First Commonwealth Financial Corporation

Good day and welcome to the first Commonwealth Financial Corporation second quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. And I'd now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Cole, and good afternoon, everyone. Thanks for joining us in today's call to discuss First Commonwealth Financial Corporation's second quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Refke, Chief Financial Officer, Brian Karup, Chief Credit Officer, and Jane Verbentz, our Bank President and Chief Revenue Officer. As a reminder, A copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the investor relations link at the top of the page. We have also included a slide presentation on our investor relations website with supplemental financial information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on page two of the slide presentation for a description of risks and uncertainty that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported financial results in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike Price.

Thank you, Ryan. We were generally pleased with the second quarter results with net income of $23.9 million, earnings per share of 24%, a pre-tax pre-provision ROA of 1.61%, and a core efficiency ratio of 57.2%. First, provision expense fell to $6.9 million from $31 million in the first quarter as three non-performing loans were resolved. The second quarter reserve increased from $2 million to $81 million, or 1.28% of total loans excluding PPP loans, as we added another $5.5 million in qualitative reserves to reflect the economy. and our COVID overlay. We believe that ratio compares favorably to other incurred banks. Although our second quarter reserve of $81 million was calculated using the incurred loss model, adding our previously disclosed day one seasonal increase would put reserves into the mid-$90 million range. That would put the reserve coverage in the mid-150s, which we believe would compare favorably to Cecil Banks, our size, even with no further reserve bill. That's all because of the strong reserve bill we did in the first quarter. Our first quarter loan deferral figure of $1.1 billion, or 17.6% of total loans, go all the way to $186 million, or 2.7% of total loans, as of July 24th. Most of our deferrals were 90 days and our approach to customers, consumers and businesses in March and early April shifted from accommodative and customer service oriented to a more credit oriented approach in May and June. The team is exercising extraordinary oversight with regard to credit. This is warranted particularly if the ongoing reopening of the economy cannot safely continue in the ensuing quarter or two, and as the impact of the initial shorter-term government stimulus dissipates. In the second quarter, our credit and banking teams did a name-by-name commercial loan review and spoke with some 1,600 clients in total. Brian Karup, our chief credit officer, will provide more credit commentary shortly. Second, the team helped roughly 5,000 local businesses preserve roughly 80,000 jobs at a median loan size of only $32,000 through the Payroll Protection Program. Excluding $571 million of PPP loans, our portfolio grew 2.7% annualized, driven by record mortgage volumes, strong indirect loan originations, and corporate banking growth. our Ohio markets accounted for all of the net new loan growth in the second quarter, further validating our Ohio expansion over the past few years. As an aside, over $20 million in PPP loan fees were wired to First Commonwealth in June from the SBA and will accrete into income in the second half of the year as we expect that the majority of our PPP loans will be forgiven. Third, the net interest margin of 3.29% fell as expected, but after adjusting for the dilutive effects of the PPP loans at 1% and an excess of low-yielding cash on our balance sheet, the NIM of our company was closer to 3.41%. Jim Retske, our CFO, will provide commentary on margin expenses and other important items. Fourth, non-interest income of $21.8 million in the second quarter increased some $2.5 million as the company set quarterly records in both mortgage originations and debit card interchange income. Regarding the former, some $203 million in mortgage originations increased gain on sale income some $1.7 million to $4.2 million. On the latter, we added 10% more debit cards with our Santander branch acquisition last year. And in the second quarter, consumer debit card swipes were up as retailers had a strong preference for cards versus cash. This produced $5.9 million in debit card interchange income, $600,000 more than last quarter. Fifth, our capital levels remain strong. We have over $200 million of excess capital, and together with our H-triple-L, this would allow us to absorb losses equal to roughly 5% of the entire loan portfolio at once and still remain well capitalized. Sixth, despite the $2.5 million uptick in our non-interest expense, the $52.8 million the underlying expense trend is down as the quarter-over-quarter comparison absorbs 3.4 million negative variance in unfunded commitment expense. Jim Rusty will elaborate on this as well, but we want to enter 2021 and sustain through the year a $51 to $52 million quarterly non-interest expense run rate. At the onset of the COVID pandemic and after the first Federal Reserve cuts in March, the executive team started a broad-based initiative dubbed Project Thrive, as we focused on, one, growth, expense and efficiency, NIM, and capital, with the express goal of emerging on the other side of the pandemic stronger than ever. We now have two dozen initiatives, some small, some large, in the works, but yesterday we announced a consolidation of 20%, of our branches across our footprint into adjacent offices that will be completed by year-end. This comes at a time that we are setting quarterly company records with online mobile account opening, mobile deposit activity, and debit card activity with our new contactless cards. In the ensuing months, we expect to launch our third generation of P2P payment and the fourth generation of an integrated mobile online banking platform. after the successful launch of a new treasury management platform for our commercial clients in June. Customer preferences continue to change meaningfully, and the COVID crisis has pushed all things digital well past traditional servicing. Just one example. In the second quarter, we opened 992 deposit accounts via our mobile online platform and summed three times our first quarter figure, which, by the way, was not bad, our investment in digital leaves us well prepared for the future. Lastly, the First Commonwealth theme will remain focused on a handful of items that will simply make us a better bank, namely accentuating opportunities to grow our core business and geographies as we continue to build the First Commonwealth brand, Second, realizing efficiencies at a time when margins are compressed and could remain there for the foreseeable future. Third, executing a handful of key digital initiatives in the ensuing months and continuing to build competitive advantage on that front. And lastly, navigating the COVID environment to deliver good through-the-cycle credit and net interest margin outcomes for our shareholders. I'd like to now turn the time over to Jim Reske. Jim? Thank you, Mike.

Before I begin, allow me to point out that we have, as usual, provided a supplement to our earnings release in the form of a PowerPoint presentation that is available on the investor relations portion of our website, which we will refer to from time to time in our remarks. Core earnings per share of 24 cents rebounded strongly from last quarter. This brings our trailing four-quarter non-core EPS average to 21 cents, well in excess of our current dividend of 11 cents per share. Second quarter results were driven by relatively positive credit experience and the net interest margin. Brian will discuss credit in detail in a moment, so my remarks will be focused on margin, expenses, and changes in our loan deferrals. The net interest margin fell from 3.65% last quarter to 3.29%. The primary driver of MIM compression was, not surprisingly, rate resets on the bank's variable rate loans following the Fed's 150 basis points of rate cuts. However, there was also a pronounced effect on them from the addition of low-rate PPP loans and the excess cash on the balance sheet as these loans were mostly dispersed into customer deposit accounts. We also saw inflows from other sources such as federal stimulus checks. As a result, we had quarter-over-quarter growth in average deposits of $758 million. Non-interest-bearing deposits alone increased by $537 million to 29.4% of total deposits, up from 25.3% last quarter. This strong deposit growth resulted in an average of $212 million of excess cash in the quarter. In fact, excess cash peaked at over $480 million in mid-July, or nearly 5% of total assets. This, of course, had a suppressive effect on the NIMS. We estimate that the impact of PPP loans and a like amount of associated deposits on NIM to be approximately 12 basis points in the second quarter, which would imply a core NIM of 3.41% for the quarter. That represents 24 basis points of NIM compression, which is within the range of previous guidance, albeit at the higher. Our ability to lower deposit costs in the second quarter helps to blunt the impact of downward rates. For example, the average rate on interest-bearing demand and savings deposits, which at over $4 billion is our largest deposit category, was cut in half in a quarter from 48 basis points to 24 basis points. As shown on page 12 of the supplemental earnings presentation, our total cost of deposits, including non-interest-bearing deposits, fell in the second quarter from 51 basis points to 31 basis points. Looking forward, we still have nearly $800 million in time deposits at an average rate of 1.51%, which will reprice downward over time and should help offset the impact of negative loan replacement yields, though not completely. As a result, even though we expect some further NIM compression, we believe the pace of compression should slow. Adjusting for the impact on NIM from PPP loans and excess cash, we expect the core NIM to drift down to $325 to $335 by year-end To offset the impact of the low-rate environment, we remain firmly focused on continuing our long and successful track record of controlling expenses. The quarter-over-quarter increase of $2.5 million in non-interest expense was strongly affected by the unfunded commitment reserve, which was a negative $2.5 million last quarter, but a positive $0.9 million this quarter for a $3.4 million negative quarter-over-quarter swing. The other notable event in NAIE worth about $419,000 of COVID-related expense in the second quarter. Going forward, we expect significant expense reductions from the branch consolidation project Mike discussed earlier. We expect this and other contemplated expense containment initiatives to enable us to maintain a non-interest expense run rate of between $51 to $52 million per quarter for the foreseeable future. Now let me provide a few general remarks on our loans and deferral and how they are trending. Last quarter, we reported that deferrals totaled $1.1 billion, or 17.6% of total loans, as of April 24th, the Friday before our first quarter earnings call. Deferrals peaked during the quarter at approximately $1.4 billion. We would note that most of our deferrals were for 90-day periods that began in the last week of March and continued through April. As such, the initial 90-day period for most of these loans has been coming to an end only in the last few weeks, so we would encourage caution in drawing conclusions from what is only early experience. However, as Mike mentioned, as of July 24th, last Friday, there remained $186.3 million of loans in deferral status or 2.7% of total loans. While that reduction is an early positive sign, we firmly believe that it's too early to draw any conclusions until we see more evidence of actual payment history on these loans. We have, therefore, increased qualitative reserves held against consumer forbearances by $1.2 million in the second quarter. Before I turn it over to Brian for discussion of credit trends, I'd like to just reiterate our rationale for remaining with the incurred loss approach. Last quarter, volatility and forecast models gave us pause as to the efficacy of those models, and now volatility continues. with a current debate over V, W, U, and SWIFT recoveries. As I mentioned last quarter, we saw no advantage in C4 adoption at the time, and we continue to believe that's the case. Delay have, in fact, allowed us to observe the various industry approaches to C4 adoption and refine our models accordingly. However, even though we are on incurred, as shown on page 6 of our supplement, we did a significant reserve build in the first half of this year, resulting in a coverage ratio that we believe compares favorably with incurred banks, as well as many CISO adopters. And we continue to build qualitative reserves in the second quarter. And with that, I'll turn it over to Brian. Thank you, Jim. Although we're in the early innings of the economic recession, we're pleased with our asset quality trends for the second quarter. Our NPL decreased approximately $3.1 million, improving from 0.93% of total loans in Q1 to 0.88%, excluding PPP. Reserve coverage of NPLs rose from 133.53% to 145%. NPAs decreased $4.5 million from 0.74% of total assets in Q1 to 0.66%. Classified loans as a percentage of total loans, excluding PPP, decreased from 1.42% to 1.21%. These improving trends form the backdrop of our approach for loan loss reserve in the second quarter. We continue to build reserves under the incurred loss model by approximately $2.4 million. Our allowance of total loans grew to 1.28%. Revision for the quarter was $6.9 million, driven by modest loan growth, an overall decrease in NPLs, of approximately $3.1 million, a decrease in specific reserves of approximately 2.9 million, and changes in our qualitative reserves. Our standard qualitative has increased by $3.4 million quarter over quarter, reflecting the economic conditions. As Jim mentioned, our coded qualitative overlay increased by $2.1 million to 9.9 million. Recall from the last quarter, We developed a framework to capture the incremental risk of loss due to COVID. The framework included eight higher-risk commercial portfolios. Additionally, we developed a consumer overlay based on our internal PDLGD models to address the risk associated with consumer forbearances. We attribute our solid performance in the quarter to our continued adherence to our credit principles. Over the past several years, we've managed concentration risk and hold levels, creating granularity in our commercial loan portfolios. As of June 30th, we only had 27 relationships over $15 million. To better identify portfolio risk, we have prepared internal industry studies for each commercial real estate segment, as well as certain CNI segments, including dealer floor plan and energy. Our industry studies are a valuable tool to identify and manage certain portfolio risks. Additionally, we use our industry studies to manage our geographic diversification and diversification within industry sectors. One of our great strengths is that we use our size, speed, and flexibility to our advantage. For example, over the course of the second quarter, we performed a comprehensive loan review. covering approximately 1,600 borrowers and $3.6 billion in commercial loans. We reviewed commercial credits as small as $350,000 so as to better understand COVID-related impacts on our commercial clients and small businesses. The review was founded on the notion that in this current economic environment, financial statements look at customers through the rearview mirror. and we wanted to look through the windshield. During our loan reviews, we relied on our experience and customer knowledge to evaluate the health of our borrowers on a name-by-name basis. These loan reviews helped us to identify potential risk and to adjust risk ratings accordingly. And with that, let me turn it back to Mike. Hey, thanks, Brian and Jim.

And with that, I'll turn it back to the operator for questions.

Thank you. We will now begin the question-and-answer session. To ask your question, you may press star then 1 on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble the roster. Our first question today will come from Frank Chiraldi with Piper Sandler. Please go ahead.

Good afternoon. I just wanted to start on the branch closures. It sounds like the $51 to $52 million that you guys are targeting in non-interest expense next year, that is based off of both cost saves here and then additional initiatives. Is that right?

That's correct. Yes, we expect savings of about $8 million, net some leakage of that savings with some revenue headwinds in our branches, and then we'll have some one-time costs in the third quarter. And the savings there, we'll be adding additional savings, and that will be less. We still continue to make pretty significant investment in digital. This year with our P2P ops in Zelle, with a new online account opening or online mobile platform and treasury management we're adding to our expense. So it comes out in the wash at about 51 to 52.

And are the closures or the combinations sort of across geography and they tend to be more rural or less rural or any detail there?

I think they're pretty equally weighted. I'll just share a few things. I mentioned that the consolidation is a function of customers' increased utilization of digital tools. We also have developed a pretty strong culture of deposit gathering, and I'll let Jane speak to that in a minute. Jane Gerbentz, our bank president. We also have looked at this pretty analytically, the distance between branches being consolidated. The median distance is three and a half miles. We feel like we can really control attrition. We're affecting 20% of the branches, which represent 10% of our deposits. And of those 10%, we really only expect about 15% to 20% attrition, or about 1.5% to 2% being truly at risk. And then the last thing I would just share is make no mistake, we are still bullish on branches. We probably have more per capita than then most of our competitors, our retail locations deliver our brand. And our people inside these branches are powerful in their outreach to the communities. And so I think we're still bullish on branches, but I think this is an important opportunity here. And I would say probably half are rural and probably half are metro. So that's probably about 10 each.

Okay. Great. And then just – And then just one quick follow-up on provisioning. You know, totally hear you on the full review, and it sounds like you've adjusted risk ratings with that review. So, you know, obviously difficult to say, and there's still a lot of uncertainty out there. But as we think about provisioning for the back half of the year, is it more reasonable at this point to assume the reserve bills are behind and and maybe provisioning in the back half of the year just a mass charge-off. So give any thoughts on that front. Brian?

Yeah, our view is that we call false strikes honestly. We stay on top of our customer base, and we run a process that we call a draft process. So as financials come in, we evaluate those. We make risk rating adjustments as appropriate. This line sheet, exercise was to make sure that we could get ahead of the lack of financial statements. Even tax returns were delayed through July. And so we needed a mechanism to appropriately adjust our risk ratings. I wouldn't necessarily say, Frank, that this is a precursor to losses later in the year. As borrowers get back on their feet, we'll adjust risk ratings back the other way. So our analysis of their projections, our analysis of their liquidity, our analysis of where we are in the process would lead us to believe that our risk ratings are appropriate at this time.

Okay. All right, great. Thank you.

Thanks, Frank.

And our next question will come from Steve Moss with B. Riley FBR. Please go ahead. Good afternoon, guys.

Good afternoon. I want to follow up on the just on credit here. I guess I was a little surprised that criticized and classifieds, you know, actually ticked down a little bit in aggregate. I'm just kind of curious as to what were the dynamics that are just given the level of business disruption, you know, we saw this quarter.

Brian? Yeah, what you'll see in the press release is that we successfully resolved three problem credits. And we were very pleased to have those resolved. Our specifics went down that were associated with those. And, you know, one was a previously disclosed parking structure in Ohio. A second was a Pennsylvania-based manufacturer in the energy sector. And the third one was an oil dealer that had been non-performing. And so, Steve, we successfully resolved those, driving our NPLs down. We also were successful in selling one of our larger OREOs, contributing to the lower NPAs.

Okay. And then I guess just in terms of business activity, you mentioned, Jim, that I think Pennsylvania, you didn't have any lending opportunities this past quarter. Ohio drove the loan growth. Kind of curious, has that dynamic improved or does that continue to be continue to be the same sort of dynamic?

Part of it is just on the record mortgage volume, our average mortgage in Ohio is about 2x what it is in Pennsylvania. And so similar activity produces larger loans in Ohio. We've also grown our indirect business into Ohio, so that adds a little juice. And You know, pipelines, we still did loan production in PA. It's just this particular quarter, the majority, if not all, of the growth came from Ohio. So there will be an ebb and a flow to that. Those markets have been very good to us. Our business is more mature in Pennsylvania. Jane, what would you add to that? Jane, you're a Benzner Bank president.

Thanks, Mike. You know, the only thing that I would add is that the Pennsylvania loan book is so much bigger across all categories. then we've got a lot more attrition to outrun. So I would expect the Ohio loan book to always – well, to show more loan growth for at least the next several quarters.

Great point, Anne.

That's helpful. And then in terms of the indirect portfolio growth here, it was quite healthy for a number of banks this past quarter, kind of wondering – if that trend is carrying over into this quarter and kind of what the mix in auto was that you guys saw.

Yeah, I mean, we are primarily used car. We do find over a decade that indirect auto tends to be a bit counter-cyclical. That's one of the reasons we hang on to it when – everybody's getting in and the margins are nothing, you know, like three or four years ago. So it's times like this that that business tends to perform pretty well. I think we also benefited from a nice rebound, you know, after a lot of pent-up demand from the, you know, probably March and April and May as consumers got out in June and July. Jane, what would you add there at your business?

Thank you. First of all, what's really important is we didn't get any more than our typical market share. So we're not stretching to grow indirect. All the banks had, I think, a pretty good May and a fabulous June. And we, just through good luck, introduced some recreational vehicle capability last year. And In the midst of a pandemic, people are buying RVs. So our indirect book is about this last quarter at least. It was probably 60% auto, 40% RV. It won't stay like that. RV will settle in at 20% of the book, I suspect. And those RVs are $25,000 pull-behind, you know, glamping kind of RVs. And credit scores are terrific. about a 780 credit score on the RV book. So it's just good luck. And as Mike said, we're primarily a used car shop, 80% used, 20% newish.

Great. Thank you very much.

And I would add that this is in spite of tighter underwriting standards. We have virtually across the board tightened our underwriting standards both for consumer and for commercial.

Appreciate all the call. Thank you. And our next question will come from Steve Duong with RBC Capital Markets. Please go ahead.

Hey, good afternoon, guys. Good afternoon. So just for your reserving this quarter, can you just go over what your forward economic assumptions are compared to where current economic activity is today?

Yeah, well, just thanks. Great question, Steve. Just keep in mind that we're on the incurred model, so we are not adopting a forecast that's driving forward-looking expected losses the way we would if we were on seasonal. But we do have qualitative reserves, even though we're on incurred, that take the economy into account. In those qualitative reserve calculations, we were assuming an unemployment rate right around 11%, between 11% and 12%. and that's part of what contributes to some reserve building that qualitative factor this quarter.

Got it. Is that 11% by the end of this year, I assume, right?

Yeah, well, it's because it's incurred, especially the ones under right now, and that's a new factor in the model, and it says because of that high unemployment rate, it adds further qualitative reserves.

Got it. And I'm sorry I missed this. What were your loan forgiveness expectations? Were you expecting all of them to be forgiven by the end of the year or the third quarter?

We generally think that probably about 90% of them will be forgiven in the second half, not really in the third quarter. Some of the mechanics of forgiveness have been delayed a little bit, it seems. So we think it's going to play itself out over the whole second half.

Got it, got it. And just another one, in your retail portfolio, how much of that is CRE versus CNI? And do you have the LTV for the CRE? I'm sorry, rephrase the question, please. Your retail portfolio for your COVID exposure? Is that all CRE?

Oh, you're looking at the retail COVID portfolio on page 8 of our supplement?

Yes, that's correct, yes.

Yes. So the retail portfolio, as we outlined on page 8, is $547 million. That's credit crossed over well over 500 borrowers. As we discussed last quarter on the earnings call, we do break our portfolio out several different ways. Our focus has been those loans greater than a million dollars. And of that, the bucket that's largest is our freestanding retail loans. These are typically loans made where the tenant is a national tenant or a large regional tenant. So about 29% of that portfolio, you could expect that tenant to be a dollar store or a convenience store with a gas station, a bank branch, a wine and spirit store. The average of those loans is around $2.8 million, 58% LTV, 143 cover. That portfolio is doing very well. And then we further break down each one of the individual buckets in retail and study them not only in our line sheets but on our ongoing review process.

Got it. Appreciate that. And let me just see here. Your Thrive initiative, the 20%, when do you expect to have that completed by?

Yeah, we'll be able to really December, December 10th, 11th. We're looking to consolidate those offices. I think one week's into the first quarter of next year.

Okay. So is the 51 to 52 million run rate, is that for basically the second half of this year, or would that be for next year? That's for next year. Got it. Okay, great. Appreciate it. Thank you, guys. Thank you.

And our next question will come from Russell Gunther with DA Davidson. Please go ahead.

Hey, good afternoon, guys. Hi, Russell. I wanted to follow up on the, you know, very granular commercial loan review and the comments you guys gave, which I much appreciated. One of them you touched on, which was the taxes coming in in July. And so first question is whether you were able to incorporate those updated financials in your analysis. And then the second question, I'm curious as to any details you can share as to what the internal studies for the CRE sector show and how you're monitoring that asset class.

Brian? Let me take the second question first. In each one of the buckets that we've discussed in our proprietary work for this call, we not only updated to the extent possible LTV, DSCR, and forbearance information, but we also reached out to our real estate clients and asked them, what are you really seeing today? What are you hearing? What should we be thinking about? You know, it's interesting in this market, as we begin to think about senior living or think about our student housing bucket, you know, while the student housing portfolio isn't very large, What we are hearing is that one major university in Ohio, the borrower there, is reporting 100% pre-lease per fall. Another one in Pennsylvania is 92% pre-lease. We're also hearing that some universities and colleges, in an effort to create social distancing, have pushed junior and seniors out to virtual learning while requiring sophomores to live off campus. So, It's a mixed bag. It's somewhat uncertain. But as we look at that portfolio, albeit not large at 99 million, roughly 24 followers, we believe our occupancy rates that held two quarters ago in the high 90s will continue somewhere mid-80s to high 90s. That's just our expectation. LTB on that portfolio is 61%. DSCR is and debt yields around 14%. We do similar work for each one of the portfolios as outlined in the COVID slide number eight.

Got it. I appreciate the thoughts there. And then a follow-up on the $186 million of remaining deferrals. I wanted to just make sure I understand your comments in terms of it potentially being too early to get positive and draw positive conclusions here. So is the expectation that, you know, a second round of deferrals would push that kind of total number higher or that $186 million, you know, because it was a forbearance program, these are higher risk borrowers that may, you know, ultimately move into a risk weighting downgrade and incremental provisioning going forward? Just trying to understand the comments from earlier.

No, that's a great question. And here's our view. Last quarter, Jane mentioned that at the onset of the pandemic, we established an outreach program to touch our customers and to offer loan deferrals and PPP loans. Based on the rolling maturities of those loan deferrals, the leadership team came together and proactively established cross-functional teams in May. And the express purpose of this was to do a look-back. The team whiteboarded round one deferral process and developed a framework for round two. We looked at our internal and external communications. We clearly laid out the requirements for our borrowers, the questionnaires that would be required for consumer, as well as the requirements for corporate. The corporate requirements are simply this. We want to see a 13-week cash flow that includes liquidity, and cash burn. We want to see a plan that includes projections so we can tie our solution to their business date. We want to be able to evaluate it and determine together whether we need incremental recourse, additional collateral, co-borrowers. In some instances, we've gone IO. In some instances, we've required debt service coverage reserves to be pre-funded with cash. And then along the way, our head of commercial real estate is pushing for LIBOR floors. We take them one at a time. So as they present themselves in a committee format for a second request, we put ourselves in a position not just to roll over and grant a second one, but find a solution on a deal-by-deal basis. Did I answer your question?

You did. I appreciate it, and thank you all. That's it for me.

Thank you. And once again, if you would like to ask a question, please press star then one. And our next question will come from Colin Gilbert with KBW. Please go ahead.

Hi, this is Chris O'Connell calling or filling in for Colin. I just wanted to continue on the deferral trends, which obviously screen, you know, very positive here. But just understanding the comments as well. from the initial comments you mentioned. You had mentioned that most of these loans had only been coming to an end in the last few weeks, but it seems like the vast majority must have come to the end if the updated deferral balances dropped that significantly from 1.1 billion down to $0.2 billion. Is that correct? Am I interpreting that correct?

Jim, do you want to start there? Yeah, you are interpreting that correct. It's just that by virtue of the timing of our earnings call, the first quarter we had several weeks of April go by before we published a number, and it was a Friday for earnings call, and so we're trying to be consistent with that and do the same thing this quarter. And so you're right, it does capture, because we're going April 24th and showing that number to July 24th, it does capture most of the 90-day rollover period. Okay, great.

And then I apologize if I missed this, but what is your outlook for mortgage banking going forward? Obviously, this quarter had record originations and was very strong in terms of the mortgage banking fee line. Do you think that can be retained going into the back half of the year, or would you expect that to fall off a little bit?

Yeah, we see deep pipelines and originations in the third quarter and continuing strength on the business, at least in the third quarter. Jane, would you like to add to that? Jane Grabenz, our bank president.

Thanks, Mike. Only that, you know, certainly the second quarter was phenomenal. Third quarter, we expect also to be very strong. I suspect we'll fall off some. You know, you just never know when the refinances are going to dry up. We have some advantage given that our portfolio is newish. You know, we didn't get into the business until 2014. So our refinance volume isn't anywhere near what most banks are. But still, you can't live off of the refinances. We feel good about the core business.

The only thing I would add is organically, year over year, ex-refinance activity, the business has grown. And it's just because of feet on the street, production, and so on. And that's probably a little different than more mature operations.

Great. That's helpful, Collar. And then finally, on the NIM guidance for the core NIM, you know, XPPP and the cash impact to kind of trend toward 325 to 335 by year end. In those assumptions or in that guidance, are you assuming that there's a significant fall-off in non-interest-bearing deposits related to kind of the PPP loans?

We are, yes. Thank you. It does take that into account. We are assuming that as the PPP loans are forgiven that a like amount of deposits will flow out of the bank. It doesn't have that much effect on the calculation because the alternative cost of borrowing right now is almost free anyway. And we have excess cash, so as some of those funds come out of the bank, it actually benefits us. But it's very, very little effect. But, yes, we are definitely taking that into account.

Okay, great. That's all I have. Thank you.

Thank you. And this concludes the question and answer session. I'd like to turn the conference back over to Mike Price for any closing remarks.

As always, we appreciate your interest in our company and your questions and look forward, hopefully, to being with you soon on your virtual conferences. Thank you so much. Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.