First Bank (FRBA) Q2 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the First Bank Second Quarter 2020 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded. I would now like to turn the conference over to the President and CEO, Mr. Patrick Ryan. Please go ahead, Sir.

Good morning. Thank you and welcome to our second quarter 2020 earnings conference call. I’m joined today by Steve Carman, our Chief Financial Officer; Peter Cahill, our Chief Lending Officer; and Emilio Cooper, our Chief Deposits Officer,. Before we begin, however, Steve will read the Safe Harbor statement.

The following discussion may contain forward-looking statements concerning the financial condition, results of operations and business of the First Bank. We caution that such statements are subject to a number of uncertainties and actual results could differ materially and therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described under item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the FDIC. Pat, back to you.

Thank you, Steve. I'd like to start my remarks this morning with a summary of the PPP program as I am sure many of you've heard from other banks that have already released earning the impact of the PPP program on our customers, on our staff and on our communities can't be understated. Certainly from our standpoint and our perspective it was a tremendous team performance with people from all parts of the bank getting retrained, shipping in, helping out, working overtime and I would certainly say it was a great success from our perspective. Three primary benefits from the program number one, we're seeing a lot of customer goodwill, at the end of the day most everybody pretty much everybody that wanted a PPP loan was able to give one, but for quite some time there was a lot of fear and anxiety out in the market and the fact that we were able to get people submitted and approved quickly and also help a lot of folks who were knocking out by their primary bank at the time, that certainly created a lot of goodwill and also created a lot of great new loan and deposit opportunities with new commercial prospects. And the third benefit obviously the additional interest and fee income that we will be receiving over the life of these loans. Stepping back from PPP for a second in the quarter, it was a good quarter in terms of our ancillary fee income sources. The prepayment penalty income was $184,000 in the quarter, which is a little bit below our quarterly average from last year of $214,000. Loan swap fee income was up significantly in the quarter at $553,000 compared to the quarterly average from last year of $114,000. Gain on sale of SBA loan came in at $38,000, which was a little below our historical quarterly average and gains on recovery of acquired loans were $293,000 in the quarter and that compared to an average last year of just under $200,000 per quarter. So all that added up to a strong noninterest income quarter for us here at First Bank. Similar to what you saw from us in the first quarter, we did believe it will be prudent to continue to put additional dollars into the reserve through added loan loss provisions. At this point once again the provisions are primarily driven by uncertainty and overall economic conditions not specific credit metrics. So far in 2020, we've been able to set aside close to $4 million in additional loan loss provisions, compared to what we did in the first half of 2019 while still generating reasonable bottom-line profits. At the end of the second quarter our ALLL for loans was 1.10%, but that includes the PPP loans in the denominator. If you back out the PPP loans, the ALLL ratio moves up to 1.20% and furthermore, if you add in $4.8 million in general credit mark as well as $3.6 million in specific credit mark associated with prior acquisitions, the ratio would move all the way up to 1.68%. Those ratios compare to an ALLL loans ratio of 1.0% at year-end 2019. During the quarter, we continue to lower our deposit cost, which helped to offset some of the impact of lower loan and asset yields. Our cost of interest-bearing deposits declined 31 basis points from 1.56% to 1.25%, but the expectation that we'll be able to continue to move this number lower over the remainder of 2020. Our mix of deposits is improving significantly and many of you know having listen into prior calls, we've had a real strategic focus on generating more non-interest-bearing balances as well as commercial balances and those numbers have certainly moved much, much higher. It's a little tough to know how the dust will settle given the impact of the additional deposits from the PPP loans, but certainly the underlying trends in both non-interest-bearing and commercial deposits have been very positive and Emilio will touch on that a little more during his part of the presentation. Our net interest margin did come down 23 basis points in the quarter from 3.30% in the first quarter to 3.07% in the second quarter but that was impacted by holding excess liquidity as well as the lower yield on PPP loans. A nice positive in the quarter was strong expense control. Our quarterly expenses came in at $9.8 million, which was down from $9.9 million last quarter. There were certainly a fair number of unusual events in the quarter from an expense standpoint. Some of them added some extraordinary or non-typical expenses in the quarter and then we also benefited from some reduction in expenses as a result of things like T&E and things like that, that were down. So net-net we think the $9.8 million is a decent number, may trend a little bit higher, but a number of the initiatives that we've taken so far this year, I think are bearing fruit and helping us keep costs low. I would note that so far this year if you compare the annualized salary figures for any new hires so far in 2020 and you compare that to the annualized salary figures from those that are part of the bank in this 2020 year, the net amount is $300,000 less when you look at the new hires compared to the department employees and we've also taken steps to significantly reduce our marketing budget given the great opportunities that are emerging for new business development on the commercial side and is giving us an opportunity to cut back on some of the general corporate marketing and we think we'll still be able to continue to grow nicely even with that lower marketing budget. We did improve our capital position in the quarter. We had a successful refinancing of our subordinated debt. We also completed our share buyback program and those two actions together helped reposition the bank's capital stack towards significantly lower cost tier 2 capital. Those actions also give the bank capital flexibility going forward to either continue the dividend or for future share repurchase program. Looking forward to the second half of 2020, the potential credit impact of COVID-19 is full wild card and a bit uncertain as it will -- how it will impact results in 2020 and beyond. The initial results from our deferrals is encouraging and I know Peter Cahill will touch on that a little bit later, but certainly it feel still too early to tell regarding how this will ultimately play out from a credit perspective. During the second half of the year, we believe we can continue to lower our funding costs to help offset lower earning asset yields and potentially move the margin up a little bit from the levels we saw in the second quarter. We believe PPP income and expense management will go a long way towards helping to offset the potential negative impact of the higher credit cost and I would say yeah it's my belief that in the commercial banking space, community banks may emerge as the real winners from what we're seeing and experiencing as a result of COVID-19 given the access to personal relationships and the access to bank that can get things done, I think the value proposition of community bankers is really being driven home right now and I'm excited about the prospects not only for the remainder of 2020 but beyond. So at this time I'd like to turn it over to Steve Carman to discuss the financial results in a little bit more detail.

Thanks Pat. We entered the second quarter of 2020 in a completely different business and interest rate environment, based on the impact of COVID-19 to the national state economies. The fed lowering the targeted fed funds rate in March 550 basis points, which led to overnight excess liquidity yielding 25 basis points or less, but the dramatic lower treasury yield curve, result was a lower net interest margin. With a strong liquidity position in the second quarter, we aggressively lowered deposit rates to help stabilize net interest income and the net interest margin. Net income for Q2 2020 was $4.1 million or $0.21 per diluted share compared to $2.8 million or $0.15 per diluted share for the second quarter of 2019. Net interest income was $16.3 million for Q2 2020, an increase of $2.2 million or 15.3% compared to $14.2 million for Q2 of 2019. Higher interest income primarily from interest income on loans combined with lower deposit costs contributed to the net interest income growth for the comparative periods. The higher provision for loan losses for the comparative second quarters in 2020 and 2019 as was the case for the Q1 comparative quarters was primarily due to qualitative assessments of challenging economic conditions due to COVID-19. Net income in Q2 2020 was enhanced by higher noninterest income compared to the same period in 2019 due to increased loan fee income of $500,000 primarily from loan swap fee income and additional income on bank-owned life insurance due to proceeds from the redemption certain insurance policies. Effective management of noninterest expense, which included the impact of the Grand Bank acquisition on 9/30/2020 were up only 7% for the second quarter of 2020 compared to the same period in 2019, which contributed to our positive results. Net income for the first six months of 2020 was $7.4 million or $0.36 per diluted share compared to $7.1 million or $0.38 per diluted share for the same period in 2019. The results for the six-month period ending June 30, 2020 were similar to the results for the second quarter. Net interest income increased $4.0 million or 14.2% to $32.2 million compared to $28.2 million for the six months ended June 30, 2019. The increase in the 2020 year-to-date net interest income was also driven by strong growth in average loans, which increased $321.3 million or 21.4% from the prior year period. Average loan growth includes the impact of PPP loans originated in the second quarter. A higher provision for loan losses, higher noninterest income and effective expense management also characterized results for the comparative six-month periods. Our tax equivalent net interest margin for the second quarter of 2020 was 3.07% as Pat mentioned, compared to 3.37% for Q2 2019, a decline of 30 basis points. The compression of our margin is primarily due to the lower interest rate environment, the origination of low yielding PPP loans and the impact of the significantly lower yields on excess balance sheet liquidity. The yield on interest earning assets declined 74 basis points, primarily due to a lower yield on loans and excess liquidity. From an interest-bearing liability perspective, total interest-bearing deposits declined 52 basis points. On a linked quarter basis, our tax equivalent net interest margin for the three months ended June 30, 2020 was 23 basis points lower than our margin of 330 for the three months ended March 31, 2020. Our emphasis has been on lowering deposit costs, reflected by lower deposit costs of 31 basis points for the second quarter. We expect that trend to continue in the third quarter. In the third quarter, approximately $239 million in CDs will reprice or mature with the cost much lower. Based on the highest current CD rates being offered the cost of these funds, were repriced lower by approximately 180 basis points, further lowering our cost of deposits, which is expected to boost our margin over the next several months. Regarding our margin of 3.07% for the second quarter, we estimate the impact of lower yielding PPP loans and carrying higher levels of excess liquidity to the margin was seven and five basis points respectively. Also contributing to a lower margin was the impact of higher sub-debt expense as our legacy sub debt of $22 million was not redeemed until June 30, which impacted the margin about two basis points. Lastly, we continued our focus on effectively managing the level of noninterest expense growth. This is reflected in lower marketing, travel and entertainment costs and data processing expenses for the comparative quarterly periods. Salary and employee benefit costs were up only 3.3% in the current quarter versus the comparable prior year period as we've limited new hires and slightly reduced staff since the acquisition of Grand Bank on 9/30 of 2019, reflective of the current business environment. Effective management of expenses has resulted in an efficiency ratio 53.64% for the three months ended June 30, 2020. That compares to 59.76% for the quarter ended June 30, 2019 and 58.03% to the linked first quarter of 2020. Next to discuss our lending results as Peter Cahill our Chief Lending Officer. Peter?

Thank you. Steve. As both Pat and Steve touched upon, the driving force for us behind loan growth in the second quarter clearly was PPP loans being able to take applications, approve document, closed and fund over 1100 loans in a couple of months plus a required total collaboration among many different teams in the bank from the sales side, which included retail to credit administration and to loan administration. Now that we have the important task of getting small businesses some relief behind us, we're ready to further assist with the process forgiveness aspect of the PPP program once that gets completely finalized by Congress. Like many banks, most of the $190 million of PPP loans we did were small in size, averaging around $178,000. We had only a handful of $2 million. You'll also note that the line of PPP loans changed the mix in the loan portfolio a bit, increasing the percentage of C&I loans bank wide to 22% up from 14%. In addition to loan growth of $6.9 million in fee income, the PPP loans provided our relationship managers will a list of qualified referrals. 20% of the loans we funded were to noncustomers and our sales staff is out there now trying to expand our business with these 200 plus customers. Aside from the PPP loan growth, non-PPP loans were up around $40 million through June. Our new business pipeline despite the slowdown caused by the pandemic looks good. We look at deals in the pipeline on a probable funding basis where we take projected year-one funding and apply likelihood to close factor to it. Loans committed in closing next week for example will have a higher likelihood close from a piece of business where we're still collecting information or competing with another back. At June 30 the pipeline was up $24 million from the end of May to $169 million. This figure exceeds the average for the past six months. One thing we're doing to augment the sales process is that we're using this period where face-to-face sales effort is always difficult to get out and leave with people during the pandemic and we're providing RMs with sales training to augment their skills. We've hired a consultant that has a history of training the sales side of banking and the focus is on becoming more proactive and less reactive, getting sales people to be better organized, little bit more process driven in identifying the types of customers and prospects that we wanted to do business with. It's important that we spend our time teaching our value proposition to the right people and I think this is a perfect time to give folks a refresher on this. Overall staffing perspective, the lending side is adequately staffed. We have a couple of openings on the credit administration side, but based upon economic conditions we're going to hold off on selling them for now. Despite the hardships of having many people out of the office, the last few months have given us a great opportunity to have folks working together on the phone or via zoom etcetera on various projects. Our credit officer who has been here only about a year was promoted to senior credit officer early in the first quarter. We then sold an opening credit administration by hiring additional junior credit officer type right at the start of the pandemic. We also brought in a new leader for our SBA [ph] team in the first quarter and having these three working with the relationship managers in loan administration went a long, long way in giving us the ability to handle the PPP crush of loan requests. Our credit losses also provided assistance in reviewing and approving the COVID-19 loan payment deferrals. We reported on these deferrals last quarter in our slide deck breaking them down by industry and collateral and we've highlighted that where we are now in yesterday's earnings release. At this point, we're seeing very few new requests for deferrals. Many of the 616 loans representing approximately $430 million of outstanding loans originally deferred have reached the end of their 90-day deferral period and as the earnings release points out, the majority of those due for payment approximately 79% have resumed making normal payments again. We also outlined in the release, the status of two industries hit hardest by the pandemic, our restaurant portfolio and our hotel portfolio have had their challenges, but we're in constant contact with these borrowers. To summarize loan deferrals, it's still very early to know the extent to which the pandemic will impact these borrowers, but we're glad with payments being resumed by so many, the portfolio loans having payments deferred has reduced over a third. At times, Steve also touched upon asset quality. Asset quality metrics look pretty good, but the length of the pandemic will certainly have an impact on both business generation as well as loan quality. Time will tell there, but we're doing the things we need to do to stay on top of these changing conditions. That's it for me now. For the second quarter, I'll turn things over to Emilio Cooper.

Thanks Peter. Deposit results for Q2 continue to move us closer toward achieving our strategic objectives for 2020. Total deposits grew $190 million from the end of Q1. Deposit balances of $1.9 billion at June 30 represent growth of $282 million up 17% for the year. Non-interest-bearing deposits were up $167 million for the quarter and are up $184 million for the year. Non-interest-bearing accounts now represent 24% of deposits, up from 17% the year prior. Our deposit mix continues to improve as we realize the benefits of prior period investments in our business. Our strong execution in helping customers and prospects with the paycheck protection program loans was a significant contributor to the record deposit increases we experienced for the quarter. This increase was aided by strong underlying organic core deposit growth and new commercial customer acquisition. The foundation we laid to investment in our cash management team and capabilities combined with our realigned leadership structure enabled us to capitalize on the opportunities presented through the competitive disruption caused by the pandemic. We posted strong growth primarily led by increases in commercial deposit. This was partially offset by a strategic reduction in our CD portfolio as we execute on our plan to aggressively drive our deposit costs lower and improve our mix. We've made significant reductions in our preferred rate portfolio and our promotional deposit rates offered. This resulted in a 48 basis point reduction in the average rates paid on interest-bearing liabilities during the quarter. As Steve indicated, we expect to see continued reduction in our cost of deposits as over $238 million in CDs mature in Q3 and reprice at a level close to 180 basis points below their current rate. During the quarter, we continue to invest in our business. We've placed guards and social distancing markers in our branches to protect our team and our customers. We added ACH positive pay account reconciliation and payee positive pay to our cash management suite of products and services. In addition we upgraded our tenant security and escrow account management platform. These investments will enable us to compete at a higher level, increase our deposit fee income and aggressively grow our commercial deposit base. During the quarter we remained open by appointment in our lobbies and our teams were creative in finding ways to provide exceptional service to our customers. Our deposit pipeline remains strong and we continue to enhance our ability to attract and onboard new commercial deposit core operating account relationships. We are looking forward to continuing to advance the ball during the second half of 2020. Back to you Pat.

Thank you, Emilio. At this point, I'd like to turn it back to the operator to open things up for Q&A.

[Operator instructions] Our first question comes from Nick Cucharale of Piper Sandler. Please continue.

So I wanted to start on PPP where you pulled your per share. I know it's early stages, but can you help us think about the opportunity to bring these clients into the bank and have you been able to increase balances from these customers that did come in?

Yeah it's a great question Nick. We think about the PPP portfolio in two ways, 80% plus or minus of the PPP loans made went to existing customers. Now in some of those cases, they were existing customers where we might not have necessarily had all the business or the primary business and so it's a little bit overly simplistic to look at it as existing and new, but certainly within the pool of existing customers, we're using this and the goodwill created, we're using this as an opportunity to further expand relationships, we're using it as an opportunity to have them refer people they know and get introductions that way. So there is certainly a lot opportunity in follow-up from the existing base of customers and separately from that we had 20% or plus or minus 200 brand-new to the bank opportunities that we're spending a lot of time cultivating, following up and working on bringing over to the bank in terms of getting the core business. In almost every case, we got the operating account set up here for the PPP funds to go in, but in some cases those ended up getting moved over if they had operating accounts elsewhere. Just from practicality standpoint they needed to get the money in new different account, but it's hard to understate the magnitude of the opportunities that are there. So as far as your second part of your question, how much of the money that's here now is going to stay. That's certainly a much tougher question to answer, but we're starting to see some of it for the beginning part, some of the PPP money this was kind of sitting around and we're now starting to see that get them put to use a little bit more, but we certainly hope that some of the runoff will be offset by additional funds from existing customers or new operating accounts from new customers and it really is a great fee system for us and Emilio I don’t know if there anything you want to add there on the deposit side?

Yeah, I think Pat made a very smart I think early strategic decision to engage if you heard Peter mentioned it was a full team effort, great collaboration but very early on in the process, Pat made the decision to engage the retail leadership team with working with customers who were deposit only as well as prospects to the bank. And as you recall, prior quarters we had realigned our structure and put branch area managers in place and this was an opportunity where we really got to see the benefit of that structure because that group of people who are not in the branches providing the customer service, but we designed that position to be more proactive in nature. They were the folks who were connecting with the deposit prospects and really working to help gather information for the PPP and keeping them aboard. And so we built a very strong pipeline of opportunities over 100 opportunities representing about $28 million and potential external balances and that's where the partnership with cash management worked well as we work through the months since their PPP's with done in getting them onboarded. So, I expect that we're going to continue to be nice growth in our non-interest-bearing as folks start to put the PPP funds to work. Those balances will certainly go down, but our underlying growth, as measured by the accounts we were able to on board what we're seeing in transaction activity and the cash management services that have been set up give me really good comfort in feeling that we've acquired their core operating relationship. So I think we'll see that that will play out very nicely overtime.

Yeah and I would just add to that we're tracking non-interest-bearing deposit growth excluding PPP and year-to-date we're certainly well ahead of plan on that metric kind of backing out whatever impact came from just loans that funded PPP accounts. So again reason to be really encouraging about what's going on underneath and despite the fact that at a gross dollar basis, the PPP dollar is obviously making hard to see what's happening there, but the underlying trends are very positive.

That's great color and then you had a big quarter for swap deeds as you mentioned in the prepared remarks. Have you seen sustained customer advertizing in the quarter there?

Certainly the real estate lending market remains active. In some ways, there is additional opportunities from banks given the retention in a little bit in the CMBS and the insurance lending market and obviously a lot of borrowers right now are looking to try to lock in long-term fixed rates and our preference is not to lock in long-term fixed rates at these low level. So I think we'll continue to see some good activity. I don't know it will be exactly at the level that we saw in the second quarter that was certainly a bit higher than what we've seen historically, but looking at the pipeline and the deals we're doing right now, where we're having conversations with borrower about swaps, I do think there will be some continued activity over the next couple quarters at least.

Okay. Great and then I heard the commentary on near-term expenses, but given the operating environment specifically the potential for a prolonged period of lower rates, do you see any opportunity for some cost savings longer term?

Yeah, I mean there is so much going on right now outside the norm that it makes it a little bit tricky to say here is what quote unquote, normal expenses are besides nobody really knows what the new normal is going to look like on the other side of this thing, but outside of all that, there are you steps that we have already taken and continue to take to find opportunities for dollars and savings and I think you saw some of the impact of that in the second quarter results and certainly from my perspective, it's not nice to have it to need them right. We're in a world where margins are low because interest rates are low and credit cost are uncertain and obviously we've got to do everything we can on the expense side to try to protect our profitability and we're well on our way to turning over every stone and finding those opportunities.

Okay. And then lastly do you have the average balance of PPP loans in the quarter?

The average was $140 million but I don’t know Steve maybe you can confirm that?

Yeah that's correct, $140.2 million.

The next question is from [indiscernible]. Please go ahead.

First just want to say thanks for all of the detailed information in the press release and the call this morning with regard to the deferral trends that's very helpful to see and certainly I would agree Pat with your comments that they're encouraging at this point. If I can focus on one of the areas of the portfolio where it seems like the trends maybe a little bit slower to move towards positive and there are certainly not alone other banks have shuddered [ph] as well and that would be the hotel portfolio. Curious if you can provide a little detail into that portfolio in terms of maybe the breakdown of the business versus vacation, flat versus maybe an independent operator, any LTVs and just any update on current occupancy rates you have at this point?

Yeah a great question Eric and let me try to hit on some high level thoughts and then I'll turn it over to Peter maybe for a little bit more color around the composition of the portfolio and the LTV some of which we did include I think in the last quarter and certainly when you look at the LTVs, we don't think there was a big change in the portfolio in the last 90 days. Some of that data will little stay as probably still pretty good, but what I think we're seeing couple things. So the way we looked at deferrals as we looked at how many loans were due for payment by mid month July and try to track what we were seeing out of that group and I think as you saw, we overall saw 79% close to 80% of those loans that hit their 90-day window were back paying as agreed. So that was just a good news. Couple of things on the hotel in particular, one the dollar amount that hit the 90-day window was actually relatively small. I think the portfolio of deferred hotel loans is about $60 million plus or minus and only about a third of those are $20 million happens to hit their 90-day window to resume payments and about a third of that did resume payment and other call it a third or some folks that we've agreed to do another 90-day deferral and then there is kind of a middle third that we're still talking to them about what the best plan is and in some cases you end up getting to a middle road of maybe they were on a full P&I deferral for the first 90-days and with occupancy trends starting to move slightly higher, some were in a position where they can go to interest-only for the next three months and it is obviously occupancy and the RevPAR numbers continue to move higher that we'll hopefully be in a position to go back to full P&I at the end of the 180 days. So that's definitely a segments that's been slow to recover obviously with New Jersey being one of the places that was very late to reopen probably not surprising that while the folks we're talking to in the space do seem to be doing better and occupancy levels are sort of creeping from 20% to 30% to 40%. For most of these folks, they need to get up closer to 50%, 60% to be kind of cash flow breakeven or in a position to meet their debt obligation and not having to come out of pocket. So there's still some work to do in terms of overall occupancy levels, but what we're hearing from our folks is that the trends are moving in the right direction and depending on the type of property that obviously makes it different. So we don’t have a lot of luxury resort exposure, a lot of more health and guard and have them in shared in home sweet area like stuff that came to be somewhat dependent on the summers in terms of people staying in excess or six [ph] in play. So some of those that are closer to the amusement parts, surprisingly haven’t bounced back as quickly, but that are some high level thoughts and then Peter maybe you can a share little bit more in terms of the mix of the portfolio by type of flag or anything like that?

Pat provided a lot of detail there. Appreciate it. I don't have exact data on the mix. I will say that virtually all our properties they were all in lot of immediate market. New Jersey opened up slower and certainly when it comes to weddings and functions and things like that, they're still being impacted significantly. On a leverage basis, we don’t have a lot of exposure anyway, but when we underwrote these loans, we feel we did it pretty conservatively. The LTVs perhaps in the portfolio heading into the pandemic anyway were less than 65% you know the other would have been under 70% in that 65% to 75% LTV range. So we think we're in pretty good shape there. We know the operators, the number of more than just a few of the hotels could be owned by the same group that were close to. So we feel like we have our handle on the exposure at this point. We just need to ride out this pandemic with them hopefully for not too much longer.

Yeah I think I would just close on the question just by noting that we didn’t -- we didn’t have a strategic initiative to rapidly grow hospitality and was a statement that we would play in selectively with what we thought were some of the strongest proven operators with multiple locations that were performing well and deep pockets personally along with limited or full recourse to help support the asset. So I think the LTVs are conservative and most if not every case, we've got limited or full recourse from substantial individuals who can help support the property. So I do think the segment will ultimately rebound, but the question really is the duration of the downturn that we don't have a great feel for just yet.

That's all very helpful. That's for the detail there. And then just looking at the press release you indicated the remaining deferred loans that have yet kind of reached their expiration that they follow the trends that the first I guess 42% have at the deferral population of the about 4.6% at that point and then once that second round expires, I assume additional amount falls off, at that point it seems like that's the potential population of loans where you may see some lost content. Just curious about your thoughts around at the end of that second round of deferrals, how you're thinking about dealing with those customers moving forward and potentially the impact on losses and provisioning at that point?

Yeah it's a great question. I wish we had a little more visibility in that. Certainly there are going to be some customers that are in industries that really haven’t reopened. You can think of places like indoor sports facilities or transportation companies where you're going to need a bit of longer-term plan to work with those folks and I think in most cases as long as you got committed quality operators and you’ve got good assets to work with, there will be opportunities to even for those folks that need more than 180 days to restructure those loans on reasonable terms, reasonable repayment schedules, even if it's for a year or two to allow them to get back on their feet. And then on the other side of it, resume to normal activity and resume to perhaps a stronger repayment schedule. So I certainly think you're going to see cases like that Eric. It's a little hard to say how many and how it's going to play out, but to me the important thing in those cases is that you're dealing with good operators who are committed to the business and that we're in a business that has real prospects on the back end of it. Certainly there are some that you might wonder about, but I think for the most part the conversations we've had with folks who are in those harder hit industries that just haven’t reopened, haven’t rebounded really at all yet, those conversations haven’t been proceeded in any sense. It's been hey how do we work together to get through the next 12 to 18 months and I think in a lot of cases some of these folks are going to have robust pricing businesses once the healthcare side but I think it's going to be our job working smartly with them to make sure that they're in a position to succeed when they get to the other side.

Got it, and then just given your I see the kind of positive commentary on loan growth opportunities going forward, it sounds that the pipeline is in a good position at this point, a couple questions there. One, in terms of are there any particular industries where you're seeing stronger demand at this point? What is the source for these new opportunities? Is it coming from similar size bank competitors or may be some of the larger banks schedule to keep our stepping back? And then from an underwriting perspective, how are you thinking about viewing these loans today in the current environment and do you expect pull-through rate to be similar to what they may have been in the past?

Yeah it's a question. In a portfolio with a probability adjusted opportunity at $168 million as you might expect, there's hundreds of loans across multiple markets and multiple RMs and each one has a selling story, but in terms of trends and themes, I'll mention a couple then turn it over to Peter, certainly we're seeing a little bit of an uptick on the real estate side. The one interesting thing about commercial real estate is most loans are built in with terms of high seven maybe higher in 10 years and that's creates a built-in portfolio of loans that are maturing in need to be refinanced and so in a market where CMBS is quite and non-existing and the insurance companies are being less aggressive I think there is just more not a lot of new development, new risk taking in the commercial real estate side but certainly plenty of opportunities with cash flow properties with tenants that are paying as agreed that are quality loans that we think should be made even though the markets are a little more uncertain. So that's certainly a piece of it, a piece of it is what we're seeing in terms of the number of commercial customers who were unhappy with the experience they had potentially with the big bank on PPP or just I think that larger banks are a little bit notorious for just kind of closing the spicket and pushing people out when the economy is not doing as well and obviously you need to be careful that you're finding new customers that are quality customers, not ones that are being moved out because of significant credit issues. But underwriting is longer, harder and it's problematic, but that's out job and the fact that it takes more time and because it dig a little deeper doesn't mean that there are still good opportunities out there. So those are a couple thoughts and I don’t know if you would add anything to that.

I would just like to confirm there has clearly been a tick up in the real estate deals in the pipeline for the reasons you just described. There are a number of C&I piece of the business in the pipeline but they're smaller right. You got numbers of deals, you got dollar volume and some of those C&I deals quite frankly have come out of this PPP process. So we're happy to see that. Competition, larger banks not so much, the largest banks not so much out there, the Lakeland Valley Providence are still around and community banks are always out there trying to find a dealer. So more of real estate to look at. You saw in dollar terms, the dollars more deals to look at in terms of smaller C&I stuff.

That's helpful thanks Pat and Pete for those comments there. Last question for Steve, on the margin, it sounds like an opportunity to lower deposit costs over the next several months will overcome any additional pressure you would have from lower rates as well as the excess liquidity, just curious if you could frame the potential magnitude of increases you could potentially realize in the back half of the year?

Thanks Eric. Obviously it's a little bit dicey from a lending standpoint as far as the rates that we'll get out loans based on the yield curve, but that being said, from a department standpoint we're continuing to lower deposit costs as we mentioned as well as the CD cost. In addition we've also lowered preferred rates on certain customers as well. So we expect that the margin can go 5 to 10 basis points higher, if we're able to continue our trend in lower deposit costs, which we expect we're going to be able to do.

[Operator instructions] The next question is from David Bishop of DA Davidson. Please go ahead.

Pat just a quick question. In terms of the loans that have reached their maturity and you said our back making payment, are these the payments on a full P&L are they recurring as normal, just maybe some color in terms of the improvement and the return to payment status for some of the deferred loans as they sort of normal occurring loans at this standpoint?

Yeah that's a great question and the answer is yes. So we only included loans that went from not paying to the original contractual terms to loans that resumed paying at the original contractual terms and that's what's in that 79%. What's in the 21% is a combination of either loans that we've agreed to an additional deferral, loans that haven’t paid yet but may still pay but they just haven’t made the payments by the time we had to cut it off for this analysis and/or loans where maybe they we're paid in P&I and we agree to additional deferral allowing them to make just interest-only payments for a period of time. So we're not included loans like that where they went from not paying anything to paying something in that 79%. Those are in the kind of remainder number if you will.

Got it. So the 79% or even that 21% obviously there is some percentage there that are making payments that they're included.

Yeah part of the problem is like you can take this analysis out to a pretty, pretty hard level and get pretty far in the weeds [ph], but we thought the important number was like 79% of people are back paying as agree and there is a portion of that 21% that probably are also going to return to paying as agreed, we haven’t got the payment yet because maybe they hit the 90-day deferral date on the 14th and by the 16th or the 20th or whatever the payment hasn’t come in yet, so technically they're not really that part of tax due but because we hadn’t got the payment yet, we didn’t count them towards that number so.

Got it. And then you spoke about the hotel hospitality portfolio, just curious in terms of what you're seeing maybe in rent collection efforts and sales trend in terms of maybe your core commercial retail book maybe just some color there what you're seeing on that level.

Yeah the retail side I would say held up remarkably well, it certainly depends on the type of property. I mean to the extent that it was single tenant, credit tenant, was a bank or a drug store or auto parts, these other things that kind of reopen fairly quickly have been doing okay. The payment history has been pretty good. Some of my strip centers where you might have had shafts and things like that, those folks took longer to reopen and were a little bit slower but I would say what we're seeing across the board in retail is payments are coming in fairly well and the other way to answer that question is the number of requests for additional deferrals on the retail CRAI loans has been relatively low. So to me even if you don’t have the exact data, that was on the property the type they will need another 90-day deferral is a pretty good time.

Got it. That's good color. Then one final question. You know that the completion of the share buyback program just trying to gauge the potential for another announcement here in the back half of the yeah?

Yeah it's a good question. I wouldn't be comfortable handicapping that right now. David I think it's you got two considerations, you got the financial considerations, you got the uncertainty that's still out there around COVID impact and you’ve also got the political and regulatory climate that you got to deal with there. You could be looking at a financial transaction that makes all the sense in the world but you got the issue of our regulators that approve additional buyback and what are the politicians saying in that. So I don’t think you can -- it's not a simple numbers into a spread sheet and spit out an answer but saying in the I think even a the board level there is differing opinion about if and when it would make sense to do another buyback. So I couldn’t tell you with certainly if it will happen but I can tell you with certainly that it's on our mind and if the right combination of that emerge and you get more and more comfortable with the credit impact from COVID it's going to be manageable, it's certainly something that I think is a result of the sub-debt and the strong capital position that should very much be on our mind as we think about whether it's the remainder of this year or next year.

Thank you. At this time, there are no additional questions. That does conclude our question-and-answer session. I would like to turn the conference back to Mr. Ryan for any closing remarks.

Okay. Thank you. We'll I'd like to just say thanks to everybody for taking the time to listen in on the call and we will look forward to regrouping with folks at the end of the third quarter. Thank you very much.

Thank you very much sir. Ladies and gentlemen, this concludes this conference. Thank you for attending today's presentation and you may now disconnect.