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First Commonwealth Financial Corp (PA)Â (FCF 0.81%)
Q2Â 2020 Earnings Call
Jul 29, 2020, 2:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the First Commonwealth Financial Corporation Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.
Now, I'd like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
Ryan Thomas -- Vice President of Finance and Investor Relations
Thank you, Cole, and good afternoon, everyone. Thanks for joining us in today's call to discuss First Commonwealth Financial Corporation's second quarter financial results.
Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Brian Karrip, Chief Credit Officer and Jane Grebenc, our Bank President and Chief Revenue Officer.
As a reminder, a copy of today's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call.
Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on Page 2 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.
Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported financial results in accordance with GAAP. A reconciliation of these measures can be found in the Appendix of today's slide presentation.
With that, I will turn the call over to Mike Price.
Mike Price -- Chief Executive Officer
Hey, thank you, Ryan. We were generally pleased with the second quarter results with net income of $23.9 million, earnings per share of $0.24, a pre-tax pre-provision ROA of 1.61% and the core efficiency ratio of 57.2%. First, provision expense fell to $6.9 million from $31 million in the first quarter, as three non-performing loans were resolved.
The second quarter reserve increased from $2 million to $81 million or 1.28% of total loans, excluding PPP loans as we added another $5.5 million in qualitative reserves to reflect the economy and our COVID overlay. We believe that ratio compares favorably to other incurred banks, although our second quarter reserve of $81 million was calculated using the incurred loss model. Adding our previously disclosed day-one CECL increase would put reserves into the mid $90 million range. That would put the reserve coverage in the mid-150s, which we believe would compare favorably with CECL banks our size, even with no further reserve build. That's all because of the strong reserve build we did in the first quarter.
Our first quarter loan deferral figure of $1.1 billion or 17.6% of total loans fell all the way $186 million or 2.7% of total loans as of July 24. Most of our deferrals were 90 days and our approach to customers, consumers, and businesses in March and early April shifted from accommodative and customer service oriented to a more credit-oriented approach in May and June.
The team is exercising extraordinary oversight with regard to credit. This is warranted particularly if the ongoing reopening of the economy cannot safely continue in the ensuing quarter or two, and as the impact of the initial shorter-term government stimulus dissipates.
In the second quarter, our credit and banking teams did a name-by-name commercial loan review and spoke with some 1,600 clients in total. Brian Karrip, our Chief Credit Officer will provide more credit commentary shortly.
Second, the team helped roughly 5,000 local businesses, preserve roughly 80,000 jobs at a median loan size of only $32,000 through the Payroll Protection Program. Excluding $571 million of PPP loans, our portfolio grew 2.7% annualized, driven by record mortgage volumes, strong indirect loan originations and corporate banking growth.
Our Ohio markets accounted for all of the net new loan growth in the second quarter, further validating our Ohio expansion over the past few years. As an aside, over $20 million in PPP loan fees were wired to First Commonwealth in June from the SBA and will accrete into income in the second half of the year, as we expect that the majority of our PPP loans will be forgiven.
Third, the net interest margin of 3.29% fell as expected. But after adjusting for the dilutive effects of the PPP loans at 1% and an excess of low-yielding cash on our balance sheet, the NIM of our company was closer to 3.41%. Jim Reske, our CFO, will provide commentary on margin expenses and other important items.
Fourth, non-interest income of $21.8 million in the second quarter increased some $2.5 million as the company set quarterly records in both mortgage originations and debit card interchange income. Regarding the former, some $203 million in mortgage originations, increased gain on sale income from $1.7 million to $4.2 million.
On the latter, we added 10% more debit cards with our Santander branch acquisition last year. And in the second quarter, consumer debit card swipes were up as retailers had a strong preference for cards versus cash. This produced $5.9 million in debit card interchange income, $600,000 more than last quarter.
Fifth, our capital levels remained strong. We have over $200 million of excess capital and together with our ALLL, this would allow us to absorb losses equal to roughly 5% of the entire loan portfolio at once, and still remain well capitalized.
Sixth, despite the $2.5 million uptick in our non-interest expense, the $52.8 million, the underlying expense trend is down as the quarter-over-quarter comparison absorbs $3.4 million -- $3.4 million negative variance in unfunded commitment expense.
Jim Reske will elaborate on this as well, but we want to enter 2021 and sustain through the year of $51 million to $52 million quarterly non-interest expense run rate.
At the onset of the COVID pandemic and after the first Federal Reserve cuts in March, the Executive team started a broad-based initiative dubbed, Project THRIVE, as we focused on one growth, expense and efficiency, NIM, and capital, with the expressed goal of emerging on the other side of the pandemic stronger than ever.
We now have two dozen initiatives, some small, some large in the works. Yesterday, we announced the consolidation of 20% of our branches across our footprint into adjacent offices that will be completed by year-end. This comes at a time that we are setting quarterly company records with online mobile account opening, mobile deposit activity and debit card activity with our new contactless cards.
In the ensuing months, we expect to launch our third generation of P2P payments and the fourth generation of an integrated mobile online banking platform after the successful launch of a new treasury management platform for our commercial clients in June.
Customer preferences continue to change meaningfully and the COVID crisis has pushed all things digital, well past traditional servicing. Just one example; in the second quarter, we opened 992 deposit accounts via our mobile online platform, some three times our first quarter figure, which by the way was not bad. Our investment in digital leaves us well prepared for the future.
Lastly, the First Commonwealth team will remain focused on a handful of items that will simply make us a better bank, namely accentuating opportunities to grow our core business and geographies as we continue to build the first Commonwealth brand. Second, realizing efficiencies at a time when margins are compressed and could remain there for the foreseeable future. Third, executing a handful of key digital initiatives in the ensuing months and continuing to build competitive advantage on that front. And lastly, navigating the COVID environment to deliver good, through the cycle credit and net interest margin outcomes for our shareholders.
I'd like to now turn the time over to Jim Reske. Jim?
Jim Reske -- EVP/CFO
Thank you, Mike. Before I begin, allow me to point out that we have, as usual, provided a supplement to our earnings release in the form of a PowerPoint presentation, that is available on the Investor Relations portion of our website, which we will refer to you from time-to-time in our remarks.
Core earnings per share of $0.24 rebounded strongly from last quarter. This brings our trailing four quarter non-core EPS average to $0.21, well in excess of our current dividend of $0.11 per share.
Second quarter results were driven by relatively positive credit experience and the net interest margin. Brian will discuss credit in detail in a moment, so my remarks will be focused on margin, expenses and changes in our loan deferrals.
The net interest margin fell from 3.65% last quarter to 3.29%. The primary driver of NIM compression was, not surprisingly, rate resets on the bank's variable-rate loans following the Fed's 150 basis points of rate cuts. However, there was also a pronounced effect on NIM from the addition of low rate PPP loans and the excess cash on the balance sheet as these loans were mostly disbursed in the customer deposit accounts. We also saw inflows from other sources such as federal stimulus checks.
As a result, we had quarter-over-quarter growth in average deposits of $758 million. Non-interest-bearing deposits alone increased by $537 million to 29.4% of total deposits, up from 25.3% last quarter. This strong deposit growth resulted in an average of $212 million of excess cash in the quarter.
In fact, excess cash peaked at over $480 million in mid-July or nearly 5% of total assets. This of course had a suppressive effect on the NIM.
We estimate that the impact of PPP loans and the like amount of associated deposits on NIM to be approximately 12 basis points in the second quarter, which would imply a core NIM of 3.41% for the quarter. That represents 24 basis points of NIM compression, which is within the range of previous guidance, albeit at the higher. Our ability to lower deposit costs in the second quarter, helped to blunt the impact of downward rates. For example, the average rate on interest-bearing demand in saving deposits, which had over $4 billion, is our largest deposit category, was cut in half in the quarter from 48 basis points to 24 basis points.
As shown on Page 12 of the supplemental earnings presentation, our total cost of deposits, including non-interest-bearing deposits fell in the second quarter from 51 basis points to 31 basis points.
Looking forward, we still have nearly $800 million of time deposits, at an average rate of 1.51%, which will reprice downward over time and should help offset the impact of negative loan replacement yields, though not completely.
As a result, even though we expect some further NIM compression, we believe the pace of compression should slow. Adjusting for the impact on NIM from PPP loans and excess cash, we expect the core NIM to drift down to 325 to 335 by year-end.
To offset the impact of the low rate environment, we remain firmly focused on continuing our long and successful track record of controlling expenses. The quarter-over-quarter increase of $2.5 million in non-interest expense was strongly affected by the unfunded commitment reserve, which was a negative $2.5 million last quarter but a positive $0.9 million this quarter for a $3.4 million negative quarter-over-quarter swing.
The other notable event in NAIE [Phonetic] was about $419,000 of COVID-related expense in the second quarter. Going forward, we expect significant expense reductions from the branch consolidation project, Mike discussed earlier. We expect this and other contemplated expense containment initiatives to enable us to maintain a non-interest expense run rate of between $51 million to $52 million per quarter for the foreseeable future.
Now, let me provide a few general remarks on our loans and deferrals and how they are trending. Last quarter, we reported that deferrals totaled $1.1 billion or 17.6% of total loans as of April 24, the Friday before our first quarter earnings call. Deferrals peaked during the quarter at approximately $1.4 billion. We would note that most of our deferrals were for 90-day periods that began in the last week of March and continued through April.
As such, the initial 90-day period for most of these loans has been coming to an end only in the last few weeks. But we would encourage caution in drawing conclusions from what is only early experience. However, as Mike mentioned, as of July 24, last Friday, they remained $186.3 million of loans in deferral status or 2.7% of total loans.
While that reduction is an early positive sign, we firmly believe that it's too early to draw any conclusions until we see more evidence of actual payment history on these loans. We have therefore, increased qualitative reserves held against consumer forbearances by $1.2 million in the second quarter.
Before I turn it over to Brian for a discussion of credit trends, I'd like to just reiterate our rationale for remaining with the incurred loss approach. Last quarter, volatility in forecast model gave us pause as to the efficacy of those models, and now volatility continues with the current debate over V, W, U and swoosh recoveries.
As I mentioned last quarter, we saw no advantage in CECL adoption at the time and we continue to believe that's the case. So, we have, in fact, allowed us to observe the various industry approach of CECL adoption and refine our models accordingly.
However, even though we are on incurred, as shown on Page 6 of our supplement, we did a significant reserve build in the first half of this year, resulting in a coverage ratio that we believe compares favorably with incurred banks as well as many CECL adopters, and we continue to build qualitative reserves in the second quarter.
With that, I'll turn it over to Brian.
Brian Karrip -- EVP/Chief Credit Officer
Thank you, Jim. Although we're in the early innings of the economic recession, we're pleased with our asset quality trends for the second quarter. Our NPLs decreased approximately $3.1 million, improving from 0.93% of total loans in Q1 to 0.88%, excluding PPP.
Reserve coverage of NPLs rose from 133.53% to 145%. NPAs decreased $4.5 million from 0.74 of total assets in Q1 to 0.66. Classified loans as a percentage of total loans excluding PPP decreased from 1.42% to 1.21%. These improving trends form the backdrop of our approach for loan loss reserve in the second quarter.
We continue to build reserves under the incurred loss model by approximately $2.4 million. Our allowance of total loans grew to 1.28%. Provision for the quarter was $6.9 million, driven by modest loan growth and overall decrease in NPLs of approximately $3.1 million. The decrease in specific reserves of approximately $2.9 million [Technical Issues] changes in our qualitative reserves.
Our standard qualitatives increased by $3.4 million quarter-over-quarter, reflecting the economic conditions. As Jim mentioned, our COVID qualitative overlay increased by $2.1 million to $9.9 million.
Recall, from the last quarter, we developed a framework to capture the incremental risk of loss due to COVID. The framework included eight higher risk commercial portfolios. Additionally, we developed consumer overlay based on our internal PD/LGD models to address the risk associated with consumer forbearances.
We attribute our solid performance in the quarter to our continued adherence to our credit principles. Over the past several years, we've managed concentration risk in both levels, creating granularity in our commercial loan portfolios. As of June 30, we only had 27 relationships over $15 million.
To better identify portfolio risk, we have prepared internal industry studies for each commercial real estate segment as well as certain C&I segments, including dealer floor plan and energy. Our industry study is a valuable tool to identify and vantage certain portfolio risk.
Additionally, we use our industry studies to manage our geographic diversification and diversification with industry sectors. One of our great strengths is that we use our size, speed, and flexibility to our advantage. For example, over the course of the second quarter, we performed a comprehensive loan review, covering approximately 1,600 borrowers and $3.6 billion in commercial loans.
We reviewed commercial credits as small as $350,000, so as to better understand COVID-related impacts on our commercial clients and small businesses.
The review is founded on the notion that, in this current economic environment, financial statements look at customers through the rearview mirror. And we want to look through the windshield.
During our loan reviews, we relied on our experience and customer knowledge to evaluate the health of our borrowers on a name-by-name basis. These loan reviews helped us to identify potential risk and to adjust risk ratings accordingly.
And with that, let me turn it back to Mike.
Mike Price -- Chief Executive Officer
Hey, thanks, Brian and Jim. And with that, I'll turn it back to the operator for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question today will come from Frank Schiraldi with Piper Sandler. Please go ahead.
Frank Schiraldi -- Piper Sandler -- Analyst
Good afternoon. Just wanted to start on the branch closures. It sounds like the $51 million to $52 million that you guys are targeting in non-interest expense next year, that is based on both cost saves here and then additional initiatives, is that right?
Mike Price -- Chief Executive Officer
That is correct.
Jim Reske -- EVP/CFO
Yes. We expect savings of about $8 million net, some leakage of that savings with some revenue headwinds in our branches and then we'll have some one-time costs in the third quarter. And the savings there, we'll be adding additional savings and that will be less. We still continue to make pretty significant investment in digital. This year, with our P2P options out, with a new online account opening -- our online mobile platform and treasury management, we're adding to our expense. So, it comes out in the wash at about $51 million to $52 million.
Frank Schiraldi -- Piper Sandler -- Analyst
And are the closures or the combinations sort of across geography and they tend to be more rural or less rural or any detail there?
Jim Reske -- EVP/CFO
I think they are pretty equally weighted. I'll just share a few things. I mentioned that the consolidation is a function of customers increased utilization of digital tools. We also developed a pretty strong culture of deposit gathering and I'll let Jane speak to that in a minute, Jane Grebenc our Bank president.
We also have looked at this pretty analytically, the distance between branches being consolidated, the median distance is 3.5 miles. We feel like we can really control attrition. We're affecting 20% of the branches, which represents 10% of our deposits. Then, of those 10%, we really only expect about 15% to 20% attrition or about 1.5% to 2% being truly at risk.
And then the last thing I would just share is, make no mistake, we are still bullish on branches. We probably have more per capita than most of our competitors. Our retail locations deliver our brand, and our people inside these branches are powerful in their outreach to the communities.
And so, I think we're still bullish on branches, but I think this is an important opportunity here. And I would say, probably half for rural and probably half for metro. So, that's probably about 10 each.
Frank Schiraldi -- Piper Sandler -- Analyst
Okay. And then just one quick follow-up on provisioning. Totally heard you on the full review and it sounds like you've adjusted risk ratings with that review. So, obviously difficult to say and there is still lot of uncertainty out there. But as we think about provisioning for the back half of the year, is it more reasonable at this point to assume the reserve builds are behind and may be provisioning in the back half of the year, just to match charge-offs? Give any thoughts on that front.
Mike Price -- Chief Executive Officer
Brian?
Brian Karrip -- EVP/Chief Credit Officer
Yes, our view is that we call faults in strikes [Phonetic] honestly. We stay on top of our customer base and we run a process, that we call a draft process. So, as financials come in, we evaluate those. We make risk rating adjustments as appropriate.
This line sheet exercise was to make sure that we could get ahead of lack of financial statements. Even tax returns were delayed through July. And so, we needed a mechanism to appropriately adjust our risk ratings. I wouldn't necessarily say, Frank, that this is a precursor to losses later in the year. As borrowers get back on their feet, we'll adjust risk ratings back the other way.
So, our analysis of their projections, our analysis of their liquidity, our analysis of where we are in the process would lead us to believe that our risk ratings are appropriate at this time.
Frank Schiraldi -- Piper Sandler -- Analyst
Okay. All right, great. Thank you.
Mike Price -- Chief Executive Officer
Thanks, Frank.
Operator
And our next question will come from Steve Moss with B. Riley FBR. Please go ahead.
Steve Moss -- B. Riley FBR -- Analyst
Good afternoon, guys.
Mike Price -- Chief Executive Officer
Good afternoon.
Steve Moss -- B. Riley FBR -- Analyst
I want to follow-up on the -- just on credit here. I guess, I was a little surprised that criticized and classifieds actually ticked down a little bit in aggregate. I'm just kind of curious as to what are the dynamics there just given the level of business disruption we saw this quarter?
Mike Price -- Chief Executive Officer
Ryan?
Brian Karrip -- EVP/Chief Credit Officer
Yes, what you'll see in the press release is that we successfully resolved three problem credits and we are very pleased to have those resolve. Their specifics went down that were associated with, with those. And one was a previously disclosed parking structure in Ohio. The second was a Pennsylvania-based manufacturer in the energy sector. And the third one was an IO dealer that had been performing.
And so, Steve, we successfully resolved those, driving our NPLs down. We also were successful in selling one of our larger OREOs, contributing to the lower NPAs.
Steve Moss -- B. Riley FBR -- Analyst
Okay. And then, I guess just in terms of business activity, you mentioned, Jim, that I think in Pennsylvania you didn't have any lending opportunities this past quarter, Ohio drove the loan growth. Kind of, curious, has that dynamic improved or does that continue to be -- continue to be the things sort of dynamic?
Mike Price -- Chief Executive Officer
Part of it is just on record mortgage volumes. Our average mortgage in Ohio is about 2 times what it is in Pennsylvania. And so, similar activity produces larger loans in Ohio. We've also grown our indirect business into Ohio, so that adds a little juice in pipelines. We still did loan production in PA. It's just this particular quarter the majority, if not all of the growth came from Ohio. So, there'll be an ebb and flow to that. Those markets have been very good to us. Our business is more mature in Pennsylvania.
Jane, what would you add to that? Jane Grebenc, our Bank President?
Jane Grebenc -- President/Chief Revenue Officer
Thanks, Mike. The only thing that I would add is that the Pennsylvania loan book is so much bigger across all categories that we've got a lot more attrition outrun. So, I would expect the Ohio loan book to always -- well, to show more loan growth for at least the next several quarters.
Steve Moss -- B. Riley FBR -- Analyst
Great points. That's helpful. And then in terms of the -- indirect portfolio growth here is quite healthy for a number of banks this past quarter. Kind of wondering if that trend is carrying over into this quarter and kind of what the mix in auto was that you guys saw?
Mike Price -- Chief Executive Officer
Yes, I mean, we are primarily used car. We do find over a decade that indirect auto tends to be a bit countercyclical. That's one of the reasons we hang on to it when everybody is getting in and the margins are nothing, like three or four years ago. So, its times like this that that business tends to perform pretty well.
I think we also benefited from a nice rebound after a lot of pent-up demand from the, probably, March and April and May as consumers got out in June and July. Jane, what would you add there? That's your business.
Jane Grebenc -- President/Chief Revenue Officer
Thank you. First of all, what's really important is we didn't get any more than our typical market share. So, we're not stretching to grow indirect. All the banks have, I think it's a pretty good, pretty good May and a fabulous June. And we, just through good luck, introduced some recreational vehicle capability last year. And in the midst of a pandemic, people are buying RVs.
So, our indirect book is about this last quarter at least, was probably 60% auto, 40% percent RV. It won't stay like that. RV will settle in at 20% of the book, I suspect. And those RVs are $25,000 for behind, glamping kind of RVs. And credit scores are terrific, about 780 credit score on the RV book. So, it's just good luck. And as Mike said, we're primarily used car shop, 80% used, 20% newish.
Steve Moss -- B. Riley FBR -- Analyst
Great. Thank you very much.
Jim Reske -- EVP/CFO
And I would add that this is in spite of tighter underwriting standards. We have virtually, across the board, tightened our underwriting standards both for consumer and for commercial.
Steve Moss -- B. Riley FBR -- Analyst
Appreciate all the color. Thank you.
Operator
And our next question will come from Steve Duong with RBC Capital Markets. Please go ahead.
Steve Duong -- RBC Capital Markets -- Analyst
Hey, good afternoon, guys.
Mike Price -- Chief Executive Officer
Good afternoon.
Steve Duong -- RBC Capital Markets -- Analyst
So, just for your reserve in this quarter, can you just go over your, what your forward economic assumptions are compared to where current economic activity is today?
Mike Price -- Chief Executive Officer
Hey, Jim.
Jim Reske -- EVP/CFO
Yes, well just. Thanks. Great question, Steve. Just keep in mind that we're on the incurred model. So, we are not adopting a forecast that's driving forward looking expected loss the way we [Indecipherable] run CECL.
So, but we do have qualitative reserve, even though are incurred that take the economy into account. In those qualitative reserve calculations, we were assuming an unemployment rate right around 11%, between 11% and 12%. And that's -- part of that contribute to some reserve build in that qualitative factor this quarter.
Steve Duong -- RBC Capital Markets -- Analyst
Got it. Is that 11% by the end of this year, I assume, right?
Jim Reske -- EVP/CFO
Yes. Well, it's because it's incurred [Indecipherable] right now and it takes -- that's been in factored into model and it says because of that high unemployment rate, it adds for the qualitative reserves.
Steve Duong -- RBC Capital Markets -- Analyst
Got it. And I'm sorry I missed this, what were your loan forgiveness expectations? Were you expecting all of them to be forgiven by the end of the year or the third quarter?
Jim Reske -- EVP/CFO
We generally think that probably about 90% of them will be forgiven in the second half, not leaving in the third quarter, some of the forgiveness. Mechanics of forgiveness then delayed a little bit, it seems. So, Steve, it's going to play itself out over the whole second half.
Steve Duong -- RBC Capital Markets -- Analyst
Got it, got it. And just another one. In your retail portfolio, how much of that is CRE versus C&I and do you have the LTV for the CRE?
Mike Price -- Chief Executive Officer
I'm sorry, rephrase the question please.
Steve Duong -- RBC Capital Markets -- Analyst
Your retail portfolio for your COVID exposure?
Mike Price -- Chief Executive Officer
Sure.
Steve Duong -- RBC Capital Markets -- Analyst
Is that all CRE?
Mike Price -- Chief Executive Officer
No. You're looking at the retail COVID portfolio on Page 8 of our supplement?
Steve Duong -- RBC Capital Markets -- Analyst
Yes, that's correct, yes.
Mike Price -- Chief Executive Officer
Yes. So, the retail portfolio as we outlined on Page 8 is $547 million. That's spread across over, well over 500 borrowers. As we discussed last quarter on the earnings call, we do break our portfolio out several different ways. Our focus has been those loans greater than $1 million. And of that, the bucket that's largest is our freestanding retail loans.
So, typically, loans made with a tenant is a national tenant or a large regional tenant. So, about 29% of that portfolio, you could expect that tenant to be a Dollar Store or a convenience store with a gas station, a bank branch, a wine and spirit store. The average of those loans is around $2.8 million, 58% LTV, 143 cover. That portfolio is doing very well.
And then we further break down each one of the individual buckets in retail and study them not only in our line sheet but on our ongoing review process
Steve Duong -- RBC Capital Markets -- Analyst
Got it. Appreciate that. And let me just see here. Your THRIVE initiative, the 20%, when do you expect to have that completed by?
Mike Price -- Chief Executive Officer
Yes, we'll be able to -- really, December. December 10, 11. We're looking to consolidate those offices. I think one week into the first quarter of next year.
Steve Duong -- RBC Capital Markets -- Analyst
Okay. Is the $51 million to $52 million run rate, is that for the, basically the second half of this year or would that be for next year?
Mike Price -- Chief Executive Officer
That's for next year.
Steve Duong -- RBC Capital Markets -- Analyst
Got it. Okay, great. Appreciate. Thank you, guys.
Mike Price -- Chief Executive Officer
Thank you.
Operator
And our next question will come from Russell Gunther with D.A. Davidson. Please go ahead.
Russell Gunther -- D.A. Davidson -- Analyst
Hey, good afternoon, guys.
Mike Price -- Chief Executive Officer
Hi, Russell.
Russell Gunther -- D.A. Davidson -- Analyst
I wanted to follow up on the very granular commercial loan review and the comments you guys gave, which are much appreciated. One of them you touched on, which was taxes coming in July. And so, first question is whether you were able to incorporate those updated financial in your analysis?
And then the second question, I was curious as to any details you can share as to what the internal studies for the CRE sector show and how you're monitoring that asset class?
Mike Price -- Chief Executive Officer
Brian?
Brian Karrip -- EVP/Chief Credit Officer
Let me take the second question first. In each one of the buckets that we've discussed in our proprietary work for this call, we not only updated to the extent possible LTV, DSCR and forbearance information, but we also reached out to our real estate clients and asked them what are you really seeing today? What are you hearing? What should we be thinking about?
It's interesting in this market as we begin to think about senior living or think about our student housing bucket, while the student housing portfolio isn't very large, what we are hearing is that one major university in Ohio, the borrower there is reporting 100% pre-leased for fall. Another one in Pennsylvania is 92% pre-leased. We're also hearing that some universities and colleges, in an effort to create social distancing have pushed junior and seniors out to virtual learning while requiring sophomores to live off campus.
So, it's a mixed bag. It's somewhat uncertain. But as we look at that portfolio, albeit not large at $99 million, roughly 24 borrowers, we believe our occupancy rates that held two quarters ago in the high-90s will continue somewhere mid '80s to the high-90s. That's just our expectation. LTV on that portfolio is 61%, DSCR is 1.73 and debt yield is around 14%.
We do similar work for each one of the portfolios as outlined in the COVID Slide number 8.
Russell Gunther -- D.A. Davidson -- Analyst
Got it. I appreciate the thoughts there. And then a follow-up on the $186 million of remaining deferrals. I wanted to just make sure I understand your comments in terms of it potentially being too early to get positive and draw positive conclusion here.
So, is the expectation that a second round of deferrals would push that kind of total number higher or that $186 million, because it was a forbearance program, these are higher-risk borrowers that may ultimately move into a risk weighting downgrade and incremental provisioning going forward? Just trying to understand the comments from earlier.
Mike Price -- Chief Executive Officer
No. That's a great question. And here's our view. Last quarter, Jane mentioned that at the onset of the pandemic, we established an outreach program to touch our customers and to offer loan deferrals and PPP loans. Based on the rolling maturities of those loan deferrals, the leadership team came together and proactively established cross-functional teams in May. And the expressed purpose of this was to do a look back.
The team white boarded round one deferral process and developed the framework for round two. We looked at our internal and external communications. We clearly laid out the requirements for our borrowers, the questionnaires that would be required for consumer, as well as the requirements for corporate.
The corporate requirements are simply this, we want to see a 13-week cash flow that includes liquidity and cash burn. We want to see a plan that includes projections, so we can tie our solution to their business gate. We want to be able to evaluate it and determine together whether we need incremental recourse, additional collateral, co-borrowers. In some instances, we have IO. In some instances, we require debt service coverage reserves to be pre-funded with cash. And then along the way, our Head of Commercial Real Estate is pushing for LIBOR floors.
We take them one at a time. So, as they present themselves in a committee format for a second request, we put ourselves in a position, not just a rollover and grant a second one, but find a solution on a deal-by-deal basis. Did I answer your question
Russell Gunther -- D.A. Davidson -- Analyst
You did. I appreciate it. And thank you all. That's it from me.
Mike Price -- Chief Executive Officer
Thank you.
Operator
[Operator Instructions] And our next question will come from Collyn Gilbert with KBW. Please go ahead.
Chris O'Connell -- KBW -- Analyst
Hi, this is Chris O'Connell filling in for Collin. I just wanted to continue on the deferral trends, which obviously screen very positive here, but just understanding the comments as well from the initial comments you mentioned. The -- you had mentioned that most of these loans had only been coming to an end in the last few weeks, but it seems like the vast majority must have come to the end, if the updated deferral balances dropped that significantly, significantly from $1.1 billion down to $0.2 billion. Is that correct, am I interpreting that correct?
Mike Price -- Chief Executive Officer
Jim, you want to start that?
Jim Reske -- EVP/CFO
Yes, you are interpreting that correct. It's just -- by virtue of the timing of our earnings call, the first quarter, we had several weeks of April go by before we published a number prior to the earnings call. And so, we're trying to be consistent with that and do the same thing this quarter. And so, you're right, it thus capture, because you are going April 24 and showing that number to July 24th, it does capture most of the 90-day rollover period.
Chris O'Connell -- KBW -- Analyst
Okay, great. And then I apologize if I missed this. But what is your outlook for mortgage banking going forward? Obviously, this quarter had record originations and was very strong in terms of the mortgage banking fee line. Do you think that can be retained going into the back half of the year or would you expect that to fall off a little bit?
Mike Price -- Chief Executive Officer
We see deep pipelines and originations in the third quarter and continuing strength in the business at least in the third quarter. Jane, would you like to add to that, Jane Grebenc, our Bank President?
Jane Grebenc -- President/Chief Revenue Officer
Thanks, Mike. Only that certainly, the second quarter was phenomenal. Third quarter, we expect also to be very strong. I suspect will fall off some. You just never know when the refinances are going to dry up. We are -- we have some advantage given that our portfolio is newish. We didn't get into the business until 2014. So, our refinanced volume isn't anywhere near what most banks are, but still you can't live off of the refinances. We feel good about the core business.
Chris O'Connell -- KBW -- Analyst
Great.
Mike Price -- Chief Executive Officer
And the only thing I would add is organically year-over-year ex-refinance activity, the business is growing. And it's just because of feet on the street production and so on. And that's probably a little different than more mature operations.
Chris O'Connell -- KBW -- Analyst
Great, that's helpful color. And then finally on the NIM guidance, for the core NIM, ex-PPP and the cash impact to kind of trend toward 3.25% to 3.35% by year-end. In that -- in those assumptions, are they -- in that guidance, are you assuming that there is a significant fall off in non-interest bearing deposits related to kind of PPP loans?
Jim Reske -- EVP/CFO
No. Yes, thank you. It does take that into account. We are assuming that the PPP loans are forgiven, that a like amount of deposits will flow out of the bank.
It doesn't have that much effect on the calculation, because the alternative cost of borrowing right now is almost free anyway. And we have excess cash. So, some of those funds come out of the bank and actually benefits us, but it's very-very little effect. But, yes, we are -- we are definitely taking that into account.
Chris O'Connell -- KBW -- Analyst
Okay, great. That's all I had. Thank you.
Mike Price -- Chief Executive Officer
Thank you.
Operator
And this concludes the question-and-answer session. I'd like to turn the conference back over to Mike Price for any closing remarks.
Mike Price -- Chief Executive Officer
As always, we appreciate your interest in our company and your questions and look forward, hopefully to being with you soon on your virtual conferences. Thank you so much. Bye-bye.
Operator
[Operator Closing Remarks]
Duration: 46 minutes
Call participants:
Ryan Thomas -- Vice President of Finance and Investor Relations
Mike Price -- Chief Executive Officer
Jim Reske -- EVP/CFO
Brian Karrip -- EVP/Chief Credit Officer
Jane Grebenc -- President/Chief Revenue Officer
Frank Schiraldi -- Piper Sandler -- Analyst
Steve Moss -- B. Riley FBR -- Analyst
Steve Duong -- RBC Capital Markets -- Analyst
Russell Gunther -- D.A. Davidson -- Analyst
Chris O'Connell -- KBW -- Analyst
