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People's United Financial Inc (NASDAQ:PBCT)
Q2 2020 Earnings Call
Jul 23, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the People's United Financial, Inc. Second Quarter 2020 Earnings Conference Call. My name is Andrew and I will be your coordinator for today. At this time, all participant lines are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Andrew Hersom, Senior Vice President of Investor Relations for People's United Financial, Inc. Please proceed, sir.

Andrew S. Hersom -- Senior Vice President of Investor Relations

Good afternoon and thank you for joining us today. On the call to review our second quarter 2020 results are Jack Barnes, Chairman and Chief Executive Officer; David Rosato, Chief Financial Officer; Kirk Walters, Corporate Development and Strategic Planning; Jeff Tengel, President; and Jeff Hoyt, Chief Accounting Officer. Please remember to refer to our forward-looking statements on Slide 1 of this presentation, which is posted on our Investor Relations website at peoples.com/investors.

With that, I will turn the call over to Jack.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Thank you, Andrew. Good afternoon. We appreciate everyone joining us today and hope you and your loved ones are remaining safe and healthy. Before discussing results, I want to take a moment to thank our employees, customers and communities we serve for their perseverance and ability during this pandemic. Since the onset of the crisis, many have said, we are all in this together. This sentiment is truly tested in the daily interactions between our employees and customers to move forward in a socially distance environment and through our engagement with community organizations to provide relief to those most in need. Their ability to confront challenges together has in the past and continues today to forge and solidify relationships between People's United and our customers. We strive to further strengthen these relationships as we play a critical role in supporting the financial health of individuals, businesses, and communities throughout this crisis and beyond.

As I mentioned last quarter, we entered this crisis in a position of strength. Our performance in the second quarter was not only indicative of the strength, but also the resilience of the franchise. Pre-provision net revenues of $210 million on an operating basis increased 15% from the prior year quarter and benefited from higher net interest income and ongoing success controlling costs. We also continue to produce positive operating leverage, as evidenced by a 230 basis point improvement year-over-year in the efficiency ratio to 53.5%. These results are reflective of the material cost savings that we have achieved from recent acquisitions and help to generate a tangible book value per share of $10.18, an increase of 7% from a year ago.

The net interest margin of 3.05% was 7 basis points lower compared to 3.12% reported in both the linked and prior year quarter. The margin compression mostly reflects the downward pricing of floating-rate loans, partially offset by meaningfully lower deposit and borrowing costs. Period end loans and deposit increased 3% and 12% respectively, linked quarter. Excluding PPP loans, loans decreased 3% largely due to lower commercial real estate balances and our planned reduction in residential mortgages. Deposits, primarily benefited from PPP funds, federal stimulus payments and higher municipal balances. Notably, strong deposit inflows reduced the loan to deposit ratio to 91% [Phonetic] from 99% [Phonetic] at the end of the first quarter.

Clearly the pandemic has significantly impacted the economy. Although as the second quarter progressed, we did see a modest uptick in business activity from the lows earlier in the period. In particular, mortgage warehouse results continue to be strong. As expected, residential mortgage originations were robust in our retail channel, but were more than offset by payoffs. In commercial real estate and C&I, originations remain modest. Unlike many banks, we did not experience a high level of line draws and C&I utilization rates have remained steady. This is a reflection of the strength of our customer base and their confidence in our ability to support their funding needs.

New business and equipment finance has been subdued, with the exception of lease where we have seen signs of increasing activity. While new business activity has been modest, our focus is on maintaining a high level of communication with customers. We have continued to serve customers in the manner in which they want to be served either in person, with a personal social distancing protocols; via our digital channels or virtually, through video meetings. This has enabled our relationship managers, branch personnel and wealth management advisors to successfully transact with customers and be responsive to their needs. We are pleased that effective July 1 all of our branches return to normal operations given the favorable pandemic trends across our footprint. With that said, our top priority remains the health and well-being of our employees and customers.

Consistent with our history on providing support in times of need, we are committed to helping customers navigate through this crisis. As of July 15, we have funded nearly 18,000 PPP loans totaling over $2.6 billion, which have supported the paychecks of more than 260,000 employees across the Northeast. Companies that received PPP loans through us have an average of 15 employees. Top industries funded include social services, healthcare, retail, professional services, and construction. Approximately 80% of these loans were under $150,000. We're also registered for the Main Street lending program, while further -- to further support small and mid-sized businesses were appropriately granted loan forbearances. At quarter end, we have approved more than 14,000 loans for deferral totaling over $7.1 billion. Price of $5 billion in commercial, and $1.1 billion in equipment finance, and $1 billion in retail. Positively, the trends in the initial forbearance request have slowed materially and we have been pleased to receive payments from 38% of the accounts, representing 19% of loan balances since they were in deferral.

We also continue to assess the needs of customers that may require extended release. Second round forbearance requests are subject to a more extensive due diligence and credit analysis to confirm additional releases needed as well as viability of the business in this new economic environment. While still early in the process, based on conversations across our customer base, we expect second round forbearance levels will be meaningfully less than the first. We believe this is the testament to our approach to relationship banking and reflects the strong capital and liquidity profile of our customers.

Turning to Slide 3. Clearly the -- during the duration of the pandemic, it is unpredictable and the total impact on the economy is unknown. However, we remain confident that our long held underwriting philosophy and diversified loan portfolio comprised of high quality, cycle tested customers will once again differentiate People's United. Our conservative business model is advantageous, especially in challenging economic conditions. One of the strategic objectives of our risk management is running a diversified portfolio that does not overly expose the bank to a single line of business. All of our relationship managers are highly credit trained and remain with customers through the entire life cycle of the loan. This enables our sales force to develop significant knowledge of each relationship and facilitate detailed conversations with borrowers. As such in times of economic stress, these deep relationships allow us to quickly transition from a new business mindset to a capital preservation focus that is sympathetic [Phonetic] with the needs of the customer.

With that background in mind, on Slide 3, we have once again provided our exposure to sectors significantly impacted by COVID-19. Similar to last quarter, we have included the retail, hospitality, and restaurants sectors. As an update this quarter, we have refined the retail disclosure to display only loans managed by our commercial real estate lending teams. It's important to reiterate our conservative view of underwriting enables us to enter this crisis in a position of strength. Credit metrics across each of our portfolios, including these sectors were at very strong levels. Balances in the CRE retail portfolio are $3.6 billion. Importantly, we do not have material exposure to enclosed retail malls and essential tenants comprise approximately half of the portfolio. These include grocery stores, pharmacies and big box home improvement locations.

In addition, we have been pleased to see a meaningful improvement in rent collection trends for retail customers we deemed at risk. Pre-pandemic rent collections were near 100%, but declined to 35% by the end of May. Based on conversations with customers, we expect rent collections to be approximately 70% by the end of July. Deferrals at quarter-end were $1.5 billion for the CRE retail portfolio. Given the portfolio's concentration of essential tenants, we expect second deferral request will be significantly less than the initial round.

Balances in the hospitality portfolio $1.1 billion of which 90% is managed by our CRE lending teams. The majority of the portfolio is flagged by major hotel brands and comprised of economy to upper midscale properties. In terms of occupancy, these properties have fared better than upscale and luxury properties across the industry. Our Top 10 clients account for over 70% of our CRE hotel exposure. Each of these sponsors are cycle tested, have extensive hotel experience and are long-tenured customers of People's United. Deferrals were $876 million for the total hospitality portfolio at quarter end. While occupancy has steadily improved since the onset of pandemic, we expect most customers to apply for a second deferral.

Balances in the restaurant portfolio are $513 million of which approximately 85% are managed within C&I, including the traditional C&I and the segments franchise finance specialized industry vertical. The remainder of the portfolio is managed in equipment finance. The majority of the franchise portfolio is in quick service restaurants, which have experienced a lesser degree of disruption especially where drive-thru traffic remains strong. Deferrals at quarter-end were $290 million for the total restaurant portfolio. Many of our customers are coming to an end of the first 90-day deferrals and presently only a few have requested another round of relief.

Before moving on, it's is also worth noting that continued high rent collection rates in our multifamily and office building portfolios. The average collection rate for our Top 15 multifamily loans is in the high 80% range. And in the high 90% range for our Top 15 office building loans. Looking forward, undoubtedly the near-term impact of the pandemic are top of mind for every bank management team. However, it is clear to us that coming years will look much different from past and therefore we remain keenly focused on investing in the franchise for the long term. In particular, we are actively pursuing ways to further strengthen our digital capabilities and enhance our already broad array of products and services offerings to meet the ever-changing needs of customers. As such we are excited by the recent formation of our Business Transformation office, which is responsible for digitization, product strategy, management, process automation and FinTech partnerships. The business transformation office is unlike any other group, we have had at People's United and will further drive our ability to innovate and reconceptualize offerings. This team will not only provide competitive advantage by enabling us to stay ahead of customer needs, but also ensure that our strategic plan successfully advance the franchise.

Consistent with the theme of meeting customer needs, we are pleased to introduce AlwaysChecking earlier this month. We are offering this premium digital identity protection service free to all personal checking account customers. People's United is proud to provide this level of digital identity protection benefits that will further differentiate the banks. This offering builds on our core value proposition of service and protection and we are confident AlwaysChecking will further attract and retain customers throughout the franchise.

Before turning the call over to David to discuss the second quarter results in more detail, I wanted to congratulate Dave Berey, our now former Chief Credit Officer. His well planned retirement earlier this month included more than 28 years with People's United. His thoughtful leadership has been instrumental to the bank and has his many, many contributions. Thank you, Dave for your dedication and we wish you all the best. We are excited to welcome Rich Barry as our new Chief Credit Officer. Rich joins us from [Indecipherable] where he was Chief Credit Officer and he brings with him more than 25 years of proven experience managing risk and growing businesses including during times of adverse conditions. His deep knowledge of our Northeast footprint and experience working at larger peer banks, which also includes holding the role of Connecticut market President at Citizens will significantly benefit People's United.

With that, here is David.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Thank you, Jack. Our second quarter financial results compared to the prior year quarter were highlighted by a 15% increase in operating pre-provision net revenue and a 230 basis point improvement in the efficiency ratio. We also maintained excellent asset quality as evidenced by net loan charge-offs to average total loans of 8 basis points. Operating earnings of $101 million or $0.24 per common share, included a provision of $80.8 million, which reflected the continued impact of COVID-19. The $47.3 million increase in the provision linked-quarter was driven by a weaker economic forecasts.

Our current modeling -- current economic modeling reflects both a baseline economic forecast out at late June and a more adverse scenario, which each weakened compared to the end of the first quarter given higher unemployment, sharper GDP contraction, and a longer expected recovery timeline into the first half of 2021.

On slide 4, we break down the allowance for credit losses by portfolio segment. The total allowance at June 30 of $414 million, up from $342 million at the end of the first quarter provides significant coverage as it represents more than 12 times our annualized second quarter net charge-offs and 140% of non-performing loans. Notable changes to segment -- allowance to loan ratios include C&I, which declined 11 basis points linked quarter to 70 basis points due to the addition of PPP loans. Excluding PPP, the C&I allowance equals 89 basis points and the total allowance is 96 basis points. Equipment finance increased 103 basis points to 201% reflective of the portfolios shorter duration loans. The average life of the equipment finance portfolio is approximately two years, which under CECL most cash flows do not revert to long-term historical loss rates and makes them highly dependent on the economic scenario model.

Moving to Slide 5. Net interest income of $405.6 million, increased $9.6 million or 2% from the first quarter. The loan portfolio unfavorably impacted net interest income by $38.3 million. In addition, lower yields in the securities portfolio reduced net interest income by $3.2 million. These headwinds were more than offset by lower deposit and borrowing costs, which benefited net interest income by $37.2 million and $13.9 million respectively. Of note, net interest income benefited approximately $12 million from PPP during the quarter, which reflects $9 million in related fees and $3 million in net interest income.

As displayed on Slide 6, net interest margin of 3.05% was 7 basis points lower than the first quarter. The loan portfolio negatively impacted the margin by 40 basis points, driven by the downward repricing of floating rate loans. In addition, lower security yields reduced the margin by 7 basis points. Partially offsetting these negative effect was our continued discipline managing deposit pricing and lower borrowing costs, which favorably impacted the margin by 29 basis points and 11 basis points respectively. Across the franchise, our line of business leaders did a remarkable job working with customers and managing deposit costs lower. Average deposit costs were 34 basis points in the second quarter compared to 71 basis points in the first quarter while borrowing costs, improved 115 basis points over the same period. The net impact on the margin from PPP was negligible in the second quarter, as the loans were not on the books for the full three months. Looking ahead, we expect PPP will have approximately 3 basis point unfavorable impact on the margin in each of the next two quarters.

Turning to loans on Slide 7. Average balances were up $1.7 billion or 4% in the first quarter while period end loans increased $1.2 billion or 3%. Growth on both an average and period end basis was concentrated in the C&I portfolio driven by the addition of PPP loans and strong mortgage warehouse results. Average balances also benefited from equipment finance, due to the continued growth in lease. It is important to note in connection with United Bank core system conversion in early April, approximately $400 million of loans secured by owner-occupied commercial properties were prospectively reclassified from commercial real estate to C&I.

Excluding PPP, loans declined on both an average and period end basis. Average loans decreased $66 million or less than 1% from the first quarter, while period end balances were down $1.3 billion or 3%. The largest driver of the decline in period end loans was $458 million reduction in residential mortgages as we continue to remix the balance sheet with a focus on higher yielding portfolios. In addition, adjusting for the reclassification, middle market C&I was down over $280 million while CRE and asset-based lending balances declined approximately $250 million and $190 million respectively. Balances in the transactional portion of the New York multifamily portfolio, which is in run-off mode, ended the quarter at $621 million, down $71 million linked quarter and $116 million year-to-date. In addition, the period end balance for the United loans, we have chosen to runoff, was $962 million, decline of $80 million from March 31 and $151 million since year end. We continue to expect runoff of $200 million to $300 million for each of these portfolios for the full year.

Moving on to deposits on Slide 8. Average balances were up $4.2 billion or 10% from the first quarter while period end deposits increased $5.2 billion or 12%. Growth on both an average and period end basis was primarily driven by inflows of PPP funds and federal stimulus payments as well as higher municipal balances. Notably $2.8 billion increase in non-interest bearing deposits was the largest driver of the higher average balances in the quarter. At June 30, non-interest bearing deposits accounted for more than 27% of total period end balances, up from 23.5% at the close of the first quarter. Looking forward, as customers further utilize PPP funds and federal stimulus payments, we anticipate deposit balances to abate in the second half of the year. Our funding and liquidity profile remains strong, with secured borrowing capacity of $13.3 billion at quarter end, comprised of $6.8 billion in federal home loan bank capacity, $3.2 billion in unpledged securities and $3.3 billion and Federal Reserve Bank pledged loans.

Looking at Slide 9, non-interest income of $89.6 million, down $34.2 million or 28%, strong first quarter results. The largest driver of the decline was a $15.1 million in lower net gains from sale of loans. As a reminder, the first quarter included a $16.9 million gain related to the sale of loans acquired in the United transactions. Excluding gains on the net sale of loans, non-interest income decreased $19.1 million and was primarily driven by lower levels of customer activity and fee waivers related to COVID-19 relief measures. Specifically, this decline reflected a $7.7 million decrease in bank service charges inclusive of fee waivers, $6.1 million in lower customer interest rate swap income, $1.9 million in lower insurance revenues reflecting the seasonality of commercial insurance renewals, and a $1.5 million reduction in commercial banking lending fees primarily due to lower loan prepayment fees in equipment finance. Overall, the net impact on non-interest income in the second quarter from fee waivers was approximately $4.7 million.

On Slide 10, non-interest expense of $304 million, declined $16.1 million linked quarter. The second quarter included $18.5 million non-operating costs up $600,000 from the first quarter and were in the following categories, $13.7 million in other non-interest expense, primarily driven by branch closures related to the United transaction, $3.6 million in professional and outside services, $1 million in compensation and benefits and $200,000 in occupancy and equipment. Excluding non-operating cost, non-interest expense of $285.2 million was down $16.7 million or 6% compared to the first quarter. The largest driver of this improvement was a $6.7 million decline in compensation and benefits due to lower payroll and healthcare related costs. Occupancy and equipment costs were favorable by $2.7 million, travel and meeting related expenditures were lower by $2.4 million, primarily due to the impact of COVID-19, advertising and promotion and professional and outside services cost collectively decreased net interest expense by $2.9 million, primarily as a result of timing.

Briefly on Slide 11, you can see the efficiency ratio improvement compared to the prior year quarter. Our 53.5% efficiency ratio is a product of our ability to generate positive operating leverage and in particular realize the projected cost take outs from acquisitions.

As referenced earlier, we sustained excellent asset quality and entered the pandemic in a position of strength. As displayed on Slide 12, net loan charge-offs to average total loans were 8 basis points, an improvement of 2 basis points from the first quarter. Non-performing assets as a percentage of loans and REO at 69 basis points, was 10 basis points higher linked quarter. This increase was primarily driven by two accounts, one represented a C&I account, which was experiencing difficulties prior to the pandemic. The other was an acquired commercial real estate loan.

Turning to Slide 13. Return on average assets of 58 basis points or 65 basis points on an operating basis, and return on average tangible common equity of 8.1% or 9.5% on an operating basis were down compared to recent quarters. The decline in these returns in the second quarter was primarily driven by the elevated provision resulting from the impact of COVID-19.

Finally on slide 14, we remain comfortable with our capital structure and balance sheet strength. Capital ratios continue to be strong given our diversified business mix and long history of exceptional risk management. It is important to note, adjusting for PPP loans, the pro forma Tier 1 leverage ratio at period end would be 8.3% for the holding company and 8.7% for the bank. Additionally, the TCE ratio, excluding PPP would be 7.6% versus the reported 7.3%.

This concludes our prepared remarks. We'll be happy to answer any questions you may have. Operator, we're ready for questions.

Questions and Answers:

Operator

Ladies and gentlemen, we are ready to open the lines up for your questions. [Operator Instructions] And our first question comes from the line of Ken Zerbe with Morgan Stanley.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. Good evening guys. I guess the first question, just in terms of the PPP loans, if I heard correctly, you're expecting a 3 basis point negative hit to NIM over the next couple quarters due to PPP loans, I'm kind of assuming like there is obviously no ancillary [Phonetic] payouts in there, you're probably not assuming anything other than the two year pay off, I guess or full amortization of these loans. But even under those assumptions, like your NIM is call it roughly 3%. I think most other banks we're hearing from say the fully I guess amortized yield or full yield on these loans is something over 3% assuming any kind of accelerated half. I'm just trying to understand like why is this negative to your NIM? What are you assuming in terms of like the loan yields for the payoffs that is resulting in such a low or a hit? Thank you.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Sure Ken. So I mean, you're correct we're basically assuming that the vast majority of those loans will be on for two years. There was a few that could possibly go five just at the tail end. I would say the average loan is about 2.75 [Phonetic] under those assumptions, average loan yield. The reason, we made the statement negligible in the first quarter, it was a small negative. The only difference, I'm sorry, second quarter, not first quarter. The only, the only real difference between second quarter versus third and fourth is that the loans weren't all on the books for the full quarter in Q2. But we assume they will be in Q3 and Q4.

Operator

Thank you. And our next question comes from the line of Dave Rochester with Compass Point.

Dave Rochester -- Compass Point -- Analyst

Hey, good evening guys.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Hi Dave.

Dave Rochester -- Compass Point -- Analyst

Just a quick one on the credit. It was really encouraging to hear your expectations on the retail CRE collections. I was just wondering what you guys are hearing from your customers that gives you confidence that collection rate is going to effectively, if I heard correctly double by the end of July. Are you getting like weekly cash flow data from these guys or seeing anything else? Any color there would be great.

Jeff Tengel -- President, People's United

Yeah, well we are having, we're having a lot of conversation with customers across all of our businesses. In that particular area, our real estate group collected data from those conversations with customers and information and that was kind of tabulated carry forward. I don't know if you want to describe that Jeff any differently.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

No, I think that's right Jeff. What we've been doing is having real robust conversations with all of our commercial real estate customers in particular focusing on places like retail. And so the comments we're making is kind of a just a collection of all of the information we're hearing back from our customers and they have seen increasing trends in rent collections. Of course it's difficult to predict what the second half of the year looks like, but as we sit here today, they've been steadily increasing since the start of the pandemic. So clearly at a much better position today than they were three months ago.

Dave Rochester -- Compass Point -- Analyst

Yes, definitely. Maybe just one quick follow-up, are you seeing any difference in either collection activity or if, underlying metrics between your originated book and your acquired book?

Jeff Tengel -- President, People's United

This is Jeff. I think it's difficult to break it out like that. The short answer is I don't know, my intuition is I don't think so, but we haven't analyzed it that way.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

I would just add, if you look at our -- if you look at our delinquencies non-performers etc. we really feel not on something, but we're not impacted yet, they are very low. So there's nothing showing up in our acquired portfolios that are changing those numbers.

Dave Rochester -- Compass Point -- Analyst

Okay, great. And maybe just one last one on expenses. Obviously there is some good expense control this quarter. Just wondering what you're thinking about for the puts and takes of the expense run rate going forward. And if this is a good run rate just excluding all the charges and what not? Thanks.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Sure, Dave. I'll take that. So the way I would think about it is, as you know, we gave guidance in January, guidance around expenses was a $1.192 [Phonetic] billion to $1.220 [Phonetic] billion. Our thinking today is that we will be right around the lower end of that guidance by this time the year so all said and done.

Dave Rochester -- Compass Point -- Analyst

All right, great. Thanks guys.

Operator

Thank you. And our next question comes from the line of Jared Shaw with Wells Fargo.

Jared Shaw -- Wells Fargo -- Analyst

Hi everybody, good evening. Just wanted to say congratulations to Dave, hope he enjoys his retirement. Maybe starting with credit. Can you give an update on what you're seeing from deferral levels as we've entered here in July? It seems like most other places are seeing pretty substantial declines. You have any updated numbers on where deferral stand either today or recently?

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Yeah, we are -- well, I guess I would say we're cautiously optimistic. We -- Jeff just described the conversations that we're having across the businesses, and it certainly includes the people that got deferrals. When we were 16% overall in the deferral level, which I think reflected our trying to be very accommodative to our customers at that initial phase. Most of the deferrals were granted in late March, early April. And so right now, and as we, as we speak there is a pretty significant number of those conversations have taken place in the last 30 days to try to gauge, anticipate how many will be asking for a second. And we mentioned in our comments, we think the hospitality group definitely will need it. And we'll definitely accommodate them. We've been talking to them regularly and as we described very good long-term customers. So, we want them and the properties. And the other kind of broader level served, we would say, I think it's going to be meaningfully below 50% -- in terms of second request and a lot of the portfolios, we're not anticipating runs it all. So the conversations have been positive. Many, many people have told us, now that they've gotten through the initial shock and they kind of reevaluated their operation and the impact there. They won't be asking for a second deferral. So I would say we feel pretty good about it.

Jared Shaw -- Wells Fargo -- Analyst

Okay, that's great color. When you look at the ones that you're more concerned about, or that may need a longer term deferral, would your -- would you -- would you be more inclined to try to come up with some type of a formal restructuring and move it off of deferral by year-end? Or would you be more inclined to utilize the longer duration deferral that CARES Act allows?

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Yeah. So if we were to grant that second deferral then we're hitting that 100 days, which we would use, I would say. And then during that period, we'd be evaluating what kind of restructuring if any is needed. So I would say, different types of businesses, different types of properties, probably it's kind of difficult to describe what kind of restructuring would do, but we would use the 180-day period and then we would kind of have to go from there unless the regulators and accountants extend that periods.

Jared Shaw -- Wells Fargo -- Analyst

Okay. And just finally from me, when you look at the equipment finance in having to put a big seasonal provision on that does that really make it less attractive to put on any new equipment finance loans right now or would you, would you still be putting on equipment finance loans today even though you may have to put a bigger provision associated with that day one?

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Yeah, I would -- I'll give you an answer and I will let David or Jeff contribute. First of all, no that doesn't discourage me at all with the -- with the lease and the equipment finance groups. They were actually performing very well. They're doing well. Their credit history is really, really good, it's much better than the industry. And I really have no reason to think that the performance isn't going to continue. This is kind of a case where CECL drives you because of the short duration period and the economic scenario to that higher provision. Once things calm down, hopefully, they do, then that requirement will be for higher provisions will be reduced and we'll recover provisions in my mind.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah, I would say that's the perfect answer, Jack. It's just, it's one of those nuances of CECL similar to we are carrying a reserve for residential mortgages larger than we think you need to, but that's driven by the long duration of the assets where it is the opposite with the equipment finance right now.

Jared Shaw -- Wells Fargo -- Analyst

Great, thanks a lot.

Operator

Thank you. And our next question comes from the line of Steven Alexopoulos with J.P. Morgan.

Alex -- J.P. Morgan -- Analyst

Hi, good evening, this is Alex [Phonetic] on for Steve. Starting off with reserves, how much of the reserve build this quarter was tied to the change in economic forecasts as opposed to -- or fully specific changes and were qualitative overlays immaterial back through this quarter?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

I would say essentially all of the reserve build was due to economic scenario modeling. They you know there are qualitative overlays as part of our process, but drive -- that's -- that's not -- wasn't really the driver, it was just a as we referenced in our comments a weaker economic forecast than last quarter.

Alex -- J.P. Morgan -- Analyst

Thanks for that. And on to fees, just one question on the $4.7 million in way fees you mentioned, can you talk about what you're doing on that front and how long you expect this to continue for? Thanks.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Sure. So similar to forbearance in the first round, we tried to be as accommodating as possible to our customer base to help them through this time period of economic uncertainty. We saw a -- as the quarter unfolded there was a reduction in fee waivers given across and this was mostly our retail base, though they were still occurring as late as June. So I would expect the impact to be substantially less in Q3 than what you saw in Q2.

Operator

Thank you. And our next question comes from the line of Steven Duong with RBC Capital Markets.

Steven Duong -- RBC Capital Markets -- Analyst

Hey good evening guys. Yeah, just a quick one, do you have your the LTVs and debt service coverage ratios for your deferred retail CRE and your hospitality portfolios?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Not that we're prepared on this call to share.

Steven Duong -- RBC Capital Markets -- Analyst

Got it, OK.

Jeff Tengel -- President, People's United

I would say, again this is Jeff. I would say that going into the pandemic, we had underwritten really all of our commercial real estate portfolio, but those segments, in particular on a pretty conservative basis. So we felt good, as good as you can be going into a pandemic obviously we didn't underwrite to a pandemic, but feel pretty good about going into the pandemic in terms of the leverage in the real estate portfolio.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

And we actually talked about that on the call last -- last quarter.

Steven Duong -- RBC Capital Markets -- Analyst

Great, thank you. And then just on the PPP fees, how much in total fees you guys book?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Within the quarter we booked $9 million of fees.

Steven Duong -- RBC Capital Markets -- Analyst

And how much is remaining?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

The total fees were in the mid to upper 70s. As Jack referenced in his comments majority of what we did was at the lowest tier loan size, which had the highest fees.

Steven Duong -- RBC Capital Markets -- Analyst

Great. And then just the last one, you guys the reserves are based on the latest economic forecast. So I guess is it fair to say if the economic forecast, if the actual economy plays out similar to what the economic forecasts are right now, then your provisioning should go back to what it was before?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah, it would settle down subject to loan growth, of course.

Operator

Right. Okay, great. I really appreciate. Thank you, guys.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Thank you. And our next question comes from the line of William Wallace with Raymond James.

William Wallace -- Raymond James -- Analyst

Thanks for taking my question. I just got two brief questions on deferrals. You stated that the experience or you're optimistic that the CARE rates will be high, on the deferrals that have come due or rolled off the deferral and then have had a payment, what percentage of those have made their next payment versus gone to a second round?

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Well, most that activities -- most, most of the activities of the first deferral would have just ended the month of June. We had July paying, but we only had the opportunity to see one payment so.

William Wallace -- Raymond James -- Analyst

You only had one loan that's had -- that's come up to a payment, is that what you are saying?

John P. Barnes -- Chairman of the Board and Chief Executive Officer

No, I was saying -- the loans that have gone into deferral that are just coming out, they are just coming out in July. So I thought you asked if everyone had made second payment and I'm saying that we haven't had an opportunity to see second payment.

William Wallace -- Raymond James -- Analyst

No, no, I'm sorry, I'm saying what percentage have made the next payment their first payment after coming off, of the ones that have come up on that payment due date.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

No, they are just coming off now. So this is the first month and so, yeah, we don't -- to me that we will know that, but what I would focus I think what's probably more important is in Jack's comment he referenced of the deferrals we granted, while loans where in deferral, approximately 40% of the accounts and 20% of the balances chose to pay, even though we granted deferrals. And he also said that we think the amount of deferrals will significantly decrease and will probably be less than half the original deferrals in the second.

William Wallace -- Raymond James -- Analyst

Okay, so. Okay. Yeah. As you think about reserve builds, can those loans that do go on to a second deferral, do you think that would you anticipate you'd have some continued though milder reserve builds due to downgrades of those loans?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yes, what I would go back to is the level of provision expense primarily governed by the economic scenario, right, number one. Levels, a lot of -- the kind of metric data that goes into our models, some of our models are dependent on risk weighting, some are risk weighting, but not all of them.

William Wallace -- Raymond James -- Analyst

Okay, all right. Thank you.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

But just one further comment. Our allowance process does incorporate some downside risk of lower internal risk ratings as well.

William Wallace -- Raymond James -- Analyst

Okay. Thank you very much. Appreciate the color.

Operator

Thank you. And our next question comes from the line of Collyn Gilbert with KBW.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Thanks. Good afternoon guys. I'm not sure if that was D or C, but nonetheless it is been a long day. To start on the borrowing pay down. So that was a pretty dramatic pay down in the quarter there and obviously really meaningfully reduce the cost. I think you brought it down to like 27 basis points on borrowing costs, David, how is that setting up the margin for the third quarter? And then what was kind of the strategy or the reasoning behind that, or at what point, did you decide to kind of pull the trigger on paying down those borrowings?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Good question Collyn. What I would say is, most of our treasury borrowing book, we tend to keep relatively short. So it was we could just naturally pay it off. We didn't have to extinguish home loan, bank borrowings or anything like that. So you make a decision, you either balloon the balance sheet right or just kind of let that deposit inflows pay down those borrowings, which is what we chose. You can -- you did see a small increase in cash and do on the balance sheet. So we did have higher levels of cash with -- with the Federal Reserve, but the more important part of the question I think is how that set up the margin for the back half of the year? We are very successful in deposit costs lowering them. There are still some opportunities, but not as great from in Q -- from Q1 to Q2, we have lots opportunity obviously from Q2 to Q3 and for the, probably the biggest driver will be just our CD books pricing down as well as customer preference for liquidity. So you saw -- we saw balances go from CDs in the money market and checking accounts as well. So we still have some positive tweaking to do there, some natural role on the deposit side.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. And just the timing of the borrowing pay down I guess is another kind of part two of that question to determine what the impact might be in the third quarter on the NIM?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah, I mean the level of borrowings, if the deposit inflows growth that we had roughly stays the same, the borrowing base isn't going to change, unless it, it's really going to be dependent on loan growth in the back half of the year. We have robust loan growth or even better loan growth, mild [Indecipherable] loan growth, there will be a funding needs.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

I thought Collyn was trying to ask how rapidly we paid down the borrowings during the second quarter, was that it Collyn?

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Yeah, what are the savings? Right, I mean if you're starting it, I think you started borrowings at 142 [Phonetic] in the first quarter, they dropped to 27 basis points. So is that just trying to understand this yeah, how much more savings could be seen in the third quarter?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Those borrowings came down, they were more front loaded in the quarter than back loaded. Number one, we are driven by the PPP loans coming in because that money is out there and then lastly by the stimulus. Sorry about that Collyn.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

No, no. That's OK, that's OK, that's helpful. Okay and then just going back to credit, so I know this has been asked a lot, but just curious, I think it was probably as late in the quarter as maybe early June where I thought the view was perhaps consistent with what you guys said following one quarter that's a provision would likely kind of be in the same range in the second quarter as it was in the first quarter and I guess if we look at where the economy was in early June while maybe you had not implemented your actual economic forecast at that point. I guess just qualitatively -- I'm just trying to connect the dots there, because I thought the messaging in early June was that the provision would be comparable to first quarter and yet, obviously it came in meaningfully higher. So beyond the economic model input anything else there that changed that viewpoint?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Well, I mean from my perspective on the call in April, we were telegraphing yeah, slightly up, is the way I would characterize it. We left open the possibility for a higher provision in Q2. You know June economic data is really the driver here, but it was definitely weaker than March.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Okay. Okay and then lastly, I think if I'm doing the math right and the numbers are right, I thought after the first quarter you had indicated that was like about $6.2 million. I'm sorry, $6.2 billion of loans you identified kind of as received. And then in the release and the deck this quarter, it looks like $5.2 billion and it looks like a drop was on the retail CRE side, did something happen within that book that you maybe would have characterized.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Yeah, that was actually Jack alluded to in his comments. So we find the definition of commercial of retail pre and we were too broad in hindsight in Q1. So what we -- the number we're focusing on is what is managed by our commercial real estate lending teams. There were some middle market CRE in the first quarter numbers.

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Got it, OK. I guess, OK. Okay, that was -- that was all I had. Thank you.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

You're welcome.

Operator

Thank you. And our next question comes from the line of Matthew Breese with Stephens Inc.

Matt Breese -- Stephens -- Analyst

Good evening. Sorry if I missed it, but did you -- could you just characterize for us what the core NIM might look like, both in the medium and really like a year out from now if interest rates were to be unchanged, what could the core NIM migrate to?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Leave it to you to ask the hardest question. While we've suspended guidance you know because of the fluidity of the situation. The -- what I would say Matt is there is clearly more forces taking the NIM down than the NIM up. You know the so the shape of the yield curve, you know Fed policy, I think consensus is rates aren't really going to change or go up anytime soon. So there is definitely pressure on the NIM. In the quarter, I think we were very successful in managing deposit costs. I tried to say in answer to Collyn's questions that we still have some more to do on the deposit cost side, but it's not nearly as much as we were able to do in the second quarter. The loan spreads held up in the quarter, but there wasn't a lot of volume. If the situation gets worse, the economy gets worse, credit spreads are going to -- are going to widen. So when you have opportunities to lend to strong customers, we will be lending that wider spreads. So I don't want to, you know, talk about where we think NIM might be in 2021 at this point, but I can see the NIM falling below 3% obviously, and I could see it in a 2.90, 2.80-ish type range over time.

Matt Breese -- Stephens -- Analyst

Understood, OK. And then to what extent did loans on deferral contribute to net interest income this quarter? And just hypothetically speaking if deferrals were to go to non-performing asset would therefore be backed out of NII?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

I'm sorry Matt, I missed that question.

Matt Breese -- Stephens -- Analyst

Well, the loans on total deferral you're not collecting principal or interest, yet you're accruing the interest in net interest income. To what extent that impacted NIM this quarter?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

So it was -- it's in the NIM. So as you stated we there are on deferral, but we're accruing that interest. So it really didn't have an impact on the NIM in the quarter.

Matt Breese -- Stephens -- Analyst

Okay. And then my last one is just on, could you provide some color on your goodwill impairment evaluation process and whether or not that's necessary at this point and then practically speaking, if there is the need to take an impairment would that factor into your ability to pay the dividend?

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Couple of questions there. What I would say is obviously as part of each quarter, we think about goodwill impairment and whether it's necessary. The factors that we discuss that as we go down that path internally and in talks with our outside accountants is that the factors aren't present for goodwill impairment for us to have to go and do a full analysis. That's driven by the fact that there is large -- the last time we've done a full assessment there were large cushions in goodwill. So we don't think that that's an event that I mean, obviously we have to go through the process each quarter. But it is not something we're expecting as we sit here today. So I'd rather not speculate on if that happens what impact that might have on the ability to pay dividends.

Matt Breese -- Stephens -- Analyst

Okay, understood. That's all I had. Thanks for taking my questions.

David Rosato -- Senior Executive Vice President and Chief Financial Officer

You are welcome.

Operator

Thank you, ladies and gentlemen. Since there are no further questions in the queue. I would now like to turn the call over to Mr. Barnes for closing remarks.

John P. Barnes -- Chairman of the Board and Chief Executive Officer

Thank you. Our performance in the second quarter demonstrated the strength and resilience of People's United. Our employees continue to deliver financial solutions despite the many challenges presented by the pandemic and provide critical support to customers. From a financial perspective, our results were highlighted by PPNR growth year-over-year, a strong efficiency ratio, high level of the deposit in flows, sustained excellent asset quality. While the impact of the pandemic on the long-term economy is unknown. We remain confident our long held conservative underwriting philosophy and diversified loan portfolio comprised of high quality, cycle tested customers will once again differentiate our franchise throughout these uncertain times ahead. Thank you all. Stay safe. Have a good evening.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

Andrew S. Hersom -- Senior Vice President of Investor Relations

John P. Barnes -- Chairman of the Board and Chief Executive Officer

David Rosato -- Senior Executive Vice President and Chief Financial Officer

Jeff Tengel -- President, People's United

Ken Zerbe -- Morgan Stanley -- Analyst

Dave Rochester -- Compass Point -- Analyst

Jared Shaw -- Wells Fargo -- Analyst

Alex -- J.P. Morgan -- Analyst

Steven Duong -- RBC Capital Markets -- Analyst

William Wallace -- Raymond James -- Analyst

Collyn Gilbert -- Keefe, Bruyette & Woods -- Analyst

Matt Breese -- Stephens -- Analyst

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