F.N.B. Corporation (FNB) Q2 2020 Earnings Report, Transcript and Summary

Hello and welcome to the FNB Corporation Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today's event is being recorded. Now I'd like to turn the conference over to Matthew Lazzaro, Manager of Investor Relations. Mr. Lazzaro, please go ahead.

Thank you. Good morning everyone and welcome to our earnings call. This conference call of FNB Corporation and the reports it filed with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measure should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings release, related presentation materials and in our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate Website. A replay of this call will be available until July 24 and the webcast link will be posted to the About Us, Investor Relations section of our corporate Website. I'll now turn the call over to Vince Delie, Chairman, President and CEO.

Good morning everyone and welcome to our earnings call. Joining me today are Vince Calabrese, Chief Financial Officer and Gary Guerrieri, Chief Credit Officer. On today's call, I will provide an overview of second quarter results and update you on FNB's participation in the paycheck protection program. Gary will discuss asset quality and provide further detail on our loan portfolios. Vince will address our financial results and cover relevant trends. I will then provide an update on our digital platforms in physical operations and finally discuss our organization's $250 million commitment and continuing initiatives to address economic and social inequity in our community. As a company and on a personal level, we've endured significant challenges and change this year. Our thoughts are with those who have been impacted by the pandemic and unrest in our community. I am proud of how our company has rallied in support of our customers and neighborhoods where we operate. The resolve to work together to emerging stronger and united and our demand for a more successful future for all of our constituent. FNB second quarter results increased significantly. Operating earnings per share increased 63% to $0.26, which included an additional 17 million or $0.04 per share of COVID-19 reserve build in the quarter and PPNR increased to 130 million. Core revenue trends remained solid throughout a challenging interest rate environment, with total revenues increasing 6% annualized to $306 million. And total assets growing nearly $3 billion to end June at $38 billion. Compared to the first quarter, loans and deposits increased $2.3 billion and $3.6 billion or 10% and 15% respectively. On a linked quarter basis, double-digit second quarter loan and deposit growth were supported by organic commercial production and originating nearly 20,000 PPP loans totaling $2.6 billion. Our fee based businesses performed exceptionally well with capital markets and mortgage banking establishing revenue records of $13 million and $17 million respectively. Our efficiency ratio was 53.7% and operating expenses were well controlled down 3% from the first quarter. Even though there has been disruption across our footprint, due to COVID-19, we've still seen good commercial loan origination activity across most of the footprint. This is a testament to our teams who continue to serve our clients and meet their borrowing needs while dealing with a challenging operating environment. To strengthen our balance sheet and ample liquidity enabled FNB to support our clients capital needs. We continue to apply our consistent underwriting standard aligned with our strategy and overall risk profile as we evaluate business opportunities in the current climate. On a linked quarter basis, total average loans increased 9% largely driven by growth in commercial loans of 14%. Commercial line balances when compared to historical levels contracted as we saw much lower line utilization of 36%. The utilization rate decreased as PPP funds were utilized to support working capital needs by many existing clients and economic activity declined during the period. Commercial loan balances were also impacted by large corporate borrowers paying down bank credit facilities with increased liquidity in the bond market. Average deposits increased 11% as we have solid organic growth and customer relationships, a large inflow of deposits for PPP funding in government stimulus activities also occurred. As part of our business strategy, we have been focused on reducing the level of wholesale borrowings by continuing to gain depositors and expand existing relationships. As a result, we were able to fully eliminate our over night borrowing position replacing it with customer deposits. Non-interest bearing deposits were up 2.1 billion or 33% from prior quarter end. Looking at June 30 spot balances, our loan to deposit ratio was 92%, including the funded PPP loans, which positions us more favorably in the current rate environment. Growing non-interest bearing deposit has been an integral part of our long-term strategy and we've consistently been able to grow organically through various interest rate environment further strengthening our overall funding mix. In fact, transaction deposits have increased 4 billion or 20% from March 31 and now represent 85% of total deposits, which compares very favorably to 79% five years ago. With the Fed taking near term rate increases off the table there is opportunity to offset net interest income headwind by continuing to reduce deposit costs. As we have stated previously, continuing to grow our fee based businesses is essential to diversifying our revenue sources and to 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 and insurance. This quarter's record mortgage banking income of 17 million better reflects the fundamentals and the results without MSR impairment as the mortgage banking business set a new production record for the quarter of 869 million. Turning to our participation in the paycheck protection program, I would first like to recognize our teams for their support of our customers and communities throughout these extraordinary circumstances. Our employees have worked tirelessly to ensure businesses receive critical funding during a time when regions within our footprint experienced extended shutdown, particularly in our Metro markets in Pennsylvania and the Mid- Atlantic and when many borrowers turned from larger banks at FNB to accommodate their needs. As part of the PPP origination process, each borrower opened an FNB account, which supports our efforts to bring in new households. Looking ahead, we are optimistic that borrowers will be able to deploy these funds as businesses around the footprint reopens. As an organization, we leveraged our technology infrastructure and expertise already in place to quickly adapt and accommodate our customers in a challenging and remote environment coupled with significant financial aid and employee volunteerism in our communities, our efforts have helped tens of thousands of small businesses during pandemic and supported the retention of hundreds of thousands of jobs. From the beginning of the COVID-19 crisis, FNB has upheld consistent volumes of total transactions to audit transactions by providing customers with a seamless transition from physical to online and mobile engagement. This was made possible from the significant investment we've submitted to our digital and online platforms over the last decade. In fact, the appointment setting feature on our new Website that went live in January enabled FNB to continue serving clients safely in our branches throughout the crisis. We grew from 26 monthly appointments in January to 2700 appointments in April. The rapid shift to remote services accelerated the enhancements to our digital strategy that were already underway and minimize disruption for our customers. As 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 delivery chain. Together with the uptick in online appointment setting, our Website increased traffic by millions of daily visitors. As we are deepening relationships with customers throughout our digital capabilities, we are also generating significant opportunities by synchronizing the physical and digital customer experience, we can take customers who utilize a single product and broaden the relationship to include products such as savings, credit cards, private banking, mortgage, wealth management and insurance. At the end of the day, it provides tremendous value to the customer to 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 FNB's mobile and online channels, with monthly average users up by 50,000 in both categories, compared to the average for 2019. While our customer adoption rates for online and mobile have accelerated, our customers have still expressed a strong desire to conduct business within our branches. As an essential business, it is important for FNB to remain available and accessible. Our business continuity team in collaboration with other units, including data science, human resources and retail banking, developed a monitoring system in which we can evaluate data related to the healthcare crisis on a locational basis. On July 13, 2020, we reopened the majority of our branch lobbies to customers adhering to the most stringent safety measures, including social distancing and cleaning protocols as we begin to move forward to the next phase of operation. With that, I'll turn the call over to Gary to cover asset quality.

Thank you, Vince, and good morning, everyone. During the second quarter, our credit portfolio continued to perform in a satisfactory manner as the COVID-19 global 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 GAAP as well as a non-GAAP basis, exclusive of our loan volume funded under the PPP program. I will also provide some updates on the status of our loan deferrals and the steps we are taking to manage our book, particularly those borrowers tagged to COVID sensitive industries. Let's now review the quarterly results. The level of delinquency ended the second quarter at 92 basis points on a GAAP basis, down 21 bps over the prior quarter as early stated delinquencies returns to more normalized levels. When excluding PPP loan volume, level of delinquency would have ended the quarter at 1.02% down to 11 bps from the prior quarter. The level of NPLS and OREO totaled 72 basis points at June, an 8 basis point increase linked quarter, while the non-GAAP level was 80 bps excluding PPP. The migration was due primarily to a few previously rated credits that were further impacted by the current COVID environment that we proactively moved to non-accrual during the quarter. Of our total NPLS at June, 48% of these borrowers continue to pay as agreed [indiscernible]. Net charges off remained at a good level at 8.5 million for the quarter or 13 basis points annualized resulting in a year-to-date level of 12 basis points. Provision expense totaled $30 million in the quarter, which includes additional build for macro economic conditions tied to COVID-19. Touch about the Q1 economic driven build, our COVID-related provision for the first half of the year totaled $55 million. Our ending reserves stands at 1.4% and excluding PPP volume, the non-GAAP ending ACL totaled 1.54%, representing a 10 basis point increase over the prior quarter, resulting in NPL coverage of 215%. But including the acquired unamortized loan discounts, our coverage excluding PPP volume is 1.87%. Under the preliminary severely adverse default scenario, the current reserve position inclusive of unamortized loan discounts would cover 78% of stressed losses. As the pandemic continues to pressure the global economy, our approach to managing the book in this COVID environment remains in line with what I communicated on last quarter's call. We continue to conduct thorough borrower level reviews within our commercial books to track key performance indicators for those that operate in economically sensitive industries, or that have otherwise been impacted by the pandemic. These ongoing targeted portfolio reviews allow our credit teams to 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 DFAST frameworks 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 deferment request window. Of these deferments 98.4% were current and in good standing prior to the pandemic. Of the remaining 39 million, 12 million is already on non-accrual. Our request for initial deferrals are essentially non-existent and we have only seen a small amount of second request for payment deferral at this time. That said we are carefully monitoring our credit portfolio and remain vigilant to identify borrowers that could face 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 customers. 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, food services and energy space. And the level of payments deferrals granted to these borrowers remains at 38%. Additionally, we have been tracking our retail secured IRE portfolio closely to assess the emerging challenges on this asset class, as well as the nature of the tenants operations and insulation from certain economic strain as essential 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 and our risk management strategies which we continue to enhance as the COVID situation plays out. Considering these challenges, our portfolio is in a satisfactory position entering the second half of the year. Realizing the uncertainty of the economic environment as we look ahead, we continue to draw on the strength of our experienced banking team to manage through this environment as we move into the latter half of the year. I would like to recognize our teams for their tireless efforts as we continue to work through this challenging environment. I will now turn the call over to Vince Calabrese, 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 current position. I'll note that our tangible common equity levels entered the year strongest position we've had nearly two decades and we are comfortable with our current capital position. Looking at Slide 5, GAAP EPS for the second quarter of $0.25, including $0.05 related to significant or outsize items. These included 17.1 million COVID-19 reserve bills and 2 million of COVID-19 related expenses. The CCE ratio ended June at 697 reflecting these items, as well as a 52 basis points temporary impact for the 2.5 billion in net PPP loan balances at June 30. Without the PPP balances, the CCE ratio would have been 749. Additionally, our CET1 estimate ended the quarter at 9.4% compared to 9.1 at March 31, and 9.4 at the end of 2019, as PPP loans carry a 0% risk weighting for risk-based capital purposes. Pre-tax pre provision earnings increased to 130 million, providing more than adequate earnings power as we declared our third quarter dividend of $0.12 earlier this week. The dividend payout ratio of 48% in the second quarter, we are well below historical levels of previous payout ratios. I will touch our capital management approach in more detail later in my comments. Turning to the balance sheet on Slide 14, the key theme is the impact of 2.5 billion in net PPP loans. [Technical Difficulty] 9.5% total loans and leases at June 30. PPP 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 [Technical Difficulty]. Our commercial line utilization ended June at 36% below historical levels down from the mid 40s spot utilization rate at the end of the first quarter as we clearly saw some customer borrowing activity shift over to the PPP and our large corporate borrowers access to capital markets to reduce their bank debt. Average consumer loans were essentially flat as direct installment loans increased 65 million or 14% annualized and residential mortgage increased 6% annualized, two bright spots to continue to perform well. The increases in direct installment and mortgage loans were offset by continued to decline indirect auto loans, consumer lines, two loan classes heavily affected by the pandemic. Continuing down in Slide 14, average deposits increased 2.7 billion or 11% on a linked quarter basis [Technical Difficulty] by 2.9 billion or 15% in transaction deposit growth. Transaction deposits equaled 85% of total deposits as our managed to client CDs continues, transaction deposit balances benefited from stimulus programs and PPP customer driven inflows. Non-interest bearing, interest bearing demand, savings account balances each increased significantly, up 1.8 billion, 854 million and 226 million respectively. Now focusing on the income statement on Slide 15. Compared to the first quarter, net interest income totaled 228 million, decrease of 4.7 million or 2%, as loan and deposit growth mostly offset the impact of lower rates. The net interest margin narrowed 26 basis points to 88 primarily driven by a full quarter impact the [indiscernible], lower the target Fed funds range to 0 to 25 basis points. Additionally averaged one month LIBOR fell to 36 basis points from 141 in the prior quarter. Total yield on average earning assets declined 58 basis points from 354 reflecting lower yields on variable and adjustable rate loans due to the lower interest rate environment and the impact of the PPP balances. Total cost of funds decreased to 67 basis points from 101 as cost on interest bearing deposits were reduced to 37 basis points. Slide 16 and 17 provide details for non-interest income and expense compared to the first quarter. Non-interest income totaled 77.6 million increasing 9.1 million or 13.3% as mortgage banking operations increased 17.6 million on a reported basis or 10.2 million excluding MSR impairments of 300,000 and 7.7 million respectively. Mortgage production established a new quarterly record at 869 million increased to 306 million or 55% from the prior quarter with large contributions from North Carolina and the Mid Atlantic region. Capital markets also set a new record of 12.5 million, increasing 1.4 million or 12.6% with strong contributions from interest rates derivative activity across the footprint. As expected service charges decreased 6.2 million, 20.5% due to noticeably lower transaction volumes in the COVID-19 environment. Turning to Slide 17, non-interest expense totaled 175.9 million, increase of 19 million or 9.7%, including 2 million of expenses associated with COVID-19 in second quarter of 2020, 15.9 million of outsize unusual or significant expenses occurring in the first quarter. On an operating basis expenses declined 5.1 million or 2.9% compared to the first quarter of 2020, as we have realized 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 as a benefit to income tax. The efficiency ratio improved significantly 53.7% compared to 59%. Starting with recent trends on Slide 18, we continue to observe daily changes in external factors, including 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 low single digits from June 30, assuming no forgiveness of PPP loan given the SBAs current expected time for processing forgiveness applications. While we expect deposits to decline, second quarter 20 levels based on an expectation, the customers increased their deployment of funds received through the government programs, we do expect to see continued organic growth in transaction deposits. We expect third quarter net interest income to reflect the full impacts of lower one month LIBOR rate on variable rate loans, partially offset by a full quarter benefit of higher commercial loan balances, continued reduction in the cost of interest bearing deposit. We expect positive trends in capital markets and mortgage banking although lower than the record levels this quarter. We expect service charges to increase the recent transaction volume trends continue. We expect expenses to be stable to up slightly from the second quarter. Lastly, we expect the effective tax rate to be around 17% for the 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 beginning on Slide 20. Continue to be very comfortable with our capital ratios as they stand today as the benefit of entering this crisis from a position of strength. As demonstrated in the new capital slides, we have added to the deck, we have ample internal capital generation cushions for all of our capital ratios in relation to 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% of total capital of 3.3 billion. Our risk weighted assets increased by 2.3 billion, which is 8.5% of total risk weighted assets of 27.5 billion [indiscernible] the 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 that has been in place for well over a decade. With CET1 of $2.6 billion and allowance for credit losses of 365 million and a remaining PCD discount of 77 million, we have a substantial base available to absorb credit losses. To put that in context, or reserves plus remaining discount on previously acquired loans would cover 62 quarters of net charge offs that average 7.1 million per quarter in the first half 2020. This is before considering the 2.6 billion in GDP volume. 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, we 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 9.2x the current levels. As far as dividend sustainability, we're governed by the Federal Reserve and the OCC. From a Fed perspective, we currently pay out 39 million in common dividends and 2 million in preferred dividends for total of 41 million per quarter. The Fed four quarter tests currently shows in excess of $153 million after paying out the third quarter dividends just declared. From an OCC perspective, there are significant cushions to support the $46 million the bank is projected to pay up to the holding company. [Indiscernible] shows a cushion of 913 million relative to net undivided profits 517 million relative to net profits for the current year, combined with retained net profits for the prior two years, cushions 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 more than supports the incremental reserve build through the first six months of the year. We generated ample capital to cover the preferred and common dividends and our CET1 ratio was consistent with where we ended 2019 at 9.4%. Earlier this week, we announced our third quarter dividend of $0.12 given the earnings levels through the first half of 2020, you can see their capacity to continue to return capital to shareholders. Overall, our capital management philosophy grounded in a conservative and consistent underwriting and credit management philosophy throughout varying economic cycles, supplemented with robust, comprehensive enterprise risk management, including very active credit monitoring processes. With that, I will turn the call back to Vince.

Thanks Vince. Looking at everything we've managed through over the last few months, the efforts of our team has been nothing short of exceptional in assisting our clients and communities in which we serve. Recent events highlighting persistent inequities 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 million commitment to address economic and social inequity in low and moderate income and predominantly minority community. As we continue to deploy these investments, our shareholders will benefit as we have continued to prudently manage risk, liquidity and capital actions to better position our company. During quarter FNB originated nearly 500 million in paycheck protection program loan and low to moderate income in rural neighborhoods, assisting thousands of small businesses and employees. Our success is a direct result of our bankers proactive outreach to over 100 organizations in non-profit entities that work directly with these communities. 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 through the links contained on the slides within today's presentation. As we look ahead to move into the next phase of COVID-19 recovery, we will continue to focus our response on four key pillars to meet the needs of each of our constituents. The pillars are employee protection and assistance, operational response and preparedness, customer and community support and risk management and actions taken to preserve shareholder value given the extreme challenges presented. Through these unprecedented conditions, our employees have consistently delivered a superior experience for our customers. In June FNB was ranked among the best banks in Ohio and North Carolina, by Forbes and AdvisoryHQ respectively a testament to the consistency of our customer-centric culture across our footprint. The company was again named a top workplace in northeastern Ohio for the sixth consecutive year by the Cleveland Plain Dealer. 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, as they have demonstrated throughout this time exactly why they continue to be our most valuable asset. Our dedication to cultivating a 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. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Casey Haire with Jefferies.

I will start with a housekeeping question. I've gotten us a lot. So the purchase accounting Vince in the quarter and the outlook going forward?

The accretion was 13.2 million of the remaining discounts from CECL approach there. You may remember that was 17 million in the first quarter. So down a little bit, but it's still pretty good healthy level there.

Okay, great. And then, Gary, on the credit quality front, so the defaults at 10% sounds like the new requests have dramatically slowed. I believe you guys were on 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 and discussions, how you expect that 10% to trend in the next quarter, this quarter?

I think Casey, in reference to that we did do 90 days and it really got active in late April -- mid to late April into May. June flattened out significantly there. There was very small, very small numbers of activity in June. So what we did, we had a significant number of our clients made the April payments, March was already made, they made the April payment and we kind of shoved them further into the recovery. So at this point, we've only seen about 50 commercial requests for second deferrals and about 250 on the retail side. So at this point, it's been very light and 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 August and September, a bit, but at this point, it's very light.

Okay. But so do you expect those deferrals to stay at 10% when you report in October or do you expect a lot of them to 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 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 need it from our perspective at this point. And I think what you will see, you will see heavier deferrals for second request coming in the hotel space and in that restaurant space as they have more pressure. The other item that I'll mention to you again is, coming into the situation, right at using the end of the year, 98.4% of these clients who took the deferrals are in perfectly good standing. So it was a very small number, as mentioned, in my report that weren't working in the normal course of business. Naturally, this shutdown has impacted a lot of clients. And a lot of clients were preserving liquidity and being cautious. But, hopefully that answers the question for you holistically.

Yes, yes. Thank you. And on the reserve build you guys had moderated this quarter. Just when did you -- what forecasts, how recent is the forecast you used to build your reserve? And do you guys given that the reserve though moderated this quarter, do you feel like you and deferrals are getting decent news there? Do you feel like the reserve build, the heavy lifting has been done or I know, it's a tough question to answer, it changes every day. But just given where deferrals are going and your lower reserve build, it feels like you guys are -- the heavy lifting is behind. So just some color there.

On the model first, let me address that one for you first. We continue to use a recessionary scenario, Casey, 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 2021. So it's a fairly good recessionary scenario that we've used in the model. As it relates to the second part of the question, with our focus and consistent view on our underwriting and our credit culture around the desired asset classes that we want to put in the book and the position and mix of our portfolio. I feel pretty confident that our book will generally outperform through 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 and the economy, if the economy deteriorates further from here, the portfolio would experience higher levels of stress. Given our position and the performance to-date our portfolio mix, the smaller portfolios across higher assets classes, we'll continue to assess the positions around it as third quarter plays out. A few additional comments here, remember in Q1, we captured the March 27 forecast when others may not have. So we utilized that most recent bit of information around our forecasted models at that point. And during that first half we built 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 tough from a reserve standpoint during this environment as we all know. In addition, we had a pretty significant decline in line utilization in direct auto and some declines in the small business portfolio which really freed up about $10 million in additional reserves during the quarter for us so that helped as well. And finally, when you're looking at the macroeconomic environment and looking at it from a static position, moving forward, similar performance across our portfolio, we wouldn't expect much of any additional build from a macroeconomic forecast perspective. And we'll continue to manage that accordingly, based on how the economy evolves from there.

Casey, I would just add, if you look at, I think we commented on this, but the reserve coverage excluding the PPP was the 154. We have $77 million of remaining discount on the acquired loans, [it's flat] [ph] in the CECL accounting, so if you -- that's available to absorb losses, so 154 goes to 187. And then as we had in our slides, we have another $14 million in reserve for unfunded lines, which is another 7 basis points or so. So there's a good amount that we've added to the reserves since the end of the year to Gary's point.

Understood. And Vince, just last one maybe, the total capital ratio, I didn't see it in the release or the deck, was it at 630?

Total risk based capital ratio?

Correct.

We did not. We did not disclose that here Casey. We have the CET1 at 9.4. We will be able to get that by the end of the call. I just don't have that handy.

Thank you. And the next question comes from Frank Schiraldi with Piper.

Just on the -- a follow up on credit, as you guys point out, if you look at the reserve ratio include the acquired book, seems to hold up well versus where peers are but, if I drill down into categories, at first glance seems to be a bit a little bit thinner in some areas than I would have expected. So I just wonder if you could give maybe a little bit more detail or color around, for example, the retail CRE book, where I think reserves are still just under 1%.

When you look at that portfolio, Frank, we have at this point, very few problems credit in that book. 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 coverages over the last few years due to the fact that some of it is retail focused, as we've talked. One of the things that we have in there is an extremely low level of delinquency today natural the situation is fluid. But the delinquency in that book is 60 basis points with very low levels of 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 it are right at 65%. So we're well positioned in that portfolio at this point. So really feel good about it and working with those clients. What's happening at this point we are seeing rental streams start to increase as the economy has opened up. We'll continue to keep an eye on that and as we move forward, but hopefully we'll continue to see positive momentum there as well.

And how are you guys approaching downgrades or deferrals pushing downgrades of credit to classified criticized or the deferrals pushing that down the road? Are you taking them as they come in 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 the first round, the credits that were insensitive industries were generally moved a notch. Other credits that were in a very strong position and we're being conservative, those particular ones weren't moved. During the second phase here, every second deferral will require a one notch downgrade, if not two in most instances to a substandard rating. So we'll continue to work that portfolio in that fashion and address those ratings accordingly based on the risk present in each one of those credit situation.

Frank, I will tell you in the commercial portfolio speaking commercial portfolio hearing, I'm not sure if you're crossing over. And similar but there's 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 they've kind of rebounded back most of the industries have come back well beyond where they were at the depths of April. So that's an ongoing process. And we have a fairly rigorous process in place to review this rating.

Vince's point there Frank is a very good point. I mean, we're known from a regulatory standpoint to be very aggressive from a risk rating touch standpoint. Our focus is that every time a banker touches a credit no matter what it is, whether it's annual review time, whether it's 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 has been in place for many years.

Right. Thanks. Just a quick one on expenses, if I could, you guys gave some guide for what to expect in the third quarter. If you could just give us a little bit of puts and takes in terms of getting there from this quarter? I know you had the tax credit would have increased expenses this quarter. So just trying to get a sense of, if I look at, if I take out the COVID related expense, I guess I'm at like 174 for the expense space 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 3Q, if you can give us any sense there? Thanks.

Yes. On the slide, we mentioned that we had the 4.1 million impairments and then going the other way, because you didn't see much movement in that other non-interest expense on it. We had lower business development, we lower OREO, before OREO we had lower miscellaneous losses and miscellaneous. So they kind of net out. As you can see, it was 21.9 in the first quarter and 21.9 in the second quarter. So when you look forward to the third quarter, I mean, the comments that I made in my prepared remarks, kind of in the mid 170s. I'd say kind of somewhere between 175, 177-ish or so. There's that includes commission's on mortgage activity, which has been very heavy. So that comes through to that line item. And we'll see some of that comes through in third quarter. So, I mean, it's really right around, I think last quarter I used like a 178, I think we'd be south of that. We came in at 176 kind of on a total basis, 174 like you said, so. It's somewhere around there, Frank, 175, 177, that kind of used as a run rate for the third quarter. In the fourth quarter, we're not really given any other direction there, but there's nothing unusual on the horizon that would hit that.

Thank you. The next question comes from Michael Young with SunTrust.

I have a quick follow up question just to start on the credit. On Slide 9, you guys present kind of your historical charge off peak rate going back to the last crisis, but you obviously performed well through x-Florida. Is that kind of 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 and the shock that and potential length of this crisis it could be worse this time around?

I feel similarly confident, Michael around how the portfolio will perform through the cycle such as this. When you look at our models, as we mentioned in terms of the stress testing and that we're doing and all of the models that we're running across the portfolio and the build of $55 million during the first six months of the year. If you would add that to normalize charge offs, you're looking at charge offs on an annualized basis in the 45 basis point range or so at that stress level. And the models are confirming that it feels to me quite good. Naturally, the economy has to stabilize at some point and the volatility needs to move away. But at this point, it feels so good from that perspective.

Okay. So just to kind of put everything together I mean, if we took the charge off rates similar to that, and then assumed kind of the macro conditions maybe stabilized in terms of the CECL allowance outlook, then you would just be kind of accounting for downgrades and those charge offs that we kind of already mentioned. And that's kind of how we should think about credit and provisioning going forward.

I would say that's appropriate.

And providing for growth.

Providing for growth.

Sure. Yes. We were hoping for that. And then maybe switching gears Vince, just on the PPP loans and 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. The SBA is still working on how they're going to receive forgiveness application. So, and we're ready for that once it comes, but it's not, we're not ready to be able to start that process yet. So, the fee recognition came in would be just kind of a normal accretion of the fees over the vast majority of the loans are the two year terms. We had a handful with the five years, but so I guess with one way to look at it is just the yield for the second quarter was 3.15, which is the coupon plus accretion of a portion of the fee. So we don't have any acceleration that's coming in there yet. And you really don't know it's hard to predict. I mean, in our heads we've been kicking around, maybe you get 15% forgiveness in Q4. You probably won't get any in the third quarter just because of -- they're not ready yet. So when they have 90 days to respond and pushes you out into the fourth quarter. So I guess we're like my modeling purposes, we've been using 15% as an assumption in Q4. And maybe you 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 we do expect to get some level of forgiveness, that'll happen in the fourth quarter and then depending on the magnitude of that set for some of the fee forward. So those are kind of the key points there or some PPP balances. And in the third quarter, I should just comment too, so the average balance was a billion nine. The average balance in the third quarter would be kind of 2.5 net is what we'll have because we didn't have all of it throughout the second quarter.

The other thing I'll say, this Vince, so I will put a pitch-in for our IT folks and Sam Kirsch in digital channels. We've built out a fairly robust system for clients to upload the information and that walks them through the forgiveness process which keeps changing. And it's fairly sophisticated but very nice process. And then Gary hired a team 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 those smaller loans that I know is being kicked around for instantaneous forgiveness for under 150. That would help tremendously but we have systems in place to help facilitate the forgiveness for our clients. The only other thing I'll point out is, when you look at the balances, our loan balances overall, were if you subtract it out the PPP loans would be down slightly was at 1%, I think, 1%, 1.5% overall. It's kind of a hard equation to do because we have smaller clients, if you look at the dispersion of deployment of those PPP loans, the relative size of our loans are smaller. Typically those customers would borrow through the PPP program, pay down their working capital facilities, right? Because there's the rate differentials fairly significant and then borrow back on their lines if they have confidence that they're going to be able to do that. So I think, we look at the transfer from PPP to our own revolver balances or line balances of small business customers that explains some of the decline in 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 there are other industries that are distressed and we don't play significantly, as you can see from the breakdown of the portfolio that we've provided in our disclosures. We're not very active in a number of those areas. So, I'm a little more optimistic about the activity moving forward. Of course, we haven't seen the fallout yet that will happen, I think from a credit perspective in the third and fourth quarter that so far, it looks okay for us. Anyway, I thought I'd share that with you, some additional commentary.

Yes. Thanks for that additional color, Vince. And then, just maybe last one for me just on the net interest margin. It looks like you guys still have some room to bring down the deposit funding costs per year, could you may be just talk about the timing and opportunity with that. And then if there's any kind of lingering roll down and loan yields from this point?

Well, on the liability side, I mean, I think if there's opportunities within the deposit base, I know, we've had significant deposit growth even outside of the PPP. The growth related 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 costs. And I'll let Vince talk about the asset side of the equation in terms of margins. But on the liability side, there is room for us to continue to improve on that side.

Just a couple of comments, so when you look at the performance for the quarter, so net interest income declined 4.7 million, given that we had 105 basis point reduction in one month LIBOR from 141 basis points to 36 basis points. That's a $22 million reduction in interest income on 8.5 billion. When you look at the net decline given that $22.3 million, it's not a bad outcome there. And then, as I mentioned in the beginning of the call, the accretion coming in a little bit lower from 17 to 13, you had some impact just comparing the second quarter to the first quarter. When you look at the -- we had 2 billion growth in average earning assets, largely funded with a billion eight in non-interest bearing deposits business that's been continuous growth. Obviously it has additional influx from the programs, but we've been growing DDAs every year. So when you look at the cost of the interest bearing deposits as we had on the slide, we were able to bring that down 37 basis points to help mitigate the impact on LIBOR. So we were 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, the cost of interest bearing deposits of 61 basis points, the average for the quarter was 72. So you have 11 basis point kind of head start going into the third quarter and there still buckets of deposits that we've targeted and we're looking at and continuing to expect to bring those rates down some more. So there's definitely some more impact there. I think as far as the asset side of it, I mean LIBOR is at 18 basis points. So it was down to 16 basis points. So that's a couple. So I will take a couple of basis points, but I don't think there's anything unusual that would come through kind of third quarter versus second quarter just other than mix, the mix of the loans that you put on. So nothing really kind of beyond that and the spreads have kind of been stable in the recent months.

Thank you. And the next question comes from Baron Shaw with Wells Fargo.

Hi guys. It's Jared here. So just a question, I guess on the reserve build. So that $17 million of incremental build from the macro forecasts. Gary is that just taking the model with the macro assumptions that you laid out and that's what's flowing through or are there some qualitative overlays, some of those other items that you discussed that offset what the model would otherwise of spit out for the macroeconomic expectation for the reserve?

No. It would include some overlays around our normal modeling process, Jared. So it is inclusive of overlays and qualitatives.

Okay. I guess if we see the macro model deteriorate in third quarter, should we assume that there is potentially some additional overlays that would offset just the pure impact to that move or not necessarily?

It's going to remain fluid. I can't speculate on what the situation with the forward view is going to be at that point. Based on where we are today, we feel good about the position of our portfolio. We continue to keep an eye on it, manage it as the macroeconomic environment changes going forward.

Okay. Vince earlier in your commentary you had mentioned something about evaluating business opportunities and as you go forward can you give a little color around what that could look like?

Yes. I mean, there are certain areas, for example, we just booked a fairly large credit in the REIT -- believe or not, it's a developer that has tenants 99% occupied, $25 million deal that an insurance company was looking to get out of retail exposure and the loan to value is 55%, the debt service coverage is 2.2x or greater. So there are transactions out there that you would do. The tenant base is largely large investment grade banks. There's four banks and our parcel on the property. And there is a grocery store that's very [indiscernible] long-term lease. 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 credit facility for AA-rated higher education institution. So there is still activity going on with billions of dollars in 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 operating 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. And I think that creates stability for lending from our perspective and continue business activities. So, I'll tell you our employees [Technical Difficulty] I made prepared comments, but these people have worked countless hours during the PPP program, managing the credit risk, I could go on and on and 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 quarter, the post-COVID quarter that we were comparing to. So again, they're not just sitting at home, which is what I was afraid was going to happen there. They are working very hard. My hats off to our employees who are passionate about their customers, they care and they are very eager to make sure we get through this and get through it soundly. So there is a lot of activity.

As we look forward though that's the type of stuff we should be assuming not bank M&A. Is that correct?

At this point, we've said in the last three years, we have not focused on, I don't think this would be the appropriate time to focus on it. We need to right the ship here from an economic perspective as a country and we need to get a better feeling for what's going to happen. There is 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, it's the same management team in the last crisis. And 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 do on the other end of it, maybe M&A, after we are through this is a distinct possibility for us given the strength of the company. So we will play that card down the road I think as we sit today. The other thing I will mention Jared as we open our PPP program up to non-clients in our newer markets, because we felt that some of the larger institutions were incapable of delivering. And in the first round of PPP, our people originated $2.1 billion. We were able to convert 83% and fund 83% of the applications that we brought in. Most of the large banks were in the low 20s or 30% range. So we brought over a lot of clients or prospects that are now clients that will lead to future opportunities for our bankers because they're now part of the capital structure of these companies. So I'm optimistic once we get through this about that as well. There's at least 2,000 middle market prospects that we now have a relationship with. So we'll see how that all plays out down the road but very good execution by our employees and that's why where we are.

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

Just a follow-up on the deferral conversation earlier. So I understand you're kind of holistic view on this exposure, so the 98% that's current and 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 current reserve?

The answer is yes. Many of those customers Russell, with the onset of the pandemic and the shocks to the economy and the shock to everyone in the business community, a significant number of them were wanting to be cautious. Some of them drew their lines up. Our line draws went up to about 46%, 47%. They wanted to grab liquidity. They looked for deferral 75% plus of our commercial deferrals decided to pay the interest not to take interest deferrals. So they paid the interest at their own volition. The more compromised industries took C&I deferrals as we've talked about. The books are relatively small. Hotels and restaurants have been severely impacted. I would expect those clients in those industries to be taking second deferral opportunities due to the volatility and opening, reopening, closing down and what is the future look like. That all being said, the deferrals in the restaurant business has been remarkably low and I think it's about 32% that has been quite surprising to us that it's not been higher. So the risk ratings have been dealt with. The risk ratings continue to be dealt with. Second, requests 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, apologies 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 Q, I'm sure.

Just directionally can you touch on whether there is a significant migration?

They're up moderately.

Okay. Thanks, Gary. And then, from a timing perspective on charge-offs, whatever the magnitude, obviously a lot of unknowns of stimulus and forbearance. But I guess, just your assumptions around timing in terms of when we could see charge-offs begin to start going up from -- you still had a very solid first half of the year?

Yes. I will tell you Russell that you're going to see that impact in Q4 and into 2021. You may see a little impact late in Q3, but I would tell you, Q4 and into 2021 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. But trying to tie it all together, do you think you can maintain this level of PPNR [QQ] [ph] based on the puts and takes of that PPNR guide?

I think we give you all the drivers, Russell, right? So, I think kind of giving the moving parts there. I think if you kind of go through some of the elements, if you think about net interest income for instance, right? We're going to have one month LIBOR today is at 18 basis points. So it averaged 36 in the second quarter. So, if you bring that down in the 5 billion to 8.5 billion, it's 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 it was $13 million, I would still expect it 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 it to still kind of be in the double digits at least. So that's an element to net interest income. And then the PPP loans, you'll have the full $2.5 billion. Those are additive to net interest income and additive to margin. The longer they are funded with DDA so. And as I mentioned earlier, we're going to continue to work down the cost of the interest bearing deposits. So that clearly will have a positive impact. But kind of net-net, net interest income, I would expect it to be down a little bit. The fee income should still be at a very strong level. The guidance, as I mentioned there, we would expect to service charges to bounce back up and they were running in the 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 the non-interest income increase some, I mean mortgage at a $16 million, $17 million is a record high. I wouldn't expect that to be as strong as that, but I would expect that to still kind of be in the double digits for sure and we will see a lot of pipelines high, there's a lot of activity continuing to go on. And this is a busy time for that business. And then, the capital markets piece, that number, we've set a couple of new records in a row. I would expect that to be very strong again in the third quarter. I can't predict another record but I expect it to be very strong kind of relative to what's in there. And then some of the other key businesses that were down, the wealth and insurance businesses, I would expect those to kind of bounce back up. So, non-interest income in total kind of will reflect all those drivers. So again, there's a lot of moving parts. And the service charges, we'll see how that plays out. The recent movement increase in the transaction is still down, but it's not down as much and would be helpful. And then the expense side, as you know, we manage expenses very closely as a company as we always deal in. The expenses have been -- if you look at them 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 will see, I would still expect it to be very strong. I think when you look at where it was for the first six months, $236 million on a year-to-date basis obviously expect it to still be very strong again in the third quarter. So, I know, I'm not giving a number but trying to give you guys all the different drivers and kind of understand what we're seeing and just what the outlook is from where we sit today. I want to back to Casey's question earlier, so the total risk based capital estimate would be about 11.9. I think last quarter, there is a slide in here, I think it was 11.6; it was 11.8 at the end of the year; 11.6 at the end of March. So the estimate is 11.9 for where we would be at the end of June.

We did have tangible book value per share growth, right? [Indiscernible] growth in the quarter.

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

So just starting quickly Vince Calabrese, just a question on the PPP impact. So in terms of the interest income contribution in 2Q related to PPP, I think, calculate maybe roughly 16 million. Can you just verify that? And then also related to PPP, what's the OpEx benefit was, you sort of alluded to it, but from the deferred loan origination cost from PPP loans also in the second quarter?

Sure. The 1.09 billion, the total interest income on that for the quarter was basically $15 million for the quarter. So, 3.15 yield, you will get to those two pieces the 1.09 billion, and then we'll have like I said, the $2.5 billion on average we would have some sort of -- haven't any forgiveness yet in the third quarter. And that 3.15 includes accretion of the portion of the fees that I mentioned earlier. And then, the FAS 91 deferred origination costs went up by 3.7 million from the first quarter to the second quarter, which is driven by -- the PPP is obviously the biggest driver of that. So that kind of bit helps on the expense side and then that's kind of comes in -- that you're accretion comes in net of that that's the yield adjustment over the remaining life as well as the fees, but obviously there is a net positive given that the fees minus cost. So that was the delta for the quarter about 3.7.

Okay. That's helpful. And then just lastly, Gary, great color on some of the credit moves, especially with the retail CRE. Just curious if you could give us a little bit, maybe similar credit metrics with the hotel book. I mean it's a small percent of the overall book, I get it, 1.5% or whatever. But just looking at the reserve on that is 1.56, 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 Collyn, when you look at the performance of it, significant chunk of that portfolio in excess of $100 million or probably about 40% plus of it is what I would call our few core customers in that space. We have never been a hotel lender other than some very strong well-heeled long tenured hotel professionals who have built up significant capital. So there is a good chunk of that business that is very, very sound. 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 have not lent into this space for over four years at this point. Delinquency on that book, naturally, some of the weaker smaller hotels, when I say that I'm talking about small mom-and-pop shops, which we got through some acquisitions, were helped shortly by the government stimulus and the deferral programs. But delinquency is at 15 basis points and we've really derisked that portfolio over the last few years, as I've mentioned. Is it going to withstand some losses? Absolutely. We understand that and we'll work through what we can with our clients and we'll probably have some increases in non-accrual assets in that book as well. I will surely expect as we move forward. But generally speaking, I feel good about the position of it, we've moved higher-risk assets off the books and we'll have to deal with some. Hopefully that helps to give you some color there.

Thank you. And the next question comes from Brody Preston with Stephens Inc.

So a quick question. Could you remind me why the $77 million PCD discount isn't part of the reserve post CECL?

With the discount on the loan portfolio. So when you go through the CECL accounting, the gross of the acquired loans into the loan balance it's just a discount to gets accreted in, I mean that's just the way the account rules work. It basically works; marks that we had left on the acquired loan prior to CECL. You had basically retained gains or remaining marks that were left there because you couldn't bring that into income until the pool was gone or very close to gone.

It was stranded capital.

Stranded there, right.

Okay, all right, thanks for that. The 1.54 reserve ratio ex-PPP, CECL is supposed to be for expected lifetime losses. So just, I don't know if you can give us a sense for what that sort of implies within your modeling for I guess near-term peak NPAs?

In terms of peak NPAs Brody, I'm not going to sit here and speculate on that. That's a difficult thing to do. There is so much volatility in the environment, when you look at where is this thing going. I don't think any of us really know. When you look at the economy today and where it's going, I would tell you that you're going to see increases in NPAs as we work through this situation across the industry. As far as throwing out a peak number, I don't feel comfortable doing that.

Okay. All right. And then I guess maybe switching gears to PPP. Just given the cost of servicing the PPP loans and I guess the longer time line of working through forgiveness. Have you all considered, selling these loans to a third-party like we've seen some smaller banks do?

I mean we've received calls on that and the people who want to buy it want to kind of get all the income for free. So it really doesn't work. 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 originating it. So once you originate it, I think if you have it, 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. It helps build loyalty. I think for us to sell it at this point would not go over well. And again, we were able to build out an automated process that made it very efficient. We are one of the few banks that had an end-to-end digital process. We introduced bankers along the way. There were 1000 bankers that interacted with clients, but they had a fully digitized process, paperless 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's online that permits forgiveness walk the client through step-by-step on forgiveness and enables them to upload documents digitally. So we're able to do it a little more efficiently. A smaller bank might struggle. They'd have to outsource probably portions of that or maybe all of it. So at that point, they may be looking to get out from under the burden of processing those ones. Considering in most cases smaller banks, it was a larger percentage of their total assets. For us it's a substantial portfolio of what we can manage it with the resources that we have. Plus, I mentioned that thousands of non-customers that we were at relationships with our bankers have been calling on and called in and said hey, I can't get my PPP loans through my large bank, would you be willing to do it for us. We accommodated those requests. I will say something else too, that I didn't mention. I mentioned in my prepared comments. Our folks reached out to 100 community groups and non-profits in low to moderate-income communities across our footprint. This was before it became an issue and we were able to originate a $0.5 billion in PPP loans and those low to moderate income in rural communities where the job retention is critically important. So I was very proud of what we did and I think we've done a masterful job of underwriting them, ensuring that we have good quality borrowers on the other end and we're going to carry it through. That's our philosophy, overall philosophy on it.

Just going back to the margin, liquidity you had a pretty significant increase in cash $370 million or so. I just wanted to understand how much of that was driven by PPP, if any? And sort of what you expect for cash balances moving forward?

Yes. The influx of the deposits that we had, which exceeded the loans and loan to deposit ratio coming down to 92% kind of captures all of that. As Vince mentioned in his remarks, we went from having overnight borrowings to investing a few hundred million that he mentioned in there which really isn't that being on our balance sheet and kind of as you sit here today that's running at about zero. So as deposits at some point we'll get utilized that number will kind of flex up and down as that happens. And then in the meantime, the PPP is such a big driver to the numbers. We continue to add new relationships and new talents and gaining the business. And to Vince's point, 25% of the PPP customers were prospects. So they were not customers so that's a pool of clients that we're going to be actively and --

And they open depository relationships with the bank because they needed to fund the loan, some of them just to move additional deposits over or expand the relationship. 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 but we developed it when we were originating to watch flows of funds, migration of funds and what we've seen is an expansion in the number of accounts that we have with that pool of customers. So the deposit balances in certain instances exceed the amount of PPP loan that is funded. That's helped us. I mean if you look at the deposits overall we're up well over the amount of PPP balances and some of those balances went 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 funding base and our ability to gain households.

Our teams are working to expand those relationships to Vince's point.

And that's in the midst of a pandemic. So I think social civil unrest, I think like I said our people have done a tremendous job. I couldn't be prouder.

Thank you. And the next question comes from William Wallace with Raymond James.

One quick modeling question. On the PPP, based on the way the rules are written today, what is your expectation of the percent of loans that will be forgiven?

I think, in total, I would think the vast majority will be forgiven. I mean it's going to be in the 90s. We don't know with certainty. Vince mentioned, we're talking about an automatic forgiveness for loans below 150,000. I'm not sure if that's going to happen or not. That clears out. I mean our average I think was...

It was [indiscernible].

The average is $129,000.

I also think we did a pretty good job. 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 we required that they validated certain pieces of information and had discussion. That's why we activated 1000 bankers across multiple lines of business to interact with the client. That will help in the forgiveness process that will help us achieve a higher percentage of forgiveness.

And then, Willy just to restate what I said earlier, I mean our assumption right now, our estimate is just based on kind of the forms estimate was to get 15% in the fourth quarter, have 75% of total forgiveness by the end of March and the 90% by the end of the 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 in utilization of the digital network with your customer base. You guys had been pretty diligent and thoughtful about your branch network over the years and you've slowly consolidated it. I'm wondering if the increase in utilization of the digital network changes the way you might approach the decisions around the branch network, if you could talk about that and I'll step out.

Yes. I appreciate the question. It's a great question. I think that obviously in this environment, there has been, let's say an accelerated educational process for clients. We had such a huge increase in adoption in those digital channels. We have always focused on the interface with the client, we always believe that, what we can control because 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 folks did an exceptional job with our Web site. I'd recommend if you haven't been on it go on and take a look at our Web site. It's designed in a way that's very easy and intuitive to purchase products and services or view educational content. The ability to put that out is going to make changes the educational process that took place through COVID-19 will certainly push users to that platform. We had a process. We closed a lot of branches, I mean we consolidated, I don't even know the numbers but generally 15 to 20 a year, over the last five years has been consolidated, some of it through M&A, some of it opportunistically because of the change in client preferences. I would expect that to continue, but I will tell you that throughout this process a number of clients had written me a letter, sent me email, stop me on the street and asked when are your lobbies going to be open? Small business customers still like to go to the branch and they want to go and make their deposits at the branch because in many instances they still use cash; coin and currency and they need to come in. Clients when they have issues like to stop in. So I think it's going to be -- there was an article in the S&P just did, it illustrated our concept branch. I think there will be fewer branches. The design of the branch and 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 conversations and the content. So I see that trend continuing and it will afford us with an opportunity to operate more efficiently as we move forward. Anyway that's --

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

Hey, guys. Most of my questions have been answered. Just, 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 did expect some bounce back perspective, I think you said it was like 40% down and now it's only down 20% kind of that range is how to think about that?

Yes. You got it, Brian.

Okay. So I wanted to make sure, I got that right. And then just with the accretion number, I guess just the timeframe we should think about recovering that remaining whatever $77 million, Vince, I guess given some of the dropdown this quarter, most of those captured by maybe the end of next year or is that fair to think about that?

I mean the vast majority would be, I'd say over the kind of the two years, 2 to 3 years. I would probably say it is probably reasonable. By the end of next year, I would think you'd have kind of the bulk of it kind of coming through. I mean it's a function of prepayments to right so that was more of the loans end up prepaying or go different refined government programs or something you'd have more of that that would come in. But I'd say a two to three year kind of time frame Brian is probably reasonable.

Okay. And then just the last one from me, guys. The impact of the PPP on margin, I guess this quarter, I guess is just in general, I guess, your comment on that?

I mean it's actually additive to the margin. I mean if you look at -- I mentioned the yield at 3.15, funding it with basically deposits of 3 basis points. So we have a spread of about 3.12. If you do the math, it's adding 10 to 15 basis points. I would say the margins during that short period there. So it's going to be a function of how long those are around as far as them coming through and how long we haven't funded with demand deposits, right? So at some point the customers are going to start to use those funds and then your mix of how you're funding it will change, but what I can say for certain is with the second quarter impact was and it was a 3.12 spread, which as you can see, if you do the math, is obviously additive to the margin we reported. Thank you.

Thank you. And that was the last question and I would like to turn the floor to management for any closing comments.

Well, I'd like to thank everybody for the questions and truly appreciate the time that you've spent with us in the interest in FNB. Please stay safe and we look forward to meeting with you next quarter. Take care.

Thank you. The conference has now concluded. Thank you for attending today's presentation. Minato central lines