect continued elevated provision expense when compared to historical levels.
Regarding fee income, we expect continued strong mortgage refinance activity over the next quarter.
Though at a more normalized valuation level that we saw the second quarter and gradual declines in volume.
Later in the year.
We also expect foreign exchange and come to rebound in the near term as overall business activity improves.
We anticipate.
Deposit Overdrafts service charge and interchange revenues to slowly return.
As consumer and business spending returns to pre pandemic levels.
With respect to expenses, we expect a gradual increase as business activities increase.
We follow a disciplined approach to expense management and have paused on most planned hiring.
Discretionary expenditures as significant investments except were critical.
Additionally, during the quarter, we closed for branch locations, bringing two and totaled 58 closures over the last two years or almost 30% of our network.
In light of accelerated changes in customer behavior observed during the pandemic, we continue to evaluate our distribution channel.
Regarding the PPP as mentioned earlier, we originated approximately $913 million PPP loans during the second quarter.
With an average fee of 3.3%.
We expect forgiveness payoffs to begin in the third quarter and be concentrated in the fourth quarter in early 2021.
The second quarter with this was historic and challenging but also highlighted new found capabilities.
Which we can build upon moving forward.
We'll continue to leverage technology, and reevaluate our distribution model to better serve the needs of our customers.
The broader economic environment remains uncertain and our clients continue to face serious challenges.
We're committed to be a stabilizing presence in our communities and remain steadfast in our promise to manage the company in a manner.
Prioritizes, the physical and financial well being of our associates and clients.
While delivering long term value to our shareholders.
This concludes my prepared comments for the call, we'll now open the call for questions.
We will now begin the question and answer.
You asked a question you May Press Star then one on your question Phil.
Our using speakerphone, please pick up your handset before pressing the key to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble the roster.
So first question today comes from Scott.
Piper Sandler. Please go ahead.
Good morning, guys.
Taking with Robin.
Hey.
I wanted to ask on the.
Credit cost expectation for the back half the year, just curious how you're thinking about the outlook for further reserve build and what would what will drive things from this point will be will be charge offs or is there just still enough uncertainty that you would expect to continue to.
Build up the reserve at least or sort of top it off at a bit what did that main drivers there.
Yes, Hey, Scott it's Jamie.
So I think so to clarify one thing I mean, when we say and the outlook that.
The back half of the year is going to have.
Elevated provision expense were really.
Hey, there's first first of all as lot of uncertainty, but be when we when we are saying that we're saying that it's elevated credit cost relative to when compared to historical level. So we booked 25 million in the first quarter 20 million here in the second quarter. We can we expect that to still be Ellen.
David whether that's at 20 million or lower or higher I mean is going to depend on a lot of factors, it's going to depend on.
When.
These loans start to come out of their deferral period, you know the uncertainty there of what's going to happen.
As we start to see charge offs emerged from the.
In the back half of the year, what that looks like the severity of those the default rates and then and then really just what the overall economic forecast is going to look like.
In terms of the.
In terms of the pandemic and in terms of the economic recovery, So a lot of factors but.
Right now based on the.
The economic models that we are looking at we still think that it's going to be somewhat elevated.
But again thats compared to historical levels.
Perfect Alright. Thank you appreciate that.
And just.
As you think about mortgage remaining elevated.
It was so far.
Out of the range site I figured I would've thought.
Elevated you'd asked me 24 hours ago I would have said elevated was maybe a third of what.
You guys actually print it just just curious.
Hi, sort of how sustainable I know it will moderate but just given the amount of air between yesterday.
Black Knight's print and what what a typical elevation looks like curious your thoughts.
Yes so.
Yeah, we do we do think that I will be that mortgage banking income will be elevated now what we do think it's going to come down, though and if you look at the second quarter. They.
The gain on sale premium overall.
In total was extremely high for us So we think that comes down.
So we think production levels stay relatively the same.
Second quarter to third quarter that gain percentage.
So what will realize on the back side, we think comes down and we think that comes down by about 20 or 25%.
So yes, we got it it was just extremely high.
The market was kind of perfect for.
The the mortgage banking division in that in the second quarter, So it'll come down a little bit but production levels, given where rates are still remain high.
Terrific alright, Thank you guys very much.
Okay.
Your next question comes from Chris Mcgratty KBW. Please go ahead.
Hey, good morning.
Jimmy maybe going to your expense comments.
Pleasantly surprised that you kept expenses down despite the mortgage.
Wondering how you're thinking about.
The expense Klein that you alluded to.
Going forward and also I think you talked about how you outperformed your efficiency targets I'm interested how you think the bank can operate reasonable range, given given where we are with rates. Thanks, Yeah. Yeah. I mean, obviously, just maybe I'll tackle the second one first on the efficiency ratio I mean, it's not as that really something that we manage to pay.
For say, but I mean, especially given the.
Pressure that we have on the net interest margin, that's obviously going to play into.
The efficiency ratio, but I mean are our goal is to.
Yeah good.
Expenses.
As best as we can.
No when we look at.
When we look at second quarter going forward I mean, obviously in the second quarter with things being shut down with activity just being low in terms of.
Employees being able to travel and whatnot.
That we had some natural decline there the expense base. So we expect that to come back a little bit in terms of a few of those categories in terms of.
T any expense and some getting back to what I would call kind of normal marketing expenses.
And trying to actually trying to grow the business now as opposed to you know this.
You know.
Kind of being more internally focused and things being shutdown. So.
We will see kind of just this I would say, it's it's a kind of a normal back to the to normal business type of.
<unk> expense increase and getting back to and investing in some of these projects that we have.
In the pipeline.
Okay, great. Thank thank you for that.
Maybe one more on the balance sheet.
What do the expectations I think you talk about positive elevated I'm just trying to try to.
Forecast out kind of core net interest income given.
Given the balance sheet size and the pressures on the margin on any any thoughts on that maybe irrespective triple b.
Yeah. So in terms of are you I guess I'll make sure I understand your question you're talking about what weird.
We are forecasting and what were thinking deposit balances are going to do for the rest of the year.
Yeah, I guess I'm trying to back into what core net interest income trends are going to be.
Yes over the next year. So yes in terms I mean in terms of the balance sheet. I mean, we do we do think that deposit balances will.
We will bleed down the big question Mark is how fast the deposit balances related to some of the government stimulus to PPP too just overall consumers.
How fast that will bleed down through the back half of the year. So we do expect that to be the case. It's just it's unclear right now how the because we are carrying a little bit of excess liquidity on the balance sheet at this point, which we are so you can say we aren't quite as.
NIM efficient I guess as we could be in terms of the them I mean, the core NIM. I mean, we are we will see pressure on them here going forward, just with the absolute level of rates being lower.
When you look at when you look at the second quarter. The second quarter would still have been a little bit elevated just because if you look at April we still had.
Lie before was a little bit elevated compared to where it is now for that first part of the quarter. So that has come down now and we will get the full quarter effects of that in the third quarter. So we'll see a little bit more pressure in the in the third quarter.
And then.
You know as and I know, we're really kind of stabilize to maybe just have slight pressure going forward because.
No that asset yields will stay will stabilize and we're seeing deposit cost moving down.
Fairly rapidly in the in the third and fourth quarter, and then kind of that Cds. Then it's really just kind of CD roll off after that so I mean, we think after Thats, all said and on the core NIM stabilizes somewhere between 335 and Threeforty.
And Chris This is Archie a couple of other points on on deposits. One is minimal charted pp dollars are still sitting sitting on accounts plus you have just consumers and businesses keeping more cash on hand.
So that from stimulus and just spending less called activity levels are lower and just be conservative I think another variable will be.
Yes, certainly.
Activity slows in the economy and keep people to continue to keep balances up and then.
Look such as could be another round of stimulus and.
If another round of stimulus check comes checks come then.
That may keep the balances a little higher than even where we were thinking in the last month. So lot of factors and are we think it's going to go down, but I'd say, we think generally it's more gradual and how that happens.
Thats, great Jamie so make sure unclear on the margin.
Three.
35, Htthree 40.
That's excluding.
Triple pay but does that include accretion.
It does include accretion, yes, but it would take out any any bumps that we would see for BPP forgiveness or anything like that yes.
Okay, Okay, yes, because that I mean, we expect that to comment.
In the back half of the year, the fourth quarter and into the first quarter, where the margin, we'll get that pop from that right.
Got it okay perfect. Thank you.
Hi, Dan if you have a question. Please press Star then one next question comes from Jon Arfstrom of RBC capital markets. Please go ahead.
Thanks, Good morning.
Hey, John.
Couple of couple of follow ups, but I guess.
Maybe start with this one.
Loan growth on your guidance, you talked about low single digits, excluding PPP.
And.
Just curious or to the drivers of that and what you're seeing I guess, maybe maybe the question of.
What the slide 10 look like.
A quarter from now which shows your loan growth categories.
John.
So we're showing kind of.
So in low single digit annualized growth.
For.
Kind of near term and and it's really a little more broad based if you look the last few quarters, it's probably been.
It's probably the last few years has probably been little more tilted towards IC Ari.
Our forecast are starting to show a little slower growth there, but a pickup in some of the commercial category. So we actually have some some nice fundings that.
We thought might hit at the end of Q2 that actually hit in the first part of Q3 and.
So it looks like it's just a little more even across up.
Across the commercial categories. In addition to ice you're right the consumer side, a little bit more depressed mainly because.
Mortgage that too so strong the refinance volume is will pay off some of the.
Mortgage side and consumer loan side, we have on that on the portfolio, but it's it's really across the commercial categories and hold less by sharing.
Okay.
Purchase market trends I know you've talked about refinance but curious on purchase market trends and then you've talked about this service charges kind of.
Starting to returned to pre pandemic levels of activity starting to return to.
And on the global just curious about overall consumer health from your point of view, yes.
On the mortgage side on the purchase side, it's very strong.
Refinance those.
With the majority certainly was more than.
Maybe closer to two searching for the for the periods, but the purchase activity is strong I think the issue we're seeing in our markets is there's there's low.
Existing home inventory.
So we are seeing in the market for example, the construction side of the builders in our in our markets are doing extremely well, there's just not that many existing houses to buy so its strongest just.
That makes little bit more challenging in the purchase side.
On the on the consumer side.
We're seeing great production, but we're also seeing.
Payoff pressure, primarily due to the refinance market. So I think we had our highest production.
Period, and consumer loans for the second quarter.
But it didnt it didnt realize we didn't realize it grows from it just because of the pay off side on them, because we refinanced our mortgage.
Service charges.
You know the what we've seen so far John is on the consumer side things are starting to pick up I mean, you can you look at like interchange.
Interchange on consumer side is pretty close almost back.
But on the business side and continues to be.
A little bit depressed, we expect that to start coming back as as business activity increases.
Overdrafts service charge fees, we had a lot of waiver programs in place during the quarter.
Some of those are still in place, but we think that will.
Plus we've had these excessive amounts of.
Checking account balances the consumers have so.
As that spends as things improve we just think thats going to be more of a gradual improvement is not going to come back all the way in Q3.
Okay.
It helps the just I wanted to couple follow ups on credit as well.
I understand what you're saying.
It's difficult to project the provision but.
You're clearly flagging some increased charge offs coming.
In the second half of the year and it's not surprising but.
Is the message on the provision you have enough and reserves.
Division essentially mattress charge offs that is that the big picture message.
Yes, I mean no.
Obviously, John lot of uncertainty in that and a lot of things could move around but for that for the time being given if the unless the economic forecasts that we input into the model with changed dramatically. That's that's correct exactly what you're saying you think about worried about what 170, yes in terms of a coverage to the loans.
Which is probably on the higher side for what we're seeing into in the industry, especially among peers. So.
We think were reserve well, but theres just a lot of uncertainty about the virus and where things go it.
Where we just we know it's not going to get back to probably pre cobot levels in the near term.
Sources of the charge offs, the just the obvious categories and stress.
Yes.
John also this is our gel start maybe to help you will hear give a little color, but during the quarter, we charge offs were pretty benign, but interestingly enough. The there were probably three credits. It had this had the drove the primary amount of our charge offs and.
And none of them, we're really into what we recall the sensitive portfolios and all of them we're already.
We already had.
More of a classic classified loan level or classified loans prior to prior to Covance. So.
These are credits are already on our radar there are in a weakened state coming into the into the endemic.
That's what we have historically, but as we look forward Bill maybe just some general color.
You are seeing yes.
We highlight the.
Various portfolios that we deem to be the higher risk portfolios and.
Those are the ones were monitoring very very closely of course.
As well as the rest of the book.
And we're actually starting to enter into our.
Referral expirees as aren't you mentioned earlier.
From the first round of referrals, so as we work our way into.
The second round up deferrals, some will need and some will not need and that's really going to help us understand.
Where our charge offs might be coming from.
Right now it's really early.
But to make a real definitive.
Call on where we think they're going to come from.
As we just haven't kind of work through that second round and gathered all the information that we named to really act.
Bye.
As we look at the highest impacted.
From Cowen BNS sit down restaurant hotels.
And things of that nature.
I do think those are going to be more longer term solutions.
And then during the course of those large cancellations and how long the coven impact last those where you'll see the fall out.
Right. That's helpful. Thanks, a lot guys.
Your next question comes from David Dodd Raymond James. Please go ahead.
Good morning, guys.
Okay.
Yes, just wanted to drill down little bit on the the hotel portfolio I. Appreciate the color that you guys gave.
Have your customers have they given you any occupancy data on any can you can you talk a little bit about what they're seeing and occupancy side relative to where we were pre pandemic.
Yes, and this this is bill.
Parents and as we look at the portfolio.
Since Kevin had we been monitors really on on a monthly basis.
And we saw it go down as is very macro warrant across the portfolio.
And even down into that.
10% or less range provide you can see as things are pretty much shutdown.
What we are seeing over the course of.
May and June we started to see some of that come back.
End of the Twentys.
And even into the low thirtys.
And we have some outliers on on either side.
So we are starting to see that really improved but it is still the bulk of our portfolio a skeleton crews.
To match with the.
Lower occupancy and starting to really start we like is the increase in kind of getting into the thirtys.
In Fortys.
Obviously as we get into the 50006 fees, we feel a lot better.
But we're starting to see them earnings.
Got it okay and.
The the in the slide you mentioned the loan to value at 63% being pre pandemic can be done any updated appraisals or have you seen any sales in the marketplace.
I've not seen any sales in the marketplace at this point.
And we have not done reappraisals.
At this point when we look at the value of hotel.
Just a short side to look at it very tight right now and so we're working and some are outside partners as well as our sponsors on book.
Starting to see when they think things are really going to start to turn on a national really focused on.
Which could be early next early next year.
Sure. Okay, and then finally, when you're thinking about the deferrals and some of these maybe had 90 days or a 180 day deferrals.
I guess it sounds like most from were 90 days I'm, assuming those will go to 180 days and then.
So thats my first part of my question, but the second part is after 180 days then what happens.
Sure.
We are the next round deferrals as another day 90 day anchorman really structure our program based on 290 days.
C or that sets as often said.
Spread and the stabilization on pandemic.
And phase one.
It was really focused on and outreach program, making sure that.
We got to all our customers and we've dealt with them.
Appropriate gave more leave hasn't come down the second round.
What we're doing is a little more analytical obviously moral import looking as well as understanding.
The relationship of yard to sponsor harvest headquarters on the deal.
And so that's why we're going through right now.
And.
What we're seeing is.
A hybrid and this we are very limited data disarm they as we work through 'em were heard small into our portfolio over and women in our portfolio.
What we're doing as we're looking at your on full payment to for forward looking at both interest only option van full payment for the situation.
And then what were then looking forward to is after they need a third round.
It's really going to be.
So focused on on the type of industry and then what the prognosis for the industry looks and then going in a structure.
What that makes sense to to accommodate us bridging too.
Stabilization, what we're not going to do is.
Yes.
Differ a third round, if we think that there is a better outcome or better prescription canals, but we will.
Looking to situationally stakeholders, and do a potentially longer around we haven't come up with exact with those products are going to be but the plan is to get stakeholder alignment between the bank in the owner et cetera, such that we have a nice road map to re stabilization on those longer.
Industries, and we think it isn't things like hotels for example, hotels will be probably that really good example, where if they're not coming back.
Over the longer ended the year early next year.
There could potentially be an interest only period and already stabilization just like you would on a normal construction of the hotel.
Okay, and how do you anticipate the accounting for those loans does that does that make them does that put them on.
And non accrual status or restructured and what or how does that impact and the risk rating.
And I should say that capital they have to hold.
Yes, they just RG, we know the six months, we know that were good there we've seen guidance on that already I think there's some additional.
Interagency guidance discussion coming.
For what would happen beyond this so were really watching that talking to our regulators and our accountants about it. So I can't tell you. The week, we know exactly now let me based on the current guidance if it goes beyond that and beyond this year, we probably would have to look at that more as a troubled debt restructure.
But again I think there are certain portfolios in industries, where as Bill said Theres probably up.
Stabilization plan that some of those industries may need in.
We we will have those conversations with regulators and accountants and open decide what we need to do.
Yes.
Thanks Real quick just.
As we look at our performance when I talk about.
Kind of the after round two.
Based on our portfolio reviews that we've completed and contains Wade.
Expectation is that third round. If there is one that can be very.
Women and targeted to.
For example hotel portfolio or maybe a sit down chain restaurant.
The bulk of our other deferrals be it.
Delivery quick serve those are around twos or going probably mostly to answer strongly.
And then there won't be around three.
We now expect and then our commercial and business banking, we are performing as we expect those to kind of come off and not need around free.
Got it now I know that situations fluid. So I do appreciate the color here at this point so thank you.
Yes. Thanks.
Your next question is a follow up from Chris Mcgratty from KBW. Please go ahead.
Okay, great. Thanks.
Jamie just wanted to ask what tax rate sorry about that.
Yes, sorry, let me grab necessarily quick.
So.
When you look at the.
When you look at the tax rate for.
Second quarter.
I mean, we think thats going to be fairly consistent going forward and around that no. Our our effective tax rate for the second quarter was just under 18% and we think thats fairly consistent here for the next couple of quarters now.
The I guess the.
The wildcard would be then how much provision expense, we have and in that could move it around a little bit but.
Yes.
Perfect. Thank you [laughter].
We do have some Eric we do have some timing of tax credits that can move that around too, but if you use 18% year in the ballpark.
Great great.
Concludes our question and answer session I would like to turn the conference back over to argue brown for any closing remarks.
Thank you Alyssa. Thank you all for joining our call and for your interest today we.
If we stay safe, we look forward to talk to again in a few months.
Good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.