First Financial Bancorp. (FFBC) Q2 2020 Earnings Report, Transcript and Summary

Good day and welcome to the First Financial Second Quarter 2020 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there’ll 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.

Yes, thanks Felica. Good morning everyone and thank you for joining us on today's conference call to discuss First Financial Bancorp's second quarter and year-to-date 2020 financial results. Participating on today's call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer. Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We'll make reference to the slides contained in the accompanying presentation during today's call. Additionally, please refer to the forward-looking statement disclosure contained in the second quarter 2020 earnings release as well as our SEC filings for a full discussion of the company's risk factors. Information we will provide today is accurate as of June 30, 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 over to Archie 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 COVID-19. Consistent with the broader industry, our results continue to be substantially influenced by the pandemic across 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 and marked our 119th consecutive quarter of profitability. Highlights included adjusted earnings of $0.40 per share, a 1% return on average assets a 13.4% -- 13.47% return on average tangible common equity and a 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 an almost 500% increase in mortgage banking revenue to $16.7 million. Core banking trends for loans and deposits were significantly influenced by the Paycheck Protection Program. During the quarter, we secured SBA approval for approximately 7,000 loans totaling $913 million. Additionally, increased liquidity in the financial system across both businesses and consumer client segments contributed 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 and 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 to a greater degree during the height of the COVID pandemic. These are all encouraging signs of our new normal of how our new normal is no longer restraining activity. Expenses were lower in the quarter, as we limited discretionary spending and implemented additional hiring controls. Credit trends remained 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 of our associates during the quarter. As can be seen on slide 19, our guiding principles in 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 pandemic management plan with more than 50% of our associates working remotely and our branches operating with closed lobbies for most of the quarter. We properly reviewed our client service model and shifted to utilizing technology in new and innovative ways. Our associates went above and beyond to provide essential services and assist customers at critical moments. Our teams worked evenings and weekends processing and funding $913 million in PPP loans, customer deferrals totaling over $2 billion in loan balances and historic levels of fee waivers and 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 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, Archie 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 remains solid with elevated fee income and an efficiency ratio that surpassed our expectations. Although we were encouraged by our relative performance, the pandemic continued to produce meaningful headwinds. Despite stable credit metrics, we recorded $20.2 million of 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 remained strong and regulatory ratios remain in excess of both internal and regulatory targets. We believe that our balance sheet is well-positioned 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 FTE 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 to 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 1 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 TCE expanded 37 basis points during the period to 8.62%. 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 $0.40 per share for the quarter which excludes $700,000 of COVID-19 related costs and $1.5 million of other non-recurring 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 remains strong and reflects our diligent approach to expense management. Turning to slides 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 and 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 3 basis points of margin dilution during the period. The impact of the recent Fed actions are further shown on slide 9, as declining interest rates caused the yield on loans to decline 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. In the period, loan balances increased $874 million, which was primarily driven by PPP loans. The remainder of the portfolio is 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 the progression of average deposits from the linked quarter. In total, average deposit balances grew $1.5 billion during the second quarter driven by large increases in non-interest-bearing deposits and brokered CDs. All of the 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 non-interest 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 incomes all met or surpassed internal expectations. Non-interest expense for the quarter is shown on slide 13. Overall expenses were relatively flat compared to the first quarter and were in line with our expectations. Non-interest expenses included $700,000 of COVID-19 related costs and approximately $1.5 million of other costs not expected to recur such as branch consolidation costs. In addition, we incurred $800,000 of incremental expenses related to the Paycheck Protection Program during the quarter. Next I'll 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 ACL, which includes both funded and unfunded reserves of $175 million and $20 million in total provision for credit losses. The model utilized the Moody's baseline economic forecast released at the end of June. Similar to the first quarter, it's worth noting that the majority of provision expense related to the expected economic impact from COVID-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 non-performing 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 much stress at the current time, we do expect some deterioration in the back half of the year, as deferrals expire and we continue to manage the pandemic. As such, we believe our current reserve levels adequately position the balance sheet based on the current economic models. Finally as shown on slides 16 and 17, capital ratios remain strong and are in excess of regulatory minimums. Total and Tier 1 capital ratios each increased during the second quarter and all ratios continue to exceed internal targets. Our tangible common equity ratio declined by 16 basis points during the period. However, as I previously mentioned, this was driven by 53 basis points of dilution from PPP loans in the denominator. We do 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 COVID pandemic develops. I'll now turn it back over to Archie for commentary related to particular areas of focus and our outlook in light of the current operating environment. Archie?

Thank you, Jamie. Given the continued economic circumstances related to COVID-19 we've updated slides 21 through 25 to highlight specific areas of focus within our loan portfolio. As mentioned earlier, Slide 22 highlights our participation in the PPP. At this point, the program remains available to customers, but recent demand is low. We are awaiting the final guidance from the SBA 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 depicts our franchise portfolio of which we had $296 million or 64% that secured round one, 90-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 area of stress within this portfolio is expected to be in the sit down restaurant category. As can be seen on Slide 24 our hotel portfolio will likely require additional payment relief given continued low occupancy rates. $370 million or 90% of the portfolio secured initial 90-day payment deferrals and we expect the majority of these deferrals to be extended. Lastly on Slide 25, $507 million or 61% of our retail ICRE portfolio secured round one deferrals, 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 PPP and stimulus dollars and outflows of additional customer liquidity. The net interest margin is expected to be positively impacted by the timing of PPP forgiveness payoffs and the associated accelerated fee recognition. We expect some modest pressure going forward excluding PPP impacts as the full impact of the lower rate environment is realized and purchase accounting declines. Current 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 continue strong mortgage refinance activity over the next quarter though at a more normalized valuation level than we saw in the second quarter and gradual declines in volume later in the year. We also expect foreign exchange income to rebound in the near term as overall business activity improves. We anticipate deposit overdraft 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 and significant investments except where critical. Additionally during the quarter we closed four branch locations bringing to a total of 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 in 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 and early 2021. The second quarter was historic and challenging, but also highlighted newfound capabilities, which we can build upon moving forward. We will 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 are committed to be a stabilizing presence in our communities and remain steadfast in our promise to manage the company in a manner that prioritizes the physical and financial well-being of our associates and clients while delivering long-term value to our shareholders. This concludes the prepared comments for the call. We'll now open up the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Scott Siefers of Piper Sandler. Please go ahead.

Good morning, guys.

Good morning.

Hey Scott.

Hey. I wanted to ask on the credit cost expectation for the back half of the year. Just curious how you're thinking about the outlook for further reserve build, and what will drive things from this point? Will it 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 a bit. What are the main drivers there?

Yeah. Hey, Scott, it's Jamie. So, I think -- so to clarify one thing, I mean when we say in the outlook that the back half of the year is going to have elevated provision expense, we really -- I mean, a, first of all, there's a lot of uncertainty. But, b, when we're saying that we're saying that, it's elevated credit cost, relative to when compared to historical levels. So, we booked $25 million in the first quarter, $20 million here in the second quarter. We expect that to still be elevated, whether that's a $20 million or lower or high, I mean it's 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, the uncertainty there of what's going to happen, as we start to see charge-offs emerge from the -- in the back half of the year, what that looks like the severity of those the default rates. And then, really just what the overall economic forecast is going to look like in terms of the pandemic and in terms of the economic recovery. So, a lot of factors. But, right now based on the economic models that we are looking at, we still think that it's going to be somewhat elevated. But again, that's compared to historical levels.

Perfect. All right. I appreciate that. And just as you think about mortgage remaining elevated, I mean it was I think, so far out of the range that I figured I would have thought. Elevated, if you had asked me 24 hours ago, I would have said elevated was maybe a third of what you guys actually printed. Just curious sort of how sustainable? I know it will moderate, but just given the amount of error between yesterday -- or last night's print and what a typical elevation looks like, curious to hear your thoughts.

Yeah. So yes, we do think that that will be -- that mortgage banking income will be elevated. Now, we do think it's going to come down though. And if you look at the second quarter, 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 game percentage. So, what we'll realize on the backside we think comes down, and we think that comes down by about 20% or 25%. So, we got a -- it was just extremely high. The market was kind of perfect for the mortgage banking division in the second quarter. So it will come down a little bit. But production levels given where rates are will still remain high.

Terrific. All right. Thank you, guys very much.

The next question comes from Chris McGratty of KBW. Please go ahead.

Hi, good morning. Jamie, maybe going to your expense comments. Pleasantly surprised that you kept expenses down despite the mortgage. Wondering how you're thinking about the expense decline that you alluded to going forward? And also, I think you talked about how you outperformed your efficiency targets. I'm interested in how you think the bank can operate a reasonable range given where we are with rates? Thanks.

Yes. Yes. I mean, obviously, just – maybe I'll tackle the second one first on the efficiency ratio. I mean, it's not really something that we manage to per se. 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, our goal is to manage expenses as best as we can. When we look at second quarter going forward, 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 in 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&E 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 this kind of being more internally focused and things being shut down. So we will see kind of just this, I would say, it's a kind of a normal back to normal business type of expense increase and getting back to investing in some of these projects that we have in the pipeline.

Okay. Great. Thank you for that. Maybe one more on the balance sheet. What are the expectations? I think you talked about deposits to be elevated. I'm just trying to forecast out kind of core net interest income given the balance sheet size and the pressures on the margin. Any thoughts on that maybe in respect to PPP?

Yes. So in terms of – I guess, I want to make sure I understand your question. You're talking about what we are forecasting and what we're thinking deposit balances are going to do for the rest of the year?

Yes. I guess I'm trying to back into what core net interest income trends are going to be over the next...

Yes. I mean in terms of the balance sheet I mean, we do think that deposit balances will bleed down. The big question mark is how fast the deposit balance is related to some of the government stimulus to PPP to 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 are quite as NIM efficient, I guess as we could be. In terms of the NIM, I mean the core NIM – we are – we will see pressure on the NIM here going forward just with the absolute level of rates being lower. 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 – LIBOR 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 effect of that in the third quarter. So we'll see a little bit more pressure in the third quarter. And then as – and I know we're really kind of stabilized to maybe just have slight pressure going forward because the asset yields will stabilize and we're seeing deposit costs moving down fairly rapidly in the third and fourth quarter and then kind of as CDs – then it's really just kind of CD roll off after that. So I mean, we think after that's all said and done, the core NIM stabilizes somewhere between 3.35% and 3.40%.

And Chris, this is Archie. A couple of other points on deposits, one is, I mean the majority of PP dollars are still sitting on accounts, plus you have just consumers and businesses keeping more cash-on-hand, some of that from stimulus. And just spending less because activity levels are lower and just being conservative. I think another variable will be certainly, if activity slows in the economy and keep people to continue to keep balances up. And then, it looks like there's going to be another round of stimulus. And if another round of stimulus checks comes then, that may keep the balances a little higher than even we were thinking in the last month, so, a lot of factors in there. We think it's going to go down. But I'd say, we think generally it's more gradual, in how that happens.

That's great. Jamie, I just want to make sure, I'm clear on the margin. So you said the 3.35%, 3.40%, that's excluding PPP.

Yes.

But does that include accretion?

It does include accretion, yes. But it would take out any bumps that we would see for, PPP forgiveness or anything like that. Yes.

Okay. Yes. Okay.

Because that's -- I mean, we expect that to come in, in the back half of the year, the fourth quarter. And into the first quarter where the margin will get that pop from that, right?

Yep. Got it, okay. Perfect. Thank you.

[Operator Instructions] The next question comes from Jon Arfstrom of RBC Capital Markets. Please go ahead.

Hi. Thanks. Good morning.

Hey, Jon.

Hi. Jon.

A couple of follow-ups, but I guess, maybe start with this one. On loan growth on your guidance, you've talked about low-single digits excluding PPP. And just curious Archie, the drivers of that and what you're seeing? And I guess, maybe the question is what does slide 10 look like, a quarter from now which shows your loan growth categories?

Yes, Jon. So we're showing kind of a as I said low-single digit annualized growth for kind of near-term. And it's really a little more, broad based. If you look the last few quarters, it's probably been I have expected the last year is probably been a little more tilted towards ICRE. Our forecast is starting to show, a little slower growth there, but a pickup in some of the commercial categories. So we actually had some nice fundings that, we thought might hit at the end of Q2, that actually hit in the first part of Q3. And it looks like it's just a little more even across the commercial categories, in addition to ICRE. The consumer side, a little bit more depressed mainly because, mortgage activity is so strong. The refinance volume is -- will pay off some of the mortgage side and consumer loan side, we have on the portfolio. But it's really across the commercial categories and a little less ICRE.

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 return to pre-pandemic levels or activity starting to return to pre-pandemic levels, just curious about, overall consumer health point of view?

Yeah. On the mortgage side on the purchase side, it's very strong. Refinance though as, with the majority it certainly was more than I think, maybe closer to two-third Jamie for the period. But the purchase activity is strong. I think the issue we're seeing in our markets is there's low existing home inventory. So we are seeing in the market for example, the construction side of the builders in our markets are doing extremely well. There are just not that many existing houses to buy. So it's strong. It's just that makes a little bit more challenging on the purchase side. 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 in consumer loans for the second quarter. But it didn't -- we didn't realize the growth from it just because of the payoff side on -- because of refinance on mortgage. Service charges -- what we've seen so far Jon is, on the consumer side things are starting to pick up. I mean, you can look at like interchange, interchange on consumer side is pretty close, almost back. But on the business side, it continues to be a little bit depressed. We expect that to start coming back as business activity increases. Overdraft, 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 have, these excessive amounts of checking account balances that consumers have. So, as that spins, as things improve, we just think that's going to be more of a gradual improvement. It's not going to come back all the way in Q3.

Helpful. That helps. Then just -- I wanted to -- a couple of follow-ups on credit as well. Understand what you're saying and 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 in reserves, provision essentially matches charge-offs. Is that the big picture message?

Yes. I mean still -- I mean, obviously, Jon, a lot of uncertainty in that and a lot of things could move around. But for the time being, given if the -- unless the economic forecast that we had put into the model would change dramatically, that's correct, exactly what you're saying.

When you think about we’re about, what, 170 in terms of coverage to loans, which is probably on the higher side for -- from what we're seeing in the industry, especially among peers. So, we think we're reserved well, but there's just a lot of uncertainty about the virus and where things go. And we're just -- we know it's not going to get back to probably pre-COVID levels in the near term.

Sources of the charge offs? Is it just the obvious categories of stress?

Yes. Jon, I’ll -- this is Archie, I'll start, maybe you could help, Bill Harrod will give you a little color. But during the quarter we -- charge-offs were pretty benign, but interestingly enough, there were probably three credits that had -- drove the primary amount of our charge-offs and none of them were really into, what we would call, the sensitive portfolios. And all of them were already in a -- we already had them more of a classified loan level or classified loans prior to COVID. So these are credits that are already on our radar. They are already in a weekend stay coming into the pandemic and that's what we had historically. But as we look forward, Bill, maybe just give a little color on what you're seeing.

Yes. We highlighted the various portfolios that we deem to be the higher risk portfolios. And those are the ones we're monitoring very, very closely, of course, as well as the rest of the book. And we're actually starting to enter into our referral expiries, as Archie mentioned earlier, from the first round of deferrals. And so, as we work our way into the second round of deferrals, some will need it, some will not need it. And that's really going to help us understand where our charge-offs might be coming from. Right now, it's really early to make a real definitive call on where we think they're going to come from. Because we just haven't kind of worked through that second round and gathered all the information that we need to really predict. But as we look at the highest impact from COVID, be it a sit down restaurant, hotels and things of that nature, I do think those are going to be more longer-term solutions. And then, through the course of those longer-term solutions and along the COVID impact last, those are where you'll see the fallout.

All right. That’s helpful. Thanks a lot, guys.

The next question comes from David Long of Raymond James. Please go ahead.

Good morning, guys.

Hi, David.

I just wanted to drill down a little bit on the hotel portfolio. I appreciate the color that you guys gave. Have your customers, have they given you any occupancy data? Any -- can you talk a little bit about what they're seeing on the occupancy side relative to where we were pre pandemic?

Yes. And -- this is Bill Harrod. And as we look at the portfolio, since COVID hit, we've been monitoring this really on a monthly basis. And we saw it go down is this very macro oriented across the portfolio in – even down into the 5%, 10% or less range of occupancy 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 into the 20s, and even into the low 30s. And we have some outliers on either side. And so we are starting to see that really improve, but it is still the bulk of our portfolio of skeleton crews to manage with the lower occupancy and starting to really start. What we like is the increase in kind of getting into the 30s and 40s. Obviously, as we get into the 50s and 60s, we feel a lot better, but we're starting to see it in the 30s.

Got it. Okay. And the – in the slide you mentioned the loan-to-value at 63% being pre-pandemic. Have you 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 a hotel its short sight to look at it very tight right now and so we're working with some of our outside partners as well as our sponsors on the book, and starting to see when they think things are really going to start to turn, and that's what we're really focused on, which could be early next year.

Sure. Okay. And then finally, when you're thinking about the deferrals and some of these maybe had 90 days or 180-day deferrals, I guess, it sounds like most of them are 90 days I'm assuming, those will go to 180 days. And then – so that's my first part of my question. But the second part is after 180 days then what happens?

Sure. We are – the next round deferrals is another 90-day increment. We've really structured our program based on 290 days to see where that senses opposite the spread and the stabilization of the pandemic and Phase one was really focused on an outreach program making sure that, we got to all of our customers, and we dealt with them appropriate and gave them relief as this will all come down. The second round what we're doing is it's a little more analytical obviously more forward looking, as well as understanding the relationship with the owner, sponsor and all the stakeholders on the deal. And so that's what we're going through right now. And what we're seeing is a hybrid and this is – we have very limited data just on the – as we work through them, we're very small into our portfolio we're limited in our portfolio. But what we're doing is, we're looking at it, if you're on full payment deferral before looking at both interest-only options and full payments working on the situation. And then, what we're then looking forward to is after they need a third round, it's really going to be focus on the type of industry it's in, what the prognosis for the industry looks in, and then building a structure would that makes sense to accommodate us bridging to stabilization. What we're not going to do is defer a third round, if we think that, there's a better outcome, or a better business given something else. But we will look at the situation with the stakeholders and do a potentially longer round. We haven't come up with exactly what those products are going to be, but the plan is to get stakeholder alignment between the bank and the owner et cetera, such that, we have a nice road map to kind of re-stabilization on those longer hit industries.

And we think it is in things like hotels? A – Bill Harrod: Yes. For example, hotels would be probably a really good example where if they're not coming back say it's a little bit longer end of the year or early next year, there could potentially be an interest-only period and the restabilization just like you would on a normal construction of a hotel.

Okay. And how do you anticipate the accounting for those loans, does that make them? Does that put them on a non-accrual status or restructured and what -- how does that impact the risk rating, or I should say the capital that you have to hold? A – Archie Brown: Yes, Dave. This is Archie. We know the six months, we know that we're good there. We've seen guidance on that already. I think there's some additional interagency guidance and discussion coming for what would happen beyond this. So we're eagerly watching that talking to our regulators and our accountants about it. So I can't tell you that we know exactly now. I mean 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 we again think there are certain portfolios and industries where as Bill said there's probably a stabilization plan that some of those industries may need and we will have those conversations with regulators and accountants and hopefully decide what we need to do. A – Bill Harrod: Yes. It's real quick just as we look at our portfolios and I talk about kind of the after round two, based on our portfolio reviews that we've completed and continue to complete, our expectation is that the third round if there is one is going to be very limited and targeted to, like for example a hotel portfolio or maybe a sit down chain restaurant. The bulk of our other deferrals be it delivery, quick serve those are round two are going, probably mostly the interest only and then there won't be around three. We don't expect. And then our commercial and business banking on a portfolio, we expect those to kind of come off and now not need a round three.

Yes, I know the situation is fluid, so I do appreciate the color here at this point. So, thank you. A – Archie Brown: Thanks, Dave.

Your next question is a follow-up from Chris McGratty from KBW. Please go ahead. Q – Chris McGratty: Great. Thanks. Jamie, I just wanted to ask about the tax rate? Sorry about that. A – Jamie Anderson: Yes. Sorry let me grab this here, real quick. So when you look at the tax rate for the second quarter, we think that's going to be fairly consistent going forward. And around that our effective tax rate for the second quarter was just under 18% and we think that's fairly consistent here for the next couple of quarters. Now I guess the wildcard would be then how much provision expense we have and that could move it around a little bit, but… Q – Chris McGratty: Okay. Thank you. A – Jamie Anderson: We do have some timing of tax credits that can move that around to, but if you use 18%, you're in the ballpark. Q – Chris McGratty: Great. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Archie Brown for any closing remarks.

Thank you, Elissa. Thank you all for joining our call and for your interest today. We hope you stay safe and we look forward to talking to you again in a few months. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.