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Peoples Bancorp Inc (NASDAQ:PEBO)
Q2 2020 Earnings Call
Jul 21, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Peoples Bancorp, Incorporated Conference Call. My name is Mike and I will be your conference facilitator today. Today's call will cover a discussion of the results of operations for the quarterly period and six months ended June 30, 2020. [Operator Instructions]

Please be advised that the commentary in this call will contain projections or other forward-looking statements regarding Peoples' future financial performance or future events. These statements are based on management's current expectations. The statements in this call, which are not historical fact are forward-looking statements and involve a number of risks and uncertainties detailed in Peoples' Securities and Exchange Commission filings.

These include but are not limited to the ever-changing effects of the COVID-19 pandemic on economic and market conditions and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and non-governmental authorities; changes in the interest rate environment due to economic conditions related to the COVID-19 pandemic or other factors, which may adversely impact interest rates, the interest rate yield curve, interest margins, loan demand and interest rate sensitivity; the success, impact, and timing of the implementation of Peoples' business strategies and Peoples' ability to manage strategic initiatives, including the expansion of commercial and consumer lending activity; the competitive nature of the financial services industry; the impact of estimates and inputs used within models, which may vary materially from actual outcomes, including in connection with the current expected credit loss model or CECL model; the discontinuation of LIBOR and other reference rates which may result in increased expenses and litigation, and adversely impact the effectiveness of hedging strategies; uncertainty regarding the nature, timing, cost, and effect of federal and/or state banking insurance and tax legislative or regulatory changes or actions and changes in accounting standards, policies, estimate, or procedures.

Management believes the forward-looking statements made during this call are based on reasonable assumptions within the bounds of their knowledge of Peoples' business and operations. However, it is possible actual results may differ materially from these forward-looking statements. Peoples disclaims any responsibility to update these forward-looking statements after this call, except as may be required by applicable legal requirements. Peoples' second quarter 2020 earnings release was issued this morning and is available at peoplesbancorp.com under Investor Relations. A reconciliation of the non-Generally Accepted Accounting Principles or GAAP financial measures discussed during this call to the most directly comparable GAAP financial measures is included at the end of the earnings release. This call will include about 30 minutes of prepared commentary followed by a question-and-answer period, which I will facilitate. An archived webcast of this call will be available on peoplesbancorp.com in the Investor Relations section for one year. Participants in today's call will be Mr. Chuck Sulerzyski, President and Chief Executive Officer; and Mr. John Rogers, Chief Financial Officer and Treasurer. And each will be available for questions following opening statements.

Mr. Sulerzyski, the floor is yours sir to begin. Thank you.

Charles W. Sulerzyski -- President and Chief Executive Officer

At this time and wish for the continued well-being of you, your families and colleagues. We continue to monitor the COVID-19 pandemic and make adjustments as necessary. As the states in which we operate have relaxed some of their restrictions, we have also moved forward in our own reopening process. On June 22, we opened all branches with services being provided during normal business hours. We also started to bring back a portion of our operational workforce. We continue to have some associates temporarily working from home as we have limited spacing in certain portions of our offices that do not allow for adequate social distancing. We are supporting our employees and communities during this challenging time and plan to continue this practice. We will monitor developments and adjust our responses accordingly.

We have had many bright points in the last few months and our execution for our clients has been the most meaningful. We have closed nearly $500 million of loans under the Small Business Administration's Paycheck Protection Program or PPP. Approximately 40% of the total number of loans made have been to new clients who were previously [Indecipherable] with other banks that were unable to help them as quickly as we could. We've had some successes and cross-selling other financial products to our new relationships. This will be a continued focus for the remainder of the year.

We grew the number of households served every month during the quarter despite limited branch access. We had originated loan growth of 4% annualized compared to March 31st, 2020. This excludes the impact of PPP loans in our previously acquired loan portfolios. We had significant unexpected record production in consumer indirect lending, which had 31% annualized growth compared to the linked quarter end. We implemented a new consumer and a new commercial loan origination system. Despite the COVID-19 pandemic, teams work diligently to stick to the original implementation timelines.

Total non-interest income, excluding gains and losses, grew 3% compared to the linked quarter, excluding the annual impact of performance-based commissions. Our best performance was in commercial loan swap fees, which were nearly 4 times what we recognized in the linked quarter, coupled with growth in mortgage banking and electronic banking income. This increase was despite the nearly $1 million decline in our deposit account service charges. We had an 8% [Indecipherable] decline in total non-interest expense compared to the first quarter.

We had core deposit growth, which exclude CDs of 16% compared to March 31st, 2020. Although deposit growth has been a highlight for us during the quarter, our clients have had an abundance of liquidity. This has significantly reduced our deposit account service charges compared to the prior periods. We also completed the previously announced acquisition of a premium finance company, which was recorded effective on July 1st, 2020. This unit will operate as Peoples Premium Finance. We were recognized as a top bank to work for by the Cleveland.com and the Cleveland Plain Dealer as well as the number one bank in West Virginia as part of Forbes annual list of America's Best in State Banks and Credit Unions for 2020.

As far as our financial performance, we announced our quarterly earnings earlier this morning. We generated net income of $4.7 million for the second quarter of 2020 or $0.23 per diluted share and $4 million or $0.19 per diluted share for the first six months of 2020. Our results continue to be heavily impacted by the provision for credit losses, which reflect the current economic outlook utilized within the CECL model. During the second quarter of 2020, we recorded provision for credit losses of $11.8 million compared to $17 million in the linked quarter and $626,000 in the prior year second quarter.

The provision for credit losses we recorded negatively impacted diluted EPS by $0.47 for the quarter compared to $0.65 in the linked quarter. The relatively high provision for credit losses in the last two quarters is not however reflective of our current credit quality, which remained stable during the second quarter. As of June 30th, 2020, our allowance for credit losses was $54.4 million, and our unfunded commitment liability was $3.1 million. We also had some non-core items impacting results during the second quarter, including $918,000 of COVID-19-related expenses, which reduced diluted EPS by $0.04. These costs were associated with donations made to our communities in support of food banks and pantries as well as assistance to our employees, including a stock award for our employees that were an Assistant Vice President or below.

Pension settlement charges that totaled $151,000 for the quarter and negatively impacted diluted EPS by $0.01 and the recognition of our remaining FDIC credits, which were $172,000 and positively impacted diluted EPS by $0.01. Our return on average assets for the second quarter was 40 basis points compared to a negative 7 basis points for the linked quarter and 91 basis points for the prior year second quarter. On a pre-tax pre-provision, our return on average assets was 1.48% compared to 1.45% for the linked quarter and 1.21% for the prior year second quarter. The second quarter of 2019 was heavily impacted by $7 million of acquisition-related costs.

For the quarter, provision for credit losses in income tax expense negatively impacted our diluted EPS by $0.67 compared to $0.81 in the linked quarter and $0.16 in the prior year second quarter. Excluding provision for credit losses in income tax expense, our diluted EPS improved by 17% over the linked quarter and was higher than the prior year second quarter. Compared to the linked quarter, the improvement was driven by a decrease in total non-interest expense. The growth from the prior year second quarter was largely due to lower acquisition-related costs, which were $47,000 for the second quarter of 2020 compared to $7 million in the second quarter of 2019. For the first half of 2020, provision for credit losses and income tax expense negatively impacted diluted EPS by $1.47 compared to $0.32 in 2019.

Acquisition-related costs were $57,000 for the first six months of 2020 compared to $7.3 million for 2019. Our efficiency ratio improved during the quarter and was 62.34% compared to 66.64% in the linked quarter and 73.24% in the prior year second quarter, which had been heavily impacted by acquisition we made in expenses. When adjusted for non-core items, the efficiency ratio improved to 59.94% compared to 65.55% in the linked quarter and 60.21% in the prior year second quarter. Most of the reduction in the respective efficiency ratios was a result of lower total non-interest expense compared to prior periods.

We have been pleased with our performance as it relates to the PPP and our participation has benefited us in many ways during the quarter. We recognized fee origination income net of amortization of deferred cost of $1.9 million and $918,000 of interest income, both of which increased net interest income. Although the PPP loans benefited net interest income, the low interest rate of 1% on these loans, coupled with the origination fees of between 1% to 5%, which were partially offset by origination costs have negatively impacted our net interest margin.

Our weighted average origination fee on the volume of PPP loans originated was 3.3%. We also recorded a deferred personnel costs of $921,000 related to the average cost of originating the PPP loans, which decreased salaries and employee benefit costs. At June 30th, 2020, we have nearly $13.6 million of deferred origination fees, net of deferred costs, which will be amortized over the life of each loan originated. When a PPP loan is for given, any remaining deferred fees and cost associated with the loan will be recognized through net interest income. As far as loan growth, the PPP loan had an aggregate principal balance of $158 million at June 30th, 2020, which was included in commercial and industrial loan balances and was net of some payoffs during the second quarter. Excluding the impact of the PPP loans, total originated loans grew -- growth was 4% annualized compared to March 31st, 2020. Most of the growth was provided by increases of $32 million in consumer indirect and $31 million in commercial real estate loans. This growth was partially offset by a reduction in non-PPP commercial and industrial loans. We have seen an overall reduction in the utilization rates of commercial lines of credit as some of our business clients have used the PPP loan proceeds to reduce line of credit borrowings while others have used the PPP loan proceeds as an alternative to drawing on open lines. Our commercial line of credit utilization rate declined from approximately 50% in recent quarters to 37% at the end of June. Based on available balances that equates to approximately $60 million of available credit not being used that had been previously.

Our quarterly average gross loans increased 13% compared to the linked quarter with most of the growth coming from the PPP loans. Compared to the prior year second quarter average loan balances grew by 15%, while average loan balances increased 10% for the first half of 2020. The growth compared to the prior-year periods was due to both the PPP loans and the full period impact of the acquired loans from First Prestonsburg. As it relates to loan modifications, we completed the first wave of modifications in March and early in the second quarter. Our commercial portfolio has experienced much smaller second wave with some clients seeking an addition of two or three months of payment deferrals. We have been more closely analyzing these requests and have not exceeded six-month deferral period in these cases.

The majority of the second request are from clients of the lodging sector as they have continued to be severely impacted by effects of the current pandemic leading to less travel among business and leisure customers. These specific requests have accounted for more than half of the total balances approved for the second request of payment relief. At June 30, 2020 our lodging-related portfolio was 3.5% of our commercial loan portfolio and comprised 2.2% of our total loan portfolio. The remaining request for additional COVID-19 payment relief have primarily been from clients operating day cares and a few clients in the retail sector. Overall the second wave of modifications account for 5% of total commercial loans or 9% of total commercial loan balances originally modified. From a consumer loan standpoint, the number of new release requests subsided significantly at the end of the second quarter.

We reached out to our installment loan clients who were a part of the initial round of release, which was generally 90 days to see if they were prepared to resume payments on their own. Those levers have only resulted in a few calls for additional release. Our collections team has added two full-time associates in anticipation of further forbearance or modification requests at the initial forbearance plans, which were up to 180 days begin to expire. From a credit quality perspective, we have continued to experience relatively stable metrics. Our net charge-off rate was negative 5 basis points annualized for the second quarter of 2020 compared to a 7 basis point net charge-off rate in the linked quarter. Our negative net charge-off rate for the quarter was due to a $750,000 recovery on a previously charged off commercial loan coupled with lower gross charge-offs for the quarter.

Non-performing loans and non-performing assets were relatively flat compared to the linked quarter end. Our criticized loans increased by $14.6 million compared to the linked quarter end while our classified loans declined by $2.2 million. We had a couple of credits downgraded this quarter based upon updated information about the borrowers that was available with the downgrades not being driven by COVID-19. We are hopeful that these credits will exit as we continue through the remainder of the year. Our delinquency trends improved as loans considered current comprised 99% of our loan portfolio at quarter end compared to 98.5% at the linked quarter end. While we have not experienced an increase in delinquencies yet, we do anticipate that this will occur in the second half of 2020 as our clients continue to be impacted by COVID-19. Our future delinquency trends could be positively impacted if additional fiscal stimulus is provided to clients.

I will now turn the call over to John to provide additional details about the income statement and balance sheet.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks Chuck. During the second quarter, our net interest income increased by 1% compared to the linked quarter and was down 3% compared to the prior year second quarter. Compared to the linked quarter, interest income on loans increased slightly and efforts in managing our deposit costs served to more than offset a decline in investment income. While the PPP loans benefited net interest income during the quarter, our dependence on LIBOR for the pricing of our variable-rate loans had a negative impact on our net interest income. The one month LIBOR moved from 1.73% at the beginning of 2020 to 0.16% at the end of June. Our net interest margin declined 32 basis points compared to the linked quarter and was heavily impacted by lower loan yields, which were impacted by the PPP loans included in commercial and industrial loan balances.

These loans earned a [Phonetic] stated interest rate of 1%. For the quarter, we recognized $2.8 million in total for interest and fees on these loans. Our investment yields declined, which were affected by the lower interest rate environment driving premium amortization higher during the quarter. We recognized an increase of $720,000 in premium amortization compared to the linked quarter with reduced net interest margin by 6 basis points. We worked to offset these declines by reducing our deposit cost by 38% compared to the linked quarter. Our cost of funds declined from 84 basis points during the prior year second quarter to 43 basis points for the second quarter of 2020. Finally, we had a negative carry on our short-term borrowings in the fore part of the quarter as we have larger cash balances for funding of loans and potential draws on lines of credit.

Our net interest margin declined 58 basis points compared to the prior year second quarter due to lower loan and investment yields, which were partially offset by our ability to control funding costs. For the first half of 2020, net interest income declined 1% while net interest margin was down 44 basis points compared to the prior year period. Lower investment and loan yields partially offset by lower funding costs continue to be the driver of the decline and net interest margin. Accretion income, which is net of amortization expense added $995,000 to net interest income or 9 basis points to net interest margin during the quarter compared to the $1.1 million or 11 basis points for the linked quarter and $1.1 million or 13 basis points for the prior year second quarter.

For the first half of 2020 accretion income added $2 million to net interest income or 10 basis points to the net interest margin and $1.9 million or 10 basis points during 2019. Our total non-interest income excluding gains and losses decreased 4% compared to the linked quarter. This was due to several factors including lower interest income and lower insurance income, which was mostly related to the performance-based commission received annually in the first quarter. Our deposit account service charges declined by 32% and were partially due to the reduced customer activity and higher deposit balances, both of which have been impacted by the pandemic. The higher balances have been impacted by the government stimulus programs and PPP loan proceeds.

Our overdraft and non-sufficient funds income decreased 47% compared to the linked quarter as consumer spending habits shifted and average account balances were higher than normal. These declines were partially offset by higher swap fees. While the number of swap transactions during the quarter has been relatively unchanged compared to 2019, the larger size of the transactions has driven much of the increase as declines have taken advantage of the low interest rates. Mortgage banking and the electronic banking income also grew compared to linked quarter and were up 39% and 7% respectively. We continue to see a good mortgage pipeline as the low rate environment has increased client demand for these products.

Compared to the second quarter of 2019 total non-interest income excluding gains and losses declined by 5%. The reduction in deposit account service charges, which were down 36% with larger the result -- was largely the reason for the decline. While insurance income was also 8% lower than the prior year quarter. Swap fees nearly doubled compared to the second quarter of 2019 and electronic banking income grew 8%. For the first half of 2020, total non-interest income, excluding gains and losses, was down 3%. Electronic banking income grew 9%, partially due to the full period impact for the First Prestonsburg acquired accounts. Our swap fees nearly doubled compared to 2019. Insurance income declined by 10% and the positive chartered [Phonetic] decreased by 11% compared to the prior year.

We also recorded additional income of $787,000 during the first quarter of 2019 related to the sale of unrestricted Class B Visa stock, which was not repeated in the current year. We closely monitored and controlled our expenses during the second quarter of 2020. Our total non-interest expense declined by 8% compared to linked quarter and by 18% in the prior year second quarter.

Salaries and employee benefits cost increased 10% compared to the linked quarter, reflecting the impact of $921,000 increase in deferred compensation cost coupled with lower medical insurance costs. Our decline in medical insurance costs were mostly related to health savings account contribution for employees during the first quarter, coupled with the COVID impact of routine physical visits and elective surgeries, which were deferred until recently.

Foreclosed real estate and other loan expenses declined 42% compared to linked quarter. This decrease is mostly due to the increased deferred cost related to higher origination volume of consumer indirect loans. We also had reductions in travel and entertainment costs, which was driven by stay-at-home orders in place for part of the quarter and other ancillary costs compared to the linked quarter.

The decrease in total non-interest expense compared to the prior-year second quarter was largely the result of reduction of $6.7 million in acquisition-related expenses, coupled with further reductions in salary and employee benefit costs, which were due to the higher level of deferred personnel cost in the second quarter of 2020. Our professional fees declined 22% and was mostly related to lower acquisition-related expenses. Our FDIC expense increased by 60% and was related to the credits we received because the level of deposit insurance fund continue to be above the target threshold of smaller banks to recognize credits. We have now utilized all credits that were issued to us.

Compared to 2019, total non-interest expense during the first half of 2020 declined 7% as we recognized a reduction of $6.7 million in acquisition-related expenses. The majority of their main decrease was related to the decline in salaries and employee benefit costs, driven by the higher level of deferred personnel costs and lower medical and insurance costs. These decreases were partially offset by increased electronic banking expense, which was up 14% compared to the prior year. The increased data processing and software expenses was [Phonetic] 13% compared to the prior -- compared to 2019 and franchise tax improved [Phonetic] 19% higher than the prior year was impacted by higher equity balances affecting our Ohio Financial Institutions stats [Phonetic]. We focused on expense management during the second quarter of 2020 and will continue to keep this as a main objective throughout the remainder of the year and into 2020.

Moving on to the balance sheet, our investment portfolio declined 19% of total assets at quarter end compared to 23% at year end. This was partially due to the larger balance sheet at June 30th, 2020 as a result of the PPP loan. Principal payments on the investment portfolio was also higher than anticipated during the quarter, given the increased refinancing activity attributed to the reduction of interest rates by the Federal Reserve Board at the end of the first quarter. The principal paid on during the quarter were reinvested into the loan portfolio to support growth, and we utilize for the payment of the Premium Finance acquisition through our cloud investment opportunities were limited during the quarter.

Our demand deposit as a percentage of total deposits improved 42% at quarter end compared to 40% at the linked quarter and year end, and we're up 37% a year ago. Core deposits, which excludes CDs, grew 16% compared to linked quarter end, 25% compared to year end and up 27% compared to the prior year second quarter end. The recent PPP loan proceeds fiscal stimulus changed consumer's spending habits and driven the increases over the prior periods.

During the March 31st 2020, we experienced a 38% increase in non-interest bearing deposits, 23% growth in money market deposit accounts, and a 10% increase in savings account balances. We also -- we have been reducing our higher cost brokered deposits in recent quarters. However, we added $180 million in brokered deposits during the second quarter as they provide a relatively low cost funding for loan growth compared to our other funding sources. Quarterly, average deposits -- total deposits were 15% compared to the linked-quarter and 17% compared to the prior year second quarter, while average total deposits grew 13% compared to the first half of 2019. All periods were impacted by: the recent fiscal stimulus, PPP loan proceeds and changed consumer spending habits. All comparisons to the 2019 periods include the full period impacts of the acquired First Prestonsburg deposits.

These increases were partially offset by intentional [Phonetic] reductions and higher cost brokered deposits earlier in 2020. The recent increase in brokered deposits occurred late in the second quarter and did not have a large impact on quarterly averages. Our cost of deposits was 34 basis points for the second quarter of 2020 compared to 55 basis points in the linked quarter and 70 basis points in the prior year quarter.

We remain committed to maintaining a strong capital during this crisis. We have been [Indecipherable] our capital levels and [Indecipherable] large reductions in capital, while still being within our internal and regulatory requirement. During the quarter, we purchased nearly 10 million of shares under our share repurchase program. We will carefully evaluate whether to continue to share repurchases in future periods and at what level. Our capital ratios even after the recent purchases of shares continue to be strong.

At June 30th, 2020, our common equity Tier 1 capital ratio was 13.44%, our Tier 1 capital ratio was 13.69%, our total risk-based capital ratio was 14.94%, and our tangible equities -- tangible asset ratio was 18 -- was 8.16%, which was negatively impacted by 86 basis points due to the additional PPP loans at June 30th, 2020.

We've recently completed another stress test on our capital, which included the following key assumptions; no net income for the remainder of 2020 or the full year of 2021 and dividends were held at the current rate of $0.34 per share as for the results. Under this scenario, we will retain capital in excess of well-capitalized levels for our holding company at December 31st, 2021.

Our projected common Tier 1 capital would exceed the well-capitalized level by $136 million, while our total risk-based capital would exceed a well-capitalized level by $74 million. For the bank, our projected ratios would be above well-capitalized levels at December 31st, 2021 as well. Our projected common equity Tier 1 capital will exceed well-capitalized level by $140 million, while our total risk-based capital would be $70 million above well-capitalized levels.

In essence, the results of our stress test indicated that we could withstand no income, continue to pay our $0.34 [Phonetic] (35:23) per share dividend and still be able to absorb nearly $90 million of additional provision for credit losses through the end of 2021, while remaining above well-capitalized status. We will continue to closely monitor capital levels and pursue additional stress testing.

As we reported earlier this morning, we will continue to pay the same dividend per share during the third quarter and we did in second. Maintaining the dividend at the current level is a high priority. We have been proactive in our approach to liquidity management and they moved early in the pandemic to ensure we had available funds for potential needs. We have many strong sources of funding and plus additional collateral to secure our lines several months ago to have multiple funding options. We managed some excess liquidity during the quarter, which cost us our net interest margin, but we believe the risk and the need outweighed the cost. During the quarter, we did not end up utilizing the PPP lending facility in material way as we are able to secure other funding at lower costs. Our loan-to-deposit ratio declined 84% at June 30, 2020 compared to 86% at the linked quarter end and 87% at quarter end.

As we disclosed last quarter, we moved forward with the implementation of the CECL accounting standard as of January 1, 2020. Compared to March 31, 2020 the underlying economic forecast continue to show deteriorating conditions through the several quarters and when coupled with our loan growth resulted in the higher loss of credit losses at the end of the quarter. The recent PPP loan growth reflects plus obligation guaranteed by the SBA and therefore had no impact on our allowance for credit loss calculations for the quarter. At June 30, 2020, our allowance for credit loss grew to 1.62% of gross loans compared to 1.47% in the linked quarter end and 0.75% at year end.

Our allowance for credit losses to gross loans was negatively impacted by 0.3 basis points at June 30, 2020 using additional PPP loans for which there was no related allowance for credit losses. Our allowance for credit losses as a percent of non-performing loans has doubled compared to year end and was 199.81% at June 30 compared to 158.49% at the linked quarter end. While our own key metric -- key credit metrics compared [Phonetic] significantly during the quarter, the economic forecast at June 30 drove much of the increase in new allowance for credit losses.

I will now turn the call back to Chuck for his final comments.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you, John. Through the recent turmoil we have found the silver lining. Our associates, even though many had been working from home are working more closely than before. Our teams are dedicated to doing what is best for our clients and are doing as much as possible to help out during this difficult time. We remain committed to our communities and through payroll deduction our associates have donated over $40,000 to local food banks in recent months. As an organization, we have also donated $250,000 during the quarter to local food banks and pantries throughout our footprint. In addition, we recently donated $25,000 to the Heisman Trophy winner and Number 1 NFL Draft Pick by the Cincinnati Bengals Joe Burrow's Hunger Relief Fund, which was designed to make a difference in food and security across Southeast Ohio.

We will continue to look for meaningful ways to give back to our communities. We are excited to be working with the new Premium Finance team and look forward to the acquisition of complementing our current business structure while also giving us the flexibility to offer additional services to our clients. As we move forward, we continue to place importance on our credit functions as we closely monitor our portfolio and work to proactively identify issues and work with our clients to accommodate modifications. As we disclosed publicly in June, we will not be providing financial expectations for the foreseeable future during the historic period of economic uncertainty.

Overall, we view our financial strength as fee income, which comprise 30% of total revenue for the second quarter of 2020; our low-cost of deposits, which were 34 basis points for the quarter, a 21 basis point decline compared to the linked quarter; our loan-to-deposit ratio, which stood at 84% on June 30, 2020; our non-performing assets as a percentage of loans in OREO, which was at 80 basis points and improved 14 basis points compared to the linked quarter end; our strong capital position, which even on distress scenarios provides a great source of strength; and our ability to maintain a high stable dividend rate.

This concludes our commentary and we will open the call for questions. Once again, this is Chuck Sulerzyski and joining me for the Q&A session is John Rogers, our Chief Financial Officer. I will now turn the call back to the hands of our call facilitator.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] And the first question we have will come from Scott Siefers of Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler -- Analyst

Good morning, guys. Thanks for taking the question.

Charles W. Sulerzyski -- President and Chief Executive Officer

Good morning Scott.

Scott Siefers -- Piper Sandler -- Analyst

Hey. John was hoping you could -- I know you provided some detail in your prep remarks, but I haven't seen the deferred personnel costs in this fashion before. I guess we're all going through new stuff with the PPP, but just curious if you can expand upon how that plays out. That does not sort of structurally lower the expense base going forward by like $900,000 a quarter, right? That's just something that happened in the quarter in which those loans were originated. Is that correct?

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

That's correct. I mean, this is all under basically FAS 91 which requires you defer your origination income as well your origination cost. So as we originate all those loans you defer those set costs, right, just like you're deferring the fees that we got from SBA. So you amortize those over that two-year period and when these come to a -- the loans gets forgiven, you'll recognize all that, the fees and the expenses at that time. But it only happens when you originate the loans not an ongoing quarterly cost.

Scott Siefers -- Piper Sandler -- Analyst

Okay, perfect. And then when those, I guess the way we'll see those costs is just on a net basis through the margin, is that right? It sounded from your prepared remarks, like the -- but the fees and expenses get sort of netted within NII. Did I hear that correctly?

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

That's correct. That's correct. All those FAS 91 fees get run -- they get deferred and run into the margin.

Scott Siefers -- Piper Sandler -- Analyst

Yeah. Okay, perfect. And then the final one, apologies if I missed this in your prepped remarks but as for forgiveness of the PPP loans, what is your sense for timing and sort of total percent that ultimately could be forgiven?

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

We think the vast majority of it will be forgiven hopefully in this calendar year, maybe 80%, 85$of it this year. But it's hard to give an answer to a question like that, since there is no clarity as to what the forgiveness process is. That's what our thinking is.

Scott Siefers -- Piper Sandler -- Analyst

Yeah, OK.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

Definitely upside as they come up with the dollar threshold that they're going to automatically basically forgive, right so that would help move things along. But right now we're thinking anywhere to have, as Chuck mentioned, give or take -- 80% give or take could happen this year.

Scott Siefers -- Piper Sandler -- Analyst

Terrific. Okay, great. Thank you guys very much. Appreciate it.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you, Scott.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome Scott.

Operator

Your next question now will come from Michael Schiavone of KBW.

Michael Schiavone -- KBW -- Analyst

Hi, good morning. Thanks for taking my questions.

Charles W. Sulerzyski -- President and Chief Executive Officer

You're welcome.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning Michael.

Charles W. Sulerzyski -- President and Chief Executive Officer

Good morning Michael.

Michael Schiavone -- KBW -- Analyst

So you guys are one of the few banks to repurchase shares this quarter. Can you talk about the decision to continue with the buybacks and your comfort with the reserve and capital levels? And then do you expect deposit the buyback from here?

Charles W. Sulerzyski -- President and Chief Executive Officer

First off at this price, we think our stock is a steal. If we're not willing to buy it why would an investor be willing to buy it? We have high capital. I think we're going to continue to analyze stock purchases. We're not buying in excessive amounts at any one point in time. So we'll continue to review it. And I don't think it's the last buyback we will ever do. And I sure hope that the value of not only our company, but all of these community banks begins to reflect in the stock price, what they're worth. So, we like -- it's hard not to like the stock at this price.

Michael Schiavone -- KBW -- Analyst

Hi, great. Thank you. That's helpful. And on the NIM, should we expect the excess liquidity and the resulting drag on the margin to stick around for the next few quarters, given limited opportunities to deploy the cash?

Charles W. Sulerzyski -- President and Chief Executive Officer

Well, I would say that we brought down our own cash that we're holding during the course of the second quarter. We're holding a little less at quarter-end that we were definitely in the April, early May time frame. But given the current situation, things -- the economy, I think the potential further shutdowns and those types of opportunities, I think, we do need to be careful, right? So, I think you need to keep a decent amount of cash.

As far as the deposits and the inflow of deposits that we've had, a lot of that depends upon timing of these forgivenesses where our customers are actually dealing with the cash that they have. I'm expecting deposit balances to be pretty strong, at least throughout the remainder -- a good chunk for the remainder of the year as that holds in there.

We have the Premium Finance company too. We're optimistic that to grow. And when we actually bought that at July 1st officially, they're kind of at a seasonal wall. They have a strong pipeline that kicks off early in the third quarter, where the July, August, September is a very strong origination period, so we know we're going to have some funding related to that as well. And -- so that's kind of how we see things playing out currently. But I do think with all the deposits and everything else, it's very difficult to see how all these plays out over the next few periods.

Michael Schiavone -- KBW -- Analyst

Right. Okay. Thank you. I think, can you just provide some color on the consumer indirect loan production and where the demand came from and kind of what are some of the credit parameters around those loans?

Charles W. Sulerzyski -- President and Chief Executive Officer

Sure. I'd be glad to help you. I'll be damned if I can tell you where the demand comes from. I mean, buying vehicles in a pandemic would not have been on my top 10 things to do. But nonetheless, volumes for -- nationally, call volumes are pretty close to where they were before. In our footprint, they are a little bit higher. So that helps us. There is not much inventory out there in terms of new cars. So it was a little bit more tilted to used cars than what we have seen historically. And the average FICO production for Q2 was 734. So we had good credit quality with good growth. So, it's kind of like the perfect storm.

Michael Schiavone -- KBW -- Analyst

Awesome. Great. Thanks for taking my questions. Have a great day.

Charles W. Sulerzyski -- President and Chief Executive Officer

You too. Thank you.

Operator

[Operator Instructions] Next we have Russell Gunther of DA Davidson. Please go ahead.

Russell Gunther -- D.A. Davidson -- Analyst

Hey. Good morning, guys.

Charles W. Sulerzyski -- President and Chief Executive Officer

Hi, Russell.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

Good morning, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

A couple of follow-ups on some of the prepared remarks. But first, I wanted to clarify comments around the deferrals. So, could you give us a sense for where -- maybe on a total dollar basis, where deferrals stand today versus quarter end?

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

Are you talking about providing loan modifications?

Russell Gunther -- D.A. Davidson -- Analyst

That's correct, yeah. Just trying to track the trend for where we are. I mean, you spoke a little bit about some of the requests for a second round, but I'm just trying to track the point to point.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

When you say quarter end, you mean June 30th versus today or you mean March 31st versus June 30th?

Russell Gunther -- D.A. Davidson -- Analyst

However you like to define it. I just would like to get a sense of where those modifications are today and how they've trended over the past 90 days.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

I think at our peak, the deferrals were about $530 million. And I think, as we sit here, it's about $486,000. So they're coming down.

Russell Gunther -- D.A. Davidson -- Analyst

Okay. Got it. And then...

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

I think the key point is really that the -- we keep talking to our customers, and we're not seeing a lot of demand for any reops on that side of the thing. Especially on the commercial side, there were 90 to 120 days. So people would start to have an inkling of where they're headed on that, I believe. At this point in time, they're going to need [Indecipherable] 51:08. So we're not seeing larger demand. So over the next 30 days, 45 days when we start to run off, so you're really not going to a large runoff yet in these months and also probably occurred well after April 13th. By the time, that process would start rolling so.

Russell Gunther -- D.A. Davidson -- Analyst

Got it. Okay. And then, along those lines, guys, thank you for that. But do you consider these customers to be higher risk given that they are in a forbearance program? And if that's the case, is that reflected in the current reserve or will we potentially see additional reserve builds for these going forward?

Charles W. Sulerzyski -- President and Chief Executive Officer

I do not consider the vast majority of these customers to be at higher risk. A good example would be the McDonald's portfolio, which is about $100 million of it. McDonald's is doing extremely well. The operators and abundance of caution did everything they could to increase their liquidity. So, of the $480-ish million that's out there, I feel really strong about -- over $400 million of it is going to be perfectly fine. Where I feel in the last quarter's call, we went through our portfolio in detail and talked about different segments that might be stressed. Fortunately for us, the only segment that we're really feeling stressed in is in the hotel portfolio, which is a relatively small portfolio and about $40-ish million of those modifications. So, we feel pretty good about it.

Russell Gunther -- D.A. Davidson -- Analyst

I appreciate the color, Chuck. You actually got to my next question, which was, how that kind of COVID-19 ring-fence has trended? You mentioned some of the sectors that you called out last quarter. So, how would you quantify it? Beyond hotel, is that really where things stand in terms of the most amount of stress you'd expect or are there still other pockets of weakness you would include in that ring-fence amount?

Charles W. Sulerzyski -- President and Chief Executive Officer

Hotels is overwhelmingly the largest piece of it. We have some day care facilities that are a little stressed. We have some non-McDonald's restaurants that are a little stressed but nothing really material. And as it relates to increase in the reserves, our reserves are bigger than our net charge-offs for the last 10 years. I mean -- so, I'm struggling with this new accounting convention. I would say that our reserves are extremely high relative to the rest of us in our portfolio.

Russell Gunther -- D.A. Davidson -- Analyst

Got it. Okay. And that was really to my last question, Chuck. Thank you for that. But hearing you on how you feel about the deferrals that you wouldn't expect significant negative credit migration there? Hearing you that COVID-19 loans at risk is a lower percentage than you would have characterized originally. Have we seen the provision level peak for Peoples in the first half of the year?

Charles W. Sulerzyski -- President and Chief Executive Officer

Well, understand how CECL works. It is based on an economic model that includes a number of components, unemployment forecasts, GDP forecast for Ohio and some for the United States. And I don't control what Moody's says to those variables. I do feel very good about our portfolio. I do feel very good about what our folks are doing. I do feel good about where our clients are. But as those economic forecast deteriorate, there's a -- according to the convention, the new convention, our reserves are going to go up. And do I think that marriage the risk in the portfolio? I don't. But I don't get to make the rules.

Russell Gunther -- D.A. Davidson -- Analyst

So that's the driver going forward. There are qualitative overlays that...

Charles W. Sulerzyski -- President and Chief Executive Officer

The qualitative overlays, yeah, qualitative overlays but you cannot -- but you can modify it, but you can't like go in the opposite direction.

Russell Gunther -- D.A. Davidson -- Analyst

Okay.

Charles W. Sulerzyski -- President and Chief Executive Officer

I think, [Indecipherable] will wind up, right? So, even when the economic indicators start to level up, if that's the point and given the fiscal stimulus at the curve, I think so far this has been very untraditional three or four months a year. And I think how this plays out will be like nothing we've seen before, right, I would imagine.

And you could probably wrap through on multitude of outcomes if you think through along enough. But with the economic indicators improved, you're going to start to see maybe a few credits. And then you're going to need to put up specific reserves on those credits. So, the economic factors could improve. Your core models could come down. You might need to have some specific reserves that you put up. How that one comes down, one goes up, where that levels off, and do you -- it doesn't mean a net increase, a net decrease. I think that was all to the comments we decided. So predicting those types of things, I think, is very difficult. But that said, we are very confident in our portfolio. We think we've seen good signs of the modifications. We think we have good signs on consumer delinquencies. But we'll see how does it play now.

Russell Gunther -- D.A. Davidson -- Analyst

And I appreciate the color. Thanks for taking my questions, guys.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome.

Operator

[Operator Instructions] Next, we have Steve Moss with B. Riley FBR.

Steve Moss -- B. Riley FBR -- Analyst

Hi. Good morning.

Charles W. Sulerzyski -- President and Chief Executive Officer

Hey, Steve.

Steve Moss -- B. Riley FBR -- Analyst

If you guys want to start -- and just follow up with the -- regarding CECL here, just kind of wondering what are your underlying assumptions with regard to GDP and unemployment?

Charles W. Sulerzyski -- President and Chief Executive Officer

I'm just -- I had a hard time hearing your questions, Steve. You want to know what the taxes are in the model that we use?

Steve Moss -- B. Riley FBR -- Analyst

Yes, for GDP and unemployment for example.

Charles W. Sulerzyski -- President and Chief Executive Officer

Yeah. So, it's US unemployment, Ohio unemployment and Ohio GDP are the three factors.

Steve Moss -- B. Riley FBR -- Analyst

Right. I guess, are you using like -- assuming like a high-single-digit, low-double-digits-type unemployment rates...

Charles W. Sulerzyski -- President and Chief Executive Officer

Well, what we use?

Steve Moss -- B. Riley FBR -- Analyst

Yeah. In kind of both the models?

Charles W. Sulerzyski -- President and Chief Executive Officer

Moody's forecast in June were 10 to 12 months out, the US unemployment is 9.68%; Ohio unemployment, 10.34%; and Ohio GDP, plus 4.51%.

Steve Moss -- B. Riley FBR -- Analyst

Okay.

Charles W. Sulerzyski -- President and Chief Executive Officer

We use the Moody's baseline scenario, right? So, I think you can go there and you'll find the number that we use for the next 12 quarters, we go out one year.

Steve Moss -- B. Riley FBR -- Analyst

Okay, perfect. And then, with regard to funding costs for the -- I apologize if I missed this. Just kind of curious where funding cost could shake out here for deposits in just total interest bearing funds in the next three to six months?

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

Well, I think for the quarter, they were 34 basis points. We have an excess of liquidity. I don't think that it's going to change that much, the cost of deposits over the next...

Charles W. Sulerzyski -- President and Chief Executive Officer

So we've done some -- continuing to lower the deposit cost. We did some a little wrapping down in June that helped a little bit, but for the most part, most of our costs are at a pretty low level. We still have some promotional products, CDs, money markets that will come off throughout the year, as well as some public funds and contracts with [Indecipherable] supplier. So, you'll see a reduction for those, but I don't think you're going to see quite the reduction in the next few quarters that we have seen over the last few quarters. So, we're probably talking basis points as opposed to tens of basis points.

Steve Moss -- B. Riley FBR -- Analyst

Okay. That's helpful. And then, just kind of in terms of -- a hard one to answer, but in terms of just business activity, I'm assuming most customers are pulling back. When do you think you do have any sense of when you could be perhaps building a more commercial pipeline or how are you thinking about that further out?

Charles W. Sulerzyski -- President and Chief Executive Officer

Well, I think there's a couple of things. I may feel better about some of the activities than you may. First, so if you look at Ohio, Kentucky and West Virginia footprint and you look at the pandemic, of cases per 1 million are way lower and our deaths per 1 million are way lower. So, the US average for cases per 1 million is 11,968. Ohio is 6,519, Kentucky 5,241 and West Virginia 2,869. So, I think that those numbers reflect state in total whereas the state got the most problems with the pandemic it's in Cleveland, Columbus and Cincinnati. So, if you look at our footprint, we're more in the rural counties. I think that our customers are probably more optimistic than Ohio on average or national on average.

We did have 4% loan growth outside of the PPP between Q2 and Q1. We do have a respectable pipeline. Is it the best pipeline I've seen in my career? No. But are the deals that we're doing, that a good deals to do? Absolutely. We also have the benefit of the PPP customers that we bought in. So far, we have sold over $40 million of deposits and loans to those new PPP customers as well as close to $150,000 in fee. And I suspect, over the next 90 days, we'll be able to increase that a multiple of times as we round those customers out and welcome them to Peoples Bank. So, I don't think it's all bleak. And we'll just keep -- chip it away, and I think it will be fine.

Steve Moss -- B. Riley FBR -- Analyst

Okay. That's helpful. And then, lastly, just kind of -- in terms of just going back to the hotel portfolio. You mentioned the largest source of stress. If you just remind us on the loan-to-values and kind of how you're thinking about -- I'm assuming a lot of those customers are going to redefer. Just how to think about maybe restructuring those loans or what your thought process is there?

Charles W. Sulerzyski -- President and Chief Executive Officer

The 64% loan-to-value, obviously, those appraisals are done 1 times when they're fully operational and reflects the income of the property. Nine of the 12 were flagged. The three that aren't, two of them are cabins and people are running to cabins to get away. And they're doing great, probably better than ever. But I can't speak for the country, but I can tell you that I made my first business trip last week and stayed in two different hotels, and stayed at a 300-bed hotel. And the night I was there, it had 80 occupants, and that was the best night I had since this thing began.

And you saw -- if you follow the national data, you saw that hotel occupancy actually dropped last week. It had been increasing. But last week, it went back. And if you saw what the CEO of Marriott said, he views this as a problem for a long-term. So I suspect these folks are going to have difficulty. A number of them are well-capitalized, and they'll get through it. If you have asked what the scenario is, I'm sure that these properties will likely be downgraded in the second half of the year. Do I expect us to have losses in the second half of the year on these properties? I think that's unlikely. It's possible. Do I think that these properties will have losses through this pandemic? Perhaps, but I don't think it will be anything meaningful, particularly in light of whatever the number is, $54 million provision.

Steve Moss -- B. Riley FBR -- Analyst

Okay.

Charles W. Sulerzyski -- President and Chief Executive Officer

[Indecipherable] whatever.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

That would be a [Indecipherable].

Steve Moss -- B. Riley FBR -- Analyst

Well, thank you very much. I appreciate all that color.

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you.

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

You're welcome. Probably a big one.

Operator

At this time, we're showing no further questions. Sir, do you have any closing remarks?

Charles W. Sulerzyski -- President and Chief Executive Officer

Thank you for listening to us go on and on and on. But thank you for participating. Please remember that our earnings release and webcast of this call will be archived at peoplesbancorp.com under the Investor Relations section. Again, I want to thank -- I want to wish everyone good health. Thanks for your time and have a good day.

Operator

And we thank you, sir and also to the rest of the management team for your time also today. Again, the conference call is now concluded. At this time you may disconnect your lines. Thank you again everyone. Take care and have a great day

Duration: 67 minutes

Call participants:

Charles W. Sulerzyski -- President and Chief Executive Officer

John C. Rogers -- Executive Vice President, Chief Financial Officer and Treasurer

Scott Siefers -- Piper Sandler -- Analyst

Michael Schiavone -- KBW -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

Steve Moss -- B. Riley FBR -- Analyst

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