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Fulton Financial Corp (NASDAQ:FULT)
Q1 2020 Earnings Call
Apr 22, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Fulton Financial First Quarter 2020 Results Call. [Operator Instructions] After the speaker presentation, there will be a question-and-answer session [Operator Instructions].

I would now like to hand the conference over to your speaker, Mr. Jason Weber, please go ahead, sir.

Jason H. Weber -- Senior Vice President and Director of Corporate Development and Investor Relations

Thank you, Sherri. Good morning. Thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the first 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 www.fult.com by clicking on Investor Relations, then on news. The slides can also be found on the Presentations page under the 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 and our forward-looking statements in our earnings release, and 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 16 and 17 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.

E. Philip Wenger -- Chairman and Chief Executive Officer

Thanks, Jason, and good morning, everyone. Thank you for joining us. I have a few prepared remarks before our President and Chief Operating Officer, Curt Myers provides insights on our business performance for the first quarter of 2020. When Curt's finished, our Chief Financial Officer, Mark McCollom will share the details of our financial performance. When Mark concludes, we'll open the phone lines for questions.

As COVID-19 developments continue to unfold, I want to spend a few minutes updating you on our response to this pandemic. Our Company's brand, 'It's Personal' is not just about words, it's about actions. As we face the effects of COVID-19 together, we are continuing to support affected individuals, families and businesses by offering special programs to ease the financial and economic impact in the communities they serve.

Some of these programs are listed for you on Slide 3 in today's presentation. And we understand the hardship our employees and customers may face as a result of business, and school closures, job furloughs, reduced work hours and social distancing. And we are prepared on an individualized and personal basis to help them through these challenging times.

Curt will provide you with the details in a moment, but we have provided payment relief to our commercial and consumer customers to help them get through this difficult time. As the severity of the pandemic became more apparent, we quickly focused on our employees, knowing that the health and safety of our team members was and is critical to our ability to meet the needs of our customers and our communities.

Like many companies, we initially implemented sanitation protocols in our offices, encouraged the use of technology rather than in-person meetings wherever possible, and put in place additional paid-time off programs to help our employees and their families. As the crisis worsened, we completely redesigned our service delivery model to strike an appropriate balance between continuing to meet customer needs and reducing face-to-face interactions. We instituted banking by appointment only in our financial centers, encouraged the use of ATMs and drive-up windows instead, and guided customers to our digital channels to support their financial services needs without requiring physical contact with others.

By quickly acknowledging the new reality of the COVID-19 environment, we have been able to support our employees, and their families, continue to serve our customers and be a source of stability for our communities. From a financial perspective, our pre-provision net revenue was approximately $74 million for the first quarter of 2020, a slight increase from the same quarter last year.

Our subsidiary bank, Fulton Bank remains well capitalized. It has ample liquidity to support our employees, customers and the communities that we serve. Mark will provide more details on this, but we believe capital and liquidity are two of the most important qualities to uphold in this crisis. We have taken several intentional steps to ensure that our capital and liquidity stay strong throughout the crisis.

Going forward, we intend to focus on our primary mission of serving the communities in which we operate so they in turn can help to push the economy and our country forward from here. To help with this effort, early in the second quarter we made a contribution to our Fulton Forward Foundation, which will be used to help our communities in the fight against COVID-19.

Our senior management team also remains focused on leading our employees through this difficult time, so that we can all continue to change our customers' lives for the better. So now, I'd like to turn the call over to Curt to provide insights on our business performances. Curt?

Curtis J. Myers -- President and Chief Operating Officer

Thank you, Phil. And good morning, everyone. Our commercial and consumer lines of business performed well in the first quarter, highlighted by the solid loan growth and strong production from our mortgage banking business. However, the positives in the quarter were overshadowed by the rapid deterioration in the macroeconomic environment as a result of COVID-19.

As Phil mentioned, we are working with our customers during this difficult time and are providing payment relief ranging from three to six months, depending on the product. As you can see on Slide 4, we provided payment relief on approximately 4% of our consumer loan balances and approximately 14% of our commercial loan balances as of April 17. We are offering other special assistance programs as well, such as overdraft and NSF fee waivers and early withdrawal penalty waivers for certificates of deposit.

We continue to provide liquidity and funding to our customers. Our loan balances increased $240 million or 1.4% linked quarter and $815 million or 5% year-over-year. The commercial pipeline at March 31, 2020 increased 19% linked quarter and 17% year-over-year. Commercial line utilization has remained relatively stable in the low 30% range for the trailing four quarters, and so far here in April.

However, it's too early to know if this trend will continue given the uncertainty in the economy, and the impact of the various lending programs instituted by the Federal government. For some perspective, during the financial crisis that started in 2007, our line utilization topped out in the low 40% range, much higher than we are experiencing today with COVID-19.

As you can see on Slide 5, we are actively involved in the newly launched Paycheck Protection Program to help our small business customers. Our team has worked heroically to get this surge in demand handled and it is a testament to our Company's commitment across the board to change lives for the better. To-date, we've processed approximately 6,500 applications, representing approximately $1.7 billion in loans. We are actively in the process of funding these loans.

Turning to fees, our mortgage company continues to grow at a strong pace by increasing market share and benefiting from the low rate environment. The total residential mortgage originations for the first quarter of 2020 were $380 million, an increase of 40% [Technical Issues] last year.

Refinance activity accounted for 44% of originations in the first quarter of 2020 compared to 25% for the same period last year. Our mortgage pipeline sits at $727 million at quarter end, which is one of the highest levels of all time. Wealth management had a solid quarter as fees were based on asset values earlier in the quarter. It didn't fully reflect the recent market sell-off. Cash management made a notable contribution to overall fees.

Moving to credit, we saw some improvement during the quarter. There is a lot -- however, there is a lot of uncertainty around the potential short and long-term impacts of COVID-19. The increase in our allowance for credit losses this quarter reflects our assessment of those impacts under the CECL methodology. Mark will have more details around the increase in the allowance and the underlying assumptions in his prepared remarks.

As you can see on Slide 6, we have limited portfolio exposure to some of the industries that were hit hardest initially from COVID-19. Most of the loans are secured by real estate or other forms of collateral, which should help mitigate losses in the event of a default. Our loan portfolio is diverse, both geographically and from a product type perspective. As a reminder, our owner-occupied commercial mortgages represent close to half of the overall commercial mortgage portfolio and we generally lend to experienced borrowers that have stable cash flow and sizable equity positions.

We continue to assess and analyze the loan portfolio for signs of weakness or stress. We believe the programs we have put in place will ultimately mitigate losses, but as we learn more of the breadth and depth of the economic downturn resulting from COVID-19, we may need to make further adjustments in future periods.

Now I'd like to turn the call over to Mark to discuss our financial results in more detail. Mark?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Thanks, Curt. And good morning to everyone on the call. COVID-19 has certainly impacted the content of this call and as you have already seen our slide deck was enhanced with several new disclosures in an attempt to address these items of focus. While comparisons to prior periods is not -- are not as meaningful today due to the rapid change in outlook, unless I note otherwise, the quarterly comparisons I will discuss are with the fourth quarter of 2019.

Starting on Slide 7, earnings per diluted share this quarter were $0.16 on net income of $26 million. First quarter earnings in comparison to the fourth quarter were impacted by a higher provision for credit losses, driven by our application of the CECL methodology and the outlook for COVID-19 on our credit.

Moving to Slide 8, our net interest income was $161 million, an increase of $2 million linked quarter despite one less business day in the quarter. Earning asset growth, both in loans and investment securities drove this NII growth. Our net interest margin for the quarter was 3.21% versus 3.22% in the fourth quarter. The 1 basis point of linked quarter compression in our net interest margin was ahead of our internal projections, and we consider this to be a solid start to our year.

The stability in our net interest margin over the past quarter was driven by our ability to reprice our deposits. Deposit cost declined 15 basis points from 77 bps to 62 bps from the fourth quarter to the first quarter and our earning asset yields declined only 10 basis points during this period from 4.07% to 3.97%. Going forward, we will be impacted by the recent severe reductions in interest rates. We believe we still have the ability to lower our deposit cost more over the next quarter, and we intend to do that.

Turning to credit on Slide 9, we adopted CECL or the current expected credit loss standard on January 1st, 2020. As a result of this adoption, our allowance for credit loss increased by $58.4 million. Slide 9 provides a roll forward of our allowance for credit loss balance from December 31st to March 31st and breaks out specific components of the changes. It also provides you with more detail on some of the material assumptions that form the basis for our first quarter provision for credit losses under CECL.

We utilized Moody's for some of the macro economic assumptions that populate our models, and for CECL, we employ the Moody's baseline forecast, which assumes a critical pandemic set of economic assumptions. I also want to point out that under CECL, it's not appropriate to assume that our first quarter of 2020 provision for credit loss is indicative of provision losses for the balance of the year -- provision levels for the balance of the year. The intent of CECL is to capture an estimate of expected future losses that exist on our books today.

Moving to Slide 10, for the first quarter of 2020, net charge-offs on an annualized basis were 26 basis points as compared to 65 basis points in the fourth quarter. The majority of our net charge-offs for the quarter related to borrowers with specific reserve allocations that were established in prior periods.

In the fourth quarter of 2019, net charge-offs were elevated by a discrete $20 million charge-off or 48 basis points related to a specific commercial relationship. Non-performing loans at March 31st decreased $1.2 million or about 1% in comparison to year end 2019. Non-performing loans as a percentage of total loans decreased 82 basis points as compared to 84 basis points at the end of last year.

The allowance for credit loss related to loans at March 31st was 1.4% as a percentage of total loan balances, up 43 basis points from December 31st. Our adoption of CECL increased this ratio by 27 basis points and our provision for the quarter, which includes the impact of COVID-19 accounted for the remaining increase. The allowance for credit loss coverage ratio as a percentage of nonperforming loans was 170% at March 31st.

Moving to Slide 11, non-interest income, excluding securities gains was $55 million, relatively unchanged from the fourth quarter, and seasonally very strong, up over 17% from the same quarter a year ago. Our strong performance was driven by mortgage banking revenues, wealth management revenues and capital markets revenues, offset by decreases in consumer card income, merchant and commercial card income. Mortgage banking revenues were up $1 million from the prior quarter, despite recognizing a $1 million mortgage servicing rights impairment charge during the quarter, as interest rates rapidly declined and expectations for prepayments increased.

Moving to Slide 12, our non-interest expenses were $143 million in the first quarter, up about $4 million from the fourth quarter. Expenses were up 3.4% compared to the first quarter a year ago was roughly one-third of this increase driven by a differing day count, since 2020 is a leap year.

The linked quarter expense increase included a $3.5 million or 4% increase in salaries and employee benefits, largely due to seasonal increases in payroll taxes and higher incentive compensation. Other expense categories in total were consistent with the fourth quarter. Income tax expense decreased $5 million linked-quarter. Our effective tax rate was 10% for the quarter, as compared to 13% in the fourth quarter of 2019. We will provide guidance on certain numbers for the second quarter, including our effective tax rate in a moment.

Slide 13 is a new slide, which focuses on our liquidity. Since early March, we have been very intentional in maintaining excess liquidity in case market conditions would cause any of our liquidity sources to contract. Since mid-March, we've maintained excess cash of between $200 million to $300 million per day. While this impacts our net interest margin moderately, in our view this is prudent planning and we'll continue to do so until we see more stabilization in the markets.

Our committed liquidity has maintained in the mid-$6 billion level over the past 30 days and our overall liquidity, including uncommitted sources such as Fed funds lines and broker deposits has remained in excess of $10.5 billion. We are fully prepared to handle the influx of PPP loans, which Curt referenced earlier.

Slide 14 gives you more detail on our capital ratios. During the first quarter, we raised $375 million of Tier 2 qualifying subordinated debt. This additional capital came at a very opportune time as we now are entering the downturn with an estimated total risk-based capital of 13.8%. We have evaluated our capital and liquidity under a variety of stress scenarios, including going back to launch levels by product type experienced during the financial recession. In these scenarios, both the bank and holding company maintained sufficient regulatory capital and liquidity.

While our regulatory capital ratios will not be impacted by the influx of PPP loans in the second quarter, those loans will cause our tangible common equity ratio to decline somewhat due to the rapid balance sheet growth. Based on our proved applications of approximately $1.7 billion in loan balances, we believe our TCE ratio will be around 7.4% at the end of the second quarter.

Absent changes to our outlook, we would then expect it to increase in the back half of 2020. While we are comfortable with our capital levels at the current time, we did take some steps to conserve capital during this period of uncertainty. We suspended our share repurchases in March and we'll continue to do so until we have better economic clarity.

During the quarter, we had repurchased $40 million under our current $100 million authorization, reducing our share count by 2.9 million shares. We also elected to hold our quarterly dividend at 13% instead of our recent practice of increasing it with our first quarter dividend announcement. Our goal is to maintain this dividend going forward.

Lastly, we would like to provide our thoughts about forward guidance for 2020. We are pulling all of the previous guidance for 2020 we had provided last quarter, as our outlook has obviously changed. At this time, we'll be providing select guidance on certain numbers for the second quarter of 2020. Those numbers are as follows. Loans. For the second quarter, we expect our PPP loan growth to be approximately $1.7 billion. For other loan categories, we expect growth on an annualized basis to be in the low-single-digit range overall with residential growth leading the way.

Deposits. Thus far, we have not seen run off as significant as we had expected, as a result of meaningful price reductions we adopted soon after the Fed had shocked rates downward in March. At this point, we are assuming deposits to experience somewhere between modest run off to slight growth in the second quarter, excluding the impact of PPP. The timing of stimulus checks, the use of proceeds by our PPP customers, unemployment levels and other economic factors, all play into this estimate.

We expect our net interest income to be in the range of $150 million to $160 million for the second quarter of 2020. Material factors impacting this estimate include the final level and mix of PPP loans and the relationship between Fed funds and other funding points, such as one month LIBOR. We expect our non-interest income to decrease from first quarter levels. Wealth management revenues, capital markets and all consumer-driven revenues, merchant, debit and credit card are expected to decline.

Mortgage banking should continue to be a bright spot, as our pipeline is very strong and we are now just entering the seasonally busy time of the year. Cash management fees should also hold up OK during this time. But overall, we would expect to see non-interest income decline 5% to 15% from first quarter levels.

Overall, we expect our operating expenses to be in the range of $140 million to $144 million. We expect our effective tax rate to be between 11.5% and 12.5% for the second quarter. We will hopefully know a lot more about the breadth and depth of the economic downturn caused by COVID-19 over the next few months. If the situation moderates, we may be in a position next quarter to provide more clarity on the second half of the year at that time.

With that, we'll now turn the call over to the operator for questions. Sherri?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning.

E. Philip Wenger -- Chairman and Chief Executive Officer

Hey, Frank.

Curtis J. Myers -- President and Chief Operating Officer

Hey, Frank.

Frank Schiraldi -- Piper Sandler -- Analyst

Just wanted to -- I know it's quite a wild card. I mean it's obviously not in your 2Q guidance. But as we think about provisioning levels going forward, Mark, you made a comment about we shouldn't necessarily assume levels remain as elevated as 1Q, I would assume that Moody's modeling has deteriorated a bit since the end of March. But the delta between the end of March and today is probably not as big as the delta modeling from January 1st to the end of March. So I mean, is it fair to think about provisioning remaining if the model holds up -- remaining quite elevated in the second quarter and then we should see quite a tail off from there. And any color or thoughts on modeling that out would be helpful.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, Frank. Frank, I think what is fair to say is we will explain to you how we came to our first quarter provision level. We had used the Moody's critical pandemic scenario, which you correctly point out was created at the end of March. And since that time, things have deteriorated in some of the updated Moody's scenarios. While we use that Moody's scenario as a baseline we did consider other Moody's scenarios that were at that time, that helped us form the overall basis for conclusion that our provision for the first quarter is satisfactory. We will continue to evaluate that baseline scenario, should that baseline scenario change as well as other Moody's scenarios to form the basis for our second quarter provision.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. But as you're thinking about it, as we look at the back half of the year when -- if the modeling hasn't changed from today, and you still have elevated provisioning in the second quarter, then in the back half of the year, as we actually start to see maybe some non-performers and some charge-off with some of the deferrals maybe and is it fair to think that you could see charge-off levels in excess of the reserve? There was -- you know you could actually see the reserve move lower in the back half of the year, given you've already reserved for the life of these loans that are on the books?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Right. Yeah, Frank. What I would say is that you are correctly explaining how CECL could work and should work under this new standard. But doing that is layering in assumptions on what the economy will be in the back half of the year, which we're obviously not providing at this time. But your understanding of CECL and how CECL should work, yes, I mean day one you were accounting for all expected future losses embedded in your loan portfolio.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay, all right, thank you. And then just a follow-up on the PPP program. You talked about in the presentation and I think in the release as well prioritizing current customers. I wonder if that potential -- has the potential to change in Phase 2 and wondering how big a pipeline is there? It looks like Phase 3 is going to be pretty similar to Phase 1 in terms of total dollar amount, a little bit lower about $310 billion and that's actually setting aside some for banks in Europe asset size of $10 billion to $50 billion. So just wondered your thoughts could Phase 2 be just as large perform as Phase 1, are there any sort of limiting circumstances?

Curtis J. Myers -- President and Chief Operating Officer

Hey Frank, it's Curt. I can give a little more color on that. We do have applications pipeline from Phase 1 that we would obviously have in the queue, if additional funding is approved as expected. So we do have additional apps in the pipeline. We would probably expect that the volume of requests would not be as significant or as quick as it was in Phase 1. But there are opportunities to continue to expand that program as we move forward.

Frank Schiraldi -- Piper Sandler -- Analyst

Is there any concerns over -- I mean, obviously, to your point regulatory capital won't be impacted. I mean the TCE ratio will go lower in the near-term if you do more in Phase 2, but I don't know how much of a limiting factor that actually is given that the regulatory -- it won't be a regulatory capital issue, can you just speak to that?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah Frank, we had assumed in our capital forecast again for the $1.7 billion, as Curt said while we think there is opportunity in Phase 2, I mean, it's a little unclear at this point whether the Phase 2 opportunity for us would be double that amount. And we feel comfortable with our TCE levels because under that PPP program, it's temporary, and in conversations we've had with other stakeholders, having a temporary decrease to your TCE level where we feel comfortable with that given the overall strength of our regulatory capital ratios.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay, great, thank you very much.

Operator

Thank you. Our next question comes from Casey Haire with Jefferies. Please go ahead.

Casey Haire -- Jefferies & Co. -- Analyst

Thanks, good morning, guys. I wanted to touch on the PPNR guide for 2Q. It looks like a pretty sizable downdraft here, starting on the NII, I mean the guide is pretty wide, down $1 million, or down $10 million. Can you just give us a little bit more color as to why that range is so wide?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes. Sure. Hey, Casey, it's Mark. The difference for that is because of PPP opening up a second plan, the fees that are received on the PPP program plus the interest all run through net interest income. So depending on what our final number is under that program that will have some influence. The other influence, which I referenced in the script is there has been, if you go back and look at the 10-year average of one month LIBOR to Fed funds, that number is about 8 basis points or 9 basis points on the 10-year average.

And today or at least yesterday, it was still sitting at around one month LIBOR was at about 80 basis points. So that -- so the difference between those was about 65 basis points, 70 basis points between the midpoint of Fed funds. We have $6.5 billion roughly in loans that are tied to one month LIBOR. So depending for how many months, you continue to have that disconnect where LIBOR is higher, because we're in a period of volatility right now, we benefit in our one month LIBOR loans for each month that that benefit continues. So that's the main difference for the wide range.

Casey Haire -- Jefferies & Co. -- Analyst

Okay, So I got it. So, the low end of the NII guide would assume that LIBOR resets to that normal relationship versus Fed funds?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Correct.

Casey Haire -- Jefferies & Co. -- Analyst

Is that -- OK. Got you. All right. Thanks for that.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, that's the --

Casey Haire -- Jefferies & Co. -- Analyst

Okay. All right, now, and then the fee guide, I mean you walked through it, sounds like a number of line items, just why would we not get any leverage on the expense side, given the fees are coming down meaningfully?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Well, we are getting some leverage on the expense side. However, there are some expenses going into the second quarter, which would be kind of related to COVID. Some of that is some staff augmentation in mortgage banking. Some of that is some bonus programs we have in place for some of our employees who have worked really hard, kind of being the frontline heroes for our organization.

Casey Haire -- Jefferies & Co. -- Analyst

Okay. Great. Just last one for me. On the modifications, appreciate the color through April 17. Can you just give us a sense as to how that is -- are we still building or did that peak in early April and then has been moderating since then? Just some color on the cadence of -- on the modifications.

Curtis J. Myers -- President and Chief Operating Officer

Hey, Casey, that definitely peaked in April, and it is moderating quite a bit.

Casey Haire -- Jefferies & Co. -- Analyst

Great, thank you.

Operator

Thank you. Our next question comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty -- KBW -- Analyst

Great. Thanks. Mark, maybe start with a question on the margin, kind of trying to isolate out the PPP. Do you have spot rates for deposits, securities and loans as of the end of the quarter? Just trying to get a sense of how much of the margin pain from the Fed, going $115 million [Phonetic] in the first quarter was actually in the numbers, I am just trying to separate the PPP and the core business. Thanks.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

On spot rates I don't have those with me, Casey, I guess -- or Chris I can follow up with you offline on that. But yeah, I don't have those. I obviously have the quarterly averages here.

Chris McGratty -- KBW -- Analyst

Okay.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Which we discussed --

Chris McGratty -- KBW -- Analyst

That would be great. In terms of just coming back to the fees that you're going to generate, I don't remember you providing the estimate in fees, but most banks are saying somewhere in the 3% range. I guess, question one would be, is that about what we should be thinking about for the fees aspect of it. And then, what are your thoughts about kind of just reallocating these fees into the reserves during an uncertain time? It would seem that most banks would have kind of an incentive to just push it back into the reserve given that bank stocks aren't necessarily trading on earnings, but just any thoughts would be great, thanks?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, sure. So two things there Chris. On our PPP slide, we did actually say on that slide that our estimated fee was also 3% what you're seeing for other banks. So that is disclosed and out there. And in terms for what we do with that fee-based revenue, there is no correlation between that revenue and what our provision levels are. Our provision levels are going to be based by running through a CECL methodology.

Chris McGratty -- KBW -- Analyst

Okay, thanks.

Operator

Thank you. Our next question comes from Erik Zwick with Boenning & Scattergood.

Erik Zwick -- Boenning & Scattergood -- Analyst

Good morning, guys.

Curtis J. Myers -- President and Chief Operating Officer

Hey Erik.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Hey, good morning, Erik.

Erik Zwick -- Boenning & Scattergood -- Analyst

I'm good. Thanks. First, a question on the PPP program. I'm curious if you have an estimate or some sort of expectation for what percentage of the loans that you approved will be forgiven? So I guess it's $1.7 billion now likely to go up in the second round. Just kind of curious, is it -- we can likely to see kind of a mid-year increase in loan balances but by the end of the year, it looks different -- it looks different kind of curious about your expectations there.

E. Philip Wenger -- Chairman and Chief Executive Officer

Well, I'd say at this point, it would be a total guess. Certainly, we believe there is a incentive for companies to use the money as it should be used and if that's the case, then it gets forgiven, but it's tough to say. But I think a large percentage of them will be forgiven.

Erik Zwick -- Boenning & Scattergood -- Analyst

I appreciate that. It's difficult to estimate. And then I assume those fees get accelerated and will impact the margin and potentially by year-end margin looks a little bit, hopefully more normal. I guess as kind of my follow-up, as I look at the CECL slide, Slide 9 and thinking about that third bullet point, curious if you can just discuss some of the additional model overlays and adjustments that you made to as you call it kind of account for the potential forecast and position and precision and additional risks?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Well, yes, exactly, that's exactly what we do, Erik, as we look at and put overlays related to -- for as an example, some companies use multiple economic forecasts and then probability weigh each of those. We instead use one economic based forecast, but then look at and run other economic scenarios to inform what the level of those overlays are for inherent modeling position and other factors.

Erik Zwick -- Boenning & Scattergood -- Analyst

Got it. Thanks for taking my questions.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Absolutely.

Operator

Thank you. Our next question comes from Russell Gunther with DA Davidson. Please go ahead.

Russell Gunther -- DA Davidson -- Analyst

Hi. Good morning, guys.

E. Philip Wenger -- Chairman and Chief Executive Officer

Hi, Russell.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Hi, Russell.

Russell Gunther -- DA Davidson -- Analyst

I wanted to follow up on Slide 6, if I could, appreciate the granularity there. Are you able to share what some of the underwriting characteristics are within sort of hotel, restaurant, energy, entertainment from whether it's an LTV perspective or debt service coverage ratio?

Curtis J. Myers -- President and Chief Operating Officer

Sure, Russell. It's Curt. I can provide a little more clarity. We tend to focus on a pretty consistent policy that applies across the board. So we do think we have conservative underwriting. We really focus on customers that we have a track record with or that would have multiple facilities and look at that business over the long haul. So we think we have good diversified, strong credit underwriting in that portfolio.

Russell Gunther -- DA Davidson -- Analyst

Okay. And then as my follow-up please, you made comments in the prepared release in terms of internal stress tests that you've run. And just curious if you could share what type of loss rates you're assuming across the portfolio, perhaps focusing on the commercial book. And what do you think is appropriate for those portfolios, given all of the uncertainty today?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, I'm happy to go over those details with you offline, product-by-product, but what we did do is that we went back, and looked at our loss rates through the five-year period of the Great Recession. And then we assumed that those losses would actually occur more quickly this time. So we assumed, what would that stress be to our capital liquidity if those losses were incurred in two-year period instead of five.

Russell Gunther -- DA Davidson -- Analyst

Okay, great. That's helpful. Thank you guys for taking my questions.

Operator

Thank you. And our next question comes from Matthew Breese with Stephens. Please go ahead.

Matthew Breese -- Stephens Inc. -- Analyst

Hey, good morning everybody.

Curtis J. Myers -- President and Chief Operating Officer

Hey, Matt.

Matthew Breese -- Stephens Inc. -- Analyst

Just a quick question on the $1.7 billion PPP loans. What is the assumed contractual life, most have used 24 months, but I just wanted to confirm?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

That's correct.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. Okay. And then secondly, in terms of the provision, as we think about the percentage of loans that have been deferred, or been given some sort of forbearance. Does the provision this quarter incorporate -- does it set aside dollars for interest on those loans that currently or haven't been or haven't actually been collected, essentially difference between net interest income and what would have been cash net interest income?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

No.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. Should we expect a provision tied to that, as we go through the year and loans that are being modified either stay put or grow?

E. Philip Wenger -- Chairman and Chief Executive Officer

If we don't collect interest that's been deferred that will come out of the margin, not the provision.

Matthew Breese -- Stephens Inc. -- Analyst

Understood. Okay. Okay, and then just lastly on the lower tax rate, is the new tax rate something we should expect to continue throughout the remainder of the year? Or is that just a 2Q tax rate?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

No, no. For our tax rate, I mean we have to put together our best estimate of what we think our earnings will be for the year and then look at our book tax differences to come up with that effective tax rate for the quarter. So based on our current assessment and the level of book tax adjustments that we have, we think that that level is appropriate. And if we stay within that bandwidth for the remainder of the year, then our effective tax rate will also stay there.

Matthew Breese -- Stephens Inc. -- Analyst

Got it. Okay. I appreciate it. That's all I had. Thank you.

Operator

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to CEO and Chairman, Mr. Phil Wenger. Please go ahead.

E. Philip Wenger -- Chairman and Chief Executive Officer

Well, thank you all for joining us today and we hope you'll be able to be with us when we discuss second quarter results in July.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Jason H. Weber -- Senior Vice President and Director of Corporate Development and Investor Relations

E. Philip Wenger -- Chairman and Chief Executive Officer

Curtis J. Myers -- President and Chief Operating Officer

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Frank Schiraldi -- Piper Sandler -- Analyst

Casey Haire -- Jefferies & Co. -- Analyst

Chris McGratty -- KBW -- Analyst

Erik Zwick -- Boenning & Scattergood -- Analyst

Russell Gunther -- DA Davidson -- Analyst

Matthew Breese -- Stephens Inc. -- Analyst

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