First Commonwealth Financial Corp (FCF) 2020 Q2 法說會逐字稿

Good day and welcome to the First Commonwealth Financial Corporation Second Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

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 on 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 Reske, Chief Financial Officer; Brian Karrip, Chief Credit Officer; and Jane Grebenc, 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 2 of the slide presentation for a description of risks and uncertainties 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.

And 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 $0.24, a pretax 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 3 nonperforming 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 1 CECL 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 with CECL banks our size, even with no further reserve build. That's all because of the strong reserve build we did in the first quarter. Our first quarter loan deferral figure of $1.1 billion or 17.6% of total loans fell all the way to $186 million or 2.7% of total loans as of July 24. 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 was warranted, particularly if the ongoing reopening of the economy cannot safely continue in the ensuing quarter or 2 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 Karrip, our Chief Credit Officer, will provide more credit commentary shortly.

Second, the team helped roughly 5,000 local businesses, preserved roughly 80,000 jobs at a medium 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% in an excess of low-yielding cash on our balance sheet, the NIM of our company was closer to 3.41%. Jim Reske, our CFO, will provide commentary on margin, expenses and other important items.

Fourth, noninterest 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 ALLL, 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 noninterest expense, the $52.8 million, the underlying expense trend is down as the quarter-over-quarter comparison absorbs $3.4 million -- a $3.4 million negative variance in unfunded commitment expense. Jim Reske will elaborate on this as well, but we want to enter 2021 and sustain through the year a $51 million to $52 million quarterly noninterest 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 expressed goal of emerging on the other side of the pandemic stronger than ever. We now have 2 dozen initiatives, some small, some large in the works. But yesterday, we announced the 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 payments 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 passed traditional servicing. Just one example. In the second quarter, we opened 992 deposit accounts via our mobile online platform, some 3x 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 team 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 $0.24 rebounded strongly from last quarter. This brings our trailing 4 quarter noncore EPS average to $0.21, well in excess of our current dividend of $0.11 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 NIM 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 NIM 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. Noninterest-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 and over $480 million in mid-July or nearly 5% of total assets. This, of course, had a suppressive effect on the NIM. We estimate that the impact of PPP loans and the 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 high end.

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 in savings deposits, which at over $4 million is our largest deposit category, was cut in half for the 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 noninterest-bearing deposits, fell in the second quarter from 51 basis points to 31 basis points.

Looking forward, we still have nearly $800 million of 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 3.25% to 3.35% 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 noninterest 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 NIE was 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 noninterest expense run rate of between $51 million 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 24, 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 24, 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 a 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 that volatility continues, with a current debate over V, W, U and swoosh recoveries. As I mentioned last quarter, we saw no advantage in CECL 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 CECL 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 CECL 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 NPLs 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%. Provision 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 qualitatives increased by $3.4 million quarter-over-quarter, reflecting the economic conditions. As Jim mentioned, our COVID 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 8 higher risk commercial portfolios. Additionally, we developed a consumer overlay based on our internal PD/LGD 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 30, 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 C&I segments, including dealer floorplan and energy. Our industry study is a valuable tool to identify and manage certain portfolio risks. Additionally, we use our industry studies to manage our geographic diversification and diversification with 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 a 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.

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

(Operator Instructions) Our first question today will come from Frank Schiraldi with Piper Sandler.

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

That is correct. Yes. We expect savings of about $8 million net of some leakage of that savings with some revenue headwinds in our branches, and then we'll have some onetime 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 option, [Zelle], with a new online account opening -- online mobile platform and treasury management we're adding to our expense. So it comes out in the wash at about $51 million to $52 million.

And are the closures or the combinations sort of across geography? And do 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 developed a pretty strong culture of deposit gathering, and I'll let Jane speak to that in a minute, Jane Grebenc, our Bank President. We also have looked at this pretty analytically. The distance between branches being consolidated. The median distance is 3.5 miles. We feel like we can really control attrition. We're affecting 20% of the branches, which represent 10% of our deposits. But 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 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 about probably about 10 each or 15 each.

Okay. And then just one follow-up on provisioning. I totally hear you on the full review and it sounds like you've adjusted risk ratings with that review. So 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 builds are behind? And maybe provisioning in the back half of the year just to match charge-offs? So give any thoughts on that front.

Brian?

Yes. Our view is that we call [pulses] that 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.

And our next question will come from Steve Moss with B. Riley FBR.

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

Brian?

Yes. What you'll see in the press release is that we were -- we successfully resolved 3 problem credits. And we're very pleased to have those resolved. Our specifics went down that were associated with those. And one was a previously disclosed parking structure in Ohio. A second was a Pennsylvania-based manufacturing the energy sector. And the third one was an auto dealer that had been nonperforming. 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 that, 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 the same sort of dynamic?

Well, 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 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'll 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 Grebenc, the Bank President.

Thanks, Mike. The only thing that I would add is that the Pennsylvania loan book is so much bigger across all categories, that 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. And 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 in this quarter and kind of what the mix in auto was that you guys saw?

Yes. I mean, we are primarily used car. We do find, over a decade, that indirect auto tends to be a bit countercyclical. That's one of the reasons we hang on to it when everybody is getting in and the margins are nothing like 3 or 4 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 after a lot of pent-up demand from the probably March and April and May as consumers got out in June and July. Jane, what would you add there? That's 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 have, 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 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 glamping kind of RVs. And credit scores are terrific, about 780 credit score on the RV book. So it's just good luck. And as Mike said, we're primarily used car shop, 80% used, 20% new-ish.

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.

And our next question will come from Steve Duong with RBC Capital Markets.

So just for your reserving this quarter, can you just go over your -- what your forward economic assumptions are compared to where current economic activity is today?

Jim?

Yes. 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 a forward-looking expected losses the way we would if we were on CECL. So -- but we do have qualitative reserves, even though we're 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 contributed to some reserve building that qualitative factor this quarter.

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

Yes. Well because it's incurred, it's looking at around [20] right now, and say, that's what we factor in the model that just 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 forgiveness mechanics or forgiveness has been delayed a little bit, it seems. So we think it's just 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 C&I? And do you have the LTV for the CRE?

I'm sorry, rephrase the question, please.

Your retail portfolio for your COVID exposure.

Sure.

Yes. Is that all CRE?

No. 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 at Page 8 is $547 million. That's spread across 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 $1 million. And of that, the bucket that's largest is our freestanding retail loans. So typically, loans made where the tenant is a national tenant or a large regional tenant, it's 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?

Yes. We'll be able to really December, December 10, 11. We're looking to consolidate those offices. I think 1 week into the first quarter of next year.

Okay. So is the $51 million to $52 million run rate, is that for the -- basically the second half of this year? Or would that be for next year?

That's for next year.

And our next question will come from Russell Gunther with D.A. Davidson.

I wanted to follow-up on this 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 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 ask them, what are you really seeing today? What are you hearing? What should we be thinking about? It's interesting in this market as we begin to think about senior living or think about our student housing bucket. 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-leased for fall. Another one in Pennsylvania is 92% pre-leased.

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 borrowers, we believe our occupancy rates that held 2 quarters ago in the high 90s will continue somewhere mid-80s to high 90s. That's just our expectation. LTV on that portfolio is 61%, DSCR is 1.73% and debt yield is around 14%. And we do similar work for each one of the portfolios, as outlined in the COVID Slide #8.

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 potentially being too early to get positive and draw positive conclusions here. So is the expectation that a second round of deferrals would push that kind of total number higher? Or that $186 million, because it was a forbearance program, these are higher risk borrowers that may 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 expressed purpose of this was to do a look back. The team whiteboarded round 1 deferral process and developed a framework for round 2. 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 need. We want to be able to evaluate it and determine together whether we need incremental recourse, additional collateral, co-borrowers, and in some instances, we've gone IO. In some instances, we've required debt service coverage reserves to be prefunded 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.

(Operator Instructions) Our next question will come from Collyn Gilbert with KBW.

This is Chris O'Connell calling -- filling in for Collyn. I just wanted to continue on the deferral trends, which obviously screen very positive here. But just understanding the comments as well from the initial comments you mentioned. The -- 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 that?

Yes. You are interpreting that correctly. 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 prior to our 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 you're only on April 24 and showing that number to July 24, 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 to the back half of the year? Or would you expect that to fall off a little bit?

Yes. We see deep pipelines and originations in the third quarter and continuing strength from the business, at least in the third quarter. Jane, would you like to add to that? Jane Grebenc, our Bank President.

Thanks, Mike. Only that -- certainly, the second quarter was phenomenal. Third quarter, we expect also to be very strong. I suspect we'll fall off some. You just never know when the refinances are going to dry up. We are -- we have some advantage given that our portfolio is new-ish. 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.

And the only thing I would add is, organically, year-over-year, ex-refinance activity, the business is growing. 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 color. And then finally, on the NIM guidance for the core NIM, ex-PPP, and the cash impact to kind of trend toward 3.25% to 3.35% by year-end in those assumptions, or are in that guidance, are you assuming that there's a significant fall off in noninterest-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, that actually benefits us. But it's very, very little effect. But yes, we are definitely taking that into account.

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