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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing-by and welcome to the Fulton Financial Second Quarter 2020 Results Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]
I’d now like to hand the conference over to your speaker today Matt Jozwiak. Please go ahead, sir.
Good morning. Thank you for joining us for Fulton Financial’s conference call and webcast to discuss our earnings for the second quarter of 2020. Your host for today’s conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil Wenger is Curt Myers, President and Chief Operating Officer; and Mark McCollom, Chief Financial Officer.
Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released at 4:30 PM yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the Presentations page under Investor Relations on our website.
On this call, representatives of Fulton may make forward-looking statements with respect to Fulton’s financial condition, results of operations and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors and actual results could differ materially. Please refer to the safe harbor statement on our forward-looking statements in our earnings release on Slide 2 of today’s presentation for additional information regarding these risks, uncertainties and other factors.
Fulton undertakes no obligation, other than as required by law, to update or revise any forward-looking statements. In discussing Fulton’s performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton’s earnings announcement released yesterday in Slides 14 through 16 of these non-GAAP financial measures to the most comparable GAAP measures.
Now I’d like to turn the call over to your host, Phil Wenger.
Thanks Matt and good morning, everyone. And thank you for joining us. Today, we will follow our usual call format beginning with some prepared remarks. First, I'll provide a high level overview of the quarter. Next, Curt Myers, our President and Chief Operating Officer will share some thoughts on our business performance for the second quarter of 2020. And then Mark McCollom, our Chief Financial Officer will share the details of our financial performance. And after that, we'd be happy to take your questions.
COVID-19 continues to have a significant impact on our world and our company. But all things considered, we are pleased with what Fulton was able to achieve in the second quarter.
I want to start up by thanking our employees for all they've done to serve our customers throughout the pandemic. It was truly inspiring to watch our team members who had their own questions, fears and challenging personal situations, manage their own needs, while continuing to fulfill Fulton's purpose of changing lives for the better for our customers.
Thanks to the dedication of our team, the flexibility of our customers and our investments in technology and digital platforms, we have continued to provide needed banking and financial services throughout the pandemic.
We successfully administered the SBAs Paycheck Protection Program or PPP, providing more than $1.9 billion in loans to businesses and non-profit customers. We offered loan deferrals and payment relief to consumers and we put in place new benefit programs to help our employees throughout this confusing and difficult time.
When I spoke with you in April, Fulton had responded very quickly to keep employees and customers safe, while continuing to deliver essential financial services to the communities we serve. Now, a three months later, while our unwavering focus on health and safety continues, we now view the virus is just one more factor we need to deal with as we go about or a day. We're working hard to ensure that our team's energy remains focused on achieving our longer term priorities of growth, operational excellence and effective risk management and compliance.
In June, we gradually began to expand lobby access for our customers. And currently, we have resumed regular lobby hours at 146 of our 223 financial centers. And a team of leaders from across our company has put in place a plan to gradually re-onboard employees who have been working remotely. This process will take place over the remainder of the year and can be adjusted or reversed at any time, depending upon the progression of COVID-19 and the associated safety protocols that health experts recommend.
Turning to our financial performance in the second quarter, our consumer and commercial lines of business perform relatively well given the environment in which we're operating. In consumer we saw increases in deposit balances, growth in residential mortgages and relative strong performance in Wealth Management. In commercial, our loan pipeline remains stable. Deposits increased even after factoring our funds we received through PPP. And we saw continuing resiliency in a number of fee income businesses, including merchant services, investment management, trust services, and swaps.
Several credit metrics improved during the quarter and you'll hear more detail about that in a few minutes. However, we'll need to wait until we know more about the depth and duration of the COVID-19 pandemic over the next six to nine months to be able to understand the longer term impact on our customers. We have been and will be very actively managing our expenses over the remainder of the year to help mitigate the anticipated negative effects of the pandemic.
Other highlights during the quarter included the opening of a new financial center in Baltimore continuing our commitment to growing our presence in urban markets. We also announced the creation of a new Fulton Forward Foundation, an independent non-profit private foundation funded by Fulton Bank.
The foundation will provide financial impact gifts to non-profit organizations that share Fulton's vision of advancing economic empowerment, particularly in underserved communities. The foundation is an extension of the bank's Fulton Forward Initiative, which promotes diversity, equity and inclusion encourages to building vibrant communities, fosters, affordable housing, drives economic development and increases financial literacy and the community's survival.
In April, in addition to our traditional and ongoing support of our communities, Fulton Bank made an extra $500,000 donation -- $500,000 donation to the foundation to support COVID-19 assistance programs in the markets we serve. About a week ago, the foundation announced that they had distributed those funds to nearly a dozen worthy, worthwhile community programs. So as you can see, we've accomplished a lot in the first half of this year under very challenging circumstances.
And now I'll turn things over to Curt, so he can discuss our business performance in more detail.
Thank you, Phil and good morning everyone. Our second quarter performance saw solid results in certain areas of commercial and consumer lines of business. We also saw challenges as well, as the full quarter impact of COVID-19 was felt throughout our footprint.
Our participation in the Paycheck Protection Program or PPP was a highlight, as we stood up processes, redeployed team members and help reserve over 100,000 jobs during this critical time. In total, we originated a little over $1.9 billion in loans through the issuance of more than 10,000 PPP loans. As noted last quarter, we continue to work with our customers during this difficult time and are providing payment relief ranging from three to six months depending on the product.
Slide 3, provides you with an update on the loan deferral programs we’ve been offering our customers during this time. New deferral activity has slowed considerably since mid-April. For our commercial customers, we are just now starting to see the expiration of those 90-day deferrals. If an additional 90-day deferral is requested, a thorough risk based underwriting and approval process will occur. While it is too early to determine the level of second deferral requests, we are confident that the total will be meaningfully less than the initial deferrals.
Shifting to loan growth, our overall loan growth trends for the quarter was strong, but were impacted materially by the PPP program. Excluding PPP, commercial loan balances declined for the quarter, with average balances decreasing $420 million during the period. This was largely driven by reduced line utilization during the second quarter. We have seen a decline in commercial line use from 33% to 25% or $340 million. With PPP funding and the gradual reopening of the economy within our footprint, certain businesses were able to pay down their borrowings. As you can see this decrease in line utilization accounted for the majority of the commercial loan decline when you exclude PPP funding during the quarter.
Looking forward, our commercial loan pipeline at June 30, 2020, remains relatively flat from the first quarter and is essentially unchanged from a year ago. In our commercial -- in our consumer lending business, our residential mortgage results continue to be very strong, producing linked-quarter loan growth of approximately 5% in spite of significant refinance activity.
Deposit growth has been a very -- has been very strong for the quarter as well as PPP funding to-date has largely remained in the customer deposit accounts and consumer deposits have also benefited from stimulus checks and the reductions in consumer spending. Deposits grew over $2.5 billion during the quarter with $1.7 billion of this growth coming in non-interest bearing accounts. We're also pleased with our progress in re-pricing our deposits; deposit costs declined 26 basis points during the quarter from 62 basis points down to 36 basis points.
Turning to fees, our mortgage company had a very strong quarter with both elevated originations and strong gain on sales spreads. Total residential mortgage originations for the second quarter of 2020 were $811 million, an increase of 67% from the same period last year.
Refinance activity accounted for 54% of originations in the second quarter of 2020 compared to 18% for the same period last year. Our mortgage pipeline sits at $879 million at quarter end, which is the highest level ever.
Our Wealth Management business also performed better than we had anticipated this quarter, as the stock market has rebounded quicker than we had expected, and we continue to see the benefit of our high level of recurring fee business. Our assets under management and administration were at $11.1 billion at quarter end.
Moving to credit, certain credit metrics showed improvement over the quarter. Our non-performing loans were flat linked-quarter and down $8 million from a year ago. Net charge-offs were $4 million down from $11 million last quarter and represented 9 basis points on an annualized basis. Despite these positive near-term credit trends, our outlook remains cautious. It is too early to fully assess the impact of COVID-19 on our regional economy and the related impact on our borrowers.
As you can see on Slides 4 and 5, we have limited portfolio exposure to some of those industries that have been impacted the most by COVID-19. We have expanded our disclosure from last quarter to provide additional sub sectors and details on areas of focus. Most of the loans are secured by real estate or other forms of collateral, which should help to mitigate losses in the event of default.
Our loan portfolio is diversified from a geographic product and collateral perspective. I will remind you that our internal house limit is $55 million to anyone borrowing relationship, which we believe is lower than other banks or size. This strategy has helped us maintain a diversified portfolio. In addition, our owner occupied commercial mortgages represent close to half of our overall commercial mortgage portfolio. We continue to generally land to experienced borrowers that have stable cash flow and sizable equity positions.
Now I'd like to turn the call over to Mark to discuss the financial results in more detail. Mark?
Thank you, Curt, and good morning to everyone in the call. We have taken feedback from many of you to provide additional COVID related disclosures during the past two quarters and this is reflected in today's presentation. Unless I know it otherwise, the quarterly comparisons I will discuss are with the first quarter of 2020.
Starting on Slide 6, earnings per diluted share this quarter were $0.24 on net income of $39.6 million. Second quarter earnings in comparison to the first quarter benefited from a lower provision for credit losses.
Our fee income also produce strong results and our operating expenses were better than our expectations on a core basis. These positive trends were offset by a linked-quarter decline in our net interest, income.
Moving to Slide 7, our net interest income was $153 million, a decrease of $8 million linked-quarter and in line with our guidance. A full quarter impact of the 150 basis point decline in interest rates, as well as a decline in commercial loans excluding PPP loans due to the rapid decline in line utilization drove this overall decline in net interest income quarter-to-quarter.
Our net interest income for the quarter was 2.81% versus 3.21% in the first quarter, the 40 basis points of linked-quarter compression and our net interest margin was slightly higher than our internal projections and was driven by the sharp decline in interest rates for the quarter. The influx of PPP loans, as well as excess liquidity we are currently experiencing. Our loan-to-deposit ratio declined during the quarter from 98.5% to 95.1%.
On the liability side, in addition to the progress we made this quarter in lowering our deposit costs, we believe our deposits can still re-price lower, as CD maturities occur during the second half of the year. These maturities total approximately $900 million over the next two quarters, at a blended average rate of approximately 1.5%.
Turning to credit on Slide 8, our second quarter provision for credit losses was $20 million versus $44 million last quarter and $5 million a year ago. This decrease in provision was driven by the pace of decline in the economic outlook during the second quarter as compared to the first quarter, as well as lower net loan charge-offs during the quarter.
Our CECL methodology utilizes Moody's for the macroeconomic assumptions that drive our models and we also consider an employee qualitative overlays to our models based on a comprehensive review of additional financial and economic data.
Non-performing loans as a percentage of total loans decreased to 83 basis points, excluding loans originated under PPP compared to 90 basis points a year ago and declined to 75 basis points including the PPP loans.
Our allowance for credit loss related to loans at June 30 was 1.53% as percentage of total loan balances, an increase of 13 basis points from the prior quarter. This ratio excludes PPP loans from the calculation. The allowance for credit loss coverage ratio as a percentage of total non-performing loans was 183% at June 30, 2020.
Moving to Slide 9, non-interest income excluding securities gains were $53 million, down 3% from $55 million last quarter and $54 million a year ago. This result was better than our guidance which have predicted a decline of between 5% and 15% and was driven by outperformance in mortgage banking, capital markets and Wealth Management revenues.
Mortgage banking revenues were up $3.7 million from the prior quarter, despite recognizing a $6.6 million mortgage servicing rights impairment charge during the quarter, as interest rates rapidly declined and expectations for pre-payments increased.
With respect to mortgage loans that we originate for sale, our new commitments were $573 million for the quarter, an all time high for the company. And our gain on sale spread of 2.89% for mortgages sold was significantly higher than our recent trend, as the sharp drop off in interest rates has increased demand for mortgage assets.
Capital markets revenue, which is primarily composed of swaps revenue was also higher than we anticipated coming in at $5 million compared to $5.1 million last quarter. Despite the decline in line utilization, which impacted loan balances, we did see solid originations otherwise, which drove this result.
We did execute on a small investment portfolio restructuring during the quarter involving the sale and reinvestment of $85 million of investment securities. This resulted in reporting approximately $3 million of securities gains during the quarter offset by a similar amount of expense to prepay some higher cost FHLB Advances.
Moving to Slide 10, our non-interest expenses were $143 million in the second quarter. Included in this amount was $2.9 million of FHLB prepayment penalties as noted above. Excluding this cost, total expenses were at the low end of our guidance and declined $2.5 million from first quarter levels and $4 million from the second quarter of last year.
While many of our expenses have been declining as a result of COVID-19, certain expenses have increased as a result of the pandemic including special bonuses for frontline personnel, contributions to COVID related charities, PPE expenses to keep our employees and customers safe and certain other costs. These expenses totaled approximately $3 million for the quarter. Our effective tax rate was 14% for the quarter, as compared to 10% in the first quarter of 2020. This was primarily due to higher pre-tax earnings in the second quarter.
Slide 11 focuses on our liquidity. Since mid-March, we've maintained excess cash of approximately $200 million to $600 million per day. This number has increased throughout the second quarter, as we have not seen a runoff in PPP funding than we originally expected. This impacted our net interest margin moderately. And despite stabilization in the markets, we would anticipate maintaining extra liquidity until we have a clearer picture on when PPP funds will be utilized. We currently registered to use the PPP loan facility through the Federal Reserve, but we've not yet had to tap that funding source as we've had strong deposit balances throughout the quarter.
Slide 12 gives you more detail on our capital ratios. We've evaluated our capital and liquidity under a variety of stress scenarios. And in all models, both the bank and holding company maintain sufficient regulatory capital and liquidity to maintain our current common shareholder dividend which is our intention.
Lastly, on Slide 13, we would like to provide our thoughts about forward guidance for the third quarter. With significant uncertainty still existing in the economy, we are not providing guidance beyond the third quarter at this time. Our third quarter guidance is as follows. For loans for the third quarter, we expect overall loan growth to be plus or minus 1% to 2%.
Residential mortgages will continue to lead the way with positive growth with commercial loans producing flat to modest declines in growth. Deposits, we would expect deposits to experience growth of 1% to 2% in the third quarter, with seasonal municipal deposit inflows offset by modest PPP deposit runoff.
We expect our net interest income to be in the range of $150 million to $153 million for the third quarter of 2020. We are not anticipating material amounts of PPP loan forgiveness to occur in the third quarter as we currently expect loan forgiveness activity to increase in the fourth quarter.
We expect our non-interest income to stay similar to second quarter levels in the range of $50 million to $53 million. Mortgage banking should continue to be a bright spot as our pipeline is very strong, and our third quarter is a seasonally busy time of the year. Overall, we expect operating expenses to be consistent or slightly lower than the second quarter in the range of $139 million to $142 million. Lastly, we expect our effective tax rate to be between 11.5% and 12.5% for the third quarter.
With that, I’ll now turn the call back over to the operator for questions.
Thank you. [Operator Instructions]. Our first question comes from Frank Schiraldi with Piper Sandler. You may proceed with your question.
Good morning.
Good morning.
Good morning Frank.
Good morning Frank.
Starting with -- just -- and I asked the last quarter too and I know it's really the wildcard for the back half of the year. But, Mark, if you -- I just wondered if you could maybe update us with your thinking on provisioning. I realized you guys aren't going past the third quarter in terms of guidance. So maybe, any color you could give for your thoughts in a CECL world provisioning in the in the third quarter?
Yes, so Frank, as you know, under a CECL model, you're providing each quarter for your current expected, future credit losses. So if we get things exactly right, then our provisioning and future periods, we've already covered all the loans on our books. So our provision really becomes the entry or once you calculate what your allowance needs to be for the third quarter that just becomes the last part of that equation. So you factor in loan growth or you factor in changes to your portfolio mix, you factor in net charge-offs. And then the wildcard that you're referring to is you factor in changes in your forward look on what macroeconomic assumptions are being used in your model.
So based on all of that, you would say that if we think we and I say we've been both our company and the industry have gotten things right. This quarter that can imply then in next quarter, if you're not changing those macroeconomic factors then you're just accounting for those other things, which is changes to your portfolio, which were giving guidance on that.
And net charge-offs, which you've seen what our performance was this quarter in terms of net charge-offs in terms of a non-performing levels, et cetera. But another wildcard and all this certainly is going to be as loan start to come off deferral. What our incidence rate is of -- those loans staying current second round deferrals or whether we start to see deteriorate.
Okay, so in the CECL world the way you're thinking about it if you've gotten things, right the models, right. And even in the face of higher charge-offs potentially at some point in the third or fourth quarter, we might see -- you could see provisioning, not even covered charge-offs as those reserves have actually -- have already been taken in the life alone sort of world is that reasonable?
That is possibility. Yes.
And then just wanted to try and get a sense of how conservative your fee income guide might be. You talked about the record mortgage pipelines seems like the MSR impairments based-off of expected pre-payments, which I guess is already baked into the model at this point. So I just wondered if you could talk a little bit about maybe the puts and takes in a fee income in 3Q being sort of in line with the 2Q result?
Yes, I think you're right. Frank, when you think of where and again – [indiscernible] the folks on the call here judge where we're being conservative or aggressive. But, in that this past quarter, we had mortgage banking revenues that included $6.6 million write-down in our MSR impairment the current value of that is written down to kind of mid 60 basis point range at this point.
So how much further – and as further write-downs might have to occur in the third quarter is really sort of anyone's guess. But, depending on the level of MSR impairment in third quarter, I think that's where there could be to use your wildcard in those third quarter numbers.
We also had swaps revenues in the second quarter that were strong, our pipeline maintains relatively stable, as Curt noted on the call, so depending on what third quarter originations are that that's another factor. And then the last thing I would mention on fee income would be Wealth Management revenues and where the stock market is because about 81% of our revenues are really tied to stock market valuations. Although a lot of those are kind of paid earlier in the quarter, so the fact that we had a fairly strong stock market in early July should bode relatively well for that business as well.
All right, okay. And then just one final quick point, if I could, I was just surprised to see within yield in the loan book, the significant compression that we saw in the [key] book linked-quarter, and I wondered if there was anything sort of funky there is that just related to variable rate loans within that portfolio if you just give a little color it looks like came from -- down from [42% to 35%] a quarter.
Yes, so I mean obviously with rates dropping Frank, we have, we have $6.4 billion of loans tied to one month LIBOR another $1.5 billion tied to one year LIBOR both of those dropped pretty fast particularly from kind of mid-May 1 and a lot of those commercial real estate loans are tied to swaps. So our swaps revenue is strong, but then with a higher percentage of that portfolio being variable rate that would account for most of that.
Got you.
Okay. Thank you.
Thank you. Our next question comes from Casey Haire with Jefferies. You may proceed in your question.
Thanks. Good morning, guys.
Hey, Casey.
Yes, so I wanted to touch on -- I appreciate the NII guide here but the NIM outlook given the wide variance in the loan growth, just some the headwinds and tailwinds that might be there. Mark, I know you mentioned you got some CD re-pricing benefits, but just some help, as we as we think about NIM in the third quarter, yes?
Sure, yes. So we don't give NIM guidance, we give NII guidance but to give you some other data points to help, one thing I would comment is we have -- we show you we have about $10.5 billion of interest bearing deposits in either demand or savings. Those averaged about 21 basis points for the second quarter, but we've continued to very actively manage that. And for the month of June, those interest bearing non-maturity deposits were 15 basis points so in addition to CDs I would expect to see that non-maturity demand will continue to price down a little bit lower as well. When you also consider margin, our PPP loans for the second quarter that impacted margin negatively by about 3 to 4 basis points and the excess liquidity that we're currently sitting on impact and margin about 7 basis points for the quarter.
So the question really then starts to become for margin again, when do those PPP customers use those funds or do they not utilize them, in which case then we will take other measures as other loan maturities and securities that come through over the back half of the year to a little down that cash position. But until we knew that for sure, as I mentioned, we're going to continue to hold higher liquidity, we just think it's the right thing to do at this part of still an unknown economy.
Yes, I get that. So on the PPP, sorry, if I missed this in the release for the deck, but the blended loan yield on that?
Yes. So as you know, to 1% coupon and our fees we're just about $60 million. We're amortizing that over two years, so that's about $7.5 million a quarter that comes in, so the blended yield on our PPP would be about 2.5%.
Okay, got you. Okay. All right, just last one for me, on the credit front, the forecast that you guys used -- what can you tell us about it in terms of like as we think about talking to you guys again in three months and what the -- I mean, I know it's a fluid situation, but like, what does your current forecast have and it does have more stimulus that any sort of macro GDP factors that that you can point to that we can look at three months down the line and say, it's gotten worse or it's gotten better?
Yes, sure, Casey. Yes, we don't have any additional stimulus in there. We're currently using Moody's for all the macroeconomic variables. And that both we employ in our models, as well as some of the macroeconomic variables that we look at for our qualitative overlays. So we're using the Moody's model of June 9, that model assumes an unemployment rate as of the end of December of 10.2%, and at the end of 2021 of 8.5%.
Now, unemployment is not actually used embedded in our models, but it is one of the larger qualitative overlays that we consider. And then we also use Moody's for all the other economic data for assumptions on that BBB bond rate, housing starts, et cetera, really all comes through their analysis that we rely upon.
Thank you.
Thank you. Our next question comes from Chris McGratty with KBW. You may proceed with your question.
Good morning.
Hey, Chris.
Hey, Chris.
Hey, Chris.
Hey, Curt. Mark, I want to go back to the NII comment just to make sure I'm clear. The guidance you gave for Q3, I guess first question, Is that an FTE number or is that just a GAAP number?
That's a GAAP number.
Okay. And I know you said most of the fees will come in Q4. Was there any PPP fees realizing Q2 and does that guide assume that 7.5 that's the right way to think about it?
Yes, it does. We've been -- as those loans have been on board and we've been -- we started amortized over the two years at that time.
Okay. Okay. And do you have to the average balance for the PPP loans in the quarter?
Yes, average balance was about between $1.3 billion and $1.4 billion.
Okay, great. And then maybe my last question. Your branch has gotten a lot of attention at the industry level given the revenue headwinds. Can you just remind us where you're -- where you guys are in terms of thoughts on branches, I know you collapse the charters a few years back. Just want to get your sense on the ability to run expenses out over the next year or so?
Yes, so we're going from 270 branches down to 223. And we continue to look at opportunities for consolidation and I believe that they do exist. So we do believe we can drive more expenses out.
Understood, thank you so much.
Thank you. Our next question comes from Daniel Tamayo with Raymond James. You may proceed with your question.
Hi, good morning, guys.
Good morning.
Just wanted to touch on the deferral information appreciate all the disclosures there. How many of the -- of those deferrals and you said that there's been -- there's an expectation for the amount, post renewal if you will to come down, but of the amount that you disclosed. Are there any re-deferrals if you will in that number and what's kind of the trend in terms of what's going current versus what's continuing being renewed there?
Hey, Dan is Curt. Just a little more insight to that, we have just started to have those first 90-day deferrals expire and we are evaluating second deferral request less than a third of them have expired and of those a -- it's been a meaningful reduction in the request for second deferrals. I think we have a better data for you in the third quarter. But as we are starting that process, we are seeing a meaningful decline in second deferrals.
Okay, thank you. And then as we look at -- I'm looking at the criticizing classified loans on Slide 4. So I was kind of surprised to see no criticizing classified in the hotel motel bucket within investor real estate. What's your read there on why that segment has held up well?
Yes, I don't have any specific things. I mean, we are very conservative in our underwriting in hotels overall. Again, we have 75% lower of cost or market value add origination and we have also very strong cash flow when we originate and then that portfolio has been performing over time. They have also a large portion of those have received PPP support that's a business that has been significantly affected and a lot of those have received PPP.
Okay. All right. That's all for me. Thank you.
Thank you. Our next question comes from Erik Zwick with Boenning & Scattergood. You may proceed with your question.
Good morning, guys.
Hi, Erik.
First just a follow up on the deferral discussion. I think Curt, in your prepared comments you mentioned that for any of those that have received deferral and make a second request, they'll go through a thorough kind of risk based underwriting process. Given that those that make the second request are likely businesses or consumers who've had their cash flow severely impacted in your businesses may be operating with revenue significantly below what would be considered normal, what does that kind of risk based process entail at this point what factors you're looking at and at what point do you make the decision that you may need to take a charge-off I’m just kind of curious how that plays out since the -- some of these loans if you were to look at them and there's new loans today may not meet your typical underwriting requirements?
Yes, a great question. So we are looking at those kind of like the markets looking at the bank stocks right now. We're looking at it from a capital standpoint. We're looking at from a liquidity standpoint, borrower and guarantor support to get through the crisis. So it's really those mitigating factors beyond just performing cash flow, so that it's very difficult to establish or understand ongoing cash flow with those borrowers right now. So we're looking at capital, we're looking at liquidity and we're looking at guarantor ability to keep those loans performing through this.
That's helpful. And then just turning to your loan growth on Slide 13, you've got the range of plus or minus 1% to 2%. And I think you mentioned that the pipeline remains stable at this point. Just curious, what you're seeing if there's any particular sectors where that the pipeline is stronger or weaker than you'd expect it and what could potentially what factors lead to that loan growth potentially coming at the bottom or the top end of that range for your outlook.
Yes, as we look at the pipeline is stable, the pipeline is very diversified. There are certain things that are not in the pipeline because they've been impacted businesses, but it still remains a very diversified pipeline. I think the variability in our growth will be essentially the same as this quarter. It's going to depend on how much line pay down that we have how much early pre-payment we have and how much residential mortgage [refi] that we have, I think that's what will move us towards the lower or upper end of that range.
Got it. Just one last small one on the FDIC insurance expense that was down quarter-over-quarter even with the balance sheet getting largest, just kind of curious what's driving that calculation today. And if the 3Q value should be similar to 2Q?
Yes, our 3Q values should be similar to 2Q and it was a function of our sub that raise actually in the tail-end of the first quarter and we downstream some of that money to the bank. So the way the FDIC now calculates that ratio they look at bank level capital ratios the leverage ratio at the bank level becomes one of those factors. So with excess capital the holding company raised and downstream and some of that at lower the ratio or lower the assessment.
Thanks for taking my questions.
Thank you. Our next question comes from Russell Gunther with D.A. Davidson. You may proceed with your question.
Hey, good morning, guys.
Hey, Russell.
Hi, Russell.
Just a follow up on the deferrals. So given where they stand today, and it sounds like, likely headed lower in the second in the third quarter, do you guys consider these customers higher risk given that they're in a forbearance program and if so is that accounted in the current reserve level today?
The current level of deferral, just to clarify the question. So in the current deferrals are worth considering them all high risk.
That's right. Yes. I'm just trying to get an understanding and to maybe gives you some context for my question, very different answers from Bank Management teams in terms of how they handled the deferral process and I've received answers to this question in terms of what we think 80% of these are money good and others a different answer. So I'm just curious, maybe there is high level in terms of your view of this deferral level and whether they're higher risk or not because they're in the forbearance program and if you think they are is that reflected in the current reserves?
Thanks for clarifying. So our initial deferral program was offered to all customers to accommodate given unknown factors at that time, we made the process very simple for customers to obtain a deferral and we did very limited credit underwriting to do that. So we are very accommodating to customers for the first round of deferrals. The -- now second round of deferrals will have a thorough credit underwriting to qualify for a second deferral and again we are seeing meaningful decline in the second round of deferrals. So to answer your question directly the first round of deferrals we do not feel is a risk factor. It was a customer accommodation. And then this round of deferrals will be more in line with where there's potential emerging credit risk.
And then Russell, this is Mark. I think your second part of your question related to CECL and how we think about those deferrals. While the deferrals because the loan is not it's one deferral so it's not showing up as delinquent in our system. It's not reflected in the base model, but it is reflected in the qualitative overlays that are part of our overall CECL methodology. So it would be captured in our provision for the quarter.
That's great color, guys. I appreciate it. And thanks for bearing with me as I asked the questions. My last one, just switching gears on the consumers fees. So I get the full picture guide. But just if you could kind of give us an update in terms of what percentage decline was from lower activity versus fee waivers and maybe how -- what the exit rate was at the end of the quarter June versus April to get a sense for run rates third quarter?
Yes, there was a minimal impact from fee waivers. We were very accommodating. We participated in the CARES program for all five of the states that that we operate, so we were very accommodating to customers. However, the customer requests for fee waivers were very limited. And the driver of that revenue was really activity based overdraft fees and credit card, debit card activity. We do see both of those climbing month-by-month as there is more activity overall.
Great. Thank you very much. That's it for me.
Thank you. [Operator Instructions]. Our next question comes from Matthew Breese from Stephens Inc. You may proceed with your question.
Good morning. A couple of follow up questions. So on the deferrals that go through the re-deferral “process” and don't meet the hurdles and therefore need additional forbearance how are you thinking about moving those loans into either criticize or classified or traditional NPL or NPA buckets should we expect those that don't cure on the next round to move into those traditional deteriorating asset quality buckets?
I think you'll see some of that, but again, it's underwriting process. So some of those borrowers may request the second deferral and we will grant that based on their capital, their liquidity their guarantor support. So it won't necessarily mean that that they are a non-performing or distressed borrower at this point. Some of them as we re-underwrite them probably we will adjust their risk rating and potentially be classified criticized or non-performing. But again, it's an underwriting process. That we will look at each one of those customers to have us grant them the next deferral.
Understood. And then could you just talk about how much flexibility you have from the CARES Act and or from the regulator's to push deferrals out, meaning it now seems like there's likely going to be businesses and sectors of the economy impacted well into 2021. Do you have the flexibility to extend deferrals out that for into mid-2021? And we could be carrying these for that long?
Well, I would just say, in regards to the regulators they have much more flexibility and willingness to work with banks then existed in ‘09, ‘10, ‘11 time period. So I think we'll have the ability to extend how long it lasts is really hard to say.
Okay. And then going back to Frank's question on the provision, just wanted to get a sense for how the Moody's forecasts have evolved in 2Q and if you have them into July have the forecast started to stabilize and become a little bit more consistent or have they been as volatile as they were in April and May just want to get a sense for how they have been moving?
From my perspective, Matt, they have stabilized and I would say they stabilized because if you think to in March, I think there were some banks that were using like there was one on the 23rd there was another one in the 27th they were coming out every couple of days things were so fast and furious. And now for this quarter I mean, the last model that Moody's developed was June 9, was the model that everyone was using for quarter end and again I know there's a lot of midsize banks that that rely on Moody's for their macroeconomic variables. So the fact that they're just slowing down the pace, to me implies that you're getting some slightly better lens into the future although again there's still certainly a lot of uncertainty out there.
Understood. And then just last one for me, I know regulatory capital ratios are well in excess of minimums, tangible, common equity. Could you just give us some sense of where you're comfortable moving that down to or is that even something you're looking at?
Yes, so, TCE I really think this quarter is going to be the low watermark. And we've expected to climb back from there and that was really a function of PPP loans putting those on to me obviously it's a 0% risk weighted asset for your regulatory ratios. But the PPP loans impact both TCE and your Tier 1 leverage ratio unless you're using the PPPLF which we haven't had to use yet as a funding source because the deposits are still sticking around. So both of those ratios Tier 1 leverage potentially tangible common equity here in the short run, we knew would dropped as a result of PPP, but because we've view that as both the right thing to do in our communities, as well as the short-term nature of the program we were comfortable with that number coming down to 7.4 and then climbing back towards closer to probably seven, eightish range by year end.
Great. I appreciate all that. That's all I had. Thank you.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Phil Wenger for any further remarks.
Well, thank you all for joining us today. We hope you'll be able to be with us when we discuss third quarter results in October. Thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.