OceanFirst Financial Corp (OCFC) 2020 Q2 法說會逐字稿

Good day, and welcome to the OceanFirst Financial Corp. earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Jill Hewett. Please go head.

Good morning, and thank you all for joining us. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin this morning's call with our forward-looking statement disclosure.

Please remember that many of our remarks today contain forward-looking statements based on current expectations. Refer to our press release and other public filings, included in the risk factors in our 10-K, where you will find factors that could cause results to differ materially from these forward-looking statements.

Thank you. And now I will turn the call over to our host this morning, Chairman and Chief Executive Officer, Christopher Maher.

Thank you, Jill, and good morning to all who've been able to join our second quarter 2020 earnings conference call today. This morning, I'm joined by our Chief Operating Officer, Joe Lebel; Chief Risk Officer, Grace Vallacchi; and Chief Financial Officer, Mike Fitzpatrick.

As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. This morning will cover our financial and operating performance for the quarter and provide updates regarding pandemic conditions in our markets and the progress we are making to return to more normal operations. Please note that our earnings release was accompanied by a set of supplemental slides that are available on the company's website. We may refer to those slides during this call. After our discussion, we look forward to taking your questions.

In terms of financial results for the second quarter, GAAP diluted earnings per share were $0.31. Quarterly reported earnings were impacted by merger-related expenses and branch consolidation expenses that totaled $3 million, net of income tax. As a result, we pegged core earnings at $0.36 a share. Given the headwind of our COVID-related credit provisions and operating expenses, we were pleased with the quarter and have positioned the company to improve a number of financial metrics in the next few reporting periods.

Regarding capital management, the Board declared a quarterly cash dividend of $0.17, the company's 94th consecutive quarterly cash dividend. The $0.17 dividend remains a conservative payout of core earnings. There are no plans to reduce or eliminate our common dividend at the present time. Capital levels remained strong with tangible capital assets to total assets of 8.8%. Please note that this ratio was negatively impacted by the PPP loan growth, which decreased the ratio by 37 basis points. The TCE ratio, excluding PPP loans, would have exceeded 9%. At the current earnings rate, we expect to continue to build capital levels for the duration of 2020.

During the first quarter, the company was able to repurchase 648,851 shares of common stock, but suspended the repurchases on February 28. Share repurchases are possible in the future, but we will preserve capital until the full impact of the pandemic is well understood. The company is slightly more than 2 million shares remaining in the current share repurchase program. Given the capital issuances earlier this year, we maintain approximately $200 million of liquidity at the holding company, which provides the capacity to take advantage of opportunities that may arise as the pandemic eases and the economy returns to a more steady state. Given the environment we faced in the second quarter and the uncertainty regarding the pandemic and the economic recovery, we will do our best to convey our views on the operating environment as well as the company's performance and risk position. The current crisis will unfold over the next few quarters and impacts may extend well beyond that.

At present, our markets are experiencing a much better public health situation than they were just a few months ago. The economy has begun to rebound, and our loan portfolio is holding up well. However, all those conditions are fragile and any setback in regional public health conditions, faltering in fiscal support programs or business conditions could rapidly erase the gains made to date. It is far too soon to be optimistic, although progress has been made, and we continue to be confident that the company is well positioned to weather the storm.

Let's spend a minute reviewing market conditions in our area of operation. When we last spoke in April of this year, New York and New Jersey were the epicenter of the crisis in the United States. I'm pleased to report that substantial progress has been made to address both the public health crisis and to begin the economic restart in a prudent, sustainable manner. Daily new COVID cases in our primary markets have decreased substantially, with the current 7-day average running 70% lower than our peak experience in April. New case reports are stable and have not increased despite several phases of reopening. Of course, we must remain vigilant, but great progress has been made and the infection rate is relatively flat. In terms of economic reopening, the regional approach has been cautious. And thus far, that approach is working. Our clients are reopening their businesses in a safe manner and rebuilding operationally and financially. The stimulus programs, in particular, the PPP program and the $600 unemployment supplement have hit their mark. We see direct evidence that the majority of our clients, both commercial and consumer, have built a liquidity surplus.

Among other positive measures, average checking account balances have increased measurably, and debit card spending have now comfortably exceeds pre-pandemic levels. In addition, the seasonal Jersey Shore markets are very active, with high volumes of visitors from across the region. The experience is different, but seasonal rentals are exceptionally strong. Residential sales are well ahead of last year and even hospitality is managing to make the most of the new operating models. We saw similar patterns in the aftermath of 9/11 and the Great Recession as driving vacations increased dramatically as more cost-effective and safer travel alternatives.

We have significant concerns that there will be setbacks ahead, but our clients have been resourceful, innovative and resilient. Over the first 6 months of 2020, just 2 OceanFirst clients have filed bankruptcy, a figure that is considerably more favorable than our historic experience and better than national or state trends. On a cautionary note, conditions in our New York City market raised some concern as many commuters have yet to return to Manhattan office space. The lack of office occupancy will continue to weigh on recovery efforts in that market.

Given our franchise distribution, the suburban and Jersey Shore markets are a much larger component of our business than the urban centers in New York and Philadelphia. So we expect the impact to OceanFirst to be muted. As Grace will outline later, our approach to forbearance management is working as intended. Our nonforbearance loan portfolio continues to perform with negligible delinquencies, net credit recoveries and very little migration to classify. Even OREO levels are a rounding error on our balance sheet. As a result, we are confident that the forbearance pools have identified the loans that present the most significant potential credit risk on our balance sheet. Also positive, a significant portion of the forbearance borrowers have indicated their intention to return to regular monthly payments at the conclusion of their first 90-day forbearance period. Of course, we are not out of the woods, and the next few months are critical in this effort. Provided we have no major setback in reopening process, the forbearance period for most loans will expire in the fourth quarter. At that time, we expect to have the information to adjust risk ratings as appropriate.

Turning to our financials. There are several unusual items to discuss. The first is our liquidity position. Maintaining a surplus liquidity position is critically important during a crisis. We overshot our goals in this regard as a result of decisions made early in the second quarter, and deposit performance that exceeded our expectations. As the PPP program was launched and our application portal began accepting requests for funding on April 3, it was immediately clear that the demand for loans will be very significant. We made a public commitment to the program and immediately moved to secure funding to meet that commitment by issuing $281 million of brokered CDs. These CDs are laddered and will come due in the next few quarters. The decision to issue these CDs was made prior to the announcement of the Federal Reserve PPP loan funding program. In addition, we made a practice of funding PPP loans directly into OceanFirst operating accounts. That decision and our clients' careful liquidity management resulted in a $500 million deposit inflow, a good portion of which remained at the bank as of June 30. Finally, despite significant interest rate reductions, ordinary course deposit growth totaled $291 million. This growth was driven by the addition of some well-priced treasury accounts in New York and certainly includes some elements of government stimulus.

Considering our excess liquidity position, we paid off every federal home loan bank borrowing due to mature in 2020 and in 2021, and still managed to end the quarter with $720 million in cash. Obviously, that weighed on returns and on our leverage ratio. Joe will walk you through our plans to address the excess liquidity position in future quarters. In addition to the excess liquidity, the PPP loan portfolio expanded our balance sheet and negatively impacted margins and returns. As these loans repay in the coming quarters, the negative NIM impact will be mitigated and capital ratio should normalize. Recall that PPP loans that are not pledged to the Federal Reserve PPP liquidity facility are included in the leverage ratio, although they are excluded from the risk-based capital ratio. In addition, due to the U.S. government guarantee, we have not allocated any credit reserve for the PPP portfolio.

Joe and Grace will discuss a number of topics in more detail, but let me outline the areas of focus for us in the third and fourth quarters. During the third quarter, we are focusing on forbearance wind down and further deposit cost reductions. Clients are indicating that a significant portion of the forbearance loan portfolio will return to monthly payments this quarter, but the monitoring of that process will be critical. As loan officers navigate the process, they collect the operating data that will be needed to determine the appropriate risk rating of any loans that are unable to return to monthly payments after the 180-day forbearance period completes. Many of these businesses have only reopened in late June and July, so it will take several months of operation to establish the data we need to evaluate credit risks. Based on the calendar, risk rating changes are likely to be concentrated in the fourth quarter. In addition, we will use our excess liquidity position to further reduce deposit costs, and do our best to stabilize or recover some ground in the net interest margin. As Joe will point out later, repricing the deposit portfolio, especially in the midst of integrating 2 acquisitions requires some patients. The progress has been made and will continue.

During the fourth quarter, we plan to address the forbearance loan portfolio and expect to be making a number of risk rating adjustments at that time. As long as interest rates remain stable, we should achieve further deposit cost reductions. Finally, by the fourth quarter, we should have the customer transaction data to support additional expense reduction initiatives. Given the importance of credit risk management, I'll turn the call over to Grace, who will outline how we view our credit risk position.

Thanks, Chris. As you mentioned, our credit metrics remained strong and stable through the second quarter. We had record low 30- to 89-day delinquencies as well as continued low nonperforming loans relative to total loans. TDRs and classified balances remained stable and low and even OREO balances were nominal at $248,000. We had net recoveries of about $230,000 this quarter, and our loss rates continues to decline. As a result, we feel confident that those customers experiencing pandemic-driven distress are in our forbearance pool, and that our forecast for forbearance balances in the third quarter effectively captures our near-term risk position. Being highly accommodative to our borrowers has not only helped our clients and our community, but has also helped us better assess our near-term risk position. Although, as Chris mentioned, any setbacks in regional public health conditions, any faltering on physical support programs or other stresses on business conditions could change this assessment.

Earlier in the quarter, the forbearance pool peaked at $1.6 billion, including $1.240 billion in commercial and $329 million in residential loans. Since that time, the balance has declined as only a portion of these borrowers require an additional forbearance period and new forbearance requests have run near 0 for several weeks. We expect almost 2/3 of our commercial customers on forbearance to return to regular monthly payments in the third quarter. This estimate is based on conversations with 90% of our commercial forbearance pool. Currently, the identified second commercial forbearance pool totals $386 million. These loans have a weighted average LTV of just 53%, a weighted average debt service coverage ratio of 1.9 and an average deal size of just $2.1 million.

Within our forecast peak exposure, the restaurant and hospitality industry represents the largest component at approximately $200 million. These credits have a weighted average LTV of just 50% and a weighted average debt service coverage ratio of 1.9. Included in these figures is the $68 million Irish [bar] portfolio in New York City, which are generally secured by mixed-use properties and have a weighted average LTV of 44%. Our forecasted peak exposure secured by retail properties is $77 million. This portfolio has a weighted average LTV of 56%, and a weighted average debt service coverage ratio of 1.4. The average deal size is just $2 million.

Moving on to residential forbearance. This pool peaked at $329 million, and we expect 1/3 of these to return to regular monthly payments in the third quarter, leading a projected peak residential second forbearance pool of $237 million to be addressed in the fourth quarter.

To date, $161 million has formally requested a second forbearance period, and the risk profile of these borrowers is consistent with those of the initial pool, including a weighted average LTV of 70% and a strong weighted average FICO score of 734. A full 82% of these credits have never been delinquent over the life of the loan. The strong weighted average LTVs in both commercial and residential forbearance loans demonstrates the conservative underwriting practices I mentioned last quarter. And while the full extent of the impact of the pandemic on property values remains unknown, LTVs at these levels provide significant downside protection. We feel our exposure to loss is modest should the pandemic recession extend into multiple quarters.

As I emphasized last quarter, our loan portfolio's risk profile was fairly conservative given our long-standing emphasis on diversification and sound underwriting practices, including strong collateral support. The portfolio is overwhelmingly secured by real estate and underwritten with conservative loan to values. Our commercial portfolio is diverse in industry exposures and property types, with no single industry exceeding 5% and no individual property type exceeding 10% of total loans. C&I lending is a modest 10% of the portfolio.

It bears repeating from last quarter's call that we have no energy, auto, equipment finance, credit card or leveraged loan exposure. Notably, none of our 10 largest commercial relationships are on forbearance, and only 2 of the top 20 requires some degree of forbearance into the third quarter. And only a single commercial client has informed us that they plan to go into liquidation year. Each credit risk profile was a direct effect on our charge-offs and subsequently, the required level of loan loss reserves. The allowance for loan loss increased $8.9 million this quarter to $38.5 million or 0.46% of total loans, covering nonperforming loans 1.8x. This balance, together with unamortized credit marks of $35 million, totaled 93 basis points of total loans, exclusive of PPP loans on which there is no reserve given the U.S. government guarantee.

Total allowance for credit losses growth was driven by a $6.7 million increase in quantitative reserves. This shift toward quantitative reserves when compared to the prior quarter reflects a much weaker economic forecast issued on June 17 by Oxford Economics. This forecast more closely aligned with other sources at that time such as S&P and Moody's, and thus did not require a qualitative adjustment to account for forecast differences. Even with that shift, qualitative reserves comprise 40% of the allowance for loan losses. That's appropriate in such an uncertain time, but it does illustrate the conservative product mix and long history of strong credit metrics. We made qualitative factor adjustments to address the COVID-19 impacts, including the impact on our forbearance portfolio, adding another $3.3 million to the allowance this quarter.

In most cases, it's premature to assess individual borrower ratings as the breadth and impact of government support actions remain uncertain and fluid. As discussed in last quarter's call, we expect risk rated migration as the Cares Act forbearance period ends. As such, we expect qualitative reserves may further decrease as this risk rated migration is reflected in the quantitative reserve. Our focus over the next 12 weeks will be to continue winding down the forbearance pool, identify TDRs and nonaccruals as appropriate and liquidate risk positions that can be exited at acceptable economics. Our credit metrics, excluding forbearance loans, are exceptionally strong. This indicates that the forbearance loans accurately identify the near-term credit risk pool. Forbearance loans accrue rapidly, and our best estimate of the fourth quarter peak is $500 million in commercial and $237 million in residential, or 9% of the total loan portfolio. As only a portion of these will transition to TDRs or nonaccruals status, the number appears very manageable in terms of our earnings, total balance sheet and our capital position. Our $181 million capital raise provides additional support in this environment. While these funds remain at the holding company, and we have no immediate plan to downstream these funds to the bank, they are available should circumstances warrant.

On a final note, I'll reiterate that we are a conservative lender that is focused on well-secured credits in low-risk segments. However, we will be impacted by regional economic trends. For now, the regional reopening appears to have struck a balance between returning to work while maintaining effective public health protocols. But this balance is delicate and may be tested in September as the school year begins. With that, let me turn the call over to Joe for some comments on the business.

Thanks, Grace. I'll discuss our loan business, including PPP as well as some comments on the net interest margin, deposits, expenses and operations. Loan originations of $975 million drove record loan growth of $450 million for the quarter after $105 million in performing residential loan sales. PPP loans totaled $504 million of the total originations and $479 million in outstandings at quarter end. Our team did a remarkable job in quick fashion in building the capacity to do these loans and automating the documentation to close efficiently in the face of the pandemic. We've now built an automated system to take our client applications for forgiveness and eagerly await the opening of the SBA portal or delivery of those requests.

In regard to the fee to be earned on these PPP loans, we expect to recognize over $15.5 million in the coming 12 to 18 months as loans are forgiven or repaid. To date, we've recognized roughly $1.7 million in fees from PPP loans through June 30, which is reflected in interest income. Loan originations from the commercial team were strong at $217 million as the bank experienced very little pipeline fallout despite current economic conditions. The commercial pipeline is off its highs from last quarter, but still 20% better than a year ago. Residential business is very strong as we experience record originations for the quarter at $242 million, and the pipeline remains at elevated levels. I [like] though Chris' earlier comments and add that the local real estate market is benefiting from limited inventory, motivated buyers and all-time low rates.

We've taken the opportunity to sell many of our 30-year conforming originations and solid gains to generate some mortgage banking income while managing balance sheet exposures. In this rate environment with solid gains available from loan sales and the ability to manage interest rate duration risk, sales occurred on a flow basis monthly as well as a bulk sale of $45.7 million. Our swap fee income was lower than Q1, but it was still a solid quarter with almost $2.5 million in revenue. Year-to-date, we are well ahead of last year as customer acceptance of the product remains brisk. Originating these loans at floating rates with a synthetic fixed rate swap product has had some adverse effect on interest margin as rates have crept to all-time lows, but it provides flexibility for the balance sheet and asset liability management and we generate that fee income upfront. We're avoiding the temptation to build margins by sacrificing our neutral interest rate risk position.

I'll add some comments on fee income generally, which was down over $2 million quarter-over-quarter due to the decrease in swap fees from an outsized first quarter and reduced fees and service charges on deposit accounts. The reduced service charges are from our active waiver or rebate of fees to our customers affected by COVID-19. And to a lesser extent, less nonsufficient fund fees as the savings rate across the client base increased measurably. Year-over-year, we're almost $6 million ahead in fee income. And positively, bankcard income is up in the quarter and year-to-date as consumers adopted the use of their cards for digital purchases.

Moving to the net interest margin. Core NIM declined by 28 basis points due to a few factors. These include the new loan activity at lower market rates, which was dominated by the PPP loans, the interest cost on our recent subordinated debt issuance and our balance sheet liquidity position during the quarter. I'll discuss each of these briefly. Loan originations of $471 million, excluding PPP or offer at rates competitive in the market, including, as noted earlier, swap loans with floating rate LIBOR spreads that adversely affected margin and residential rates among the lowest on record. The PPP loan originations yielded 2.81% and were comprised of a 1% interest rate and 1.8% in fee income recognized in the quarter, as part of the effective yield. Together, the new loans and PPP originations reduced NIM by 7 and 2 basis points, respectively. Subordinated debt issuance impacted NIM by 6 basis points. And our decision early in the pandemic to keep some additional liquidity on the balance sheet by raising $281 million of broker CDs for risk mitigation impacted the margin by 13 basis points. $100 million of the brokered CDs at an average rate of 1.07% went off in October with another $75 million tranche at 1.15%, maturing in January of '21. Fortunately for us, we didn't need the additional liquidity given the deposit growth from not only the PPP loan proceeds, but also our own organic deposit build from new and existing corporate treasury clients and retail core growth.

Our cost of deposits for the quarter decreased 13 basis points to 57 basis points, as deposit rates from all areas of the bank were cut. The Country Bank deposit book saw a decrease of 57 basis points for the quarter. And since the Country acquisition on January 1, we've seen deposit costs decrease by 73 basis points in that book. Two River Community Bank has seen a year-to-date decrease of 46 basis points and the OceanFirst legacy books down by 11 basis points. We still expect further reductions as time deposits at Country and Two River Community Bank continue to mature and are repriced lower, and the aforementioned brokered CDs run off. I hope you can appreciate our pacing of the changes of Country and Two River. We're being very careful to preserve the client relationships that were central to both acquisitions. Our loan-to-deposit ratio of 93% as of June 30 provides plenty of room for loan growth and disciplined deposit repricing.

Expenses were well-managed and include $1.1 million in discrete COVID-19 related expenditures for the quarter and $2.1 million year-to-date. We remain confident in our quarterly expense run rate and we'll recognize savings from the branch consolidations completed in May while spending wisely on digital account acquisition and continued employee and customer safety. We are actively managing headcount in the current environment. From March 31 through year-end, we expect the number of employees to be reduced by approximately 9%, comprised of Two River Committee Bank consolidations, some Country Bank and Two River back office personnel, normal attrition and a recently completed voluntary retirement plan program. The merger integration for Two River Community Bank was complete mid-May as schedule and converted the core system and consolidated 8 branches in the Two River markets as well as 5 legacy OceanFirst branches. Country Bank will be integrated in 2 stages. 100 branches will be rebranded OceanFirst in the fourth quarter, and the final systems integration will be completed in early 2021. In regard to daily branch operations, you may recall that we were one of the first banks to close branch lobbies and limit activity to drive-through teller transactions only. We reopened our branches for full-service in person transactions in stages beginning June 15, and are operating at normal capacity, utilizing appropriate safety protocols, including the use of personal protection equipment and limitations on the number of customers in the branch at any one time. Activity has been about 80% of pre COVID levels, but it's too early to determine any long time trends.

I'll finish up with some comments about the markets we serve and second half expectations for loan growth. Expect loan growth for the remainder of the year to be modest or flat with dependence on the economic recovery, business reopenings and people returning to work. We continue to see opportunistic borrowers with liquidity looking for deals, while many others struggle to reopen. Seasonal businesses have benefited by good weather and pent-up demand or drive to vacation or long weekend. Construction has resumed and wholesalers of building, industrial supplies and other trades are very busy and profitable. All restaurants on our markets are adapting and are breaking even at best. Hospitality remains well off breakeven occupancy levels other than seasonal shore hotels and extended state properties. Retail is spotty based on geography with certain retailers such as car dealers and the larger big box stores seeing pent-up demand. Some clients report difficulty in attracting workers back to the workforce. In CRE, urban areas, New York City and Philadelphia are soft. Suburban office is surprisingly unaffected and warehouse distribution and other transportation and logistics are strong. While retail, other than discount stores and shopping centers anchored by grocery, are seeing inconsistent performance. With that, I'll turn it back to Chris.

Thanks, Joe. Before we open it up to questions, let me just close with the following summary. There was noise in the quarter in terms of excess liquidity, the PPP program, weak deposit fees due to COVID and even the Two River integration. That noise is temporary and should work itself out in the coming quarters. We have a clear handle on our current credit risk position. The vast majority of our loan book did not require forbearance and is performing well. The forbearance loan portfolio appears positioned to decrease materially over the near term. Given the conditions today, we're confident that we have the earnings power and capital position to address credit risks we face in the coming quarters.

Deposit costs are positioned to be reduced further, and that effort will be critical to defending our margin as we move forward. Operating expenses will benefit from the elimination of 13 branches this quarter as well as additional cost-saving strategies that will be addressed in the coming months. We're in a position to improve operating performance over time and earnings should recover as the credit cycle moderates, which may result in decreased credit provisions. Our ability to forecast either the end of the pandemic or the strength of the economic recovery is very limited. We are closely watching public health conditions in our market. They have improved dramatically but could turn at any moment. Fiscal stimulus, which has played a pivotal role in supporting the economy, the continuation of that support must continue in the near-term in order for additional progress to be made.

Collateral values. So far, residential real estate is holding or increasing in value and even CRE cash flows are remarkably steady. Our credit risk models are quite sensitive to collateral values, so we're monitoring them closely. At this point, let's move to the Q&A portion of the call. Thank you.

(Operator Instructions) Our first question comes from Frank Schiraldi with Piper Sandler.

Just trying to get a sense, as always, about provisioning. And the -- it seems like the model stabilized a bit. So if that's the case, is it fair to say the qualitative builds are mostly behind? And from here, it's just really quantitative factors and credit migration, specific credit migration that's going to drive provisioning going forward?

I think that's fair, Frank. Absent the change in the environment, right, where we have a big change in the reopening process or something like that, that doesn't appear at present to be an issue. We have been building up qualitative reserves, knowing that as these loans come out of forbearance, some of them will become TDRs or even nonperforming. And at that point, the quantitative factors will be taking over. You'll be making risk rating changes and the quantitative portion of your reserve will probably increase. But at the same time, as you're getting that certainty, a lot of the qualitative reserves we've established are due to the uncertainty. So you may see -- you'll see one category growing and the other category, hopefully reducing. And there's no -- we can't be really precise about the allocation of that or the timing of that. And -- but we're encouraged by what we've seen. And actually, Grace, do you mind just to talk a little bit about the process of the conversations you've had with clients in order to establish your comfort with where we are today in terms of those reserves?

Sure. So as part of our monitoring of the forbearance exposures, the credit team and the lenders reached out to, I think I mentioned, 90% of our commercial borrowers. And then we had discussions with members of senior management team on both sides, credit and lending, talk about each credit, at least the larger exposures. I think it was everything over $2.5 million. So it's a significant portion of the commercial forbearance. And it was through those conversations that I was informed on -- helping me inform what key factor adjustments we should make to capture the risks that Chris mentioned and you were talking about.

In terms of -- it seems like then if the risk weighting story is probably going to be more of a 4Q story. I think that's kind of what you indicated, Chris. Then it seems like -- I don't want to put words in your mouth, but 3Q might be a little bit of a lull in provisioning as long as the qualitative stuff holds up. But when we start to see migration into lower risk weightings and NPAs, perhaps, you guys gave, I think, a best guess of where -- I'm not sure what Grace is -- 9% I heard by the end of the year, I think. But what is -- what are your best guesses in terms of provisioning levels versus earlier this year versus the first and second quarter? Do you think 4Q could very well be higher as the -- because CECL really is a quantitative model, right, more so than qualitative. So could that overwhelm the qualitative improvement? I know that's tough to say here in July, but just wondered your thoughts there.

It is. It's very tough to say, Frank, because we don't have our crystal ball. But when we have these conversations with clients, we're delving into their liquidity position, we're delving into the level of operation, whether they plan to reopen or not open. We're trying to evaluate the real estate values and things like that. So if we thought that we were facing a wave of additional provisions later in the year, we would be taking them now. That's the whole point of CECL. So -- but we do recognize the uncertainty. And I think what you see in our provisioning now in the first quarter, it reflects that uncertainty. And we're -- based on the calendar today, it would appear that most of these things are going to be worked out by the fourth quarter. And then we're going to be left with what is the TDR pool and the nonaccrual loan pool. And then our precision around reserves then, I think, will be much better. You shouldn't -- at that point, you shouldn't be sitting on a reserve that has a big qualitative piece. It should be a reserve that is, in many cases, almost all quantitative. So we think we're calibrating that right, but there's a lot of questions, and there could be a lot of changes between now and then.

Okay. And then just finally on the loan growth, Joe. I think you mentioned maybe moderate to flattish. Just wondering if that is correct, given your pipeline is 20% stronger than last year, and I guess, Two River and Country helped that out. But if we look at the loan growth graph here on Page 11, is it kind of -- is that kind of the story, you're going to see some decent-sized loan originations and then you're seeing a decent amount of payoffs to offset that? And then just curious where those -- if centered on any geography in terms of the originations?

Interestingly, Frank, for the first half of the year, we saw pretty even growth and activity throughout all the regions. So the legacy footprint of the bank probably generated 40%, and then we got 30% of the growth in Europe, 30% percent in Philly. So it's nice we're seeing activity from everybody, which is good. And I think what we're going to see is continued opportunity. We're open for business, which is good. We hear a lot of anecdotal commentary about people not entertaining opportunities for either their clients or God forbid, entertain something for new clients. So that's a positive for us. The pipeline is down a little bit quarter-over-quarter year-over-year. You're right. It's up $60 million. It's up 20%. And I'll give you an example, we just did another $50 million in loan approvals this week. So I'm bullish, but we're also selling residential loans in the secondary market. We believe from balance sheet management, we should continue to do so. So I think that -- I think that it's prudent just to recognize that there may be some fits and starts in the economy as well.

Your next question comes from Russell Gunther with D.A. Davidson.

Could you guys spend a little time addressing how the customer transaction data you gather that you believe can lead to some cost reductions later in this year and into 2021? Can you just provide a little more detail in terms of how that informs your view on the expense run rate into next year?

Sure. We've been, Russell, very aggressive at closing branches and consolidated 53 branches in the last few years. So we have not been slow to pull the trigger when we see patterns that make sense to us. And I want to emphasize that in most of those cases, we were following our customers' leads. So as customers move to digital channels, we want to put our expenses and our people and our tools and our technology in the channels they want to be in. So then the pandemic comes along, and we see a spike in use of mobile banking and the digital channels. That would suggest that we now have a much higher number of customers that are willing to bank without a branch. We're certainly not insensitive to having a branch or having branches close by. But given the stress of the environment, given the pandemic, given that we just closed 13 branches, we don't want to be heavy handed and go and rush to make a decision today. That said, we look at the early -- the branch counts that Joe mentioned, right, they're about 80% pre pandemic. And that's not uniform for every branch. Some branches have all their customers back and some don't. And we're watching this pattern to understand which of our branches might be candidates for consolidation later in the year. So I think that's kind of the crux of it. We just don't want to -- we've been a fast and early mover. So we think we can take 90 days, 120 days, understand what the customers are telling us and then react in a way that helps the company but doesn't sacrifice our customer satisfaction.

And I appreciate that, Chris. And that's kind of what I'm wondering, given that you guys have been still ahead of the curve here, both on the digital platforms, also on the branch reduction as well. Just trying to get a sense of how much meat this might possibly have as it would benefit earnings next year. Or are there other franchise investment that may absorb some of that potential cost savings?

Well, it is always net, to your point, about investment. There's a net save typically as we do this, but we do invest in the other areas. And we've made a lot of investments into the digital side. We're not staring at any giant capital investments in digital. I think we're very happy with what we've built, and we incrementally improve those kind of on a quarter-to-quarter basis. But it is personnel shifts where if we consolidate a branch that might have half a dozen people in it, but the save is not a half a dozen people because we move people into the call center or into our video banking group that does face-to-face interactions with people across video. The early transactions after we reopened lobbies were quite strong. They appear to have fallen off pretty dramatically now in the last week or so. So it's unclear, was there a bubble of customers that missed the branch and the minute we reopened them in mid-June, rushed in to take care of something, and they won't be back, or is this just noise we see in -- so I don't think it's going to take us a long time to figure it out. But we want to be careful. The strength of our franchise has always been our funding and our funding comes from the strong relationships, both commercial and retail. So you don't want to hurt the baby.

That makes sense. I appreciate your comments there, Chris. And then just a final question for me is really a follow-up, and just to confirm what Grace was talking about and the conversation around the reserves. So kind of a pro forma deferral around the end of the year of 9%. Now is that captured in your reserve today and it sounds like in the qualitative factor? Is that expectation currently reserved for? Or is that going to show up incremental in the fourth quarter as that risk migration formalizes?

Well, we'd tell you that we've made an assumption that is an internal assumption that we're not going to kind of share that a portion of those credits will become TDRs or nonperformers, and we need a reserve to cover that. And now if we're spot on to that, then we've got -- the reserve is perfectly calibrated. I don't expect that. I expect it's probably going to be a little higher, a little low. And it's all going to be based on that final yield. But Grace, you had some figures about the coverage of the deferral portfolio that I think are probably informative.

Sure. So I thought it might be helpful to see reserves against our expected peak forbearance, just another way to look at the adequacy of the allowance. So with the current balance of $38.7 million in the ACL that's for loans. If you take out our day 1 CECL reserves of $21 million, that leaves just under $18 million. And that is 2.4% of our forecasted second forbearance pool. So -- but the short answer, Russell, is it's a general -- there's not specific credits that we're saying, oh, I think that one might be downgraded. So we don't have like a column of those that we then calculate a reserve against. The conversations I was referring to before really were striking to me that there weren't obvious downgrades. There's -- companies are doing better than they thought. They have liquidity. But as Chris emphasized in his comments, there's a lot in flux still, and things could go in a variety of directions. So we trying to capture that risk and as we go along. And I think 2.4 against our estimate for second forbearance total is pretty healthy.

And I just want to emphasize, too, the process. If we have known bad information on a credit, we're going to downgrade it. So we're not waiting to do a downgrade. What's happening is we have a lot of situations where we have no information. It's not good. It's not bad. Let's take a restaurant that maybe opened the last week in June or the first week in July, we have no idea whether that's going to be a good story or a bad story. So we're deferring action until we have data. But as we went through even during the second quarter, we mentioned it's kind of, ah, we had only single liquidation issue in our commercial base. But that credit, for example, that's known bad information, right? They're not going to reopen. It happens to be a fitness center. So we took action on that. We marked it. We did what we needed to do. So this process is not putting off making decisions. It's making every decision we can when we get the information we need to make that decision. And we know that most of this is going to require a few months' worth of operation for our commercial clients. We'll analyze that information. Just the calendar winds up being that's probably more of a fourth quarter timing than a third quarter time. But we're not deferring the decision, I want to be really clear about that. Where we know we have bad information, we're downgrading those loans.

(Operator Instructions) Our next question comes from Christopher Marinac with JMS.

Just wanted to continue on the same line of questioning. And Grace had mentioned the additional -- the reserve angle. And I was curious how we think about the acquired reserves and the additional disclosure that you've given in the last couple of quarters, should that come down kind of slowly or quickly? And then as those loans transition, how does that play into the overall reserve coverage in the future?

Chris, are you talking about the -- I'm sorry, I'm not sure I understood the question. Are you talking about the qualitative component or the credit marks on acquired loan?

Really the credit marks. And obviously, if we add all of it in to the existing reserve and exclude PPP, you're around 1%. And I'm just kind of curious how that's going to look a couple of quarters from now as those loans may pay off more. And if there's acceleration, how does that play into kind of your reserve just considerations?

So in other words, would we keep the overall level at around 1% or their plan on building?

Correct.

I think the answer to that question is going to depend on the risk characteristics or the profile of what's in the portfolio at that time. So if the riskier of those credits were to pay off or roll off or be generally exited or not necessarily even gently. And that dramatically changed the overall risk profile and risk of loss than the number, as a percentage of the total portfolio, would potentially come down (inaudible).

Chris, it's Mike. Let me take a shot at that, too. It's $35 million, $11 million of that is specific credits so that we've marked. So to the extent that those credits default on the charge offs, we could offset those charge offs at this $11 million. And that's specific loan. And then the other $24 million, that's more general, and that is accreted in income over the life of the loan. And that general -- most of that comes in over the next 3 or 4 years.

And I want to clarify something, too, that our forecast for peak second forbearance of just under 9% of total loans, we don't -- we certainly don't expect all of that to become nonaccrual or TDR loans. In fact, it's anybody's guess at the moment, like Chris just described the conversations we're having with these borrowers. But there's enough positive stories, and that's part of the difficulty, right, in estimating the allowance. But I can imagine it's all of those. I mean I won't venture a guess here in this environment. But it's certainly not going to be all of them. I am (inaudible).

Great. That's helpful. And I guess my follow-up is just about the LTVs that you've reinforced the last couple of presentations. Have you had any anecdotal evidence where you have had property sell and just sort of confirm those values in recent months?

I think the values depends a great deal on the segment. So there's some oddities about this recession, if you will, that is different than other recessions we've experienced. First is the residential property values are not only holding up well, they're probably understated because I think the values have come up. And they've come up sharply in the suburban markets. We're talking about in most of the markets we operate in, you're seeing 10% to 15% year-over-year price gains. And I know that happens in some parts of the country. That usually doesn't happen in the northeast or certainly hasn't happened since the Great Recession. So the residential pools, I think the LTVs are fine and probably conservative or understated. On the commercial side, we've not seen as many properties move. So it's really hard to get a precise kind of valuation, but it is very much based on the property type. So to the extent we have -- our assumption is that our LTVs and things like industrial warehouse, logistics, even multifamily, at least for our multifamily portfolio, it's been reasonably steady rent collections. So that -- maybe cap rates come up a little bit, but it shouldn't be a disastrous experience. So we won't know for sure until we see properties trade. But our exposures and what we're most worried about is the rest of the industry, right, is what is a restaurant property worth and what is a hotel property worth. And fortunately, we don't have -- that's an even smaller portion of even the forbearance portfolio.

Our next question comes from Collyn Gilbert with KBW.

Chris, just to sort of segue from that last comment that you just made. And it's kind of a big picture question, but you always have really thoughtful answers in the way you think about all of this. So I'm going to ask you. So as you had indicated, obviously, OceanFirst has been very good at consolidating branches, and that's maybe going to be part of the plan going forward. Do you have a thought as to in the future for what maybe OceanFirst is going to experience? Or what the industry could see in terms of the repurposing of a lot of this branch real estate, bank real estate as the industry looks to consolidate away from that and you guys as well? Like any thoughts on what happens to that real estate? I mean you just sort of indicated to we're not sure really what property values within a restaurant or a hotel would be worse. Like how do you think about your own branch real estate and how that gets repurposed?

That's a really good question. And I think there are -- well, first, we're not in the camp that you shrink all the branches and you have tinier branches. So there's a lot of discussion over -- look, I change my average square footage of a branch. We're more in the camp of how many branches do you need to support a geography. Because if people are only coming in once a month or so or once every 6 weeks, they'll drive a little bit longer. And especially in our suburban market, if you're coming to a branch, you got in a car, and if you got in a car and you're going an extra 3 traffic lights or a half a mile in one direction or the other, it really doesn't matter very much. I mean you might be a little bit put off of your change the location, but you don't need to have the same density. So we're more in the camp of you consolidate the locations and you get really good at digital, not having a lot of smaller locations or more efficient locations. I will tell you that we learned the hard way that branch real estate, when it is no longer occupied by a bank, is not particularly valuable, especially outside the urban market. So one of our first acquisitions, we took in properties at a certain value, closed branches and we did not realize the real estate value we thought we would. So we've been much more careful about valuing real estate and lease exit costs and things like that. And one of the reasons we've been aggressive about trying to get it out is that it does -- it's a drag on the balance sheet. There are exceptions to that. I know peers that are in urban markets where their branches are actually held well below book value and they have embedded gains if they wind up exiting. But for a bank like us, it's kind of a push. We've actually gone into a discipline, though, of having a group within the bank that does nothing but liquidate bank facilities. And as you can tell, with 53 of them, that's a lot of places to -- we assist and negotiate down or sales to make. And -- but it won't be at a gain. I'll tell you just a funny story, one of the more aggressive bidders on one of our branches was a cannabis distribution company that loved the idea of both the drive-through and the vault. So maybe that's the future of branches.

It's interesting. Okay. That's helpful. Just then 2 other questions. One on deposit costs, right? So I hear your messaging that you want to be cautious there and you have a customer base you need to preserve. But can you just give us a sense of what your kind of current CD offering rates are? Just trying to gauge kind of the magnitude that you could see some of those deposit rates drop.

Collyn, it's Joe. Probably a great example of where we're going is where we've been, right? So Country and Two River acquisitions, Country especially but I'll just try to give you a couple of thumbnail numbers real quick. We have -- for the remainder of the year, so from now through the end of the year, I have $571 million worth of CDs repricing. Average yield on those CDs today is 149. And in 2021, I have almost $664 million at an average yield of 169. So those are going to come down markedly. I think our 1-year CD today is 50 basis points. And our -- that's probably the highest rack rate I offer. So -- unless you want to go out 6 or 7 years. So I expect fully to continue to reduce deposit costs. And we're doing that as well in our government municipal business. That is a very sticky business. That's a business that we do really well. And much like some CDs, there's some guaranteed price and we continue to reduce that quarter-over-quarter as these guarantees come due. And we're not seeing any runoff. People understand. So it's a little -- it takes a little bit longer for us because we already had such a good funding base at lower yields, but we can work it down even further.

Collyn, if we stayed in this environment, and it might take quarters for us to get there, but I would look back to the lull in our deposit costs in the last cycle. So which -- we had a number of quarters where we were below 30 basis points in total deposit costs. I'm not saying we're not going to be there in the next quarter or 2, but that's kind of the trajectory, you could see us down pretty well. And we might even get lower than we did in the last cycle.

Yes. Well, with all this liquidity, I would -- not just for you but for the industry, I would hope so. I think so. Okay. And then just on the PPP. I know it's hard to determine and hard to guess, but just for modeling purposes and how you guys are thinking about it, what's your sort of -- what are you assuming in terms of forgiveness in the next few quarters? So how that trajectory is going to look in terms of percentages, like in each quarter?

I think it all depends on how effective the SBA is in terms of their portal. I think as we mentioned, we've got a portal up and running. We've got electronic documents from our customers. In theory, when they open that up, and we can hit send, you should see some pretty rapid forgiveness. I will say that we have not been extending the maturity of our PPP loans. So we're not in that camp of giving people 5 years because we don't think that what was originally intended. And we don't think our customers need it. You're either going to be okay or you're not going to be okay. So my guess is you'll begin to see them in the third quarter, probably the bulk in the fourth quarter. And if the SBA is doing what they're supposed to, we should be able to clear a lot of it by the first quarter or in the first quarter of '21.

Right now, Collyn, we've -- almost every single or probably 99.5% of the loans are 2-year loans. We didn't really do much of the 5-year loan tranche. And the SBA has indicated to the banks, I think it came out yesterday or the day before that they expect to open their portal August 10. We've done 3,000 loans. I think I mentioned earlier, we set up an automated system to have customers start to provide their forgiveness applications to us in advance of the SBA portal opening. We've already got over 500 applications of the 3,000 loans, and that's going to ramp up pretty quickly. So I think Chris is right. I think we'll see the vast majority of the income that we would accrete if the loans stayed open over 2 years come in, in the next couple of quarters.

Our next question comes from Matthew Breese with Stephens Inc.

First of all, just kudos for the presentation and particularly the pages, Pages 3 and 4, those are really helpful. With that, we're starting to get a good sense for what the initial cure rate is on loans coming up on the end of the initial 90 days. 65% is for you on the commercial side. Is there any reason to believe that, that figure is a good or a bad number to use for the cure rate on the second round? I mean I can see both sides of this argument, but just wanted your thoughts.

We've had that discussion internally, and I want to be careful to tell you that we don't have a number that we're using, but that doesn't sound like a crazy assumption. And it really goes to the content of the conversations. And as Grace described them, there's a lot of liquidity out there, and I think that's underappreciated. I mean I know we know. If you look at all the bank balance sheet, you see there's a ton of liquidity. Our businesses, as we talk to them, have more cash than you would think at this point of a crisis, right? And I think the race is to the vaccine because many of the hardest parts we're going to have in this portfolio are going to be those that will benefit the most from the vaccine. And it's really a waiting game. If folks have liquidity, and we've talked to a couple of restaurateurs who say, look, if I can hang on until there's a true reopening, and maybe that's early 2021, I'm going to be in great shape because a bunch of the restaurants aren't going to be here, and I'm going to have the seats and staff and the ability and the margins to have a great year. So I think it's going to depend a lot on how quickly the pandemic eases and whether we have these rolling things for a year or whether the vaccine comes out and you get a much faster recovery. But we did not expect the cure rate in round one that we are seeing, and it's been surprising to us. That said, on the consumer side, we're not concerned about it, but the cure rate was lower than we thought in the first round. And I think that's our clients and probably people across the industry just being careful about the personal liquidity and saying, gee, if I have an opportunity to defer again, I'd like to build up some cash reserves. And there are a few prominent finance experts that are actually telling people that they should go on forbearance and then put their loan payments in their savings account. And we're seeing some of that kind of behavior. So I'm not overly concerned about the consumer portion. The last thing I'd say is if you think about forbearance in general, it helps our clients for sure. But forbearance builds liquidity, right? So if you get loan forbearance and you're not spending it on other stuff, you're going to be building up your liquidity position and help you get through this time period. So we've been very encouraged by the conversations that Grace noted with about 90% of our commercial borrowers, but it is still a fragile environment. And we watch these COVID cases in our markets every single day. So far, they've been flattish. We're dealing with the reopening. But if that were to change, I would be a little more concerned.

And to take the conversation one step further, and let's just -- I'm trying to get a sense for what the transfer rate at the end of the year from things on deferral to TDR or nonperforming. Is it safe to say that if the cure rate is the same, that the most distilled, so if it was $500 million of commercial forbearance, you apply that cure rate, you're left with $200 million at the end of the year that, that would be the balance you would transfer to TDR or NPA? There would be 0 in deferral, right?

It would be very low levels in deferral. I mean, the only situation where we might defer is if there is a very unique and specific COVID issue. So if you think about it and I don't recall us having any of these loans, but if you think about like a performing arts theater, right, there is no way that they will be able to operate until really there's a vaccine. So if they had a good business and they're going to remain closed for another 90 days, maybe you could make an exception. But I would expect that the majority of the credits we have in our book, and people may have different books, but in our book, they're going to have to either come out of forbearance and return to normal or we'll risk rate them. I do want to make another important point about the allowance, though. So let's just play that forward and forget about the percentage of loans that wind up being, say, nonaccrual. If loans go nonaccrual, you're going to do an impairment analysis. And then we're right back in the real estate discussion because the vast majority of our book, and this is a nuance to OceanFirst, but we're real estate secured in almost all these loans. So now we're going to do our best to estimate collateral values. And if it's something like a warehouse or a multifamily building, it's probably going to be straightforward. Trying to figure out collateral values on a restaurant property a hotel is going to be difficult even in the fourth quarter. So I think then you're going to get into these discussions about, okay, it's nonaccrual, what is the appropriate reserve on that nonaccrual loan. And a reserve on one industry versus another might be quite different. We may have to haircut some of our valuations on things like hotels and restaurants until we know more about that.

Understood. Okay. And then lastly, Chris, you talked about measures you'll be taking to stabilize the NIM or even make up some ground in the back half of the year. Could you just give us a sense for where you see that NIM stabilization point? Is that clear or better? Or is there potentially another leg down in 3Q?

So I think what you saw in the big leg down in Q2, a little bit of it was a self-inflicted gunshot wound, right? So we put on that liquidity. I'm proud we did, and we did it for all the right reasons. But that was the single biggest cost to us, was carrying a $700 million worth of cash. So we can reverse that. So that's not going to happen again. We're not going to have another big liquidity build on top of that in the third quarter. So that takes some of the headwind out. We're also not going to do PPP loans again, so we're not going to have that pressure on the margin. So you're really down to this kind of 7 basis points or so of ordinary course pressure and then how much of that can we overcome in deposit costs and other measures. So I think it will be relatively stable. I don't think we're going to be losing or making up a lot of ground in either direction. And I think this quarter, the drivers this quarter of the NIM issue, meaning the liquidity and the PPP program and the subordinated debt, those are not going to recur, so they're not going to provide pressure on us going forward.

(Operator Instructions) Our next question comes from William Wallace with Raymond James.

Couple of follow-up questions. Sticking to this concept of the second round deferrals rolling off and then being able to figure out what to do with what's left. How would you guide us to think about the cadence of charge offs? Will you be charging these loans if you move into nonaccrual, but only building reserves if you move in the TDR, or will charge-off to be really first and second quarter of next year event? Just maybe help us think about that. And then on top of that, the way the CECL model works, I'm not sure if you're using the Moody's forecast or Fed forecast or whatever. But over the forecast period, if the unemployment rate remains at that sort of high single-digit-ish type level and the GDP forecast doesn't improve, would you assume that you would have to maintain your reserves at current levels? In other words, would you have to cover your charge-offs entirely? Or would you be able to use reserves to cover those charge-offs?

Well, I'll take the first one because it's easier, and then I'll give Grace the second one. In terms of when you're going to see that charge-off activity, it's certainly possible that we'll have some charge-off activity in the fourth quarter as we calibrate on a loan-by-loan basis, what's nonaccrual. And then what is the real estate collateral on that nonaccrual loan, do we think that we've got a deficit we've got to charge-off. So there could be some in the fourth quarter. If that's the end of kind of the forbearance wave, so to speak, and we move into next year, then you might see charge-off activity when the loan is finally disposed of and you're trueing up the actual, call it, the auction value of the real estate or if you're doing incremental appraisals because property values, say, in restaurants change a lot over the first half of 2021. But the charge-off activity would happen first when you initially assess the nonperforming loan and determine the appraisal. That's a fourth quarter event. And then if the appraised value were to sync further, you could have additional write-offs or when you actually liquidate that piece of real estate to finish foreclosure, whatever that may be, you would true it up. So I think it's going to be a little bit over a few quarters, probably Q4. And then depending on how much of this asset type we have in Q4, you might go into beginning of next year. I will say, though, that one option that we'll think carefully about is when we get to the end of what we perceive is the end of the forbearance pool. And we're going to have to watch the public health crisis, the way the economy is going, the level of fiscal stimulus, where the vaccine is. If we think that the worst is over in any given quarter and whether that's the fourth quarter or the first quarter of next year, and we think we can exit these in bulk, we would not be averse to saying, look, here's a market we think we have, why don't we exit a bunch of the stuff so that we no longer have to have conversations like this with you guys. And we can just say, look, it's gone and we've resolved it. So I couldn't even begin to handicap either a possibility of us doing that or a timing, but that is a door we will consider.

Okay. And then thoughts on how the economic forecasts will drive the ability to utilize the reserves?

Yes, I'll pass that to Grace.

Will, so if I understand the question correctly, I guess you're asking if, say, the forecast continues to be fairly negative in the first quarter of '21. And so it would indicate more reserve build, and we'll be able to -- we have to replenish charge-offs at that time. And I would say this is a general question, there's a lot of -- it depends to it. It would depend, I think, at that time, on how that economic forecast compares to our actual risk profile. If our nonforbearance portfolio continues to have the current credit metrics at that time and our second forbearance, we had gotten through all of it the way Chris just described and really kind of isolated or capped figured out exactly, quantified the degree of loss and exposure, then there might be an argument for not having to maintain the reserve build despite the economic forecast. Then there might be a 2-factor adjustment in the other direction, if it was justified. Not sure if I hit on your real question or not. So I'll pause there.

No, that's fair. I think the answer is it depends. Fair enough. Okay. And then, Chris, you had mentioned the -- you talked a little bit about collateral values and the improvement in the residential market and then the -- not much visibility on the commercial real estate market just because of the lack of trades. But I'm curious, as you guys underwrite new deals, maybe in sectors that are not directly impacted by COVID, what you're seeing in the appraisals of the properties? What are the appraisers doing with cap rates? And what impact is that having on the collateral values?

There's 2 things, and I want Joe to chime in as well because he's a little closer on some of these appraisals. But we're getting general COVID disclosures, which are not very helpful. So the appraisers are kind of stamping every appraisal and going, well, this is what I think, but this COVID, so I could be wrong. So that's not very helpful, but it probably protects them. I would tell you that in some like industrial and all that, it's a relatively straightforward. You're doing NOIs, net present valuing of it. It's very clear with good cap rates. It's -- and Joe, maybe you can talk about a couple of the deals we've done recently and how the appraisals and how you've handled the LTVs.

Interestingly for us, and I'll echo Chris' comments about the appraisers and making the COVID disclosure, and some of that is just because there's no comps, right? There's not a lot of comps, the comps you use on a pre-COVID. We've seen some adjustment to cap rate, not meaningful adjustment to cap rate. And I think our approach for new transactions has largely been stick to the credit appetite that we have, which has always tended to be a lower LTV perspective. And if we do, and we have financed some properties where we have, for example, we financed a couple of great retail properties where there are tenants, in line tenants, that are on deferral. We take out all of their cash flows from the cash flow math and we discount the values and we tend to look at lower LTV loans. So we're still doing loans. The value of the property may come in where we have a 50 LTV. Our internal LTV after discounting the -- the retailers aren't paying because they're on deferral, rent deferral, may be a little bit higher, might be 60, might be 65, but the appraiser is coming in at a value, assuming that at a certain point in time, that property will be released or where the people will begin to pay. So we take a fairly heavy hand to some of these properties, and we continue to win transactions. So it tells you that you could be in the market with a certain credit appetite and still do well. We just want a substantial Amazon distribution warehouse at a very low LTV. I think it was south of 40 LTV. So we're still big in some of that.

And you're saying that that's an LTV on a value that you're being pretty aggressive on cash flow assumptions or cap rates. So it's an LTV on a value that you're hitting hard or relatively hard. Is that -- am I hearing you correctly?

Yes. Yes.

Okay. All right. And then just one last question, just for a point of clarification. I believe it was maybe in Joe's prepared remarks. I believe you made the statement that he feels that OceanFirst is comfortable with the expense run rate. And so -- and then there was a lot of commentary about cost save initiatives and also the cost saves out of the converted acquisition. So I'm just confused, I guess. What is -- is $51.1 million after the one time? Is that the run rate that you think we'll see in the back half of the year? Or will the deal cost saves and other initiatives that are underway, drive that lower? And if so, can you maybe help us quantify that because the moving parts have all changed so much.

Yes. I'll take that. So the $51.1 million, first of all, include $924,000 prepayment penalty on -- for home loan bank borrowings. So the core rate is really about $51 million, pretty close to $51 million even. And we think that going forward, we'd had some costs that are coming out because of the Two River conversion in May and the 13 branches that are closed. So we expect that to be probably about $2 million or so coming out of the run rate in the third quarter and then maybe a little bit more in the fourth quarter with some of the voluntary retirements that Joe mentioned earlier.

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

All right. Thank you. With that, I'd like to thank everyone for their participation on the call this morning. As I said at the conclusion of the first quarter, our company has been around since 1902 for a reason. We take conservative credit risk positions. We're strongly profitable. And we maintain ample capital levels. We look forward to talking again after our third quarter results are posted in October. Thank you.

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