Great Western Bancorp (GWB) Q3 2020 Earnings Call Transcript

Great Western Bancorp (GWB)
Q3 2020 Earnings Call
Jul 29, 2020, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Great Western Bancorp third-quarter earnings conference call. [Operator instructions] I would now like to turn the conference over to Seth Artz, head of investor relations. Please go ahead.

Seth Artz -- Head of Investor Relations

Thank you and welcome everyone to our call this morning. Joining the call and sharing prepared remarks, we have Mark Borrecco, president and chief executive officer; Peter Chapman, chief financial officer; Steve Yose, chief credit officer; and also with us for -- particularly for the Q&A portion, we have Doug Bass, our chief operating officer; and Karlyn Knieriem, chief risk officer. Before getting started, we'd like to remind you that today's presentation may contain forward-looking statements that are subject to certain risks and uncertainty that could cause the company's actual future results to materially differ from those discussed. This is especially true in the current environment with extreme uncertainty stemming from the COVID-19 pandemic.

Please refer to the forward-looking statement disclosures contained in the presentation on the company's website as well as periodic SEC filings for a full discussion of the company's risk factors. Additionally, any non-GAAP financial measures discussed in this conference call are only provided to assist you in understanding Great Western's results and performance trends and should not be relied upon as a financial measure of actual results. Reconciliations for such non-GAAP measures are appropriately referenced and included within the presentation. I would now like to turn the conference over to Great Western Bancorp's president and chief executive officerm, Mark Borrecco.

Mark, please go ahead.

Mark Borrecco -- President and Chief Executive Officer

Thank you Seth and good morning. Thank you for joining the call. I hope that you, along with your family and coworkers, are doing well and staying healthy. I am excited to be leading my second earnings call as the CEO of Great Western Bank.

Before we jump into the financials, I first would like to update you on our current operating environment. We have reopened 140 of our 175 branches, and we are pacing a return of our support employees to our admin locations. Most of our core markets have experienced a quicker rebound in reopening and business activity as evidenced by the Google mobility chart on Slide 2. We established a one-time PTO cash out option to provide financial support to our employees during these challenging times.

We increased contributions to our Making Life Great grant program. Committing additional funds to support our impacted communities. And even with our modified operating procedures, we continue to provide exceptional customer service to our clients. As we move to Slide 3, I want to share information on key conservative steps we have taken to address our asset quality while repositioning the bank as we manage through this pandemic.

Our initial objective is to bolster our credit risk management. We hired Steve Yose as our chief credit officer on May 11 of this year. Having Steve and his 35 years of experience join the bank was a critical first step in repairing our credit risk culture. We've partnered with Protiviti to have them perform a third-party review of all credits greater than $5 million, along with smaller credits in select segments.

This is to ensure these loans are properly risk rated, that we are using consistent underwriting criteria and that we have reasonable appraisals. Our enhanced risk rating system is running in parallel with our historical process, but has enabled us to better understand current portfolio performance as well as assisting us in evaluating our potential CECL build. Second, we continue to take conservative and measured actions. We reduced our dividend this quarter to $0.01 to be protective of capital.

We continue to be deliberate with our loan loss reserve after our significant build last quarter resulting in a 2.06% coverage ratio excluding PPP loans and before our CECL implementation on October 1. Our initial round of loan modification deferral requests related to COVID amounted to 16.6% of total loans. Our second round deferral modification request, we implemented a disciplined process to make sure we are having the right conversation with these clients. As of this call, our numbers are 59 customers with -- for $257 million in total loans for a second round new or extended deferral requests.

The number of principal and interest deferrals for round two is tracking lower at approximately 30% compared to 65% in round one. That said, it is still early in the process, and we will continue to monitor deferral requests closely. Our third focus has been to increase our specialization through a realignment of our organization to business line segments. This will ensure that we have the right skills and the right expertise decked against the appropriate industry.

We have appointed Eric Bauer, a seasoned ag banker to lead our agribusiness division in a renewed way. Our retail business has been centralized under Karlyn's effort. Her priority will be to implement a simplified retail delivery model that will drive core deposit growth and deeper relationships with our consumer clients, along with continuing to drive down our deposit costs. We have segmented our treasury management business to better support our commercial clients and to create a greater awareness for non-interest income opportunities.

Historically, Great Western Bank has processed all of our commercial loans, regardless of size and complexity, the same way. This is highly inefficient. To this end, we have established a new small business center of excellence that will leverage technology to enable us to need fewer resources to originate and monitor our loans and at the same time, significantly improve the customer experience and allow us to better manage our risk. I am optimistic about these enhancements and look forward to the positive impact they will have on our results.

Now for insight on our financial performance, I would like to turn the call over to our CFO, Pete Chapman. Pete?

Pete Chapman -- Chief Financial Officer

Thanks Mark and good morning everybody. Just to start with this quarter's net income of $5.4 million was driven by a $53.3 million pre-tax pre-provision income which was $2.8 million or 6.6% above the prior quarter. Now looking at revenue. Net interest income was $108 million, an increase of 4.2% from the prior quarter.

Within this result, interest expense declined $9.6 million, as we saw a significant drop in deposit costs and also a favorable mix impact from inflows of large volumes of lower cost deposits from government stimulus programs. This was offset by a $5.4 million decline in interest income due to lower yields on assets. Also included within interest income was PPP loan income of $4 million at a 3.1% yield. Adjusted NIM contracted only 8 basis points to 3.47% as a 36-basis-point decline in loan yields were largely offset by a 34-basis-point decline in deposit and funding costs which represented a 50% decline in the cost of deposits for the March -- from the March quarter.

Our investment portfolio saw declining yields which contributed to a 4-basis-point decline. And also, there was a 2-basis-point decline in NIM from PPP lending. Our loan portfolio yield is getting some support from almost $5 billion of fixed loans, yielding 4.38%, $2 billion of loans that have hit floors averaging 4.56% and $1 billion in variable loans that repriced beyond 90 days yielding 4.55%. In combination, these loans all make up about 80% of our loan portfolio excluding PPP.

Loan loss provision expense of $21.6 million was below the $71.8 million in the prior quarter as that included a significant qualitative overlay related to COVID under our incurred loss methodology which increased reserves 80% -- 87% in the March quarter. Related to credit charges, we realized an additional credit charge of $29.9 million on a senior care credit that is a loan held at fair value. The nature of this item is similar to a loan loss provision however credit fair value adjustments, pass-through non-interest income in the income statement. Now looking at non-interest income, our net loss of $11.7 million includes that credit charge mentioned above.

Excluding fair value items, non-interest income was $14.1 million for the quarter. This was $0.5 million lower than the prior quarter due to a $1.5 million reduction in overdraft fees, low wealth management income, while mortgage banking income was a positive at $2.4 million which was an increase of $1.3 million, as a result of some strong seasonal performance in that part of the business. Expenses were $67 million for the quarter compared to $66 million in the prior quarter which excludes the goodwill impairment realized during the March quarter. The increase was driven by a small number of nonrecurring items which we feel were proactive and measured actions in this environment.

Salaries and benefit costs were higher due to one-off items including the payout of PTO offered to employees for $1.1 million and severance costs of about $1.6 million which were partly offset by lower incentive-based compensation. Consulting fees were higher by approximately $1 million, the largest driver of which is a third-party review of our loan portfolio which Mark touched upon earlier. In addition, there were $2.2 million of an increase in unfunded commitment reserve costs stemming from paydown activity on credit lines causing unfunded balances to increase. These increases were offset by a $3.5 million decline in OREO costs.

On expenses, like the severance realized in this quarter, where we can take action that will cause a short-term increase in expenses but will realize benefit over the longer term, we'll continue to do so given the current environment. Moving on to capital. Our capital position held flat this quarter with total capital of 12.9% and common equity Tier 1 capital of 10.6%. Our tangible common equity was 8.9%, a decrease of 9.3% from the prior quarter.

Excluding the PPP loans, that ratio would have actually increased to 9.4%. Tangible book value per share improved further to $20.98, up from $20.84 in the prior quarter and $19.94 in the prior year. As Mark has mentioned, we did declare the dividend of $0.01 per share for the quarter ending 30 June, 2020 which is a reduction from the prior quarter. We recognize dividends are a key focal point in our decision reflects protecting our capital position in this current environment.

While we're confident capital levels remain strong, with so much uncertainty related to COVID-19, we're being cautious in maintaining capital and current levels given the environment. We'll continue to monitor the impact of COVID-19 and consider dividends in this context in subsequent quarters, should the environment become more clear. Loan growth was $621 million primarily related to PPP loans during the quarter. Non-PPP loans contracted by $102 million in the quarter, mainly due to line paydowns in both ag and C&I offset with $132 million of growth in the commercial real estate portfolio.

Deposits rose $11.2 billion which was almost $1 billion increase due by inflows from PPP proceeds and consumer stimulus receipts. Within that growth, our mix improved significantly including an $83 million reduction in time deposits and a $619 million increase in non-interest-bearing deposits. Now looking at the chart, you'll see we've added a chart on Slide 7 which highlights a few key segments. Namely hotels, ag and healthcare.

I'll now hand over to our chief credit officer, Steve Yose, to expand upon those segments along with discussing asset quality and also elaborating aiding on some credit initiatives Steve has got in process. Over to you, Steve.

Steve Yose -- Chief Credit Officer

Well, thank you Pete. In just a short amount of time since joining in May, I've been able to get a solid understanding of the organization, the team and the portfolio. I'm confident stating that we have a good mix of challenges and opportunities and I'm very excited to be a part of it. I'll discuss some of the key initiatives we are implementing now and also cover some key results.

I'd like to begin my commentary by sharing a few key actions and initiatives related to how we're going to improve our asset quality. We are taking steps to improve more risk focused and create a more unified credit risk culture as an organization; and two, the new risk rating system was effectively developed and enhances our ability to manage the portfolio as the special mention category is a key staging category when loans show deterioration and the 9-point granularity within our past ratings will help prioritize credit risk activities and lift our overall monitoring and management by providing a better early warning indicator; and three, create an enhanced credit policy to provide a risk focused approval process that requires further approval elevation for higher or specialist industries, a risk-based hold limit that leverages the new risk rating system, and a focused and more accountable credit approval process. I see these steps to be an opportunity to lift our overall risk accountability by relying differently on certain roles and resetting expectations. They also fit with the overall strategy Mark touched on earlier, and I'm looking forward to the impact they'll have on this organization and on asset quality.

Regarding key asset quality results for the quarter, we did experience some deterioration in key metrics as we're getting even more active and working through our problem loans. One hotel credit and one senior credit moved to nonaccrual which moved on accruals up to $274 million. While challenged before COVID, their troubles were amplified by COVID impacts in recent months. Additionally, one of the senior care loans just mentioned plus another smaller senior care loan contributed to our increase in the substandard category.

Charge-offs annualized continued to trim flat with 0.37% for the quarter and 0.33% for the nine months year to date. As a new chief credit officer, I was pleased to see that Great Western Bank took its conservative step last quarter to increase its loan loss reserve which ended up at 1.54% of total loans excluding PPP, and the total coverage ratio of 2.06% of total loans excluding PPP. I'm also happy with the development of the new loan risk rating system and its implementation on October 1. This risk rating system will be greater granularity and objectivity into our risk approach.

Additionally, it will provide an enhanced early warning indicator of issues in our loan portfolio. Not only will it align a criticized loan structure, special mention will be a more useful in migrating problem loans out of watch, and the 9-point scale for past loans will allow better management and smoother migration. And as we've said, we will also adopt CECL on October 1 when our new fiscal year begins. While we have more calibration to do, current estimates are for our current reserve to increase between 40% and 60% based on the current quarter.

This would increase the pro forma allowance to loans to 2.7% to 3% which could increase further if the economic environment shows a weaker outlook. For a quick update on PPP loans, we have provided more than 4,600 loans for approximately $724 million which is about 7% of our total loans. As Mark mentioned earlier, loan modifications for the first ground ended up being 16.6% of total loans at just under $1.7 billion, with the three top segments being hotels, entertainment and food and drink. Two-thirds were P&I deferral with the rest is interest-only or extensions and none in forbearance.

So far, we've approved $257 million in requests for a second deferral among 57 customers. In March and April, when requests were coming in, we approved the majority of the requests in line with the industry by granting most deferrals with a large majority at 90 days regardless of need during the first round. But for the second round, we are more focused on reviewing current financials, projected financials and collateral values. Additionally, we are using the information to support credit rating decisions to assure timely and accurate risk ratings.

As Pete mentioned, we have a diverse portfolio. With me being new and looking over the portfolio, the segments I am focused on in detail, given their size and also the potential risk in the current environment are hotels, diversified ag and healthcare. The ag portfolio has been covered in great detail in earlier earnings calls, but I want to emphasize the diversity of the book to the extent that referring to it is just ag is an over generalization. It is a diversified portfolio.

The diversify -- the diversity across ag sub segments helps manage cycle risk. The geographic diversity helps manage location risk and overall, the sector helps manage against economic cycles that don't always correlate with the general economy. Supply chain has also improved and has largely been restored. Milk prices are seeing some of their highest values on both national and export demand have ramped up.

Pork and soybeans are doing extremely well with progress in our footprint exceeding national averages. Now turning to the healthcare portfolio. It is a key segment in our portfolio as well. Some consider healthcare to be vulnerable to COVID and some do not.

We have had a few problem loans surfaced in the past few quarters of certain relationships but nothing widespread with any sort of common issue. We are relatively balanced across senior care, assisted living and retirement communities, skilled nursing, hospitals and other health services and social assistance. We have about 44 relationships in senior housing, 46 in skilled nursing and 33 in hospitals, therefore, it is easier to engage with borrowers and identify potential risk migration. At this stage, we have eight relationships totaling $101 million as classified.

Hotels. We discussed hotels last quarter given the sudden impact from COVID. The portfolio is 90% within our footprint with 200 relationships and hotels spanning 130 cities. Top cities include Rapid City and Sioux Falls in South Dakota, Colorado Springs and Denver in Colorado, Omaha, Nebraska and Des Moines, Iowa.

These make up 30% of the book. Hotels -- the hotel loan portfolio average loan-to-value is 61%, with 84% of the relationships flagged and the remainder in casino, hotels, boutique and resorts. 72% of the portfolio received some form of payment deferral in the first round, and currently 10% has received a second round deferral. We have only one relationship over 1 million rated substandard and expect more relationships to migrate to special mention and substandard should the current environment remain unfavorable.

We don't deem all of these portfolios to have outside risk to COVID. Of these, I'd say, hotels, senior care and skilled nursing are showing higher segment risk along with restaurants and entertainment segments. And we remain proactive managing and identifying risk migration in the rest of the portfolio. As I stated at the beginning of my comments, we have put in place credit risk focused strategies to address our asset quality challenges which also provide a significant opportunity for us.

Now back to Mark.

Mark Borrecco -- President and Chief Executive Officer

Thanks Steve. As I mentioned last quarter, our top priority, after ensuring the safety of our employees and communities, is improving our asset quality. And I'm proud to say that this quarter, we have made good progress. With Steve's support and guidance, we have identified areas and made policy changes that will make a meaningful impact in improving our credit quality and culture.

In conjunction, we are taking conservative and measured steps to protect capital and to better understand our portfolio and to realign our organization to have greater specialization. And while I realize that we have work to do, I am energized about what I have learned in my first four months with the bank and for what I see for Great Western Bank in the future. At this point, we'll now have time for question and answers. Operator?

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Mark Borrecco -- President and Chief Executive Officer

Good morning Jeff.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks. Good morning. I suppose I'd take the topic of -- just on the provision in CECL related I guess do you have the dollar spread between the current reserve and the CECL assumption as of today? And I guess, when I close that gap sooner? And then lastly, just the -- kind of the provisioning level, are we off the peak of 2Q? And in that adjustment, do you expect the adjustment largely to be day 1 accounting versus kind of flowing through the provision?

Pete Chapman -- Chief Financial Officer

Yeah. Jeff, so a couple of things in there, obviously. So if you take just our current allowance and gross that up by the 40% to 60%, that's sort of the dollar value of provision. In terms of current levels of provisioning or we might let Steve Yose talk to sort of what he's seeing in the portfolio this quarter.

And then just thirdly, in terms of day 1 versus day 2 obviously the advantage we have in adopting CECL is sort of we're now in the pandemic. So certainly, we've got the ability -- we would hope to take more on day 1 rather than day 2, Jeff, unless there is a significant deterioration in the environment during that December quarter. When we adopt on 1 October which is a little far out to be able to predict that. But in terms of sort of provisioning in sort of current quarter, Steve, certainly, we're not giving guidance, but just what we're seeing in the portfolio.

Steve Yose -- Chief Credit Officer

Well, as I stated in my remarks, I was pleased to see the large provision. If you're a new chief credit officer, you want to make sure we're well reserved. And last quarter, we did take a big provision. And this quarter, we also took a fairly sizable provision.

Mark mentioned the Protiviti exam that we're doing, outside examiners coming in who are looking at our entire portfolio with a fine tooth comb as far as dealing with the risk ratings and making sure we have everything risk rated, you could say correctly as we implement CECL on day 1. So I'm very confident that the reserves will show on legal day 1 which also include the impact of COVID would indicate that our provisioning, I think would -- I don't know if would be lower, but I would assume it would be.

Jeff Rulis -- D.A. Davidson -- Analyst

Make sense.

Steve Yose -- Chief Credit Officer

OK. Thank you.

Jeff Rulis -- D.A. Davidson -- Analyst

Thanks.

Operator

The next question comes from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Mark Borrecco -- President and Chief Executive Officer

Hi Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Close enough. Good morning everyone. Let's go at that question another way. CECL.

I guess, hypothetically, if we're sitting here in six months, first quarter of CECL was adopted, you're saying that 50% higher reserves should capture life of loan losses based on what you're seeing today? Is that a fair way of summing all this credit up?

Pete Chapman -- Chief Financial Officer

I would say so. Based on what we know now, Jon, based on the current environment. So obviously, we don't know what's going to roll forward in six months, but based on now.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Right.

Mark Borrecco -- President and Chief Executive Officer

Yeah. I would say that that's why when I talk about the way we're risk rating the portfolio, the granularity of our risk rating as well as the environmental factors looking at COVID and the other things in the economy, that's all part of the analysis we're putting in for the -- and so that takes into account anticipation over the next six months, there's a lot of uncertainty. And so that's why it's a hard question to answer.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Just -- I guess, the bigger question on the dividend. So from an outsider's view, cutting the dividend twice in a row, two quarters and going to $0.01. It signals something maybe a little more ominous and I look at the CECL reserve estimate for the next six months is manageable for your company, but to see the dividend go to $0.01 a share. I just want to go into a little more detail in terms of the thought process around it, why take it to $0.01 because it seems like even though credit is stressed, it's certainly manageable.

Thanks.

Pete Chapman -- Chief Financial Officer

Yeah. Look, we would hope so, too. I think there's a couple of factors playing into that, Jon. Obviously, as we were going, as all banks moved into the crisis, we entered with more elevated levels of NPAs.

Certainly, a lot of those are industries such as ag which probably aren't directly related to COVID, but it's undeniable, we entered the crisis with higher NPAs. Certainly, there's a high degree of uncertainty around the environment looking forward. And to your point, while capital levels remain strong, while the outlook for CECL appears to be manageable, we just felt it was prudent at this time the amount of capital in itself from a dividend perspective is not the largest amount of money, but we just saw it just with the outlook being so uncertain as appropriate for us given where we are, Jon.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Right. Thank you.

Mark Borrecco -- President and Chief Executive Officer

Thanks Jon.

Operator

The next question comes from Andrew Liesch with Piper Sandler. Please go ahead.

Andrew Liesch -- Piper Sandler -- Analyst

Good morning everyone.

Mark Borrecco -- President and Chief Executive Officer

Good morning.

Andrew Liesch -- Piper Sandler -- Analyst

A question on expenses. I recognize there may be some one-time items in salaries and benefits. And maybe the consulting fee don't continue at this pace. But it also sounds like there's some other technology upgrades and enhancements that you're making along the way.

What's a good level of operating expenses to build off for this upcoming quarter? And then how do you see that trending throughout fiscal 2021?

Pete Chapman -- Chief Financial Officer

Yeah. Certainly. From a baseline perspective, as you've picked up, Andrew, it's probably a couple of million of one-offs in there this quarter. So it hopefully would be a little lower on a run-rate basis.

We are looking at the cost base, though. And as I said in my comments, if there's the ability to pull forward some expenses that will help us in 2020 or 2021. We'll certainly take the opportunity to do so. But in the absence of that, maybe a little lower than this quarter.

And then in terms of the outlook for '21, we're going through a pretty heavy strategic planning process at the moment. So we'll probably refresh guidance as we move forward next quarter in terms of what that tech investment looks like. We believe it's manageable, but we're just doing the work at the moment to go through that process. So we'll be able to give you a little bit more there next quarter.

Andrew Liesch -- Piper Sandler -- Analyst

OK. Thanks for taking the question.

Pete Chapman -- Chief Financial Officer

Thanks.

Mark Borrecco -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte -- KBW -- Analyst

Hey. Good morning guys. Thanks for taking my question. Just wondering, Peter, if you could give a little bit insight into the expectations for the core margin, just given some of the trends you're seeing this quarter with additional liquidity and where the interest rate is shaping up?

Pete Chapman -- Chief Financial Officer

Yeah. Look, we're really pleased with the margin this quarter, Damon. We thought it held up a little better than a lot of others. So for next quarter, we're certainly not seeing the pressure on deposit costs.

So we think we've still got a little bit of room to move there. I think the uncertainty on margins for this next quarter is just how PPP income will flow through. So we had about $4 million of that this quarter. And just depending on how early the prepays or the waivers, sorry, of that might affect margin this quarter.

So that's probably the biggest wildcard that probably is the one that -- it's a little bit hard to forecast at this moment, Damon.

Damon DelMonte -- KBW -- Analyst

OK. Great. And if I could just kind of just quickly follow-up on that point about the PPP. What are your expectations for forgiveness over the next few quarters? Do you think it's going to be more of a fiscal fourth quarter or fiscal first quarter then?

Pete Chapman -- Chief Financial Officer

It depends on how quickly the SBA piece comes up and running. But our sense is it's probably the fourth calendar quarter, so the December quarter and moving into 2021, Damon, is our sense. But certainly, that's just based on where we sit now at -- but there's a bit of work to do there to see how long the PPP stuff starts -- or the SBA start, sorry, to come up and running, but probably back half -- back end of this year, we would say.

Damon DelMonte -- KBW -- Analyst

OK. Great. Thanks for taking my question.

Pete Chapman -- Chief Financial Officer

Thanks.

Operator

The next question comes from Janet Lee with JP Morgan. Please go ahead.

Janet Lee -- J.P. Morgan -- Analyst

Good morning.

Mark Borrecco -- President and Chief Executive Officer

Good morning.

Pete Chapman -- Chief Financial Officer

Good morning.

Janet Lee -- J.P. Morgan -- Analyst

I have a question on ag portfolio. I appreciate all the color you provided on the slides. So the ag's standard loans and non-accruals were relatively flattish this quarter. Given the strengthening in commodity prices and improvement in supply chains, as you mentioned, do you think the negative credit migration in the ag portfolio what seems is now sort of behind you? And should we start -- can we start expecting to see a problem ag credit experience in positive migration to pass rating in the coming quarters.

Understand that we can't refer to ag as a singular thing. So if you can provide more details by sub segments, that would be great.

Mark Borrecco -- President and Chief Executive Officer

As I mentioned in my remarks, we see milk prices improving, and we actually see in our stressed portfolio in ag, significant improvement as far as debt coverage ratios. They all are cash flowing fairly well. We are being very careful as far as how we're looking at the risk ratings of those. So I'm anticipating that as we get year-end statements from our clients and as we see commodity trends at least staying stable, to your point, we're hopeful in improving our asset quality metrics within the ag portfolio.

So that's one part of our portfolio. I do see potential improvement. We're taking a cautious approach. There's some we can probably upgrade today, but we just wanted to confirm with the uncertainty in the environment, the market prices and all those type of things.

So that is one area just to your point that we do anticipate improving asset quality.

Janet Lee -- J.P. Morgan -- Analyst

Thank you.

Operator

The next question comes from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi. Good morning everyone.

Mark Borrecco -- President and Chief Executive Officer

Hey Terry.

Terry McEvoy -- Stephens Inc. -- Analyst

Sorry to go back to CECL. But Pete, I was just wondering, what is the phase-in process going to be in terms of the capital impact? There's some decision or elections internally that you can take, I believe, to that will impact capital over time?

Pete Chapman -- Chief Financial Officer

Yeah. We haven't formalized yet those yet, Terry, in terms of exactly which option we'd take, but certainly in this environment, any deferral you can take to help capital levels will be one we'll look pretty seriously at. So yet to finalize, but most likely one of the deferral options.

Terry McEvoy -- Stephens Inc. -- Analyst

And then as a follow-up, the third-party you engaged to review certain parts of the loan portfolio. How much did they -- how much of the portfolio did they review in the last quarter? And I'm just trying to gauge what the outcome of that review could be in this current quarter, if they haven't looked at all them previously.

Karlyn Knieriem -- Chief Risk Officer -- Analyst

Good morning Terry. This is Karlyn. The -- in this last quarter, they have looked at about 20% of what they were scheduled to review which we will, before 9/30, our fiscal year-end, we will review about -- between 66% and 70% of our portfolio. They're about 20% complete.

Terry McEvoy -- Stephens Inc. -- Analyst

Thank you.

Mark Borrecco -- President and Chief Executive Officer

Thanks Terry.

Operator

This concludes our question-and-answer session.

Mark Borrecco -- President and Chief Executive Officer

Just one more.

Pete Chapman -- Chief Financial Officer

I think there's one more that just popped in. I'm sorry I think we...

Operator

I'm sorry. I did not see that.

Pete Chapman -- Chief Financial Officer

No problems at all.

Operator

Well let me announce. David Long with Raymond James is the next questioner. Please go ahead.

David Long -- Raymond James -- Analyst

Thanks for jumping in. I just want to drill down a little bit more on the hotel portfolio to understand the risks there a little bit better. Can you provide any color on the occupancy rates that you're seeing?

Steve Yose -- Chief Credit Officer

Well, I would -- I don't -- just anecdotally, if you look at our footprint, to Mark's point, we have a lot of states that have opened up significantly. And so for example, parts of Nebraska, definitely in the parts of South Dakota. We see really high vacancy rates, some weekends, close to 100% to 80%. And then of course areas like Arizona and some of the other areas are very weak, where occupancy is more in the 30% to 40%.

So it's really a mix across the board. I also want to emphasize that 85% of our hotel book does have guarantees of some sort, either personal or corporate. Some of those are very strong guarantees. So even though the hotels might be struggling, we do have a core book that does have strong guarantees.

So we're hopeful that those will continue to hold up. But it really is across the board just depending upon location. The ones that are struggling the most are the business hotels. Those that are tied to business travel.

And so we've seen vacancies quite low in those, especially, for example, in Omaha, and areas where we see more business travel like Denver.

David Long -- Raymond James -- Analyst

Got it. And I would -- I see that you guys have deferred a lot of deferrals on a big portion of that portfolio. My gut's telling me that they will be participating in round two as well, a lot of those hotels. But the question I was -- after a second 90 day, if it gets to that point, what happens at that point? If you get past the 180 days of deferrals, have you guys talked about that or had discussions with the accountants to regulators or what you need to do with those credits after 180 days?

Steve Yose -- Chief Credit Officer

Well, if you look at the -- what I made in my statements, the second round, we're looking at a more disciplined approach. In other words, we're talking now to those customers. We're asking them now, what is your -- can we take additional collateral? Those that are stronger guarantors, maybe they've got to put more money into it. We're also looking at the risk rating of those.

So we anticipate, while the ag portfolio will hopefully show improving asset quality trends, we do anticipate this hotel portfolio showing some deterioration in certain markets. And so we are looking at those clearly. And frankly, if we do have some relief up to six months. But if we do go longer than that on deferrals, we will have to look at potential TDRs in some of those portfolios.

I can't tell you which ones those are at this point. But it is something that we will be looking at. And we will take a conservative and prudent view of the risk rating of that portfolio.

David Long -- Raymond James -- Analyst

Got it. I appreciate the color. Thanks a lot guys. Thanks again for taking my question.

Mark Borrecco -- President and Chief Executive Officer

Thank you.

Pete Chapman -- Chief Financial Officer

Thank you.

Operator

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

Mark Borrecco -- President and Chief Executive Officer

Thank you operator. And again, just thank you to all of you for joining the call this morning. If we can provide additional information or answer any other questions, please let us know. Otherwise, stay safe, and have a great day.

Thank you.

Operator

[Operator signoff]

Duration: 42 minutes

Call participants:

Seth Artz -- Head of Investor Relations

Mark Borrecco -- President and Chief Executive Officer

Pete Chapman -- Chief Financial Officer

Steve Yose -- Chief Credit Officer

Jeff Rulis -- D.A. Davidson -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

Andrew Liesch -- Piper Sandler -- Analyst

Damon DelMonte -- KBW -- Analyst

Janet Lee -- J.P. Morgan -- Analyst

Terry McEvoy -- Stephens Inc. -- Analyst

Karlyn Knieriem -- Chief Risk Officer -- Analyst

David Long -- Raymond James -- Analyst

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