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First Merchants Corp (NASDAQ:FRME)
Q1 2020 Earnings Call
Apr 23, 2020, 2:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the First Merchants First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded.

This presentation contains forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. Such forward-looking statements can be identified by the use of words like believe, expect, or may and include statements relating to First Merchants' business plans, growth strategies loan and investment portfolio, asset quality, risks and future costs. These statements are subject to significant uncertainties that may cause results to differ materially from those set forth in such statements, including changes in economic conditions, the ability of First Merchants to integrate recent acquisitions, changes in regulations and requirements of the Company's regulators, litigation, changes in the creditworthiness of customers, fluctuations in market rates of interest and other risks and factors identified in First Merchants' filings with the Securities and Exchange Commission. First Merchants undertakes no obligation to update any forward-looking statement whether written or oral relating to the matters discussed in this presentation or press release. In addition, the Company's past results of operations do not necessarily indicate its anticipated future results.

I would now like to turn the conference over to Mike Rechin, President and CEO. Please go ahead.

Michael C. Rechin -- President and Chief Executive Officer

Thank you, Andrea, and good afternoon, everyone. Welcome to our earnings conference call and webcast for the first quarter ending March 31, 2020. Joining me today are Mark Hardwick, our Chief Financial Officer and Chief Operating Officer; as well as John Martin, our Chief Credit Officer. Also joining me today is, Michele Kawiecki, our Senior Vice President and Director of Finance, who'll actually be presenting material later in the presentation; and Mike Stewart, our Chief Banking Officer is also with us in the event that he can add thoughts to questions later in the presentation.

Given the rapidly changing environment, our goal is to provide a thorough review of 2020's first quarter coupled with an eye toward First Merchants' positioning for the balance of the year and into 2021. We released our earnings in a press release this morning at approximately 8 a.m. Eastern Time and our presentation speaks to material from that release. The directions that point to the webcast were also contained at the back end of that release and my comments begin on Page 4, a slide titled First Quarter 2020 Highlights.

First Merchants earned earnings per share of $0.62, net income of $34.3 million, a return on assets of 1.09%. The earnings per share and net income compared with last year's first quarter of $0.78 and net income of $38.8 million.

Total assets grew to $12.7 billion, 24.3% over the first quarter of 2019 and the growth was a function of our third quarter 2019 acquisition of Monroe Bank & Trust coupled with the organic growth on the next line down, loan growth of 7.9%, deposit growth of 8.9%, respectively, from last year's first quarter. Through the course of John Martin's discussions, you'll hear about loan demand as we see it through the first quarter and a little bit of our pipeline as we move forward in an unusual time period.

We recorded $19.8 million of provision in the first quarter and coupled with less than $600,000 in net charge-offs, our reserve increased 23% from year-end, which is about the same rate of growth from 3/31 of 2019. Mark and Michele will have further comments on the provision composition and the reserve level in their presentations.

Our common tangible equity to assets totaled 9.91%, and back to the allowance for a second, the allowance plus fair value marks totaling 1.54% of loans at March 31. With the quarter's earnings, our tangible book value increased to $22.46, an 11.9% increase over 2019.

Before Mark speaks in greater detail on our results, I'd like to summarize a few perspectives on our actions over the last 45 days. And so, on Page 5, I have a page that describes First Merchants supporting our employees' health and financial stability. And the top couple of bullet points speak to the fact with over 1,850 teammates, we've enabled over 1,000 of them to work from home, have the technology to be both available and effective. We provided an additional 80 hours of paid time off for flexibility purposes for our full-time associates for COVID-related sick and dependent care, the flexibility needed as changes occurred on short notice. The bottom points really just speak to a culture of high-touch communication with both individuals and the entire Company at a rapidly changing set of needs.

I'm going to move to Page 6, a couple of comments on our support of the business community. And up top is kind of the highlight program of the last month as it relates to business clients. We find ourselves in between two Congress-approved fundings. And then most of the bullet points here speak to the wave that is just in the process of getting boarded onto our balance sheet as we speak. Desirable program for our business banking and commercial lending-oriented middle market organization and so we had great demand as is evidenced in the top point greater than 3,750 applications and greater than $750 million funded to businesses benefiting more than 120,000 employees.

In parenthesis, you can see that the Company brought experience with the SBA programs into the new product announcements. John is going to cover it later but as of March 31, we had over $200 million in commercial loan modifications, approximately 3% of the portfolio and the modification discussions with our clients have gone on. John is going to bring you up to speed later on as to where it was on a more current time period across all the lines of business.

Right ahead of us, we have a team of bankers evaluating and preparing other aspects of the CARES Act, specifically the rollout of the Main Street lending program to support larger businesses. We know that guidance is due soon. We'll be ready to measure the attractiveness of that to our clients relative to our delivery. Had a strong first quarter and the second bullet point from the bottom just talks about funding general working capital growth. I think John may make a comment that we didn't have large run-ups on line draws and he'll have some material to exhibit that point.

We've offered and are seeing wider use of commercial client technology to maintain operating routines of our commercial clients in the bottom bullet point with heavier use of remote deposit capture devices in the field and wire modules being used by all of our clients.

I'm going to move to Page 7, additional First Merchants response. Top bullet point, a Board-approved action of a $1 million contribution commitment to impacted First Merchants markets through local not-for-profit organizations. We're going to be giving back to frontline organizations who are critical in addressing the most basic needs in the markets that we serve.

A couple of bullet points around modified delivery, and so, the clients have really adapted quite well to alternative delivery of consumer banking with drive-thru lobby -- I'm sorry, drive-thru transactions and lobby service still available on a individual meeting basis by appointment. It's been a great opportunity to highlight our technology and so our investments over the last couple of years have seen increased digital banking use as our call center taking thousands of calls and steering our clients toward their best avenue to have their needs met, multiple channels working in sync to satisfy the needs and answer questions. John is going to talk at length and kind of quantify all of the modification request. But on this page, consumer and mortgage loan payment deferrals granted on a case-by-case basis up to 90 days without incurring any fees or any credit reporting.

Hardship bridge loans was an early First Merchants program even before the CARES Act just to recognize that we had consumer customers that had needs on what the hardship began to evidence. It's been useful for us throughout our banking centers and consumer clients.

And then lastly, sharing knowledge and encouraging caution. I think we've seen nationwide that there has been a higher incidence of fraud attempts and COVID-related scams and so we're trying to protect our clients through this difficult period.

With that having been said, I'll join you later, but Mark's wants to get a little bit deeper into our first quarter results.

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

Thank you, Mike. My comments will begin on Slide 9, where total assets on Line 7 increased by $2.5 billion, or 24.3% since the first quarter of 2019. Investments on Line 1 increased by $835 million or nearly 45% during the same period due to strong deposit growth and acquired liquidity, while loans on Line 2 increased by $1.3 billion, or 17.9%. Acquired loans accounted for $733 million of the $1.3 billion in loan growth, leaving organic growth to account for $577 million, or 7.9% of our growth. Additionally, on Line 3 the allowance for loan losses increased by $18 million, or 22.2% over the first quarter of 2019, primarily due to COVID-related provisions during the first quarter of 2020.

The composition of our $8.6 billion loan portfolio shown on the upper right of Slide 10 produced a yield for the quarter of 4.85%. Loan yields are under pressure given the 150 basis point decrease in the prime lending rate during the quarter and the trailing impact that it's had on LIBOR as well. As the graph on the right illustrates, 67% of our loans are variable with half for pricing daily. Our loan yield of 4.85% is down from last year's peak of 5.32%.

On Slide 11, our investment portfolio has a longer duration than peer, which is a good offset to our variable rate loan portfolio. And as of March 31, 2020, our unrealized gain totaled $121.7 million, a $95.6 million increase since this time last year. You will also see meaningful realized gains on the sale of securities when I cover Slide 16 due to strategic movements within sectors of our investment portfolio to both take advantage of gains and improved yields.

On Slide 12, total deposits increased by $1.8 billion, or 22.6% over the first quarter of 2019. Monroe Bank & Trust accounted for $1.1 billion of the growth, while organic deposits grew by $717 million, or an annualized 8.9%.

Common equity on Line 7 increased by $322 million from the first quarter of 2019 to the first quarter of 2020. Beyond normal earnings and dividends and other comprehensive income changes, the 100% stock purchase of Monroe Bank & Trust that we closed back in September of 2019 increased equity by $230 million. And the completion of our announced share buyback program decreased equity by $75 million. The Company repurchased just over 2,150,000 shares over the duration of the program.

Capital and liquidity are positioned well for the future and management is pleased with the structure of our balance sheet, as we enter this recessionary environment. We believe that our loan-to-deposit ratio of 87% and our loan to asset ratio of 68% provides the Bank with fortress balance sheet levels of liquidity.

The mix of our deposits on Slide 13 is the key to both liquidity strength and low cost funding. First quarter interest-bearing deposits cost -- deposit cost totaled 106 basis points, down from last year's peak of 133. When we include non-interest-bearing demand deposits, our interest expense for the quarter totaled 88 basis points.

All regulatory capital ratios on Slide 14 are above the regulatory definition of well-capitalized and our internal targets, which ensure the Bank maintains fortress-like levels of capital.

Now, let's turn to Slide 15. The Corporation's net interest margin, net of fair value declined by an additional 10 basis points from the fourth quarter of 2019 to the first quarter of 2020. This chart, going back to the first quarter of 2018, highlights the asset-sensitive nature of the Bank's balance sheet. As the Fed funds rate started this two-year journey at 150 basis points, increased to 250 basis points during the peak of our margins near the end of 2018, and then declined by 225 basis points, including this last 150 basis point decrease in the first quarter of 2020 to just 0.25 point. Despite the quick and decisive action around deposit rates in 2019 and the first quarter of 2020 and additional upcoming CD maturities during the remainder of 2020, we anticipate some additional net interest margin compression again next quarter.

Staying with the two-year timeline for a moment. In the first quarter of 2018, our loan-to-deposit ratio was 94% and now it's just 87%. Our liquidity is healthy in this recessionary environment, but challenges margin. We've essentially traded illiquid loan yields of 4.85% for liquid bond yields of 3.16% on approximately $710 million of earning assets over this two-year period, leading up to the current recession.

Non-interest income on Slide 16, totaled $29.8 million as of March 31, 2020, an increase of $11.1 million, or 59%, primarily due to the acquisition of Monroe Bank & Trust. Additionally, several items in the category provide a natural hedge to the Bank's net interest income by growing when rates decline and declining when rates rise.

Customer-specific line items accounted for $7.3 million of the increase to include growth in fiduciary and wealth management fees of $2.2 million; gains on the sale of mortgage loans, increased by $2.1 million; derivative hedge fees and card payment fees, two separate line items here, increased by $1.1 million each; and service charges increased by $900,000 for the quarter.

Non-interest expense on Slide 17, totaled $66.1 million in the first quarter of 2020, compared to just $56.6 million in the first quarter of 2019. Of the increase, our merger with Monroe Bank & Trust accounted for nearly all of this change. I should also add that post-integration, which we completed in November of 2019, we have achieved all of our announced cost savings that were part of our original targets.

Now, on Slide 18, as Mike mentioned in his opening remarks, the decline in both net income on Line 8 and EPS on Line 9 were primarily the result of provision expense on Line 2. Additionally, despite margin pressure, the efficiency ratio on Line 10 remained at an impressive 52%.

On Slide 19, you can see trends of EPS, dividends and tangible book value per share.

And on Slide 20, you will notice our total compound annual growth rate of tangible common equity is still over 10%, totaling 10.12% and our dividend yield is nearly 4%.

Now, Michele Kawiecki, our Senior Vice President of Finance will cover a couple of key items related to the CARES Act and their impact on our financial statement.

Michele M. Kawiecki -- Senior Vice President and Director of Finance

Thanks, Mark. On Slide 22, the first item I want to discuss is our deferral of CECL adoption. We used the incurred loss method of calculating our allowance this quarter and increased our qualitative factor for current economic conditions to arrive at a provision of $19.8 million. We were prepared to adopt CECL as of January 1. The validation work on our models was performed in 2019, and we're ready to go. In our 10-K, we disclosed that our day one adjustment for a January 1 adoption was an increase of 55% to 65% from the allowance of $80.3 million at December 31 and the reserve and other liabilities to cover unfunded commitments of approximately $18 million.

We used Moody's forecast scenarios in our CECL models and had selected a few different scenarios to develop an acceptable allowance range. Our models are primarily driven by the unemployment rate. There are other economic indicators in our equations too, but unemployment rate is the most significant. In the last two weeks of March, Moody's was rapidly reforecasting established scenarios and created new COVID scenarios, which led us to question the reliability of the forecast. When presented with the choice of adopting, we decided to stay under the incurred loss method until the forecast risk was lower and there was a bit more certainty with a clear view forward. With the hope that the FASB and SEC would allow for interim period implementation, such as April 1 or July 1. Now, subsequent to us making that decision, the transition conditions indicated by the SEC turned out to be less desirable than we anticipated, yet they still haven't issued written guidance. But we decided to stay the course and keep our teams moving on the review and analysis of our results for the quarter.

I think the benefit of waiting to implement is that we will have a better view of the impact of this pandemic, the government stimulus programs and the impact of our own initiatives on our region and the communities we serve, which should minimize volatility in earnings.

The other thing that the CARES Act put in play is it allowed us to carry back net operating losses to a prior period with a different tax rate than the current rate as a result of the Tax Cuts and Jobs Act. Taking advantage of that tax rate differential resulted in a one-time adjustment, which lowered income tax expense by $1.2 million. That along with the large provision lowered our Q1 effective tax rate to 9.2%.

Slide 23 shows a summary of our allowance. On the top right corner is a roll-forward, showing charge-offs of $600,000 for the quarter, adding in the provision to come to an ending allowance of $99.5 million, which is an allowance to total loans coverage ratio of 1.15%. I have boxed the allowance plus fair value marks because adding in the remaining fair value marks on Line 9 of $33.1 million results in an adjusted coverage ratio of 1.54%. If you do a burndown analysis using a 2% charge-off rate on loans as of 3/31, the after-tax impact of total charge-offs is equal to the allowance plus fair value marks. When you consider our strong capital levels covered by Mark, in addition to this credit coverage, it's apparent we have great balance sheet strength. So I feel like we have more than adequate credit reserves going into the second quarter.

That concludes the items I wanted to discuss. I will now turn it over to our Chief Credit Officer, John Martin.

John J. Martin -- Executive Vice President and Chief Credit Officer

All right. Thanks, Michele and good afternoon. I'll begin my comments on Slide 25 with a detailed presentation of the portfolio, overlay quarter-end modifications, review line utilization, discuss some specific portfolios in mortgage lending. I'm going to quickly review the first quarter asset quality and then wrap up with my comments and observations from recent activities.

Turning to Slide 25. This slide presents the portfolio from a collateral-based perspective and loans have been grouped based on FDIC reporting, which is more closely tied to collateral. In the first quarter, the loan portfolio grew $144 million, or 6.8% annualized. Commercial loans grew $194 million. Of note, was a move of roughly $230 million from Line 4 to Line 5 as projects were moved from construction to multifamily and CRE, non-owner-occupied categories. Basically, the first quarter was more of the same, steady growth with a stable portfolio growing in the mid- to upper-single digits.

Turning to Slide 26, which is the new quarter -- which is new this quarter. I've grouped the commercial assets by NAICS segmentation -- segments or the North American Industry Classification System to show the detailed composition of the loan portfolio by primary -- by borrower primary industry. I draw your attention to the roughly $44 million of restaurant exposure that was moved from lessors of real estate NAICS from below to the restaurant and food services segment to help provide a clear illustration of the concentration. This supports statements we've made on prior earnings call that First Merchants has built a diversified commercial portfolio across industries. And in a state that has a robust manufacturing base, our largest exposure is, well, manufacturing, followed by public administration from our public finance business and agriculture.

Along those same lines, with little energy production, we have little or no oil and gas exposure. Other portfolios highlighted of note include $188 million in hotels and another $152 million in restaurant and food service, which are industries we are actively engaging our borrowers for participation in the PPP program, as well as loan modifications to help bridge the impacts of the shutdown.

Turning to Slide 27. And using the same industry segmentation, I presented an overlay of quarter-end modification request using the 21 segments as before. This is early cycle modifications, it's as of the end of the quarter, but you can see the concentration in restaurant and food services, as well as dental. Hotels, I'd note that they were not as fast to request modifications, but have since showed an increase. So, I'd ask that you take note of these numbers. If you're taking notes at home here, these are where we are to date rather than just the end of the first quarter, which is what the slide was. So updating these portfolio since the end of the quarter, roughly 35% of the hotel portfolio has requested modifications, 63% of the dental portfolio, and 28% of the restaurant and food services portfolio have requested deferrals. Overall, there have been just over $775 million in commercial modification requests and just over $25 million of consumer modification requests.

Moving on to Slide 28. Line utilization has been stable across the commercial portfolio. And while there have been isolated instances of defensive line draws, there has not been a wholesale move to draw down lines in order to accumulate cash. And I would add that lines of credit are frequently supported by borrowing bases that are regularly monitored and managed as situations change.

Turning to Slide 29. I've included a slide to spotlight the structured finance business to help clarify what it is, what's included and then dive into the sponsor finance business. The structured finance business, kind of the umbrella here, contains four primary lines; public finance, sponsor finance, debt capital markets, and asset-based lending. The public finance business was started in 2015 and it has consolidated the lending and depository gathering activities to cities, towns and municipalities. Approximately 85% of the loan portfolio is supported by a taxing authority, while 15% is to public-private partnerships supported by project cash flows and collateral.

The sponsor finance business was started in 2016 and markets to private equity firms in the Midwest and Southeast. I'll talk more about this in a minute.

The debt capital markets business started in 2018 and formalized our sell-side approach to transactions where First Merchants serves as the agent and syndicator. This business does not have a balance sheet and serves to facilitate the management of participating bank relationships.

And finally, asset-based lending started in 2019 is supported by a back office secured credit department with tight controls, managing draws and operations. All four businesses are led by seasoned executives with more than 20 years of experience.

Then elaborating, I'm going to turn to Slide 30 and diving deeper into the sponsor finance business. I've included portfolio highlights of the business. As I just mentioned, the team is marketing to private equity firms in the Midwest and Southeast to acquire companies, which have less than $10 million in EBITDA led by a former Midwest region Chief Risk Officer for GE with detailed and frequent portfolio oversight. New opportunities are structured with revolving credit facilities and senior secured amortizing term loans with lower senior leverage profiles and less than 40% target loan-to-value senior debt structures. We underwrite both the opportunity and the private equity firm in both single and multi-bank opportunities.

Moving to Slide 31, I've included a breakout of the investment real estate portfolio and the related modifications. The portfolio has one-third concentrated multi-family or 8.2% of total loans. The portfolio is geographically concentrated around our footprint as you would expect, which includes Indiana, Ohio, Illinois and Michigan. I've broken out an estimate of the retail real estate-related exposure, where our strategy for retail real estate has been to originate projects which are Amazon-resistant, which does include tenants which require face-to-face contact.

Turning down -- turning now to Slide 32, which I highlight -- where I highlight -- excuse me, recent mortgage activity. This is a real bright spot in the quarter. With a low interest rate environment, the mortgage lending business has been robust with a strong pipeline. Some of the items of note including -- include being able to achieve a modest premium to market, as well as an ability to use a pricing-based balance sheet strategy to place 15-year fixed mortgages on balance sheet when a comparable yield to mortgage-backed securities exists.

In closing out the slide as a result of the strong pricing, we have utilized extended locks to expand the pipeline without having to add additional processing capacity. And finally, the home purchase market for jumbo loans has continued to remain strong, despite the current pandemic environment.

Moving on to Slide 33, I've spotlighted the mortgage consumer loan portfolio and the composition of the mortgage and consumer loan modifications. Modifications thus far have been modest by comparison to the overall portfolio side.

Turning to slides 34 and 35. Briefly, I would just add that this quarter's asset quality was a continuation of prior quarter's strength and does not yet reflect the economic impact of the pandemic and subsequent shutdown. This is a good place for the Company to start from.

Then moving to Slide 36, and where do we start from? Well, by engaging our customers and working a path forward. We modified most loans in recent weeks with a 30-day -- or excuse me, with a 90-day deferral, while understanding how the borrower is being affected. We surveyed their access to liquidity and their initial plans and structured our deferrals with a pushback of principal, while accruing interest, which will be repaid when the borrower returns to a normal P&I amortization schedule.

We are beginning the cycle with a stronger credit profile and enhanced monitoring processes. We are originating PPP loans and helping our customers get access to the program while forward -- while planning forward for the forgiveness process in anticipation of receiving additional guidance. The entire First Merchants team who has worked to build the process and deliver results around this program has been amazing. We now have a team focused on Main Street lending program in anticipation of rollout and the opportunities that might exist for our borrowers under that program, which I think Mike Stewart can share details on. And we have an experienced workout staff and established special assets program from the last recession in place and ready to assist borrowers. And finally, we continue to maintain our credit underwriting standards supplemented by good judgment and a focus on understanding how the pandemic will impact our borrowers.

I'll turn the call over now to Mike Rechin.

Michael C. Rechin -- President and Chief Executive Officer

Thank you, John. I really like your last slide in the top bullet point of it: proactively engaging clients and customers to chart the path forward. While, I seem to be on a schedule of record Zoom calls and webinars, the balance of this Company is out in front talking to their clients, listening to their concerns here and how we can solve for them. I share John's appreciation for the teamwork that the Company is performing.

So I'm on Page 38. My eyes are tempted to get to the bottom where it talks about being well positioned for this challenge and for the future strength and stability that lines under that. But I don't want to cheat and skip some summarizing from earlier comments. We're going to go into the second quarter midway through April with a strong foundation of pre-tax pre-provision earnings, a better part of $58 million; tangible common equity nearly 10%; a deferral CECL implementation; protection of an allowance and fair value marks of 1.54% of loans; a lot of liquidity from an 87% loan-to-deposit ratio. What John just covered is a really well diversified portfolio with sharp underwriting and portfolio management and it produces a high-performance execution results profitability return on assets and efficiency ratios.

While we maintain a valuation above tangible book value, we also know that it's 50% of our historical average. So, I do think we're well positioned. We're optimistic. And our goal with our material today was to evidence our mindfulness of today's recessionary environment. I think we know what we're up against, and we're evaluating virtually all variables in our business. We're optimistic about navigating this Company and our clients for what's ahead.

So at this point, Andrea, we are open for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Scott Siefers of Piper Sandler. Please go ahead.

Scott Siefers -- Piper Sandler & Co. -- Analyst

Good afternoon, guys. Thanks for taking the question.

Michael C. Rechin -- President and Chief Executive Officer

Thanks, Scott. Good afternoon.

Scott Siefers -- Piper Sandler & Co. -- Analyst

Hi. So, first question is just on CECL and the decision to delay and definitely appreciate the rationale. I guess, I'm just wondering, you did take a big provision despite not being -- not adopting CECL, which took advantage of sort of the qualitative factors under the incurred method. So, in a sense you did a CECL-like provision, I guess, in the sense that it's sort of similar to the large ones we've seen so far this quarter. What would have been the difference between your provisioning levels this quarter and what they would have been under CECL?

Michele M. Kawiecki -- Senior Vice President and Director of Finance

We used the Moody's forecast on our CECL models to help inform that qualitative adjustment for the provision that we booked. I mean, I think even under the incurred loss model you can't ignore what's going on in the economy. So, I don't think the difference between the incurred loss provision versus the CECL provision would have been materially different.

Scott Siefers -- Piper Sandler & Co. -- Analyst

Okay. And will that be the sort of the way it goes going forward? In other words, enough flexibility under the qualitative that you could prep and really continue to build the reserve substantially if needed given eventual clarity on the forecast?

Michele M. Kawiecki -- Senior Vice President and Director of Finance

Yeah. I think there's room for that.

Scott Siefers -- Piper Sandler & Co. -- Analyst

Okay. Perfect. And then, you mentioned in your comments about the hopes to do sort of an interim adoption of CECL but then mentioned that some of the transition stuff was not as favorable. Can you go into just a bit more detail on how and when you might be able to do an interim adoption?

Michele M. Kawiecki -- Senior Vice President and Director of Finance

Well, when the CARES Act was passed, it said that we either adopt it December 31 at the end of this year or when the emergency act is canceled. And so, that was the provision that was written in the CARES Act. But in the CECL guidance initially that allowed for interim adoption and we didn't know if that was still going to be in play or not and we're waiting to hear from the SEC on their official guidance. They still haven't issued it, although the SEC accountant did make a statement that said that we would have to restate back to January 1, but we're still waiting on guidance around that.

Scott Siefers -- Piper Sandler & Co. -- Analyst

Okay. All right. Perfect. Thank you very much.

Operator

Our next question comes from Daniel Tamayo of Raymond James. Please go ahead.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

Good afternoon, guys. Thanks for taking my question.

Michael C. Rechin -- President and Chief Executive Officer

Hi, Daniel. How are you?

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

I'm doing well. Thank you. So, I guess, first, given -- I'll get right into a meaty question here. On the tax rate given the usage of the NOLs in the first quarter, is that something that you expect that could be used again going forward or is that -- I think I heard it one-time in the comment. So any comment around what the tax rate might be going forward would be great?

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

That's a one-time item and we would anticipate, if we have similar levels of provision, that the tax rate would go to about 12.5%. And if we didn't have a provision at all, if you just run through that math, it gets to a tax rate of 15.5%. So, the NOL was pretty significant and the fact that we had a large provision this quarter pushed the tax rate even lower.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

Got it. That makes sense. And then, I guess, on the margin, you mentioned an expectation for that to contract in the second quarter. And then just kind of stepping out into the third quarter and beyond, do you think given similar type of rate scenarios that you might see stability there going forward?

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

Yeah, I do. I kind of anticipated a second quarter pressure on the margin that was similar to the first quarter and then stabilization. So -- and that's just because the rate cuts happened late in the quarter and then they'll be fully recognized in the second quarter. And by then we'll have the majority of our deposit reductions completed. We do still have about $1.1 billion of CDs that were amortized over the next 12 months -- however, priced over the next 12 months, I should say, and they're at about $185 million and we repriced it down by at least a 4 percentage point, which takes some of the remaining pressure off. But we think we're going to be challenged in the second quarter in a way that's similar to the first.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

All right. That's terrific. Thanks for answering my questions.

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

Thank you.

Michael C. Rechin -- President and Chief Executive Officer

Thanks, Daniel.

Operator

Our next question comes from Damon DelMonte of KBW. Please go ahead.

Damon DelMonte -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hey, good afternoon, everyone. I hope everybody is doing OK during these challenging times. First question, just regarding the PPP participation, pretty active originations I think you said around $750 million. What was the average rate on those? Like [Speech Overlap]

Michael C. Rechin -- President and Chief Executive Officer

Like average size?

Damon DelMonte -- Keefe, Bruyette & Woods, Inc. -- Analyst

No, the fee?

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

3%.

John J. Martin -- Executive Vice President and Chief Credit Officer

3%?

Michael C. Rechin -- President and Chief Executive Officer

They're about 3%.

Damon DelMonte -- Keefe, Bruyette & Woods, Inc. -- Analyst

3%? Okay. And what is your expectation for when you'll probably begin the forgiveness process? Like were these booked mostly in March or first part of April? What can we expect for when some of these loans can be paid off?

John J. Martin -- Executive Vice President and Chief Credit Officer

Yeah. They -- Damon, this is John. The PPP program, it has a forgiveness after eight weeks. So, it will be actually after or before the quarter even ends they should begin to have a -- they start to see those loans forgiven.

Michael C. Rechin -- President and Chief Executive Officer

I think it really -- this is Mike, Damon. The process for forgiveness has not been fully offered yet. And so, with John's point, we're actively funding now, and so some of the metrics that were provided speak to that. So, we're actually funding toward the back end of the initial wave. And if you think about eight weeks of usage to demonstrate appropriate use for forgiveness through payroll, it really gets pretty close to the end of the quarter before the forgiveness process could even get started. So it will be interesting to see.

John J. Martin -- Executive Vice President and Chief Credit Officer

And I'd add too, with the second round of funding here, we'll be putting on another wave. So, it's eight weeks and then the forgiveness starts and then we're going to be actively any of the customers that we have that weren't able to get through, the first round will be, obviously, queued up for the second round. And that eight-week clock will start to tick.

Damon DelMonte -- Keefe, Bruyette & Woods, Inc. -- Analyst

Got it. Okay. And then just another question on the margin. Mark, I think, you noted that the fair value accretion was 12 basis points to $3.5 million this quarter. How does the schedule look for the remaining quarters of the year?

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

We'd expect a like amount for the remainder of the year.

Damon DelMonte -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Okay. That's all I have for now. Thank you very much.

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

Thanks, Damon.

Operator

Our next question comes from Terry McEvoy of Stephens. Please go ahead.

Terry McEvoy -- Stephens Inc. -- Analyst

Hi. Thanks for taking my questions.

Michael C. Rechin -- President and Chief Executive Officer

Sure, Terry.

Terry McEvoy -- Stephens Inc. -- Analyst

John, thanks for all the modification data and the way it was presented and broken out. I guess, I'll start there with a few questions. When you were getting the customer request for modifications, was it kind of yes to all your customers, or were you -- was there a level of selectivity where you went through each borrower and really reviewed the situation?

John J. Martin -- Executive Vice President and Chief Credit Officer

What I'd say is that, we had all of our borrowers complete a business relief assessment questionnaire where we ask them a series of questions about their current business situation, financial situation, how they plan to navigate the business and their access to liquidity, checking savings, investments accounts, etc., to try and get a forward look on what they might be facing. The first 90 days, obviously, they had financial statements that were backwards looking and those all looked strong from prior periods. And so, we're really, I would say, looking at their questionnaire and trying to make an assessment. But on balance it was fairly accommodating to the customers as they request the relief.

Terry McEvoy -- Stephens Inc. -- Analyst

And let's say, it was a 90-day request and fast forward 90 days and we haven't changed in terms of the economic outlook. Do you have the flexibility to continue to work with that borrower for another 90 days?

John J. Martin -- Executive Vice President and Chief Credit Officer

Yeah. The guidance that came out, Terry, actually provided up to two 90-day periods or basically six months without running into TDR as a classification. You couldn't be delinquent at the end of the year in order for it not to be a TDR. So you couldn't have granted an extension for a borrower who was delinquent. But the idea, plan, the strategy is to reassess after 90 days and ask even more questions about what are their plans. So that as we get closer to the end of that six-month period we have a better understanding of what the borrowers and the Bank's strategy will be going forward.

Terry McEvoy -- Stephens Inc. -- Analyst

And then maybe a quick question for Mark. Just looking at fee income, as we try to think about the second quarter, certain areas are down more. Maybe the best way for us to model it out is to think about what happened in March. So, is there any way you could give us a sense for those fee areas that are down because of the situation and the level of decline that you saw late in the first quarter? I'm thinking card payments, service charges, etc.

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

Yeah. When I look through this, the wealth management fees with a decline in the market will have an impact. Card activity is less than normal, as everyone is staying at home and not going out as often. Everything else is really strong. I would expect to have another great quarter in gains on the sale of mortgages, another great quarter in derivative hedge income. And the securities gains probably won't be as much. We've had some great opportunities in the first quarter to take advantage of the municipal market vis-a-vis the mortgage-backed market. And I don't anticipate the same kind of opportunity, but the quarter is still young. So, if we see them we'll definitely take advantage. There is a little bit of service charge related to the EIC, is that the right term the payments?

John J. Martin -- Executive Vice President and Chief Credit Officer

The fee integration we're still in some fee waivers or omission of business that will release themselves.

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

Yes. And then we -- well, that is positive. And then there's a slight offset as we look at all the tax payments and trying to be accommodative and make sure that the -- not the tax payments, the stimulus payments to consumers to be sure that they fully recognize that benefit and not use it to cover all overdrafts. So, there may be a little bit of pressure there. But Mike, do you have any other thoughts?

Michael C. Rechin -- President and Chief Executive Officer

Well, yeah. Terry, this is Mike Rechin. Two other thoughts on top of what you've already heard. The hedge business, as you know, on Line item 5 on Mark's non-interest income slide is a customer hedge and that -- the demand for that has been great. It is premised on commercial loan closings, which might slow down a little bit but I've already seen early in the month of April that that volume is going to be high and that's a lucrative business for both the Bank and for its clients. And Mark already spoke to the mortgage volume, but it's particularly strong. We had $140 million of closings in the first quarter. We have a pipeline of $180 million in the second quarter. So that gain on sale which is predominantly an 80% or more sale business ought to stay relatively high as well.

Terry McEvoy -- Stephens Inc. -- Analyst

Great. Thank you for that. And thanks for all the extra slides in today's presentation. Appreciate it.

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

You're welcome.

Operator

Our next question is a follow-up from Daniel Tamayo of Raymond James. Please go ahead.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

Thanks for taking my follow-up.

Michael C. Rechin -- President and Chief Executive Officer

Sure.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

Just kind of a follow-up on the CECL guidance. So, now that you've taken this part to preserve -- reserve provision, excuse me, in the first quarter and the reserves are larger, how does that impact what the CECL Day one impact will be when you do implement it?

Michele M. Kawiecki -- Senior Vice President and Director of Finance

Well, assuming that January 1 is the implementation date that what we disclosed in our 10-K would be our adjustment.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

So, the 55% is -- I mean, that would -- it will still be the same percentage basis off of whatever the reserves are as of that previous end point?

Michele M. Kawiecki -- Senior Vice President and Director of Finance

Well, I think the one -- if January 1 remains the implementation date and so, for instance, if we're allowed to implement CECL as of a different day of the year, we would have to take a fresh look at that number. But as of right now, with what the SEC at least has said verbally, it sounds like they will have us restate back to the January 1 date and the guidance that we've provided would still be in play.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

I see. Okay. And then, this is a separate question. Just on the wealth management revenues, it looks like they came up a little bit in the first quarter. Are those based on like an average market value or some kind of intra-quarter value that you would expect that revenue number to come down in the second quarter?

Michael C. Rechin -- President and Chief Executive Officer

Well, I think the dominant -- you're asking a billing question. I think the larger impact in terms of the magnitude of those fees is the year-over-year comparison of Monroe. You might recall, Monroe had for a $1.3 billion bank kind of an outsized private wealth business and actually a good percentage of the size. Or the specific question you asked about the derivation of our fee structure, I can't answer off the top of my head. I think it's off of -- I think his question is off of what date is it over an average period of time or a month end or quarter end period of time? I should know that, but I don't.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

We can follow-up offline. That's fine.

Michael C. Rechin -- President and Chief Executive Officer

I appreciate the question.

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

Thanks for taking my follow-ups.

Michael C. Rechin -- President and Chief Executive Officer

Sure.

Operator

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

Michael C. Rechin -- President and Chief Executive Officer

Andrea, thank you for hosting. I have no other comments other than thankfulness. I hope everyone listening has had the same good luck with health that our Company has had. We've had been particularly fortunate that our associates have stayed in good shape, which has allowed us to have the service level we have and the esprit de corps that we've enjoyed. I hope the same goes for everyone on the call. Talk to you soon.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Michael C. Rechin -- President and Chief Executive Officer

Mark K. Hardwick -- Executive Vice President, Chief Financial Officer and Chief Operating Officer

Michele M. Kawiecki -- Senior Vice President and Director of Finance

John J. Martin -- Executive Vice President and Chief Credit Officer

Scott Siefers -- Piper Sandler & Co. -- Analyst

Daniel Tamayo -- Raymond James & Associates, Inc. -- Analyst

Damon DelMonte -- Keefe, Bruyette & Woods, Inc. -- Analyst

Terry McEvoy -- Stephens Inc. -- Analyst

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