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Western Alliance Bancorp (WAL) Q1 2020 Earnings Call Transcript | #riskmanagement | #security | #ceo | #businesssecurity | #


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Western Alliance Bancorp (NYSE:WAL)
Q1 2020 Earnings Call
Apr 17, 2020, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone. Welcome to the Earnings Call for Western Alliance Bancorporation for the First Quarter of 2020. Our speakers today are Ken Vecchione, President and Chief Executive Officer; and Dale Gibbons, Chief Financial Officer. You may also view the presentation today via the webcast through the company’s website at www.westernalliancebancorporation.com. The call will be recorded and made available for replay after 2:00 PM Eastern, April 17th, 2020 through May 17th, 2020 at 9:00 AM Eastern by dialing 1-877-344-7529 using the passcode 10142009.

The discussion during this call may contain forward-looking statements that relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements contained herein reflect our current views about future events and financial performance and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from historical results and those expressed in any forward-looking statement.

Factors that could cause actual results vary materially from historical or expected results are included in this presentation, the related earnings release and our filings with the Securities and Exchange Commission. Except as required by law, the company does not undertake any obligation to update any forward-looking statements.

Now for the opening remarks, I have to now turn the call over to Ken Vecchione. Please go ahead.

Kenneth A. VecchionePresident and Chief Executive Officer

Good afternoon and welcome to Western Alliance’s first quarter earnings call. And joining me on the call today are Dale Gibbons, our — and our Chief Credit Officer, Tim Bruckner. I will first provide an overview of Western Alliance’s response to the coronavirus pandemic, then Dale will walk you through the Bank’ financial performance, afterwards we will open the line to take your questions.

I’ll begin by laying out Western Alliance’s approach to the COVID, an economic crisis. First and most importantly, I hope that everyone on the line is doing well, and that your families and loved ones are safe and healthy. These wishes are especially extended to all the care and safety workers actively putting themselves in harm’s way to protect our communities. At Western Alliance Bank, our people remain healthy and engaged, and despite the vast majority working-from-home for the last month, continue to go above and beyond the call of duty to serve our customers and the communities we operate to navigate this challenging time.

Our business continuity plans have been working as anticipated, and I am proud of the entrepreneurial spirit our people continue to demonstrate to get the job done and develop unique solutions for our clients. First, I’d like to lay out the business actions Western Alliance has taken in light of the evolving environment. Although we did not anticipate the widespread severity and likely duration of the virus, we did start assessing potential risks and mitigants as early as mid-January. And as the breadth of the pandemic became apparent, we accelerated implementing plans in mid-February to prioritize asset quality, capital and liquidity management.

We have since divided the business into appropriate risk segments led by senior managers with deep credit and workout experience to monitor and force the early engagement with our borrowers and begin the necessary credit triage process. For example, Robert Sarver is leading the hotel franchise group, while I am leading the warehouse lending and gaming groups, Dale has corporate finance; and Tim Bruckner coordinates overseas and directs’ all credit activities.

Our overall risk management approach is focused on establishing individual borrower level strategies in which we are proactively engaging in customer conversations to evaluate and agree upon financial plans focused on liquidity management to conserve resources in anticipation of an elongated economic downturn. Today, we have had direct dialogue with all borrowers with over $3 million in exposure or 86% of our portfolio, and substantial dialogue below this level. We assume that all borrowers will have some level of COVID-19 impact and are focused on evaluating our borrowers’ remediation efforts, access to capital and contingency plans.

We’re also very pleased that Congress and the entire federal government came together to expeditiously pass the CARES Act and stimulus measures a few weeks ago. Additionally, we applaud the Fed’s actions to reduce interest rates to support liquidity in the financial markets to quantitative easing for a wide variety of asset classes and provide support for small and medium-sized businesses through its innovative new lending programs. We recognize that the SBA has a large task in front of them, and I’m extremely proud to say that our people work tirelessly with them so that we could successfully process the PPP program loans on the first day.

We have dedicated over a quarter of our workforce to avail our clients of this important program and have successfully approved over 2,600 applications totaling $1.5 billion today. We anticipate funding approximately $150 million per day. As part of our broader risk management strategy, we have prioritized implementing the PPP program as the most expedient method to quickly get incremental liquidity to our clients. Furthermore, we believe that the newly initiated mainstream lending program when implemented provides incremental liquidity for our large clients as well as PPP participants. Our approach to loan modifications and deferment request is to look for resourceful ways to partner with our clients along with assessing their willingness and capacity to support their business interests. We are asking our clients to work hand-in-hand with us for a long-term solutions to hopefully short-term challenging environment, whereby our clients contribute liquidity, capital or equity as an integral component to loan modifications.

Our longer term solutions-based approach distinguishes us from industry standardized 90-day deferral programs. Our approach collectively uses the resources of the borrower, government and the banks’ balance sheets to develop solutions that extend beyond six-month window provided for in the CARES Act. This negotiation process has likely slowed our modification pipeline as approximately $400 million has been processed today. We learned during the last downturn when both the borrower and the bank use their resources to bridge the gap, it generates a mutually favorable outcome.

With all of this as the backdrop, I’d like to walk through our financial performance for the quarter. Despite a uniquely challenging operating and rate environment, I am proud to report that in the first quarter, Western Alliance generated $163.4 million of operating pre-provision net revenue, up 10% year-over-year and 3% quarter-to-quarter. We continued with the adoption of CECL accounting changes this quarter, which resulted in a provision for credit losses of $51.2 million for the quarter, 47% of which was driven by our robust balance sheet growth. Dale will go into more detail in a bit on how the unique features of CECL drove our provisions, but our ACL to funded loan ratio now stands at 1.14%.

WAL generated net income of $84 million or $0.83 per share and tangible book value per share was $26.73. This quarter, we produced a NIM of a 4.22% and had net recoveries of $3.2 million and continue to improve our operating leverage. Even with our increased vigilance, organic balance sheet continue to be healthy in Q1 for both loans and deposits. Deposits grew $2 billion to $24.8 billion as we gained market share in several of our key business lines as well as traction in one of our recently launched deposit initiatives, which added over $400 million. This highlights the continued strength of our diversified funding channel and overall deposit franchise to generate stable low-cost liquidity irrespective of the macroeconomic environment.

Continuing on our strong momentum from 2019, total loans increased $2 billion to $23.1 billion. Approximately $1.5 billion of this was through organic loan growth from new client projects and another $500 million was credit line drawdowns, of which approximately half was redeposited into the bank.

Let me take a moment now to make a few high level comments on Western Alliance’s loan portfolio. We believe that our well-diversified business model and purposeful decisions made over the past decade regarding conservative underwriting criteria and sector allocations positioned the portfolio to withstand the current economic environment. At quarter end, asset quality was stable with a decline in totally adverse graded loans and OREO to assets of 1.2% from 1.27% in Q4.

Western Alliance has no direct energy or large retail mall exposure. We stopped making loans to the quick service restaurants sector several years ago with current exposure of only $150 million. Our construction and land and development portfolio is now under 9% of our loan book. In our institutional lot banking business, which makes up 30% of the CLD portfolio, we have not received any deferral request at this time. Single family residential construction, which composes another 27%, were still experiencing positive absorption trends through March. However, April’s traffic has fallen off.

Our portfolio is extremely well positioned coming into the pandemic and right now is performing as expected. We are especially focused on monitoring and engaging with our clients in our hotel franchise finance and technology and innovation segments, which will be reviewed in more detail later in the call.

During the quarter, we repurchased 1.8 million shares at an average price of $35.30. Additionally, consistent with our 10b5 plan, we repurchased 270,000 shares thus far in Q2. However, given the rapidly changing environment, we have now paused our share repurchase activity.

Finally, Western Alliance arrives at this crisis in a position of strength uniquely prepared to address what’s ahead. We remain well capitalized and highly liquid with the CET1 ratio of 9.7% and ample liquidity — total liquidity resources of over $10 billion.

Dale will now take you through our financial performance.

Dale M. GibbonsVice Chairman, Chief Financial Officer

For the first quarter, Western Alliance generated net income of $84 million or $0.83 earnings per share. Net income was reduced by a $51.2 million provision for credit losses driven by the adoption of CECL, balance sheet growth as well as the change in the economic outlook due to pandemic.

Strong ongoing balance sheet momentum, coupled with diligent expense management, drove operating pre-provision net revenue to $163.4 million, up 10% from a year ago, which we believe is the most relevant metric to evaluate the ongoing earnings power of the company. Net interest income and fee income remain relatively stable producing net operating revenue of $285.3 million, primarily a result of lower yields on loans, which was partially offset by lower rates on deposits and borrowings.

Non-interest income declined $10.9 million to $5.1 million from the prior quarter due to mark-to-market of preferred stock holdings of primarily large money center banks of $11.3 million, partially offset by $3.8 million equity investment gain. To-date, of the $11.3 million mark, $3.5 million has been recovered. As credit spreads widened during the last quarter, the yield on preferred stocks followed impacting valuations. We do not believe this represents a premanently reduced valuation and that preferred stock values will continue to recover over time. Finally, non-interest expense declined $9.3 million as compensation and other operating expenses declined by $7 million.

Regarding implementing CECL in our allowance for credit losses, in our 10-K, we disclosed the adoption impact of $37 million, $19 million of which was attributable to funded loans, $15 million for unfunded commitments and $2.6 million for held-to-maturity securities. This resulted in a combined January 1st allowance of $214 million.

During Q1, loan growth drove an additional $24 million of required reserves and another $30 million was driven by changes in the economic outlook as a result of the pandemic. In total, reserve availed during the first quarter was $91 million, an increase of 50% from the year-end reserve. The quarter end ACL of $268 million was 1.14% of funded loans, up 30 basis points. Provision expense for the quarter was $51.2 million, which is over 10 times the average quarterly provision during 2019.

As of March 31st, the reserve bill reflects our best estimate of the future economic environment, including the impact of government stimulus programs. We utilized an assimilation of various Moody’s macroeconomic outlook scenarios to capture the most likely economic outcomes in a more severe scenario for potential tail risks. As the economy continues to change, we will adjust our ACL modeling accordingly.

Turning now to net interest drivers. Net interest income for the quarter declined a modest $3 million from the prior quarter to $269 million as there was one less day during the quarter compared to Q4 and margin compression was offset by loan to deposit growth. Investment yield showed a modest improvement of 2 basis points from the prior quarter to 2.98%. However, on a linked quarter basis, loan yields increased 31 basis points due to the lower rate environment. The average yield of our portfolio at quarter end or the spot rate was 5.02%.

Interest bearing deposit cost increased 18 basis points in Q1 to 90 basis points as a result of immediate steps taken to reduce our deposit costs after the FOMC cut rates twice in March. The spot rate of total deposits at quarter end was 29 basis points. Total funding costs decreased 11 when all of the company’s funding sources are considered, including non-interest bearing and borrowings.

Through the transition to a substantially lower rate environment during the quarter, net interest income was $269 million, a decline of 1.1% from Q4. Continued strong balance sheet growth and immediate steps taken to reduce the cost of interest bearing deposits counteracted the decline in Prime and LIBOR. Net interest margin declined 17 basis points to 4.22% during the quarter as their earning asset yield fell 28 basis points, partially offset by 19 basis points funding cost decrease.

With regards to our asset sensitivity, our rate risk profile has declined notably as the majority of our variable rate loan portfolio has flipped to fixed rate as floors have been triggered in the declining rate environment. Presently, 82% or $8.1 billion of variable rate loans with floors are at the floors. With the addition of our mix shift primarily to fixed rate residential loans, $16.2 million or 70% of loans are now behaving as a fixed rate portfolio. This has reduced our interest rate risk on a 100 basis point parallel shock lower scenario to 3% at March 31st from 6.5% one year ago and assumes that rates are held flat at zero across the term structure.

Turning now to operating efficiency. On a linked quarter basis, our efficiency ratio decreased 200 basis points to 41.8%. As mentioned earlier, the improvement was attributed to decreases in compensation and other operating expenses while our revenues increased modestly. As a core component of our strategy, we continue disciplined expense management to sustain industry-leading operating leverage and profitability.

Our core underlying earnings power remains strong as pre-provision net revenue ROA was 2.38%, flat from the prior quarter, while return on assets was down 70 basis points to 1.22% directly related to our provision expense in excessive charge-offs of $54.4 million.

As Kim mentioned earlier, our strong balance sheet momentum from 2019 continued into Q1. During the quarter, loans increased $2 billion to $23.2 billion and deposits also grew $2 billion to $24.8 billion. Loan to deposit ratio increased to 93.2% from 92.7% in the fourth quarter. Our strong liquidity position continues to provide us with balance sheet capacity to meet funding needs. Shareholders equity declined by $17 million as dividends and share repurchases were matched by net income. Tangible book value per share increased $0.19 over the prior quarter to $26.73 per share as our share count declined.

We continue to believe our ability to profitably grow deposits is both a key differentiator and a core value driver to our platform’s long-term value creation. Q1 is a seasonally strong deposit quarter, and coupled with the roll out of our deposit initiatives, deposits grew $2 billion. The increase was driven by growth of $1.3 billion in non-interest bearing DDA primarily from market share gains in our mortgage warehouse operations. Additionally, HOA continues to perform well and contributed $330 million of low cost deposits. During the quarter, the relative proportion of non-interest bearing DDA grew to nearly 40% of deposits from 37.5% on a linked quarter basis.

Turning to loan growth. In line with the industry, the vast majority of growth was driven by increases in C&I loans totaling $1.8 billion, followed by $107 million in construction and land development, and $92 million in residential. Residential homes now comprise 9.7% of our portfolio, while construction loans decreased as a relative proportion of the portfolio to 8.9% from 9.2% in the fourth.

At the segment level, Tech & Innovation loans grew $626 million, with $124 million from capital call and subscription lines and $176 million from existing technology loan draws, in turn bolstering technology-related deposits by $383 million. Corporate finance loans grew $408 million, which was primarily due to line draws, two-thirds of which were from investment grade borrowers bringing utilization rates to 38% from 13% during the prior quarter. Mortgage warehouse also contributed to loan growth of $550 million, approximately 50% of which was due to line draws. Across the bank, one quarter or about $500 million of our net new loan growth was driven by drawdowns on existing loan commitments from the beginning of the quarter. In all, total loan growth of $2.2 million for the quarter was fully funded by deposit growth for the same amount.

Overall, asset quality was stable during the quarter with total adversely graded assets increasing $10 million during the quarter to $351 million, while non-performing assets comprised of loans on non-accrual and repossessed real estate increased $27 million to $97 million or 0.33% of total assets, and is now held-for-sale.

Within these categories, we had migration from special mention to substandard and some of the normal investor funding was delayed in tech and innovation. As a precaution, when remaining liquidity declines below six months, repaying those loans into either special mention or sub for enhanced monitoring and engagement. This quarter, we also — we saw the cumulative impact of our efforts of managing certain special mention and substandard loans as several resolved in our favor with no losses, a $100 million of adversely graded loans resolved during the past quarter, 37 loans or $50 million paid-off in full, while the other $50 million were upgraded to pass.

As Ken mentioned in his introduction, we’re well positioned entering this economic cycle. We only incurred $100,000 of gross credit losses during the quarter, which was more than offset by $3.3 million in recoveries, resulting in net recoveries of $3.2 million. We typically have one or two one-off credit charges every quarter. However, highlighting the strength of our loan book, we didn’t experience any of these in Q1. We believe early indication in identification and conservative management helps mitigate losses on these assets. In all, the ACL-to-funded loans increased 30 basis points to 1.14% in Q1 as a result of CECL adoption and the result in provision expense related to Q1 loan growth and changes in the economic outlook.

We continue to generate capital and maintain strong regulatory capital ratios with tangible common equity, the total assets of 9.4% and a CET1 ratio of 9.7%. In Q1, a reduction of TCE-to-total assets was mainly driven by $2.3 billion increase in tangible assets due to our significant loan growth, while the tangible common equity was affected by $15.4 million of provisions in excess of charge-offs due to CECL adoption.

In spite of reduced quarterly earnings and the payment of quarterly cash dividends of $0.25 per share, our tangible book value per share rose $0.19 in the quarter to $26.73 and is up 15.2% in the past year. Our diversified deposit generation platform and access to significant liquidity resources is critical in times of economic stress.

Overall, we have access to over $10 billion in liquidity, primarily through our $4.7 billion investment portfolio, of which $2.7 billion are investment grade readily marketable and not pledged on any borrowing base. Additionally, we have $7 billion in unused borrowing capacity with the Fed, Federal Home Loan Bank and Correspondent. Our strong capital base, access to liquidity and diversified business model will allow us to address any credit demands in the future.

I’ll now hand back the call to Ken to conclude with comments on a few of our specific portfolios.

Kenneth A. VecchionePresident and Chief Executive Officer

Thanks, Dale. Regarding our Hotel Franchise Finance business, we believe our focus on the Select Service subsegment, conservative loan to cost underwriting discipline and strong operating partners sets us up for a maximum financial flexibility to weather the duration of the crisis. Like most hotels in the country, our clients have seen a dramatic reduction in occupancy rates over the last month, and senior management is involved in active dialogue with each borrower to evaluate remediation efforts and contingency plans. Going into the pandemic, 75% of the portfolio had an LTV under 65% and more than 73% had a debt service coverage ratio of 1.3 times.

Additionally, we only partner with experienced hotel operators with significant invested equity and resources to support ongoing operations. Fully 66% of the portfolio is with large sponsors who operate more than 25 hotels and 90% operate 10 or more properties with top franchises or flags. Based on our ongoing constructive dialogue, we believe that sponsors view this as a temporary event and want to continue to maintain and support these properties over the long-term, given their significant equity investments. We are actively working with them to appropriately utilize the PPP program and the Main Street lending programs, along with their own liquidity as a helpful financial bridge to arrive at a longer-term solution. Based on the mutually developed financial action plans, we will selectively implement loan modifications along the lines we previously discussed. This is a prime example where both parties contribute to a comprehensive solution.

Now, regarding our Tech & Innovation business, we primarily financed established growth technology firms with a strong risk profile, mainly companies classified as Stage 2 with an established business model, validated product, multiple rounds of investment, and a path to profitability. This provides greater operating and financial flexibility in times of stress. 99% of the borrowers have revenues greater than $5 million and have strong institutional backing with 86% backed by one or more DC or PE firms.

During the quarter the portfolio grew $495 million to $2 billion or 8.8% of the total portfolio, which was attributed to $175 million of existing line drawdowns in the technology division and an additional $124 million from capital call lines, a product that historically has had zero losses.

Tech & Innovation commitments grew $284 million in Q1 and utilization rates increased to 60% from 49% in Q4 2019. The portfolio is fairly granular with average loan size of $6 million and these borrowers are generally liquid with more than 2:1 deposit coverage ratio. Additionally, since 2007, warrant income has covered cumulative net charge-offs 2 times over. Currently 14% of technology loans or $164 million has less than six months remaining liquidity, which is in line with historical trends. Although some fund raising has been delayed, we were pleased to see several investment rounds closed over the last several weeks and days with strong continued sponsored support.

In conclusion, we see increased cash generation driven by our balance sheet momentum going into the quarter-end as well as continued loan growth from the PPP distributions. We expect pre-provision net revenue to continue to grow to Q2 with the ability to absorb any necessary future provisions. Given uncertainty surrounding the likely duration of the virus and evolving economic environment, we will continue to reassess our outlook as health and economic facts warrant.

Regarding asset quality, our proactive risk management approach is institutionalized throughout the Company. We are actively working with our borrowers to develop mutually agreed upon financial plans assuming an elongated economic downturn that leads to long-term solutions. Our strong collateral positions and little unsecured or consumer lending should serve us well in mitigating potential risk of loss as we navigate these uncertain times. We stand ready to implement the likely next phase of PPP and the Main Street Lending Program to assist our clients and communities.

Finally, Western Alliance has assembled a seasoned management team that has weathered several economic downturns and is applying the lessons learned from the Great Recession to face these uncertain economic times.

And with that we’ll open up the line, operator, and we’ll take everyone’s questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Casey Haire of Jefferies. Please go ahead.

Casey HaireJefferies — Analyst

Thanks. Good morning, guys.

Kenneth A. VecchionePresident and Chief Executive Officer

[Indecipherable]

Casey HaireJefferies — Analyst

Just a question on the reserve build. Obviously, a tricky proposition here. But trying to get — you guys mentioned you used a bunch of Moody’s scenarios. Can you just give us some color as to how much weighting was given to the Moody’s adverse scenario, what kind of recovery you guys are assuming, how much government help, the stimulus stuff that the government is doing, has offset it, and then obviously the duration? I know that’s a lot, but just trying to get some color as to the magnitude of reserve build here.

Kenneth A. VecchionePresident and Chief Executive Officer

So we primarily use the baseline case as of March 31st and then we looked at — we looked at S1 and we looked at S3. S3 is kind of the adverse scenario, which is obviously more critical and a longer recovery period.

We do struggle with what is the timeline of this type of thing and how much the things come back. We do think that the institutions and the plans done by the federal government and — both on the congressional side as well as the FOMC have an effect in terms of being able to mitigate this and draw — make a bridge to when we’re at a time when we can start to turn the economy back on.

I don’t have a timeline for you in terms of kind of when that is going to be, but we will look at this. We fully reserved as of March 31st and we’ll look at this again at the end of the second quarter.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Yeah, I would just add and say we did factor in some impact with the PPP program. But as we were processing, we didn’t know what that size level is going to be. So having 2,600 participants over $1.5 billion looking to go out is going to be very helpful. I don’t think it’s been fully factored into our reserve calculations. But that $1.5 will help cover $6.7 billion of commitments in our Company or $4.6 billion of current outstanding loans, which means that’s about 20% of our current portfolio.

Casey HaireJefferies — Analyst

Okay, great. And just following up on the loan modifications, if I heard you right, I think you said $400 million to-date. So just specifically what exactly are you guys doing there and then like any color as to how much you’ve improved upon that $400 million as of April 17th here?

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. By the way that $400 million is April 17th number. [Speech overlap]

Casey HaireJefferies — Analyst

Okay.

Kenneth A. VecchionePresident and Chief Executive Officer

Okay. Number two, I would say, in terms of color, I think we caught a lot of our clients by surprise, our borrowers by surprise, when we said early on this is going to be a longer-term problem and let’s have a longer-term solution rather than the standardized cookie-cutter 90-day P&I deferral. And by the way that took a lot of getting used to from our client base and we had to go back to them several times. As we’ve had that conversation, you can see that our viewpoint is more likely than not going to be correct. We don’t know how long it’s going to go, but we said, let’s start with figuring it out and through the end of the year. And because of that we need you, the borrower, to contribute something, more equity, more collateral, more liquidity to the project and then we will help you along with a deferral as well. Ad we took each loan on a case-by-case basis. So we did make broad proclamations that said, we’ll just do 90 days here.

So every loan is being different and I assume, as we get into questions about different books of business, I’ll give you some stories behind each one of those books of business. But we think getting out there and dealing with our clients on a one-to-one basis is going to be helpful.

And by the way the same lessons that we learned in the great — in the great recession that getting there early, having conversations for the longer term helps our clients survive, but more importantly they know that we will be there when they start to see growth opportunities. And the combination of their growth opportunities, the ability to get through this gives them the ability to prosper longer term. And that’s our approach when we sit down and we talk to our clients, Casey.

Casey HaireJefferies — Analyst

Okay, great. Just last one for me. You guys clearly prioritizing the PPP program for loan growth. Just a question, how — what do you — how are you guys funding this? I’m just trying to get a sense for what the margin — the incremental NIM might be. And how willing — how — regarding capital and liquidity, are you willing to go much higher on the loan to deposit ratio and — as well as on the TCE ratio?

Kenneth A. VecchionePresident and Chief Executive Officer

So you may have noticed, our ending balances for loans and deposits were significantly above the average balance for the first quarter. So we had $1.7 billion more in loans and $1.5 billion more in deposits. Two-thirds of the deposit number was in DDA. That gives us, we think, momentum in terms of expanding PPNR into 2Q. You layer this $1.5 billion then on top of that, we have a myriad of ways to be able to fund this. One is, we think we have additional deposit opportunities. Two is, the Federal Reserve has said they’ll advance 100% on these loans. And three, we have another $10 billion of liquidity that we could get elsewhere. So we’re not really concerned about funding that cost. I think it’s going to be something around 25 basis points. If we put it to the Fed, it’s 35 basis points to do that. And we’re — and then we’ll take these in.

So that, again, I think shows that we expect continued balance sheet growth into the second quarter, primarily driven by these PPP notes.

Casey HaireJefferies — Analyst

Okay. So — and if I’m understanding the PPP, it comes on at around 2% with the fees associated. So, it looks like about a 1.75% incremental margin. Is that right? [Phonetic]

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. So our weighted fee on the $1.5 billion we’ve done is 2.4%. And then these loans — I mean, the preponderance of this is fairly short term. We’re going to call it six months. But then for the part that isn’t forgivable, that has a tail that goes out two years.

Casey HaireJefferies — Analyst

Got you.

Kenneth A. VecchionePresident and Chief Executive Officer

On those — the actual loan rate on the entire program is 1%. So you get 2.4% on the entire bucket and some of that is going to be accelerated in terms of recognition based upon the short-term nature of the forgivable element.

Casey HaireJefferies — Analyst

Great. Thank you. I’ll step back.

Operator

The next question today comes from Arren Cyganovich of Citi. Please go ahead.

Arren CyganovichCiti — Analyst

Thanks. I was wondering if you could just talk a little bit about the working with the customers. I appreciate all the commentary. I guess I just want to have a better understanding of what proportion of your customers are actually getting deferrals now and how that — how those are categorized relative to the modification that you’re discussing?

Kenneth A. VecchionePresident and Chief Executive Officer

I’m going to let Tim Bruckner, our Chief Credit Officer, take one.

Tim R. BrucknerChief Credit Officer

Hi. Thank you. And this — this is, I think, a nice follow-on to the discussion we’ve just had. In the prioritization of this, the customer conversation, that dialog, is of top priority. So that started for us back in February. We’ve got two parts to this that have come into our common language. There is the trough and then there is the recovery and stabilization and a new normal.

As a bank and as a business, we know that the better that we do and the better that we help our borrowers through that trough in terms of proper planning, the better that asset stabilizes and the new normal. So, the conversations are actually going very, very well, but there is obvious differences between borrowers and industries and businesses. And so, necessarily there is different conversations and discussion. But what that lets us do as a business is then monitor that cash and liquidity through the trough and be best positioned in the recovery and in stabilization and normal, whatever it is for their business. And so it’s really a dialogue that started in February, and it will continue throughout this entire process, PPP is just part of it.

Kenneth A. VecchionePresident and Chief Executive Officer

So, this is Ken. Let me just — it’s an interesting question that you asked because there is not one singular answer for the entire portfolio, it depends which portfolio you’re talking about. But maybe some color behind the portfolios would be helpful here. So, for example, we’re talking to everyone in the hotel book, right, that’s HFF, that’s $2 billion. Well, 50% of those — 50% of our clients have already made their P&I for April, and then 80% of the remaining 50% are in deep conversations with us where we hope that we’ll have something tied down in the next couple of weeks in terms of a modification program, and then they’ll make their payments at that time or maybe they’ll extend first and then we’ll get some payments after that.

So that’s the wholesale book, and that’s how the conversation is going there. The conversation, say, in lot banking is quite different. We’re actually getting inbound calls and people are asking us, are you going to be there when we find opportunities? And then, our question is, well, are you looking for deferments? And we’ve got a couple deferrals. We’ve got a couple of clients call and say, I’m not going to ask for anything. I’m looking at the future, I need you to stand with us. So those are just two different ways the book is different.

Our gaming book, OK. Is completely different than what’s happening. We think our gaming book, other than five or six small deferrals that we made on principle, we think our overall gaming book has enough liquidity to survive into the summer, right, which is — so that makes our conversation there a little bit different. We can take a little bit more time. We can see how the Main Street lending facility can be accessed because the gaming companies could not access the PPP program. So, every different segment of our book has a different conversation, and that’s why, if I can reiterate again, and Tim was very early on this in our — all right, we do a weekly Senior Operating Committee meeting, but in the second or third week of January, he just stood up and said, OK. We’re going to have senior leaders be in-charge of books of business across the entire company that have workout experience, heavy credit experience, had been through something like this. And therefore we can tail each discussion differently. That was, for example, Robert running the hotel business — Robert was born with hotel business in his veins, why wouldn’t he take that on and run with that? All right. And so we look for different strengths to match up against the portfolio here, I’m sorry, it’s a longer answer, but I hope it gave you some color as to how we’re managing our conversations with our clients.

Arren CyganovichCiti — Analyst

That’s very helpful. I appreciate it. Thank you.

Operator

The next question today comes from Brock Vandervliet of UBS. Please go ahead.

Brock VandervlietUBS — Analyst

Thanks. Good morning. Just a bigger — big picture to start. Do you think this is going to be a mild or severe recession in the scale of recessions that you’ve — that we’ve experienced in the past?

Kenneth A. VecchionePresident and Chief Executive Officer

Well, my answer keeps evolving as information evolves. And I try not to be tick by tick, but certainly more pessimistic than I was in early March and mid-March, given 22.5 million people have recently filed for unemployment claims. So I think it’s going to be deeper than I’ve ever experienced, right, but I think our answers or our approach was one that we anticipated that it was going to be longer than what people thought, we just didn’t think the severity of what we’re seeing was going to be as deep.

Brock VandervlietUBS — Analyst

Okay. And more specifically around investors’ real concerns here, for the hotel book, like what percentage of properties would you say go bankrupt in an average recession?

Kenneth A. VecchionePresident and Chief Executive Officer

Okay. So — I’m sorry, Brock. I didn’t mean to cut you off.

Brock VandervlietUBS — Analyst

Yeah. Go ahead.

Kenneth A. VecchionePresident and Chief Executive Officer

Okay. So, we went back and we looked that the GE — this was originally the GE business. And we bought it in GE — from GE 2016. So when we went back and we looked at their performance level from 2007 to 2015, and during that time, during those eight years, total losses amounted to $52 million, average charge-offs is 60 basis points with peak losses coming in 2010 at 3.3%. They had a portfolio of about $1 billion in size. Now what’s important to note is, their portfolio was completely different than the model that we constructed. Their portfolio was more of a shotgun approach; they had week flags, we do not; they have small operators, we do not; they had week sponsors, we do not; and they had LTVs of 75%, and our LTV, as I said earlier, are about 60%. So we have a different model than what they have, but that’s our best look back to get a gauge of what may happen going forward, adjusting for the difference of our model.

Tim, you want to comment?

Tim R. BrucknerChief Credit Officer

I just want to add one thing to that is, I think if you really look at it to our sponsorship and sophistication of investor composition is a lot different than that legacy portfolio as well. We really have the larger operators at the higher level of sophisticated investor when we have these dialogues and say, come on, we’re solving for something here that isn’t 90 days. We have folks that understand why and how we can work together and do that. And that’s going to keep the leverage down on this portfolio. How we do on that puts us in the position and the rebound that we want to be in.

Brock VandervlietUBS — Analyst

And lastly, the debt service coverage ratios that you show on Page 20, are those as of Q1 or are those through April because clearly hotel performance has got deteriorated?

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. That’s for Q1, Brock. We wouldn’t have that information that quickly for April.

Brock VandervlietUBS — Analyst

Got it. Okay. All right. Thanks for the color.

Kenneth A. VecchionePresident and Chief Executive Officer

Thank you.

Operator

The next question today comes from Brad Milsaps of Piper Sandler. Please go ahead.

Brad MilsapsPiper Sandler — Analyst

Hey. Good morning, guys.

Kenneth A. VecchionePresident and Chief Executive Officer

Good morning.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Good morning, Brad.

Brad MilsapsPiper Sandler — Analyst

Ken, I think you gave the stat on the tech book that 14% of the companies had cash on hand for six months or less, which was pretty consistent with history. I was curious if you could give that same kind of stat for the hotel book. Obviously I know that the PPP program, it was having an impact there as well, but just kind of want to get any kind of sense on kind of forward look on debt service coverage for that book if you could look at it in a similar way to — as you look at the tech book?

Kenneth A. VecchionePresident and Chief Executive Officer

Well, I don’t have the stat on what the collective liquidity is for the hotel book. We are — that is one of the single most important questions we ask our clients. And it’s — we’re gathering that information as we speak. They generally don’t run with a lot of liquidity, and now here’s my however, my however is if you are a recently opened hotel, which we have a couple, they have liquidity, because they had that liquidity on their balance sheet getting ready for the opening. So, they’re OK. If you’re a hotel that was building up your reserve to do a pit, you have some of that liquidity. If you’re a hotel that’s been operating for a while and distributions have gone back to your investors, you have less. And therefore, we have to talk to you to go to the investors, to get a capital call, to come in for you to get a defer — to get some deferral. So, a little bit different, and that’s why one of the things that I can keep repeating here, case by case, individual hotel by individual hotel, and our individual property throughout the whole book of business.

Brad MilsapsPiper Sandler — Analyst

Okay. And just maybe a follow-up — two follow-ups. One, how large is the gaming book? And then secondly, I think at the end of last year, you had about $8.5 billion of unfunded commitments in total for the whole loan portfolio. Can you talk about the potential for those to be drawn down, maybe where you’ve cut those two and implications of that would have on capital?

Kenneth A. VecchionePresident and Chief Executive Officer

So I’ll take the easy question, and then I’ll slip it over to Dale for the harder one. The simple answer is $500 million on gaming.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Yeah. So the most significant draw we’ve ever had on unfunded has been 8% of that amount, which, frankly, we got close to kind of where we were with this drawdown. We’re not seeing any more additional draws at this time. We’re — in fact, we’ve had some kind of repayments of some of those draws.

So we don’t see — and a lot of these draws there — I mean they’re — or these commitment lines, we don’t think they would really kind of ever be drawn down in terms of the structure behind some of these credits. So while we have these unfunded elements to them and we did have a drawdown in March predominantly, we’re not seeing anything else subsequent to that.

Brad MilsapsPiper Sandler — Analyst

Okay, great. Thank you, guys. I’ll hop back in queue.

Operator

The next question today comes from Chris McGratty of KBW. Please go ahead.

Kenneth A. VecchionePresident and Chief Executive Officer

Hey, Chris.

Chris McGrattyKBW — Analyst

Great. [Indecipherable]. Quick question on just the balance sheet trajectory. Given the comments about the gross and the draws, any thoughts on adjusting the resi mortgage strategy a bit just in light of the capital and liquidity?

Kenneth A. VecchionePresident and Chief Executive Officer

So the resi — the purchase of resi mortgages may be far more opportunistic right now than we’ve ever seen as some of our clients are selling their mortgages at significant discounts, which will allow us to go ahead and buy at higher yields than we bought in Q1. So we’re going to look at that. The keyword we used to use — or we used for our share repurchase was opportunistic. Same thing here. If we can get the right risk/reward trade-off, in fact, there are resi mortgages available that have better or lower LTVs, lower DTI and higher FICO scores that are selling for much higher yields than what we’ve recently purchased, say, at the end of 2019. So we’ll look at that and if there’s opportunity there, we’re going to take advantage of it.

Dale M. GibbonsVice Chairman, Chief Financial Officer

I think an important thing on this program as well as on the hotel book is collateral. I mean we are in strong collateral positions that — such that it would take considerable sustained valuation declines to ever pierce where we are in terms of risk of loss.

Chris McGrattyKBW — Analyst

Okay. And just if I could follow up, Dale, in terms of either the CET1 or the tangible. Obviously, this quarter had a big jump down just because of the growth. Where do you comfortably run those ratios in this environment over the next few quarters?

Dale M. GibbonsVice Chairman, Chief Financial Officer

Well, I mean, so we saw a decline in those two. Now with the PPP program, that could pull down our TCE. It really won’t have an effect on CET1 because those are all 0% risk weight as they are SBA backed. But we can see this number come down into the 8s [Phonetic].

Chris McGrattyKBW — Analyst

Okay. And then maybe the last one, if I could do it. The color on the hotel history of loss was great. Could you do a similar run-through of the tech book in terms of peak losses when you didn’t own it? I think they were kind of in the mid-single digit but the early stage. But just blended, I think they were around 2%, 3%. Any color would be great.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Your recollection is correct. I don’t have those in front of me, but we’ll pull them up. As you know, they’re available on SNL. [Phonetic]

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. The last time I looked at it, and it was a while ago and it wasn’t for this particular situation, as I said in my prepared remarks, there was a 2 times coverage of the warrant income to the credit losses. And as you know, credit losses come early and the warrant income comes later. But when you look at it overall, that the warrant income that we get has always covered the — more than covered the credit losses. Unfortunately, we — it just can’t be timed to be in the same quarter.

Dale M. GibbonsVice Chairman, Chief Financial Officer

I think it’s also notable that our mix has changed since then as well. So we’re now doing a significant portion of our growth has been in these capital call and subscription lines. It’s not something that Bridge was engaged in as a stand-alone enterprise but something that we entered as part of our risk mitigation strategy, essentially last year, to really lend into areas that have had 0 to no losses historically for not just us but for other participants in the space.

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. Let me give you some color as part of our review. Just so you know, I’ll speak for Tim Bruckner for a second. But every Monday at my SO, senior operating committee meeting, we set the tone for what we’re going to try to accomplish that week, that month, that quarter and so forth, depending on the circumstances. And then we run two senior loan committees on Tuesdays and Thursdays. Basically, we’re not really approving senior loan packages, but we are reviewing large credits that are being worked on for modification. And then Tim holds individual weekly meetings with each one of our risk segments. So we’re daily talking to a segment and getting live information.

So on the Tech & Innovation, which is as live as I can get it, I was asking the credit officer there last night, How would you describe our book of business? And the way he just said — what he said was, I see rating turbulence, but I don’t see large losses. So things can move around in terms of pass, not pass. But he’s — at this point, the book is behaving well at this point.

Tim R. BrucknerChief Credit Officer

I might add just one more point to that. We’ve seen the support from the sponsorship. We’re in these transactions at a low loan-to-value with a number of rounds typically in front of us before we’re in. And so what we’re seeing is that if anything takes a hit here, it’s a hit on valuation before it impacts our loans. So the rounds are clearing. The funding is occurring. The valuations might be slightly lower, but the capital is still flowing in this segment, and that gives me some comfort.

Chris McGrattyKBW — Analyst

Great. Thanks for all the color.

Operator

The next question comes from Timur Braziler of Wells Fargo. Please go ahead.

Timur BrazilerWells Fargo — Analyst

Hi. Good morning.

Kenneth A. VecchionePresident and Chief Executive Officer

Good morning.

Timur BrazilerWells Fargo — Analyst

Maybe for Dale first. You had indicated that you’re starting to see some of the utilization come back. Is that in the technology book as well or are those utilization rates still increasing?

Dale M. GibbonsVice Chairman, Chief Financial Officer

All those — our utilization rates are fairly stable from where we are right now on both sides, both on the Tech & Innovation as well as in the corporate finance area.

Timur BrazilerWells Fargo — Analyst

Okay. And then of the 14% of the tech loans, which have six months or less of liquidity, have any of those been funded up in the last couple of weeks or was your commentary in the prepared remarks for other relationships?

Kenneth A. VecchionePresident and Chief Executive Officer

No. What’s there now has not been funded up. We had a couple of sponsors put money into a couple of projects right before the end of the quarter, which was helpful to us. But overall, that number has been relatively steady in Bridge’s history.

But we are encouraged by what we’re seeing away from us with sponsors completing their rounds. We actually had credit that wasn’t in any trouble in our life science yesterday that got a substantial amount of sponsor financing. So we’re not seeing the sponsor financing run away from us or run away from the industry.

Timur BrazilerWells Fargo — Analyst

Okay. And then just one more on the loan modification. It looks like, at least through quarter end, the majority of it was within your Arizona and Nevada portfolios. I guess what’s driving that? Is that forbearance on residential loans or why such a high number out of those two geographies?

Tim R. BrucknerChief Credit Officer

It’s really the pace and cadence of those customer discussions. Those discussions drive it. The discussion results in an assessment of liquidity, liquidity necessary to bridge the trough. In some cases, that liquidity already exists. The solution, which may include some form of modification, is tailored to the liquidity goal. So it’s really just the pace and cadence of those discussions.

Timur BrazilerWells Fargo — Analyst

Okay. And then last question from me for you, Ken. With your commentary that you’re a little more pessimistic now than you were in mid- to late-March, I’m just wondering how that correlates with using the baseline Moody’s assumption for allowance. So we see another tick higher for adjustment on the existing portfolio? Or at this time, are you still comfortable with the $30 million that was provided for the existing book in detail?

Kenneth A. VecchionePresident and Chief Executive Officer

So, I’m comfortable with the provision that we provide at quarter end based on everything we knew at that time, right? I’m sorry, I just had a senior moment. Second part of your question was…?

Dale M. GibbonsVice Chairman, Chief Financial Officer

Do you want to add more to it?

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. Do you want to take that or…

Dale M. GibbonsVice Chairman, Chief Financial Officer

Well, so obviously this seems to change almost by the hour in terms of what the expectations are. And since then, we’ve had some worse news, we’ve had north of 20 million people file for unemployment. We maybe got teased with some good news with — last night with a treatment that looks like it’s going to be — proved to be efficacious for this.

In the next 75 days, my guess is, there’s going to be a lot more news. And so, we’re going to reassess this at the end of June in terms of what that looks like. If we can get things back and some track upward again in terms of the economic outlook, I could see things getting better. If that’s not the case, if we’re still doing kind of in this lockdown phase, I don’t think that’s — we’re probably looking at additional provision in the second quarter. Can’t really say right now.

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. Just — I’m sorry, recaptured my thought, I froze there for a moment thinking. But I think what’s going to be surprising to folks is that the pace of charge-offs are going to be — or the cycle is going to be pushed out and elongated because of the PPP program and because of the Main Street lending facility. And I think people, I think investors will be surprised that there aren’t heavy charge-offs coming early on. Maybe on some of the smaller businesses, you would expect to see them. But on some of the larger credits, I don’t see charge-offs coming to the back part of the year if they come at that time, right? And so, now, added to Dale’s comments, depending on how quickly the country opens up and the speed and the pace, we’ll then determine what we need to do as we look forward at the end of Q2.

Timur BrazilerWells Fargo — Analyst

Good commentary. Thank you.

Operator

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

Jon ArfstromRBC Capital Markets — Analyst

Hey. Thanks. Good morning, guys.

Kenneth A. VecchionePresident and Chief Executive Officer

Good morning.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Good morning.

Jon ArfstromRBC Capital Markets — Analyst

Thanks for that comment, Ken. I was just going to ask about that, but maybe we’ll go at it a different way in the provision. So, Dale, the — I think what you’re saying is, things are a little better by late June, early July, that $30 million incremental in the provision would go away for Q2. Is that the right way to think about it?

Dale M. GibbonsVice Chairman, Chief Financial Officer

Well, I wouldn’t necessarily say that that $30 million would be reversed. I mean, if the outlook at the end of June is similar to what it was at the end of the first quarter, I think that there’s no additional amount given for deterioration of credit conditions. So, I think that holds with that $30 million. For that to be released back into income, I think we probably have to get to a farther period down the road and say, you know what, we actually are well on our way toward reducing our unemployment rate. We’re bringing people back in. And so, the outlook is better than kind of what is the base case for Moody’s at the end of the first quarter. And we have — that has an extended return. I mean, that’s — some of that really is held down through the end — through 2021. If instead you get back to something that resembles more of, pick your letter, right, a V or a U instead of like a lazy U or an L, I think there’s a possibility that you could release that.

I think what Ken said was, we’re not really expecting to experience charge-offs if and when they come, until after these periods of the PPP program, the Main Street lending program and as well as the rules allowing for certain types of some of these restructurings that can be done in the site of this overall pandemic. That’s going to push out recognition of loss at least, I think, a couple of quarters.

Jon ArfstromRBC Capital Markets — Analyst

Yeah. That all makes sense. I’m not saying reversal, I’m just saying it doesn’t show up again in Q2. I guess, the other question is on margin. It appears like you’re set up reasonably well from a margin perspective. I appreciate all the disclosure, but give us an idea of some of the near-term, longer-term puts and takes, how you’re thinking about the margin.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Yeah. So, we have a lot of clients that are at their floors, we talked about that. I would say, competitively at this point in time, spreads have widened out as rates came down and as uncertainty rose. If that settles in, you could see that maybe some of the spreads would actually come down over time, which could put pressure on earning asset yields on a more longer-term basis.

I think that assumes that things are getting better economically. Well, if things are getting better economically, maybe the Fed has been inclined to look at where we are in the zero band and start putting that back up. So, you could be in a scenario that you actually don’t see rates coming down in terms of loans generally because at the same time spreads are declining, maybe overall base rates start to rise because people are comfortable in terms of kind of the recovery of the economy. So — but those are two dynamics that I really don’t know how to gauge.

But we’re at the zero bound here. I don’t see — obviously I don’t think things are going to get lower. The Fed has come out and said that they’re against negative rates. I think that would certainly be a mistake to go there. So, I mean, you maybe have this kind of overall lighter compression over time. But as of right now, that’s certainly not the case. As Ken indicated on the residential side in particular, we actually have seen rates rise. And in fact, spreads in residential loans have increased in some cases and really haven’t participated in terms of the rate cuts that have taken place.

Jon ArfstromRBC Capital Markets — Analyst

Okay. Good. And then, Ken, maybe one more for you. You talked earlier about $1.5 billion in organic loan growth. Maybe a third of it was credit drawdowns is, I think, what you said. Can you talk a little bit about the quality of that growth, how you think about that? Is — it seems like it’s still a big number for a lot of uncertainty in the economy. So maybe just bigger picture, broader, talk about the quality of the growth and maybe some of the drivers of that.

Kenneth A. VecchionePresident and Chief Executive Officer

Yeah. So, the loan growth was $2 billion. The credit drawdowns brought it down to what would have been $1.5 billion. That was our estimate somewhere early into the quarter when we started to see some opportunities build. Now, where that growth came from? Capital call lines, industry has never had a loss; came from warehouse lending, we’ve had that business 11-plus years, we’ve never had a loss. It came in resource financing. Not only have we never had a loss, but the team that’s been running that business for 35 years has never had a loss.

So, you don’t — if you can forget about the pandemic for a second and go back to our approach in 2019, we started talking about derisking the balance sheet. CLD was coming down, which it has, and we were up — you saw the uptake in our residential book of business and our warehouse lending and our capital call lines and resort financing. So, those businesses are zero or very low-risk loss businesses. And I would expect the volume for Q2 to match what we did in Q1 on an organic basis, but I would expect the growth to come in those business segments that I just mentioned.

Jon ArfstromRBC Capital Markets — Analyst

All right. Thanks a lot.

Kenneth A. VecchionePresident and Chief Executive Officer

Thank you. Appreciate it.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Appreciate it.

Operator

The next question today comes from Tyler Stafford of Stephens. Please go ahead.

Tyler StaffordStephens, Inc. — Analyst

Hey. Good morning, guys. Maybe just to start on that last question there or last comment, can you just talk about the balance sheet growth expectations this year? Obviously a strong start here in the first quarter. You mentioned some of the drawdowns on the line. But just how should we think about both loan and deposit growth for the remainder of the year relative to that prior kind $600 million to $800 million range? Thanks.

Kenneth A. VecchionePresident and Chief Executive Officer

I’m not going to put a number out there. There are just so many moving factors. I have a little more visibility around Q2. And I think I would plan absent the PPP loan portfolio. I think I would plan on the lower end of that range, $500 million to $600 million on deposits, $500 million to $600 million on loans. And if we surprise to the upside, then great. We put in on the deposit side a number of different programs that we thought — we hope that could be successful and/or maybe take some market share from our peer group.

We’ll see if we can make that happen for the rest of the year. But I think toward the lower end of that range would be the right thing to do. And don’t forget, when we spike in Q2 and have some of that spike hold on to Q3 because of the PPP loans, they’re going to just fall away toward the back half of the year.

Tyler StaffordStephens, Inc. — Analyst

Fair enough. Fully recognize there’s lots of puts and takes there. Thanks. The rest of my questions have been asked and answered.

Operator

The next question today comes from David Chiaverini of Wedbush Securities.Please go ahead.

David ChiaveriniWedbush Securities — Analyst

Hi. Thanks. A follow-up on the hotel book. You mentioned that loan modifications are going through at the end of the year. But hypothetically, if hotels remain empty until a vaccine is developed, which could be 12 to 18 months from now, at what point and under what scenario would you move to foreclose on the hotel properties?

Kenneth A. VecchionePresident and Chief Executive Officer

David, if it came across as the end of the year, I meant the end — I thought I said the end of the quarter or during the second quarter, if that’s what you —

Dale M. GibbonsVice Chairman, Chief Financial Officer

So yeah, what we’re looking for is we’re looking for solutions that combine capital contribution from the borrower with our ability to give them a deferral or some relief in the modification that takes us beyond three months, beyond six months, which we see a lot of the other competitors doing. It seems like they’re just handing out kind of three-month deferrals and say, well, let’s address this again in June or July. We’re not doing that. We’re trying to bridge to a longer time line.

In terms of what does this look like. So I mean these borrowers, they have obligations. We’re going to be able to give them some relief on this type of thing, but — and a lot of them have considerable resources to draw upon. So is there a situation whereby some of them become very stressed and we see migration down to special mention down to substandard? I think that’s certainly the case. What’s it going to take for us to foreclose on one of these?

Well, we have a value. We have shareholders that we need to respond to and we’re going to be accountable to that, and we’re going to be responding to that. That’s why we think the loan-to-value is so important here because if somebody isn’t — if somebody doesn’t want to be able to continue here or has to throw in the keys, then it’s like, OK, well, as long as hotels overall haven’t fallen more than 40% of original value, we probably have very nominal risk of loss because of where we are in the strong LTV.

David ChiaveriniWedbush Securities — Analyst

That’s helpful. Thanks for that. And then shifting gears, you mentioned about how the Main Street Lending Program should benefit some of your larger customers. I was wondering, will you be able to swap out your existing loans for the new loan under the facility and essentially transfer the risk to the government?

Dale M. GibbonsVice Chairman, Chief Financial Officer

No. No, the program doesn’t allow for that in terms of — when you issue a Main Street Lending Program, it has to be a new disbursement. It can’t pay off something that’s already outstanding.

David ChiaveriniWedbush Securities — Analyst

Okay. And do you believe the program is big enough to make a difference? Because looking at the SBA PPP program that those funds were exhausted fairly quickly.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Well, I mean they were exhausted fairly quickly. And I guess it remains to be seen whether they’re going to reauthorize that for another $250 million. I’m not sure that the process for the Main Street Lending Program is going to be as complicated a pathway as it is for the Federal Reserve. You don’t have to have two different parties from different — opposite ends of this political spectrum to be able to unite on something and agree. You have to get the FOMC, the Board of Governors of the Federal Reserve System to agree on this.

So I don’t know. I mean I think it remains to be seen what the demand is. They put it out there at $600 million. It seems like that’s got some room to go. It obviously goes to much larger enterprises. $2.5 billion of revenue, 10,000 employees. So we’ll see about kind of what that looks like. But I haven’t heard anything about that, but I think they want to get it going and maybe see what the demand is before they go on from there.

But again, we expect to be early. We were early with PPP. We got $1.5 billion. If you look at the proportion of what we did in PPP relative to our size to the overall banking community in the country, we had a much higher penetration than most institutions.

David ChiaveriniWedbush Securities — Analyst

And then the last one for me is. In the slide deck, it was mentioned about 82% of the variable rate loans with floors are at those floors. Can you remind us, what’s the average life or average stated maturity of those loans?

Dale M. GibbonsVice Chairman, Chief Financial Officer

Well, the average stated maturity of our loan book is just under four years, and it’s going to track pretty closely with that.

David ChiaveriniWedbush Securities — Analyst

Thanks very much.

Operator

The next question today comes from Gary Tenner of D.A. Davidson. Please go ahead.

Gary TennerD.A. Davidson — Analyst

Hey. Thanks, guys. Good morning. I just wanted to ask a couple of question on the PPP. Dale, I think you had mentioned that as those get funded, they’ll be on the balance sheet for up to six months. I thought the time line for when the bank or borrower could, I guess, apply to have the loan forgive was about seven weeks. Is that — is there something different than [Speech Overlap] — am I understanding that —

Dale M. GibbonsVice Chairman, Chief Financial Officer

Well, let me clarify a little bit. So you obtain a PPP loan and the portion of that, that is forgivable, i.e. that’s used to cover employee compensation, certain elements of rent and other — the basic expenses, that’s the part that can be forgiven by the SBA. And so that is going to be a shorter time line. The actual PPP loans themselves are two years. So what we see is we see what was the usage — somebody gets a loan for X amount. What is the usage of that?

About two-thirds of the amount used for these loans has been for something that should be ultimately forgivable because those funds are going to be used to support those particular items that are identified in the legislation. The back third is something that isn’t forgivable. And so that’s going to be more of a term structure for two years.

Gary TennerD.A. Davidson — Analyst

Okay. Thanks. And the fees on that, you’ll be accounting for them through spread income or is that — will that through other [Phonetic]?

Dale M. GibbonsVice Chairman, Chief Financial Officer

It will go through spread income. And it will be front-end loaded because of the kind of the odd nature of how these loans are going to amortize with a payment forgiveness and then the borrower responsible for the rest.

Gary TennerD.A. Davidson — Analyst

Right. So it would artificially inflate the margin, say, in the second quarter. And then a lesser impact is to get paid off beyond that?

Dale M. GibbonsVice Chairman, Chief Financial Officer

Yes. Second and third.

Gary TennerD.A. Davidson — Analyst

Yeah. And then just a follow-up in terms of the paydowns. I think, Ken, you mentioned some paydowns from those — of the loans that were drawn in March, you’ve seen some of the repayments. So can you maybe quantify what you’ve seen in terms of the repayments on some of those lines?

Dale M. GibbonsVice Chairman, Chief Financial Officer

It’s been modest. What I meant to say is we’re not seeing additional draws of any significance, and there’s been some modest payments. It seems to have been stabilized. And that echoes what I’m hearing from these other institutions. I think BofA made a particular comment about this. But if you look at where these corporate finance loans, who the syndicator is, it’s JPMorgan, it’s BofA, it’s Wells Fargo, it’s the larger institutions. And I think what we’re seeing really mirrors what they’re talking about.

Gary TennerD.A. Davidson — Analyst

Thanks, Dale.

Operator

The next question comes from Michael Young of SunTrust Robinson Humphrey. Please go ahead.

Michael YoungSunTrust Robinson Humphrey — Analyst

Hey. Thanks for taking the question. Maybe just a follow-up, Ken, on your comments about net charge-offs and when they’d be realized. I guess maybe in particular, could you just talk about high level where you think those will come from at this point? It sounds like maybe you don’t expect as much from hotel given the collateral base there, but would it be more tech and life sciences businesses with less collateral base or some of the C&I categories, in particular, shared national credits or anything like that, that maybe we’re not seeing or focusing on right now?

Kenneth A. VecchionePresident and Chief Executive Officer

So I think I took a little bit of a step out there saying, I just think charge-offs will be a little bit later. My crystal ball isn’t as clear to say which group is it — are going to have the charge-offs. And I don’t feel comfortable really putting that out there at this time. I just don’t — if things are changing so quickly that I would clearly be wrong. And I’d just rather hold back my intuitive feel on that. But I do feel generally that charge-offs will come later in the year and not as early as people think.

Michael YoungSunTrust Robinson Humphrey — Analyst

Okay. And then maybe, Dale, just on the shared national credit book. I think that was the strategy that you guys had had in the past on a small basis. Maybe it’d gotten up to about $1 billion, maybe outstanding at one point. Can you just tell us the balance at this point? And anything that we should be looking at there in terms of mitigating factors?

Dale M. GibbonsVice Chairman, Chief Financial Officer

Yes. I mean we’re probably at about $1.4 billion. I mean most of the draws that have come down have come down in SNCs. And as we’ve talked about in the past, this is a low investment-grade portfolio. The syndicators are, as I just mentioned, the large banking companies that we participated in. We’ve — at times, we’ve tried to do so, so that we can augment our ability to push for deposits from some of these enterprises that are in our markets. And so, we’ve taken a little piece of them.

Michael YoungSunTrust Robinson Humphrey — Analyst

Okay. And then, maybe just last one for me. Just on the expenses, obviously a pretty decent step-down this quarter related to, I assume, lower comp expectations. But is that kind of a new run rate that we should kind of base growth off of from here or any other factors that maybe shifted meaningfully with everyone working from home, etc?

Dale M. GibbonsVice Chairman, Chief Financial Officer

No. I think we’re on a lower trajectory from where we were with the step-down. We’re continuing to do the necessary investments that we have in technology to make sure our platform continues to support what we’re doing today, which is basically executing on our — in our business resumption continuity programs.

Michael YoungSunTrust Robinson Humphrey — Analyst

Okay. That’s all for me. Thanks.

Dale M. GibbonsVice Chairman, Chief Financial Officer

Ken?

Kenneth A. VecchionePresident and Chief Executive Officer

Well, it looks like we’ve exhausted all the questions. So we ran longer. We thank you for spending time with us. We look forward to talking to you again, and we wish you a good weekend, health and safety out there for everyone. And we’ll be in touch. Thank you all.

Operator

[Operator Closing Remarks]

Duration: 80 minutes

Call participants:

Kenneth A. VecchionePresident and Chief Executive Officer

Dale M. GibbonsVice Chairman, Chief Financial Officer

Tim R. BrucknerChief Credit Officer

Casey HaireJefferies — Analyst

Arren CyganovichCiti — Analyst

Brock VandervlietUBS — Analyst

Brad MilsapsPiper Sandler — Analyst

Chris McGrattyKBW — Analyst

Timur BrazilerWells Fargo — Analyst

Jon ArfstromRBC Capital Markets — Analyst

Tyler StaffordStephens, Inc. — Analyst

David ChiaveriniWedbush Securities — Analyst

Gary TennerD.A. Davidson — Analyst

Michael YoungSunTrust Robinson Humphrey — Analyst

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