Earnings Call Transcript - FNB Q2 2020

Operator, Operator

Hello and welcome to the FNB Corporation Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note, today's event is being recorded. Now I'd like to turn the conference over to Matthew Lazzaro, Manager of Investor Relations. Mr. Lazzaro, please go ahead.

Matthew Lazzaro, Manager of Investor Relations

Thank you. Good morning everyone and welcome to our earnings call. This conference call of FNB Corporation and the reports it filed with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings release, related presentation materials and in our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until July 24 and the webcast link will be posted to the About Us, Investor Relations section of our corporate website. I'll now turn the call over to Vince Delie, Chairman, President and CEO.

Vince Delie, Chairman, President and CEO

Good morning everyone and welcome to our earnings call. Joining me today are Vince Calabrese, Chief Financial Officer and Gary Guerrieri, Chief Credit Officer. On today's call, I will provide an overview of second quarter results and update you on FNB's participation in the paycheck protection program. Gary will discuss asset quality and provide further detail on our loan portfolios. Vince will address our financial results and cover relevant trends. I will then provide an update on our digital platforms in physical operations and finally discuss our organization's $250 million commitment and continuing initiatives to address economic and social inequity in our community. As a company and on a personal level, we've endured significant challenges and change this year. Our thoughts are with those who have been impacted by the pandemic and unrest in our community. I am proud of how our company has rallied in support of our customers and neighborhoods where we operate. The resolve to work together to emerge stronger and united and our demand for a more successful future for all of our constituents. FNB's second quarter results increased significantly. Operating earnings per share increased 63% to $0.26, which included an additional $17 million or $0.04 per share of COVID-19 reserve build in the quarter and PPNR increased to $130 million. Core revenue trends remained solid throughout a challenging interest rate environment, with total revenues increasing 6% annualized to $306 million. Total assets grew nearly $3 billion to end June at $38 billion. Compared to the first quarter, loans and deposits increased $2.3 billion and $3.6 billion or 10% and 15% respectively. On a linked quarter basis, double-digit second quarter loan and deposit growth was supported by organic commercial production and originating nearly 20,000 PPP loans totaling $2.6 billion. Our fee-based businesses performed exceptionally well with capital markets and mortgage banking establishing revenue records of $13 million and $17 million respectively. Our efficiency ratio was 53.7% and operating expenses were well controlled, down 3% from the first quarter. Even though there has been disruption across our footprint due to COVID-19, we have still seen good commercial loan origination activity across most of the footprint. This is a testament to our teams who continue to serve our clients and meet their borrowing needs while dealing with a challenging operating environment. To strengthen our balance sheet and ample liquidity enabled FNB to support our clients' capital needs. We continue to apply our consistent underwriting standard aligned with our strategy and overall risk profile as we evaluate business opportunities in the current climate. On a linked quarter basis, total average loans increased 9%, largely driven by growth in commercial loans of 14%. Commercial line balances when compared to historical levels contracted as we saw much lower line utilization of 36%. The utilization rate decreased as PPP funds were utilized to support working capital needs by many existing clients and economic activity declined during the period. Commercial loan balances were also impacted by large corporate borrowers paying down bank credit facilities with increased liquidity in the bond market. Average deposits increased 11% as we have solid organic growth and customer relationships, with a large inflow of deposits for PPP funding and government stimulus activities also occurring. As part of our business strategy, we have been focused on reducing the level of wholesale borrowings by continuing to gain depositors and expand existing relationships. As a result, we were able to fully eliminate our overnight borrowing position replacing it with customer deposits. Non-interest bearing deposits were up $2.1 billion or 33% from prior quarter end. Looking at June 30 spot balances, our loan to deposit ratio was 92%, including the funded PPP loans, which positions us more favorably in the current rate environment. Growing non-interest bearing deposits has been an integral part of our long-term strategy, and we've consistently been able to grow organically through various interest rate environments, further strengthening our overall funding mix. In fact, transaction deposits have increased $4 billion or 20% from March 31, and now represent 85% of total deposits, which compares very favorably to 79% five years ago. With the Fed taking near-term rate increases off the table, there is an opportunity to offset net interest income headwinds by continuing to reduce deposit costs. As we have stated previously, continuing to grow our fee-based businesses is essential to diversifying our revenue sources and mitigating pressure on net interest income in an extended low-rate environment. Interest rate expectations are now reflecting lower for longer; it is important we continue to build on our recent success in capital markets, mortgage banking, wealth management, and insurance. This quarter's record mortgage banking income of $17 million better reflects the fundamentals and the results without MSR impairment as the mortgage banking business set a new production record for the quarter of $869 million. Turning to our participation in the paycheck protection program, I would first like to recognize our teams for their support of our customers and communities throughout these extraordinary circumstances. Our employees have worked tirelessly to ensure businesses receive critical funding during a time when regions within our footprint experienced extended shutdowns, particularly in our Metro markets in Pennsylvania and the Mid-Atlantic, and when many borrowers turned from larger banks at FNB to accommodate their needs. As part of the PPP origination process, each borrower opened an FNB account, which supports our efforts to bring in new households. Looking ahead, we are optimistic that borrowers will be able to deploy these funds as businesses around the footprint reopen. As an organization, we leveraged our technology infrastructure and expertise already in place to quickly adapt and accommodate our customers in a challenging and remote environment. Coupled with significant financial aid and employee volunteerism in our communities, our efforts have helped tens of thousands of small businesses during the pandemic and supported the retention of hundreds of thousands of jobs. From the beginning of the COVID-19 crisis, FNB has upheld consistent volumes of total transactions and provided customers with a seamless transition from physical to online and mobile engagement. This was made possible from the significant investment we've made in our digital and online platforms over the last decade. In fact, the appointment setting feature on our new website that went live in January enabled FNB to continue serving clients safely in our branches throughout the crisis. We grew from 26 monthly appointments in January to 2,700 appointments in April. The rapid shift to remote services accelerated the enhancements to our digital strategy that were already underway and minimized disruption for our customers. As the operating environment remains in a constant state of change, we will continue our innovative approach to better serve our customers. I will now share some updates regarding our operations and delivery chain. Together with the uptick in online appointment setting, our website increased traffic by millions of daily visitors. As we are deepening relationships with customers throughout our digital capabilities, we are also generating significant opportunities by synchronizing the physical and digital customer experience. We can take customers who utilize a single product and broaden the relationship to include products such as savings, credit cards, private banking, mortgage, wealth management, and insurance. At the end of the day, it provides tremendous value to the customer to have multiple product relationships within FNB on a single platform connected through digital capabilities. Overall, the acceleration of digital and remote banking volume demonstrates our versatile integrated multi-channel strategy. Customers have been more active in FNB's mobile and online channels, with monthly average users up by 50,000 in both categories compared to the average for 2019. While our customer adoption rates for online and mobile have accelerated, our customers have still expressed a strong desire to conduct business within our branches. As an essential business, it is important for FNB to remain available and accessible. Our business continuity team, in collaboration with other units, including data science, human resources, and retail banking, developed a monitoring system in which we can evaluate data related to the healthcare crisis on a locational basis. On July 13, 2020, we reopened the majority of our branch lobbies to customers adhering to the most stringent safety measures, including social distancing and cleaning protocols as we begin to move forward to the next phase of operation. With that, I'll turn the call over to Gary to cover asset quality.

Gary Guerrieri, Chief Credit Officer

Thank you, Vince, and good morning, everyone. During the second quarter, our credit portfolio continued to perform satisfactorily as the COVID-19 global pandemic continues to evolve. Our credit metrics have held ground in this challenging economic environment, which I will cover with you in greater detail on both a GAAP and non-GAAP basis, exclusive of our loan volume funded under the PPP program. I will also provide some updates on the status of our loan deferrals and the steps we are taking to manage our book, particularly those borrowers tagged to COVID-sensitive industries. Let's now review the quarterly results. The level of delinquency ended the second quarter at 92 basis points on a GAAP basis, down 21 bps over the prior quarter as early-state delinquencies returned to more normalized levels. When excluding PPP loan volume, the level of delinquency would have ended the quarter at 1.02%, down 11 bps from the prior quarter. The level of NPLS and OREO totaled 72 basis points at June, an 8 basis point increase linked quarter, while the non-GAAP level was 80 bps excluding PPP. The migration was due primarily to a few previously rated credits that were further impacted by the current COVID environment, which we proactively moved to non-accrual during the quarter. Of our total NPLS at June, 48% of these borrowers continue to pay as agreed. Net charge-offs remained at a good level at $8.5 million for the quarter or 13 basis points annualized, resulting in a year-to-date level of 12 basis points. Provision expense totaled $30 million in the quarter, which includes additional build for macroeconomic conditions tied to COVID-19. Touching on the Q1 economic-driven build, our COVID-related provision for the first half of the year totaled $55 million. Our ending reserves stand at 1.4%, and excluding PPP volume, the non-GAAP ending ACL totaled 1.54%, representing a 10 basis point increase over the prior quarter, resulting in NPL coverage of 215%. But including the acquired unamortized loan discounts, our coverage excluding PPP volume is 1.87%. Under the preliminary severely adverse default scenario, the current reserve position inclusive of unamortized loan discounts would cover 78% of stressed losses. As the pandemic continues to pressure the global economy, our approach to managing the book in this COVID environment remains in line with what I communicated on last quarter's call. We continue to conduct thorough borrower-level reviews within our commercial books to track key performance indicators for those that operate in economically sensitive industries or have otherwise been impacted by the pandemic. These ongoing targeted portfolio reviews allow our credit teams to quickly identify and proactively address emerging risks at the borrower, industry, or overall portfolio level. Additionally, we continue to conduct a series of scenario analyses and stress test models under our existing allowance and DFAST frameworks as we work through this challenging environment. As it relates to our borrowers requesting payment deferral, 10% of our loan portfolio excluding PPP loans were approved during the initial deferment request window. Of these deferments, 98.4% were current and in good standing prior to the pandemic. Of the remaining $39 million, $12 million is already on non-accrual. Our requests for initial deferrals are essentially non-existent, and we have only seen a small amount of second requests for payment deferral at this time. That said, we are carefully monitoring our credit portfolio and remain vigilant to identify borrowers that could face further pressure during uncertain economic conditions. This approach allows us to quickly identify and manage risk in the portfolio while still meeting the credit needs of our customers. The composition of the portfolio remains diverse and well balanced across several product lines, geographies, and industries. As shown on Slide 10, our exposure to highly sensitive industries remains low at 3.8% of the total portfolio, which includes all borrowers operating in the travel and leisure, food services, and energy space. The level of payments deferrals granted to these borrowers remains at 38%. Additionally, we have been tracking our retail secured IRE portfolio closely to assess the emerging challenges on this asset class, as well as the nature of the tenants' operations and insulation from certain economic strain as essential businesses. Our weighted average LTV position in this book remains strong at 65%. In summary, we continue to manage our credit portfolio through this difficult economic environment by drawing on our strong credit fundamentals and our risk management strategies, which we continue to enhance as the COVID situation plays out. Considering these challenges, our portfolio is in a satisfactory position entering the second half of the year. Realizing the uncertainty of the economic environment as we look ahead, we continue to draw on the strength of our experienced banking team to manage through this environment as we move into the latter half of the year. I would like to recognize our teams for their tireless efforts as we continue to work through this challenging environment. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Vince Calabrese, Chief Financial Officer

Thanks, Gary. Good morning. Today I'll review the second quarter results and trends in our operating environment and discuss our capital management approach and current position. I'll note that our tangible common equity levels entered the year in the strongest position we've had in nearly two decades, and we are comfortable with our current capital position. Looking at Slide 5, GAAP EPS for the second quarter was $0.25, including $0.05 related to significant or outsized items. These included $17.1 million COVID-19 reserve builds and $2 million of COVID-19 related expenses. The CCE ratio ended June at 6.97%, reflecting these items, as well as a 52 basis points temporary impact for the $2.5 billion in net PPP loan balances at June 30. Without the PPP balances, the CCE ratio would have been 7.49%. Additionally, our CET1 estimate ended the quarter at 9.4% compared to 9.1% on March 31 and 9.4% at the end of 2019, as PPP loans carry a 0% risk weighting for risk-based capital purposes. Pre-tax pre-provision earnings increased to $130 million, providing more than adequate earnings power as we declared our third quarter dividend of $0.12 earlier this week. The dividend payout ratio of 48% in the second quarter is well below historical levels of previous payout ratios. I will touch on our capital management approach in more detail later in my comments. Turning to the balance sheet on Slide 14, the key theme is the impact of $2.5 billion in net PPP loans. The PPP was the primary driver in the linked quarter average increase of $2.1 billion or 9% as well as strong organic activity across most of the commercial segments. Our commercial line utilization ended June at 36%, below historical levels down from mid-40s spot utilization rate at the end of the first quarter as we clearly saw some customer borrowing activity shift over to the PPP and our large corporate borrowers access to capital markets to reduce their bank debt. Average consumer loans were essentially flat as direct installment loans increased $65 million or 14% annualized, and residential mortgages increased 6% annualized, two bright spots that continue to perform well. The increases in direct installment and mortgage loans were offset by continued declines in indirect auto loans and consumer lines, two loan classes heavily affected by the pandemic. Continuing down to Slide 14, average deposits increased $2.7 billion or 11% on a linked quarter basis, driven by transaction deposits which grew $2.9 billion or 15%. Transaction deposits equaled 85% of total deposits as our managed to client CDs continued, and transaction deposit balances benefited from stimulus programs and PPP customer-driven inflows. Non-interest bearing, interest bearing demand, and savings account balances each increased significantly, up $1.8 billion, $854 million, and $226 million respectively. Now focusing on the income statement on Slide 15. Compared to the first quarter, net interest income totaled $228 million, a decrease of $4.7 million or 2%, as loan and deposit growth mostly offset the impact of lower rates. The net interest margin narrowed 26 basis points to 88, primarily driven by the full quarter impact of the Fed lowering the target Fed funds range to 0 to 25 basis points. Additionally, the average one-month LIBOR fell to 36 basis points from 141 in the prior quarter. Total yield on average earning assets declined by 58 basis points to 354 reflecting lower yields on variable and adjustable rate loans due to the lower interest rate environment and the impact of the PPP balances. Total cost of funds decreased to 67 basis points from 101 as the cost on interest-bearing deposits was reduced to 37 basis points. Slide 16 and 17 provide details for non-interest income and expense compared to the first quarter. Non-interest income totaled $77.6 million, increasing $9.1 million or 13.3% as mortgage banking operations increased $17.6 million on a reported basis or $10.2 million excluding MSR impairments and $7.7 million respectively. Mortgage production established a new quarterly record at $869 million, an increase of $306 million or 55% from the prior quarter, with large contributions from North Carolina and the Mid-Atlantic region. Capital markets also set a new record of $12.5 million, increasing $1.4 million or 12.6% with strong contributions from interest rate derivative activity across the footprint. As expected, service charges decreased $6.2 million, or 20.5% due to noticeably lower transaction volumes in the COVID-19 environment. Turning to Slide 17, non-interest expense totaled $175.9 million, an increase of $19 million or 9.7%, including $2 million of expenses associated with COVID-19 in the second quarter of 2020, and $15.9 million of outsized unusual or significant expenses occurring in the first quarter. On an operating basis, expenses declined $5.1 million or 2.9% compared to the first quarter of 2020, as we have realized lower variable expenses, such as travel and business development, and increased FAS 91 benefits given the amount of loans originated in the second quarter. Additionally, we recognized an impairment of $4.1 million from a second quarter renewable energy investment tax credit transaction. Related tax credits were recognized during the quarter as a benefit to income tax. The efficiency ratio improved significantly to 53.7% compared to 59%. Starting with recent trends on Slide 18, we continue to observe daily changes in external factors, including multiple aspects of potential economic recovery, changes in government programs, and regulation changes over current programs. Saying that we are providing our current directional outlook for the third quarter based on what we know today, which is subject to change. We expect period end loans to increase low single digits from June 30, assuming no forgiveness of PPP loans given the SBA's current expected time for processing forgiveness applications. While we expect deposits to decline from second quarter 20 levels based on an expectation that customers will increase their deployment of funds received through the government programs, we do expect to see continued organic growth in transaction deposits. We expect third quarter net interest income to reflect the full impacts of the lower one month LIBOR rate on variable rate loans, partially offset by a full quarter benefit of higher commercial loan balances and continued reduction in the cost of interest-bearing deposits. We expect positive trends in capital markets and mortgage banking, although lower than the record levels this quarter. We expect service charges to increase if recent transaction volume trends continue. We expect expenses to be stable to up slightly from the second quarter. Lastly, we expect the effective tax rate to be around 17% for the full year 2020. For the remainder of my comments, I would like to discuss our risk-based capital position and overall management philosophy given the current environment beginning on Slide 20. We continue to be very comfortable with our capital ratios as they stand today as the benefit of entering this crisis from a position of strength. As demonstrated in the new capital slides, which we have added to the deck, we have ample internal capital generation cushions for all of our capital ratios in relation to well-capitalized thresholds. For example, for the total risk-based capital ratio far below 11%, total capital would have to drop by $258 million, or 7.9% of total capital of $3.3 billion. Our risk-weighted assets increased by $2.3 billion, which is 8.5% of total risk-weighted assets of $27.5 billion. The $258 million is after-tax dollars. On top of our capital position, we have a conservative bias in how we build reserves, especially given the consistent underwriting philosophy that has been in place for well over a decade. With CET1 of $2.6 billion and allowance for credit losses of $365 million and a remaining PCD discount of $77 million, we have a substantial base available to absorb credit losses. To put that in context, our reserves plus remaining discount on previously acquired loans would cover 62 quarters of net charge-offs that average $7.1 million per quarter in the first half of 2020. This is before considering the $2.6 billion in PPP volume. Another way to look at this is relative to severely adverse charge-offs in our last stress test. Again, using $442 million in reserves plus remaining discount, we cover 75%, $586 million in charge-offs projected under the severely adverse scenario for a nine-quarter period. To put the $586 million in context, that compares to $64 million over nine quarters using the first half of 2020 net charge-offs, or 9.2x the current levels. As far as dividend sustainability, we're governed by the Federal Reserve and the OCC. From a Fed perspective, we currently pay out $39 million in common dividends and $2 million in preferred dividends for a total of $41 million per quarter. The Fed's four-quarter tests currently show in excess of $153 million after paying out the third quarter dividends just declared. From an OCC perspective, there are significant cushions to support the $46 million the bank is projected to pay up to the holding company. The OCC shows a cushion of $913 million relative to net undivided profits and $517 million relative to net profits for the current year, combined with retained net profits for the prior two years, cushions above well-capitalized levels ranging from 228 basis points to 384 basis points. In addition to looking at our capital position, it's important to consider PPNR generation. Year-to-date PPNR of $236 million more than supports the incremental reserve build through the first six months of the year. We generated ample capital to cover the preferred and common dividends, and our CET1 ratio was consistent with where we ended 2019 at 9.4%. Earlier this week, we announced our third quarter dividend of $0.12 given the earnings levels through the first half of 2020, you can see their capacity to continue to return capital to shareholders. Overall, our capital management philosophy is grounded in a conservative and consistent underwriting and credit management philosophy throughout varying economic cycles, supplemented with robust, comprehensive enterprise risk management, including very active credit monitoring processes. With that, I will turn the call back to Vince.

Vince Delie, Chairman, President and CEO

Thanks, Vince. Looking at everything we've managed through over the last few months, the efforts of our team have been nothing short of exceptional in assisting our clients and communities in which we serve. Recent events highlighting persistent inequities in our country have affirmed our important mandate to support those who are vulnerable and traditionally underserved. As an organization, we continue to place a strong emphasis on being inclusive, and this is demonstrated by our recent $250 million commitment to address economic and social inequity in low- and moderate-income and predominantly minority communities. As we continue to deploy these investments, our shareholders will benefit as we have continued to prudently manage risk, liquidity, and capital actions to better position our company. During the quarter, FNB originated nearly $500 million in paycheck protection program loans in low- to moderate-income rural neighborhoods, assisting thousands of small businesses and employees. Our success is a direct result of our bankers' proactive outreach to over 100 organizations and non-profit entities that work directly with these communities. This is just an example of how committing our resources this way leads to good business results. I encourage everyone to learn more about our ongoing initiatives and commitment to diversity and inclusion through the links contained on the slides within today's presentation. As we look ahead to move into the next phase of COVID-19 recovery, we will continue to focus our response on four key pillars to meet the needs of each of our constituents. The pillars are employee protection and assistance, operational response and preparedness, customer and community support, and risk management and actions taken to preserve shareholder value given the extreme challenges presented. Through these unprecedented conditions, our employees have consistently delivered a superior experience for our customers. In June, FNB was ranked among the best banks in Ohio and North Carolina by Forbes and AdvisoryHQ respectively, a testament to the consistency of our customer-centric culture across our footprint. The company was again named a top workplace in northeastern Ohio for the sixth consecutive year by the Cleveland Plain Dealer. This recognition, which is based solely on employee feedback, joins the list of nearly 30 such awards received over the past decade. All of this has been made possible by our dedicated employees. In closing, I would again like to thank my fellow team members, as they have demonstrated throughout this time exactly why they continue to be our most valuable asset. Our dedication to cultivating a superior culture directly translates into a better customer experience, greater financial performance, and higher returns for our shareholders. With that, I will turn the call over to the operator to open the call for questions.

Operator, Operator

Yes, thank you. We will now begin the question-and-answer session. And the first question comes from Casey Haire with Jefferies.

Casey Haire, Analyst

I will start with a housekeeping question. I've gotten a lot of questions about the purchase accounting Vince in the quarter and the outlook going forward?

Vince Calabrese, Chief Financial Officer

The accretion was $13.2 million of the remaining discounts from the CECL approach there. You may remember that was $17 million in the first quarter. So down a little bit, but it's still a pretty good healthy level there.

Casey Haire, Analyst

Okay, great. And then, Gary, on the credit quality front, so the defaults at 10% sounds like the new requests have dramatically slowed. I believe you guys were on a three-month program. So, I mean, they should be either extending or going back to normal. What is sort of based on your indications and discussions, how do you expect that 10% to trend in the next quarter, this quarter?

Gary Guerrieri, Chief Credit Officer

I think we had a period of increased activity that started in late April and continued into May, but June saw a significant decline. The activity in June was very minimal. Many of our clients made their payments for April, following their March payments, which pushed them further into recovery. Currently, we have only received about 50 commercial requests for second deferrals and around 250 for retail. Overall, the activity has been quite low, and our bankers are in regular communication with these clients. We anticipate that activity will increase as we move through the rest of July and into August and September, but for now, it remains quite light.

Casey Haire, Analyst

Okay. But so do you expect those deferrals to stay at 10% when you report in October, or do you expect a lot of them to go back to normal?

Gary Guerrieri, Chief Credit Officer

Yes. We expect a lot of those deferrals to go back to normal payments. And we'll report that going forward as a lot of those clients are not going to need a second deferral, it's going to be a significant number that will not need it from our perspective at this point. And I think you will see, you will see heavier deferrals for second requests coming in the hotel space and in that restaurant space as they have more pressure. The other item that I'll mention to you again is, coming into the situation, right at using the end of the year, 98.4% of these clients who took the deferrals are in perfectly good standing. So it was a very small number, as mentioned, in my report that weren't working in the normal course of business. Naturally, this shutdown has impacted a lot of clients. And a lot of clients were preserving liquidity and being cautious. But, hopefully, that answers the question for you holistically.

Casey Haire, Analyst

Thank you. Regarding the reserve build, it has been moderated this quarter. When did you update your forecasts for building the reserve? Given that the reserve has moderated, do you believe you are receiving positive news regarding deferrals? Do you think the main challenges of reserve building have been addressed, even though it’s a difficult question to answer since conditions change frequently? Considering the direction of deferrals and the reduced reserve build, it seems like you might have already handled the most significant issues. Could you provide some insights on that?

Gary Guerrieri, Chief Credit Officer

On the model first, let me address that one for you first. We continue to use a recessionary scenario, Casey, released in mid-June, with the average unemployment rate of 11% over the forecast horizon with annualized year-over-year GDP not turning positive until the middle half of 2021. So it's a fairly good recessionary scenario that we've used in the model. As it relates to the second part of the question, with our focus and consistent view on our underwriting and our credit culture around the desired asset classes that we want to put in the book and the position and mix of our portfolio, I feel pretty confident that our book will generally outperform through the cycle as it did in the last. That said, there is a significant amount of uncertainty, as you mentioned, in the economy, at this point and the economy; if the economy deteriorates further from here, the portfolio would experience higher levels of stress. Given our position and the performance to-date our portfolio mix, the smaller portfolios across higher asset classes, we'll continue to assess the positions around it as the third quarter plays out. A few additional comments here, remember in Q1, we captured the March 27 forecast when others may not have. So we utilized that most recent bit of information around our forecasted models at that point. And during that first half we built totally $55 million now, through the first six months. Also of note, we really essentially have no credit card, student loan and a very small energy portfolio. Those are tough from a reserve standpoint during this environment as we all know. In addition, we had a pretty significant decline in line utilization in direct auto and some declines in the small business portfolio which really freed up about $10 million in additional reserves during the quarter for us so that helped us as well. And finally, when you're looking at the macroeconomic environment and looking at it from a static position, moving forward, similar performance across our portfolio, we wouldn't expect much of any additional build from a macroeconomic forecast perspective. And we'll continue to manage that accordingly based on how the economy evolves from there.

Vince Delie, Chairman, President and CEO

Casey, I would like to mention that the reserve coverage, excluding the PPP, stands at 1.54%. We have a remaining discount of $77 million on the acquired loans, which is available to absorb losses, bringing the coverage from 1.54% to 1.87%. Additionally, as noted in our slides, we have an extra $14 million reserved for unfunded lines, which adds about 7 basis points. We've increased our reserves significantly since the end of the year, supporting Gary's point.

Casey Haire, Analyst

Understood. And Vince, just last one maybe, the total capital ratio, I didn't see it in the release or the deck, was it at 630?

Vince Calabrese, Chief Financial Officer

Total risk-based capital ratio?

Casey Haire, Analyst

Correct.

Vince Calabrese, Chief Financial Officer

We did not disclose that here, Casey. We have the CET1 at 9.4. We will be able to get that by the end of the call. I just don't have that handy.

Operator, Operator

Thank you. And the next question comes from Frank Schiraldi with Piper.

Frank Schiraldi, Analyst

I would like to follow up on credit. As you mentioned, the reserve ratio, including the acquired book, appears to perform well compared to peers. However, when I examine specific categories, it seems a bit thinner in some areas than I anticipated. Could you provide more details about the retail CRE book, where I believe reserves are still just under 1%?

Gary Guerrieri, Chief Credit Officer

When you look at that portfolio, Frank, we currently have very few credit problems in that book. We feel confident about our sponsors across that portfolio. We've focused our underwriting on higher cash flow streams and required debt service coverage over the last few years, particularly since some of it is retail-focused, as we've previously discussed. Today, we have an extremely low level of delinquency, which is currently at 60 basis points, with very few rated credits at this moment. From our perspective, that book has been very well underwritten. Additionally, as I mentioned earlier, the loan-to-value ratios are right at 65%. We are well positioned in that portfolio and feel good about it while working with those clients. Notably, we are seeing rental streams begin to increase as the economy has opened up. We'll continue to monitor that, and hopefully, we will see positive momentum moving forward.

Frank Schiraldi, Analyst

And how are you guys approaching downgrades or deferrals pushing downgrades of credit to classified or criticized or the deferrals pushing that down the road? Are you taking them as they come in and just wondering if you feel like there could be as these deferrals come off a migration there that could drive further reserve builds?

Gary Guerrieri, Chief Credit Officer

During the first round, the credits that were in sensitive industries were generally moved a notch. Other credits that were in a very strong position and were being conservative, those particular ones weren't moved. During the second phase here, every second deferral will require a one-notch downgrade, if not two in most instances to a substandard rating. So we'll continue to work that portfolio in that fashion and address those ratings accordingly based on the risk present in each one of those credit situations.

Vince Calabrese, Chief Financial Officer

Frank, I will tell you in the commercial portfolio speaking commercial portfolio hearing, I'm not sure if you're crossing over. And similar but there's very active management risk rating reviews that go on perpetually. So, there's a very aggressive management system in place to ensure that as we review financials and review credit covenant compliance, that the appropriate risk rating is assigned to those credits. So the migration on risk rating, if that's what you're asking, is going on now, I mean it's been going on.

Gary Guerrieri, Chief Credit Officer

When these deferrals come in, it may have been a little early right because the majority of the impact for our commercial customers based upon what I'm hearing was happening in April, late March into April and May. And they've kind of rebounded back most of the industries have come back well beyond where they were at the depths of April. So that's an ongoing process. And we have a fairly rigorous process in place to review this rating. Our focus is that every time a banker engages with a credit situation, regardless of whether it's during an annual review, a line of credit renewal, or a phone call, we require them to evaluate the circumstances and downgrade risk on a monthly basis. This proactive approach has been implemented for many years.