OceanFirst Financial Corp (OCFC) Q1 2020 Earnings Call Transcript - The Motley Fool

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OceanFirst Financial Corp (NASDAQ:OCFC)
Q1 2020 Earnings Call
Apr 24, 2020, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the OceanFirst Financial Corp. Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Jill Hewitt, Investor Relations Officer. Please go ahead.

Jill A. Hewitt -- Senior Vice President, Director of Investor Relations & Corporate Communications

Good morning and thank you all for joining us this morning. I'm Jill Hewitt, Senior Vice President and Investor Relations Officer at OceanFirst Financial Corp. We will begin today's call with our forward-looking statements disclosure. Please remember that many of our remarks today contain forward-looking statements based on current expectations. Please refer to our press release and supplemental presentation for our forward-looking statement disclaimer. Our investor presentation and other filings with the Securities and Exchange Commission contain risk factors that could cause actual results to differ materially from these forward-looking statements.

Thank you. And now, I will turn the call over to our host, Chairman and Chief Executive Officer, Christopher Maher.

Christopher D. Maher -- President and Chief Executive Officer

Thank you, Jill and good morning to all who have been able to join our first quarter 2020 earnings conference call today. This morning, I'm joined by our Chief Operating Officer, Joe Lebel; Chief Risk Officer, Grace Vallacchi and Chief Financial Officer, Mike Fitzpatrick. As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. This morning, we have a number of topics to cover that relate to the quarter. Our recent acquisitions and of course updates regarding the impact of the pandemic on our business. After that, we look forward to taking your questions.

In terms of financial results for the first quarter, GAAP diluted earnings per share were $0.27. Quarterly reported earnings were impacted by a number of unusual items that totaled $10.4 million net of income tax. These items related primarily to the adoption of the CECL loan loss standard and the dual acquisitions completed on January 1. As a result, we paid [Phonetic] core earnings of $0.45 a share. Looking past some of the unusual items for the quarter, underlying financial performance was strong as demonstrated by expanding margins, an increase in non-interest income and well-controlled operating expenses. The earnings strength of the franchise is critically important as we move into an environment of substantial economic uncertainty.

Regarding capital management for the quarter, the Board declared a quarterly cash dividend of $0.17, the company's 93rd consecutive quarterly cash dividend. $0.17 dividend represents a conservative 38% payout of core earnings. As you will recall, we maintained a relatively low payout ratio over the past few years to prepare our balance sheet for a shift in the credit cycle. This allows us to maintain the common dividend while continuing to provide a degree of capital flexibility. There are no plans to reduce or eliminate our common dividend at the present time.

Capital levels remain strong with the tangible capital assets to total assets of 8.9%. At the current earnings rate, we expect to build capital levels for the duration of 2020. Early in the year, the company was able to repurchase 648,851 shares of common stock, but suspended repurchases on February 28 as the global impact of the pandemic became apparent. Share repurchases are possible in the future, but we will preserve capital until the full impact of the pandemic is well understood. The company has slightly more than 2 million shares remaining in the current share repurchase program.

Just a quick note regarding tangible book value per share, which now reflects the impact of the Two River and Country Bank acquisitions. Tangible book value per share decreased by about 3% primarily driven by the consideration paid for the dual acquisitions completed in January. The book value dilution is slightly more favorable than the estimate provided when these transactions were announced in August of last year and should accelerate the tangible book value per share earn back period.

Turning to the income statement. The first quarter demonstrated strong performance in net interest income, healthy fee income driven by swaps and well managed expenses. Included in the core operating expense number is $1 million of expenses related to the pandemic. These pandemic related expenses should moderate in future quarters. Even without fully realizing the efficiencies from the twin acquisitions, the core efficiency ratio remained close to 55%. Joe will provide more detail regarding funding costs, but the stabilization of net interest margins also bodes well for future quarters.

Later in the call, Grace will walk you through credit provisioning and the impact of CECL and the pandemic. Our decision to implement CECL require some additional discussion. As you may recall, I've been vocal regarding the pitfalls related to the two CECL and strongly advocated that the new standard be set aside given the unprecedented economic shock the world is facing. Unfortunately, the policy action taken regarding CECL has made things even worse. By offering an optional deferment, we have created a few new issues. First, bank's differing CECL may be considered to have more precarious balance sheets.

Second, securities guidelines require the disclosure of impacts related to upcoming accounting changes. The banks electing to defer CECL have some responsibility to share the CECL estimates anyway. And finally, the idea that the deferral would require a future restatement of prior period financials is the icing on the CECL cake. We have a high quality loan portfolio and a strong capital position and determined that it would be best to just move forward as planned. I guess every crisis experiences an accounting issue in 2008 with the application of mark-to-market and for the pandemic, it will be CECL.

Asset quality is especially important as we move into unfamiliar economic environments. As discussed on previous calls, we've been pruning the balance sheet of higher risk loans for quite some time and we continue to sell higher risk loans in the first quarter. First quarter loan sales were responsible for 82% of our net charge-offs for the quarter. Helping drive down the level of non-performing assets to just $16.6 million or a mere 16 basis points of non-performing assets to total assets. In fact, other real estate owned amounted to less than $500,000 at quarter end. Given economic conditions, we expect these figures to grow in the upcoming quarters. But our balance sheet provides the critical room to work with our clients during a challenging time.

Regarding the pandemic, we provided several supplemental slides to our quarterly earnings release. These slides include important details regarding forbearance programs and our efforts to serve as a conduit for the SBA's PPP program. I won't repeat the discussion from our March 24 pandemic Investor Call. However, I will assure you that the bank was early to respond to the pandemic. We continue to address operating conditions in a wide variety of ways. We remain open for business, are assisting customers and are prepared to operate in a socially distanced world for a extended period of time.

Our operating discipline and strong digital solutions allowed OceanFirst to address forbearance and crisis response quickly and effectively. By applying our forbearance experience in Hurricane Sandy, we have been working with clients to address forbearance requests since March 16. Over the past several weeks, we have had thousands of conversations with businesses and consumers that have resulted in request to defer payments on $1.1 billion worth of loans. Our deferral experience indicates that forbearance loans performed quite well when their pre-crisis credit risk attributes are conservative. Grace will talk you through our supplement slides which demonstrate the quality of the loans requesting temporary forbearance.

Joe will discuss lending activities including our participation in the SBA PPP program. However, I want to quickly highlight the importance of having dedicated substantial resources over the past several years to build out our digital banking platform. To put our efforts in perspective, OceanFirst was not an active SBA lender when the CARES Act was signed on March 27, less than one month ago. I'll say that again, OceanFirst did not have an SBA department nor had we originated an SBA loan. Our SBA portfolio related exclusively to loans acquired through the purchase of other banks.

In recognizing the critical importance of this program for our clients, we responded quickly by simultaneously building a digital application interface while working with the SBA to activate the SBA license we acquired on January 1, as a result of the Two River acquisition. By April 3, we were channeling hundreds of Digital PPP applications from our clients into our nCino commercial loan system for processing. Our first successful submissions to the SBA generated SBA approvals on Sunday, April 5. The week of April 6 was dedicated to developing a custom built electronic closing package that would comply with somewhat fluid SBA guidance.

On April 14, we began closing these loans electronically becoming among the first banks in our market to disburse funds. Through today, we have secured SBA approval for 1,568 loans, totaling $350 million, which will fund over 36,000 jobs in our communities. Delivering for our clients was possible because of our extraordinary commercial lending team. Of course, they were supported by amazing information technology professionals who had the tools, skills and experience to respond promptly.

Before I turn the call over to Joe and Grace, I want to acknowledge the recent decrease in our share price. We know the entire banking industry has been impacted, but every OceanFirst employee is also a shareholder. We share a common goal to create shareholder value and know that the decisions we make in times of crisis are especially important. Our efforts in the upcoming quarters will focus on helping our customers through an incredibly challenging time. Assisting our customers in their recovery will protect and preserve the assets of the bank and build the bank's reputation in our communities. A combination of the strong balance sheet and stellar community reputation represent the path to building shareholder value over time.

At this point, I'll turn the discussion over to Joe to provide more details regarding operating conditions and some additional color regarding many of the initiatives I've outlined.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Thanks, Chris. Loan originations of $426 million drove loan growth of $158 million for the quarter. Year-over-year originations were up 63%. Commercial lending closings were strong at $267 million with quarterly commercial growth of $165 million. New York and Philadelphia continue to progress as they closed $170 million in the quarter. I'll note that the quarter had very little loan originations from Country and Two River as expected after an acquisition but closings have occurred in April and their pipelines are building.

Our swap fee income had a strong quarter with over $4 million in revenue and while, we expect revenue to be bumpy due to volume and economic conditions, we anticipate a solid year in swaps to offset reductions in other fee business. Our residential real estate continued its solid performance with $149 million in closings. The total pipeline at $525 million at quarter end was at an all time high with record commercial and residential activity. We anticipate a solid second quarter in loan activity and while there could be some fallout due to the uncertain economic environment, we remain confident in our underwriting risk appetite.

While Grace will provide much more detail on credit metrics in her comments to follow, I'll note that we are reunderwriting every commercial pipeline transaction as we approach closing. To be sure, the underlying business is healthy and cash flows are intact. In the residential business, we have also gone back a second time and reverified income and job status prior to closing. We've also increased minimum down payments for purchases and eliminated cash out refinances for vacation homes and investment properties. While, also reducing loan to value limits on equity lines and loans.

Moving to the net interest margin. We saw a core net interest margin improvement of 1 basis point and a reported net interest margin expansion of 4 basis points. The reported figure includes purchase accounting accretion and modest prepayment fees. The additions of Country Bank and Two River Community Bank loan portfolios help to keep margins stable despite the effect of prior rate cut -- Fed cuts in lower weighted average originations. Our cost of deposits increased 6 basis points to 70 basis points due to deposit costs from the acquired Country Bank and Two River Community Bank.

OceanFirst legacy saw a reduced weighted average cost of deposits of 2 basis points in the quarter to 60 basis points while the weighted average cost of deposits at Two River was 87 basis points and the Country Bank deposits 146 basis points. We expect the cost of deposits in all portfolios to decrease in the second quarter due to continued repricing. Expenses were well managed and as Chris noted included approximately $1 million in COVID-19 related expenditures most of which represents pandemic bonuses paid to branch staff and back office personnel.

We remain confident in our quarterly expense run rate but cautious given the economic outlook. We expect to spend as necessary in digital acquisition, cyber security and other important initiatives, including in the safety and protection of employees, customers and visitors to our facilities. While we will be vigilant with our management of expenses. Now it's not the time to save a few dollars at the expense of the health and safety of our staff, our customers and our community.

Merger integration for Two River Community Bank remains on track with a mid-May systems conversion and branch consolidation as scheduled. As previously noted, we will be closing five legacy OceanFirst branches the same weekend. I will note that the majority of the closure expenses related to the branch consolidation are in the first quarter expense number, closings will occur in Q2 and we will see the financial efficiencies beginning in Q4.

In regard to Country Bank, we've elected to delay their systems integration date and we will not make a decision on a revised date until mid-year. Since there are no branch consolidations involved to Country, the run rate and upcoming cost savings were not as significant. In regard to daily branch operations, you may recall, we were one of the first banks to close branches and limit activity to drive through teller transactions only. As we now begin to focus on the return to work in a new normal environment, we expect to begin by focusing on the return of full-service banking utilizing a hub-and-spoke methodology.

Full service would be available to certain geographically specific hub branches with surrounding spoke branches limited in hours or closed inside traffic while remaining open at the drive-throughs. We are exploring abbreviated schedules as well, easing both customers and employees back into a safe environment over time. We will employ safety protocols, which will include the use of personal protection equipment. Chris provided some overview comments on the Paycheck Protection Program commonly referred to as PPP.

Let me provide you a few more details to-date. We've electronically distributed over 3,000 applications for assistance receiving back more than 2,500 and we're able to secure SBA approval for almost 1,600 prior to the first round of funding being exhausted. These approved loans represent $349 million in loans to businesses employing over 36,000 workers. We remain driven to approve the remaining request in our queue when the SBA program is reloaded with the goal of supporting loans approaching $500 million and over 53,000 jobs between the loans we've done so far and the request we have in-house. And just a note on funding of the short-term loans, if needed, we will utilize borrowings from the Federal Reserve allocated to PPP pledged loans at a cost of 35 basis points, which will help to offset any funding costs for liquidity needs and has the added benefit of capital protection.

With that, I'll turn the call over to Grace.

Grace M. Vallacchi -- Chief Risk Officer

Thank you, Joe. As Chris mentioned, I'll discuss CECL adoption and the components of the increase in our allowance for credit losses as well as provide an update on our customers seeking debt relief. I would like to preface these remarks however with some contextual comments regarding our preparedness for the current environment. OceanFirst has long had a conservative credit culture and strong earnings stream. This is borne out by the stress test results we shared during our Investor Call last month. You may recall that this stress test included a severely adverse scenario, but approximated the severe adverse case in the most recent CCAR guidelines.

Our model indicates an ability to absorb over $300 million of credit costs over a nine-quarter period while maintaining our profitability, our ability to pay dividends and our capital ratios well above both bank policy and regulatory minimums. We certainly hope that the level of fiscal intervention will result in a far less onerous environment, but we believe the balance sheet is prepared for a shock. These results are not an accident. Over the past several years, management has focused on building a fortress balance sheet in anticipation of the next credit cycle. These actions included maintaining our credit underwriting discipline despite increasingly liberal market terms and a focus on credit risk management practices, that ensured safe and sound growth.

Evidence of our efforts is the widely diversified credit portfolio as well as our risk selection. We have not participated in the leveraged loan market, energy sector credits, credit card finance, automobile loans or equipment finance, even land loans are negligible totaling just $19 million which is one quarter of 1% of total loans. While we could now predict what would trigger the next credit stress events, this management team has been through several credit cycles over the course of our careers and these experiences have taught us that preparation is the best defense for times like this. With that context, I'll turn to the primary components of the increase in our allowance for credit losses. The components I'll discuss are outlined in more detail on the slides that accompanied last night's earnings release.

In summary, our transition from the incurred loss methodology to CECL resulted in an aggregate $15.6 million or 92% increase to loan reserves between December 31 and March 31. Now to break this change into components. Our December 31, 2019 ending allowance balance was $16.9 million. We added the day one CECL mark of $4.2 million, Two River and Country acquisition CECL marks of $5.4 million, funded net charge-offs of $1.1 million and then added to the CECL reserve to address the expected economic deterioration related to COVID-19. The COVID addition was driven by $7.2 million of qualitative factor adjustments.

During the first quarter, our loan growth was centered in portfolios with historically very low loss rates. This combined with further declines in loss rates in almost all of our loan portfolios would have resulted in a net contraction of $1.2 million in legacy OceanFirst reserve requirements despite net loan growth. These figures reflect the current risk rating distribution of our portfolio. CECL models are quantitatively driven and historical loss rates and portfolio composition are key drivers of the allowance balance. We have focused our lending activities and lower risk assets and subsequently have benefited from a very low level of credit losses for many years.

These facts drive the allowance math, acknowledging the unprecedented economic challenge ahead and the quantitative reserve limitations, we expanded the total reserve by adding qualitative reserves related to COVID that totaled $7.2 million. This $7.2 million qualitative factor adjustment is intended to set aside reserves to account for the likelihood of risk-rating migration as the impact of the pandemic becomes clearer. This represents our best estimate at this time of expected future credit losses from the pandemic.

It's too soon to know the depth and duration of the economic impact. The nature and breadth of economic stimulus is not yet fully known nor is the mitigating effect these programs will have on the economy and individual borrowers. As the impacts become clearer, we expect the risk ratings on certain loans to deteriorate. This shift may result in increased quantitative reserves, which could be funded by decreases in qualitative reserves over time. This again represents our best estimate at this time of expected future credit losses from the pandemic.

I will add what we learned from our experience during Hurricane Sandy. The forbearance loans performed reasonably well. In that case, our initial Sandy reserve was $1.8 million, yet net charge-offs related to Sandy totaled less than $500,000. Of course the pandemic is a different and much broader event and could be more protracted or severe than Sandy. While very difficult to assess, at least now, our collateral remains intact and undamaged and can return to productive use more quickly than real estate destroyed by a natural disaster.

Active acquirers like OceanFirst also maintain purchase accounting marks related to acquired loan portfolios. Even following the implementation of CECL. While these balance sheet marks exist outside the allowance for credit losses, they represent a different element of credit reserve. As a result of the seven whole bank acquisitions made by OceanFirst, we maintain a net amortized credit mark of $38 million that is in addition to our $32 million allowance. We believe that these two figures should be viewed in concert.

Real estate values are by far the most important indicator of future losses for us. And our low loan to values should partially protect us even in the event of a substantial decline in real estate values. This reality was evident during the great recession, when our peak annual loss rate was just 57 basis points. Our stable earnings stream is currently sufficient to fund the level of future provisions that could be driven by risk rating migrations, additional qualitative factor adjustments and net charge-off activity.

As I mentioned, our low historical loss rates are largely due to our conservative risk selection in both individual loans as well as overall portfolio composition. Again, we have no exposure to the energy, airline or equipment leasing industries. We're not a credit card lender and has not participated in the leveraged loan market. We don't maintain a consumer automobile portfolio. So that's comforting not to have to consider lease residual valuations, even land loans are conservative $19 million or less than 20 basis points of total assets.

Next I want to share some information on those borrowers that are seeking forbearance. To date, our early and active outreach has resulted in $775 million of commercial loan forbearance requests. These credits have a strong pre-pandemic risk profile with just 5% rated special mention or substandard and 93% never delinquent over the past 24 months. A full 96% of this exposure is secured by real estate with a very low weighted average loan to value of just 55% and strong debt service coverage of 1.9 times. In aggregate, these borrowers are well-positioned to weather the current economic conditions.

Our commercial forbearance requests are centered in the accommodation and food services industry and commercial real estate secured by retail properties. No other industry comprises more than 5% of total forbearance requests or more than 5% of total capital. And quarter of our forbearance requests are from borrowers in the accommodation and food services industry. This includes restaurants of $92 million and hotels of $110 million or 1.2 and 1.4 of total loans, respectively. In aggregate, our accommodation and foodservices credits have a weighted average loan to value of 52% and weighted average debt service coverage of 2.6 times. This includes the Irish Pub portfolio at Country Bank of $69 million where our real estate collateral has a weighted average loan to value of just 44%.

The commercial real estate request secured by retail properties totaled $106 million. These credits have a weighted average loan to value of 53% and debt service coverage of 1.8 times. We've also received over 1,100 residential debt relief request totaling $311 million. These credits also have a strong pre-pandemic risk profile. The current weighted average FICO score is 742 on these borrowers and the weighted average LTV is 70%. Furthermore, almost 90% of these loans have never made a late payment over the life of their loan. You can see why this segment of low LTV, and high FICO loans with exceptional payment history is not cause for undue concern.

Returning to our credit risk profile more broadly, I'd like to point out that our allowance for credit losses now exceed non-performing loans by a measure of 1.8 times. When compared to 2008, our starting point for this crisis includes a more diverse loan portfolio, stronger profitability, a lower dividend payout ratio and approximately 250 basis points higher capital levels. In short, we believe we believe, we are prepared for the storm.

I'll now turn it back over to Chris. Thanks, Grace. At this point, Mike, Joe, Grace and I would be pleased to take some questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning and I hope everyone is well.

Christopher D. Maher -- President and Chief Executive Officer

Thanks, Frank. You too.

Frank Schiraldi -- Piper Sandler -- Analyst

Just on the reserves. Even if you adjust for the marks on the purchase book and the reserve to loan ratio still I'd argue well below where some of your community bank peers have built their reserves. I know Grace spoke to the confidence in the portfolio and the low expected loss, but I wonder if partially, it also reflects maybe a difference in opinion on how provisioning is likely to play out. It seems like a lot of the calls, I've been on -- management teams are talking about a very front loaded provision where I've gotten the sense in the past, Chris, that you look at the potential for CECL provisioning is being a bit more stable through the year maybe as later in the year, some quantitative factors maybe take over for the qualitative factors currently. So I wondered, if you could just speak to that. Thanks.

Christopher D. Maher -- President and Chief Executive Officer

Thank you, Frank. It's a difficult time for all of us -- any -- us and our peers to estimate what the impact of this pandemic might be. Look, if we thought that we could put aside more reserves in response, we do that -- we would have done that and are very cautious not to send the message that, hey, we've taken some giant reserve that don't worry about it for the rest of the crisis. I don't think any of us know exactly what the duration or the depth of the crisis would be. I think the important point that I would stress is that taking a really healthy provision, the largest we've taken ever of almost $10 million for the quarter, we still maintain an ROA, core ROA over 1%, so we can continue to fund provisions as needed. It's very hard to tell what we will need. So if -- we do look at this as the data comes in, we're going to be data-driven.

So I won't say that while the aggregate number of forbearances is something that gives you pause, as we've had conversation with our borrowers, I think they've been very productive discussions about how their businesses will fare and we went into this and I think, like many banks, our clients got through 2008. They have very low levels of leverage. They put cash aside. In many cases, they request for forbearance is a precaution. It's not that they don't have any cash to pay us, it's -- they're trying to preserve their liquidity because they know they've got to restart their businesses in hopefully 90 days or somewhere in that timeframe. So I think, Frank, you characterized it reasonably well. I would expect elevated provisions during the course of the pandemic, but I don't think, there are anything that should overly concern us given our -- our earnings stream and our starting position.

I'd also point out that our composition of loans is different than many peers and we really have avoided -- we have avoided, a lot of asset classes that carry higher provisions, you think about credit cards, they typically run 800 basis points. So if you have any of those on your balance sheet that's going to drive a more significant reserve -- almost everything we have is real estate secured and the LTVs are quite low. So we could have non-performers, but the actual charge-offs over the course of pandemic may be lower than you think.

Frank Schiraldi -- Piper Sandler -- Analyst

Thanks, Chris. Appreciate it. And then just follow up, obviously Joe, you spoke to the strong pipeline, can you maybe just talk a little bit more about growing the loan book in this environment. And maybe if the focus has changed at all and how you get comfortable with things like collateral values here. Thanks.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Yeah. Good morning, Frank. Yeah, I think, I tried to refer to some of that in my comments in the sense that we're trying to -- we're looking at every one of these a little differently. As you would expect, we're making sure that the underlying criteria is still meet, what was our credit standard and what may be even a little tighter credit standard at the moment. And I think from the loan growth perspective, we're focusing on the big, strong CRE types of credits as you may see, we've recently financed -- approved two financings for Amazon warehouses. We're in the process of doing some -- some other credit tenants such as Walgreens, CVS, the kind of stuff where you're not going to make a killing in spread, but what you know is that you're going to put assets on -- at the right leverage position with bonafide strong historical cash flows.

And I think as you go forward. I mentioned, I think the second quarter will be fine. Just because of what's in the pipeline. I think, we'll see some fallout. But I do think the second quarter be OK. But I think, it's hard to forecast going forward. Right. I mean it's -- we just don't know how things will occur. It really just depends on -- on how the pandemic plays out and not only consumer, but also our commercial customer confidence.

Frank Schiraldi -- Piper Sandler -- Analyst

I think you might have mentioned loan to values. Has that underwriting standards in terms of the loan to values you're willing to go up too. Has that changed meaningfully?

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

I wouldn't call it meaningfully. I think -- it's -- some banks have come out and said, we are not going to do certain types of lending equity, lending has been a good example. Our equity book -- home equity book has largely been for customers, it's a reactive portfolio, very low LTVs in the mid-50s, typically. We're still doing them. We've cut back on the maximum LTV, but we're not going to say -- we are not going to be there for our client that needs our support but we absolutely are looking at underlying -- underwriting criteria and scaling back a bit. Yes.

Frank Schiraldi -- Piper Sandler -- Analyst

Great. Okay. Thank you.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Thank you.

Operator

Our next question will come from Matthew Breese of Stephens. Please go ahead.

Matthew Breese -- Stephens -- Analyst

Hey. Good morning.

Christopher D. Maher -- President and Chief Executive Officer

Good morning, Matt.

Matthew Breese -- Stephens -- Analyst

I was hoping, you could maybe walk me through the process of actually getting a forbearance, what's the bar for approval and are there any cases where you deny your forbearance?

Christopher D. Maher -- President and Chief Executive Officer

So they're very different processes on the consumer and the commercial side. So when we had this experience during Sandy as well, on the consumer side, you're dealing with lower dollar amounts, and the burden for someone to provide paperwork in the middle of whatever crisis they're going through is pretty rough. You can't take someone who may have, a family tragedy playing out in front of them and say, hey look, we'd like your tax returns. So on the consumer side, our rule is very clear. If you're willing to certify that you have a COVID-19 issue and you need forbearance, you're going to get it and we're going to put you on forbearance, and then as we relook at those loans in 90 days.

We'll have a deeper conversation over the reasons that you might need forbearance and I think that that's appropriate. I think if you consider the kinds of folks that have been impacted. We just don't feel that reunderwriting those is appropriate. However, so that we understand the risk profile of what we're doing, we are capturing information like the FICO score at the point of forbearance is granted, so that we can understand the degree of deterioration that might hit this segment and make sure we're reserving appropriately as time goes on. So we're collecting information but a consumer forbearance request is reasonably automatic.

It's a little different when you shift to commercial and -- we also want to be accommodating. We want to make sure that people who have been impacted by COVID but you also recognize that there is a lot of commercial borrowers who would jump at the chance to go, interest only for a period of time or and that they may or may not have had a significant impact to their business. So in that case, we are asking for minimal but there's some reasonable documentation about what's going on in the business. Again, this is about making sure that our forbearances are thoughtful and are prudent. So let's take the case of commercial real estate. We're asking for new rent rolls. So we understand how much deterioration, there has been in the rent roll and look, we have cases where if you were covering at the 2 times your debt service and now you're covering at 1.5 times your debt service.

We're probably having a conversation saying that a forbearance is not appropriate. But if your rents are down, then you can pay -- a principle but not interest, we may put you on IO and etc. So -- and it's dual purpose as well, first we want to throttle the amount of forbearances we grant. So there is a credit approval required. And the second thing is, this is the kind of data we will need during the course of the year to understand how much credit risk we're facing. So it's an important point to pull that in. The $775 million worth of requests that we noted earlier there is a few hundred million of that we've been able to take action on and forbear on. I would expect, we will get through the rest of it in the coming weeks and make those decisions. But we're just -- as you can appreciate, we're just getting rent renewals for April for many of the commercial real estate tenant. So it's two different analysis and hopefully that helps.

Matthew Breese -- Stephens -- Analyst

Very helpful. I mean, the million dollar question on our end is -- is how many, how fast are these modified or loans with forbearance, how fast are they going to grow and to what extent are they going to transition to non-performers. And any detail you have in terms of on the consumer side, whether or not, if it's a residential loan, homeowners are unemployed or if it's commercial loan and these -- these companies are shut down. Do you have those types of metrics at your fingertips?

Christopher D. Maher -- President and Chief Executive Officer

Yeah, so well look, I can -- we can share some of what or highlight some of what we shared to date, which is if you take a look at the consumer book, the fact that the FICOs are in the 740s is extremely encouraging and the reason for that is FICOs driven -- I think it's a misconception, it's driven just by late payments. It's driven a lot by credit utilization. So you don't wind up with a 740 FICO score, if you're tapped out. Right. If you've got all your credit lines pull down. So these are customers that have liquidity that are probably frightened about what's going on the economic environment, they're trying to preserve cash. They don't understand how long they're going to be out of work. So any piece of help, they can get. So I'm not terribly concerned on the consumer side. Although the duration of time that people out of work is going to play into this.

On the commercial side, it's too early to tell. So we're collecting information. But I think, it would be too early to go out and make broad statements. I will say that when you think about how do to assess the risk, if you go back to our March 24 call, we wanted to make sure we disclose to everyone, our concentrations in sectors where there could be a risk. Now, it's much more important to look at who's requesting forbearance, where they're coming from. And we went out and this is just our position, we proactively called our commercial clients in high risk segments and said, what's going on. Do you need help, talk to us, tell us what's going on. And we wanted to pull those forbearances out quickly. I don't want to wait until someone misses a payment to start a forbearance conversation.

So I think if you look in the slides -- the supplement slides, we showed you the unit trend in request for forbearance and at least for this way, that appears to be moderating for both consumer and commercial. So look, I mean, we don't know how long the pandemic is going to last and how the restart efforts are going to go, but we think, we have the majority of the forbearance request are reflected in the numbers we are sharing with you today and there's not going to be say another $1 billion coming to us in the next 30 days. We think, we've got a good handle on the tempo [Phonetic].

Matthew Breese -- Stephens -- Analyst

Understood. Okay. And then on the provision, I understand it's very hard to predict what's going to happen here, but maybe you can just set the stage in terms of the framework. As we think about the underlying assumptions, if we go from an unemployment forecast and we take it from 5% to 10%, is the next incremental 5%, if we were to go to 15%, is that as painful as the first or is there some -- does it soften as you go higher or is there any sort of where you could frame the -- that for us.

Christopher D. Maher -- President and Chief Executive Officer

I think, there is two key attributes you have to remember in reserving. The first is the probability of default and then the second is the loss given default. So things like the unemployment rate do affect the former, they don't necessarily affect the latter, although they may, it's really hard to tell this, early in. So I don't think it's as sharp, Grace can give you a little more information when I'm done about kind of how we look at the model, but in a portfolio like ours, where the vast majority of loans are real estate secured and you have some presumption to real estate values, staying in the same range and let's say, they're going to stay where they are.

Your actual losses -- the net charge-offs are going to be lower than you might expect. So I think for a balance sheet like ours, it would not be unusual to see an elevation in non-performing loans but like we saw in the credits -- in the last credit cycle in 2008, our peak non-performing loans crested at 300 basis points or so. But our worst year of charge-offs, which is 58 basis points. So I think we may have a bunch of loans that we're dealing with, but the actual risk to capital and earnings in the balance sheet may be lighter than that. Grace, anything you would add to the way we're -- the model works.

Grace M. Vallacchi -- Chief Risk Officer

The only thing that I would add is that what's unusual about this situation is that the model and many CECL models are based on historical correlations between things like unemployment and GDP, going back decades. But given the measures that are being taken by the Federal government for instance the supplemental $600 payment for unemployment, we really don't know how strongly those correlations will hold, we would think that they -- that they will be mitigated somewhat by that. Lot of people are actually making more money on unemployment than they did as an hourly worker. So that all kind of remains to be seen that's the only thing I would add besides what Chris said.

Matthew Breese -- Stephens -- Analyst

Understood. Thank you. And then my last one, in terms of getting loans done, has some of the underlying mechanics, have they improved yet? I mean, local county, clerk's office, notaries, areas where ink signatures are necessary. How much of a hindrance is this to business and are the municipalities catching up and making improvements on their end?

Christopher D. Maher -- President and Chief Executive Officer

It's getting better, so we had a couple of our states, New Jersey and now Pennsylvania going to electronic notary, which is a new thing for them. By and large the counties have been pretty good. So we were initially concerned that title might be a log jam or something like that for real estate transactions. They're a little slower, but they've continued to function. Probably the area where we still see significant concern is around -- anything related to construction, so construction has been shut down or discretionary construction in many of the areas we operate in.

Although there are some carve outs like residential properties, we have fewer than say five contractors involved. The process of appraisals, the process of inspections, the ongoing management of that segment has been -- it's been more problematic, but we're observing, I guess Pennsylvania will restart construction to a certain degree in a couple of weeks and we may see New York and New Jersey go to that as soon as well -- so. So right now, that's what we're seeing, we're seeing it inspection CEOs those municipal inspectors being out on the job.

Matthew Breese -- Stephens -- Analyst

Got it. Okay. That's all I had. Appreciate you taking my questions. Thank you.

Christopher D. Maher -- President and Chief Executive Officer

Thanks, Matt.

Operator

Our next question will come from Christopher Marinac with FIG Partners. Please go ahead.

Christopher Marinac -- FIG Partners -- Analst

Hey, thanks. Good morning, Chris and team. Thank you for all the background both last night and on the call this morning. So back to the reserve level overall. I mean your -- even with CECL, you're reserving for actual loss expectations right, Chris. So at the end of the day, your point of kind of the past experiences with Hurricane Sandy and other disasters only lead to kind of what you expect on losses any new reserve for that today. So it really reflects what you're expecting and until you have a different fact pattern, there is no reason to expect that the reserves should significantly change. Is that fair?

Christopher D. Maher -- President and Chief Executive Officer

Yeah. That's correct. And I would point to the number Grace shared that $7 million worth of the allowance we took is not quantitatively driven, it's qualitatively driven. So we knew that the model was producing a number that we thought was light compared to what, what our expectations were. So that set aside, will cover some migration of loans as they kind of burn down. The other thing is that look there is no reason to believe that Sandy will be exactly like this, they're very different situations. Although in Sandy, we had the destruction of collateral. We had real estate destroyed in some cases completely destroyed.

And our forbearance loans at that point, had a 1.2% charge-off rate on the consumer side and interestingly, we had no commercial charge-offs related to Sandy. So, and we've tried to be a careful and conservative lender. So -- and look, it was not the kind of broad-based issue we're facing now with the pandemic. But there wasn't $2.5 trillion flooding into the economy either nor were there unemployment programs like there are today. So it's a tough time but our quantitative reserves would have been about $7 million lower, we up them with the qualitative reserve because we knew, we need to put some additional funds aside for margin.

Christopher Marinac -- FIG Partners -- Analst

And then two follow-up questions, Can you remind us how the fair value mark will evolve over time, does that kind of go down quickly in the next couple of quarters or will it be slow?

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Okay. Chris, it's Mike. It's accretive back in the income over the life of the loan, but it is based on a level yield that's it. So it's more at the front-ended loan. So even though it's probably in over the last, the next four years. Most of it comes in and then there's kind of a long tail. So that'll creep back in the income over the next several years.

Christopher Marinac -- FIG Partners -- Analst

Great. So we can still use that as a sort of de facto reserve almost as if you -- just like you said in the slides.

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Yeah, I think, you can use it as a pool -- $38 million being accretive back in income and you could use that to be -- to reallocate that into the credit losses if needed.

Christopher Marinac -- FIG Partners -- Analst

Great. And then last question just on the Fed's kind of upcoming Main Street lending facility. Is that something that might apply to your commercial borrowers. Just any early read on that.

Christopher D. Maher -- President and Chief Executive Officer

It's a small number of credits that would be of the size in nature to qualify for a Main Street program. So we may have a few loans that we would add related to that, but it would be for us much smaller event than the PPP program is.

Christopher Marinac -- FIG Partners -- Analst

Got it. Thanks, Chris, and thank you everyone.

Christopher D. Maher -- President and Chief Executive Officer

Thanks, Chris.

Operator

Our next question will come from Russell Gunther with D.A. Davidson. Please go ahead.

Russell Gunther -- D.A. Davidson -- Analyst

Hey. Good morning, guys.

Christopher D. Maher -- President and Chief Executive Officer

Good morning, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

Chris, I know, we really don't have a great crystal ball in terms of how long the current situation is going to persist, but just given sort of your footprint and sensitivity to summer months and if beaches and Boardwalks remain closed, is that type of event captured in a qualitative reserve this quarter or how might that play out within your modeling?

Christopher D. Maher -- President and Chief Executive Officer

I think that's an area, Russell that is highly comparable to what we went through in Sandy, because even though people who come to the beach, lot of the restaurants, hotels were just unavailable for use in the season following Sandy, remember Sandy hit late October and early November, very few businesses were able to completely reopen by the following day or they might have reopened in part. We expect a weak summer season this year just because of social distancing requirements and we think, it may hopefully based on the numbers, maybe the second half of the season be better than the first. And usually, July and August are more important to these summer resort towns, than say May and June. I guess the way I would think about it is, we'll probably limp through the season, it will be OK.

We have the other benefit which we saw after 9/11, which is when people don't want to get on a plane, they want to get in a car and something around 25% of the US population is within a tank of gas of the Jersey Shore resorts. So I think that there'll be some element that will support us this year. And then, I wouldn't be surprised if next year and -- God willing, we have a vaccine and things are a little better shape, next year could be a really roaring year for the shore. So I think a weak year this year, possibly very strong next year and the advantage we have is we don't have to rebuild these places. There were cases where literally the entire building was gone, there was nothing but sand and you needed a lot of help to get something rebuilt and productively deployed, some cases that took two or three seasons.

Russell Gunther -- D.A. Davidson -- Analyst

Understood. Okay. And so I guess, Chris, just to summarize, were that to play out. You believe that that type of scenario is kind of captured in the qualitative adjustments that we spoke on this quarter that weak summer scenario.

Christopher D. Maher -- President and Chief Executive Officer

That's right. I think that -- I'll go back to my earlier comments that reserves and charge-offs relate to the net credit experience not to non-performing loans. And when you have a very conservative real estate values, you may have a bubble of non-performing loans that is not resolved in the same degree of net charge-offs. So we may carry some of these and look the six month forbearance program will get us through this summer. If we've got further issues after that some of these will become TDRs. But we go into this at a pretty good leverage rate most of our clients.

Russell Gunther -- D.A. Davidson -- Analyst

Yeah. No, I appreciate you confirming that and here's hoping for a better result. I've got my heart set on Spring Lake weekend this summer. So we're all polling for the same thing. I wanted to follow up on questions for the loan growth. And Joe, your comments, what are you guys assuming for kind of pull-through rates within commercial and resi, obviously a different situation via historicals. And then is there enough visibility to recommit to a net organic loan growth of $50 million to $100 million or just how do you see that shaking out throughout the remainder of the year.

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

So I'll take it in stages, Russell. I think the -- I think the resi business with the underwriting criteria that we've always had and then just that, as I mentioned earlier, the focus on making sure that the new transactions that are going on are the right transactions and verifying all the income and jobs that as well kind of good stuff. We tend to see a very strong pull through rate typically in the 90s and look the pipelines have been very strong.

Do I think we will have fallout? Sure. Is there some concern, as we talked about, just trying to get stuff through the pipe. Yeah. What we've done though, I think is what we've always done, which is stick to what we do well, in terms of the type of properties we finance, the expectation for down payment. So I think that and look, we haven't seen a significant fall, if anything, we continue to see a lot of volume and our rates today are not at the bottom, a lot of the very large banks are markedly lower than us in rate for other reasons. I don't know why.

But, so that I think is an answer on the resi side. On the -- on the commercial side. I think, it's a little harder to predict although I will tell you that with the addition of Philadelphia and New York to our legacy markets, it's really allowed us and we've seen it quarter-over-quarter. Philadelphia have a good quarter, then New York will have a good quarter, the legacy market have a good quarter.

So I do believe, we're going to still see opportunities. And as I mentioned earlier, our focus on really strong underlying credit CRE or strong operating businesses in our markets that we know. Believe it or not, we're going to get some new business out of the opportunities and some of the things we've done in the PPP program. We've reacted quickly, we've gotten a lot of kudos even from customers or non-customers that we didn't do the PPP, they've heard how quickly we reacted to our own client base.

So I think that we're going to see more fall out there, it's hard to predict a number, but I think that we'll be successful. In terms of committing to a loan growth, I think it's a harder dynamic, right. I think the second quarter, we'll see loan growth barring -- barring us deciding to sell some bells and pools in residential just for liquidity, but I think, it's a harder dynamic to determine whether or not we're going to see that. It's hard to forecast in the third and fourth quarter.

Russell Gunther -- D.A. Davidson -- Analyst

Understood. I appreciate your comments, Joe and then guys, last line of questions for me would be to try to put a finer point around the expense discussion understanding the kind of COVID related costs in there. I wonder if you could comment about just what impact on expenses, whether it's positive, falling to the bottom line, just from certain services being or facilities being closed, any offsets on fees that would be lower. Do those things kind of come out in the wash and then around assumptions for cost savings. I believe last quarter, you spoke about a $50 million quarterly run rate by the end of the year. Any update to that guidance would be helpful as well.

Christopher D. Maher -- President and Chief Executive Officer

I guess, I classify, Russell by saying that expenses will be a -- should be a tailwind for us, not a headwind. We will complete as Joe mentioned the Two River integration in the second quarter that and the reduction of five additional legacy branches that were planned before the pandemic, give us that tailwind going into the second half of the year. We're a little cautious though about setting -- I wouldn't set out any guidance about a specific expense number, but as of right now, I would say, our trends should be favorable. We just want to be cautious and understand as we work through reopening protocols, expenses like PPE equipment and things like that are going to start to pile up. I still think, we've got a tailwind. But we'll give you a better update probably after the second quarter.

Russell Gunther -- D.A. Davidson -- Analyst

Okay, great. Thank you guys. That's it from me.

Operator

Our next question comes from Collyn Gilbert with KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, everyone.

Christopher D. Maher -- President and Chief Executive Officer

Good morning, Collyn.

Collyn Gilbert -- KBW -- Analyst

First, kudos to you guys for pulling off what you did on the PPP program without having any kind of SBA platform in place prior to that. So that's very impressive. One thing I just want to understand and haven't asked my banks yet, but you guys are the first to ask, but what -- how do you see the relationship between those borrowers that are asking for PPP participation. And then could they also be asking for forbearance requests too, or how do you either collaborate on those two or isolate those two situations.

Christopher D. Maher -- President and Chief Executive Officer

Look, one of the reasons, to be really good about the PPP program is it improves the liquidity of your commercial clients. So every dollar we can get out to them to help fund their payrolls is going to strengthen their businesses. And in the long run, that's going to strengthen their ability to work with us. So there is a -- there's a virtuous cycle here, where at the end of the day, keeping our businesses afloat is only good for us, right. And we're also doing it obviously protecting jobs in our community, banks are closely correlated with their communities. If communities fine, you're fine. If it's not, you can't do that much to change it. So we looked at that. We also -- we got a tremendous outpouring of requests from non-customers.

We accommodated a few as we could, but I think that this is going to be one of those reputational moments for most banks and look, we're not the only bank that did a great job with PPP, a lot of our peers have done a wonderful job as well. But some haven't been able to deliver and I will tell you that banking was a commodity business three months ago. It's not a commodity business today. People understand it, I've even had a couple of cases where people said, look, I need to give you guys a call in 30 days. When this calms down, we need to move over to you, because we're disappointed with our bank. So and thanks for your comments about us getting PPP going. A lot of our staff is up -- in 24/7 we are working straight through the night to make sure we got this on because we knew it's that important for our community.

Collyn Gilbert -- KBW -- Analyst

Okay. And then just in terms of the question on those that applied for the PPP program, could they -- I mean then also apply for forbearance.

Christopher D. Maher -- President and Chief Executive Officer

Yes. And there is an overlap there.

Collyn Gilbert -- KBW -- Analyst

Okay.

Christopher D. Maher -- President and Chief Executive Officer

And we look at it, and we say, what's the reason for the forbearance. And if you're a restaurant or something, maybe you're functioning on take out only or if you're a multifamily landlord and you have a slightly depressed rent roll for the next 90 days, but you think it's going to catch up. That's a perfectly reasonable reason to have forbearance. What we've always stayed away from is businesses that had a defined significant weakness before the pandemic started, those are the kinds of businesses that we may not be granting forbearance because we may not be able to help them.

Collyn Gilbert -- KBW -- Analyst

Right. Okay. Do you happen to know offhand or has the number -- either number of borrowers are dollar size where there was overlap between the two programs?

Christopher D. Maher -- President and Chief Executive Officer

I don't have that handy. But we may be able to give after the call.

Collyn Gilbert -- KBW -- Analyst

Okay. That's fine. It's just -- again another question I have, others -- but I just started thinking about that. Okay. And then just lastly, Joe you had indicated in your opening comments, just you mentioned swap activity was strong this quarter, but yet, I think you had indicated that you thought that overall activity would still be strong for the year there. And I guess, I'm a little surprised by that in that -- just the thought that activity would sort of come to a screeching halt. Can you just kind of walk through sort of how you're thinking about that business line and what activity you would need to see within your commercial borrower base to sort of drive that?

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Yes. I think for us adopting the product, little over a year ago, after I'd say probably a few years of client saying this is -- we -- a lot of us that have been familiar with swaps in the past from prior companies. We look forward to the opportunity and when we have the depth and the breadth to be able to do it on our own. So adopting it was good, a lot of clients were excited to have it, it's open new doors for us. And another thing I mentioned that swap income can be choppy, right quarter-over-quarter depending on what you get done.

I think what we're seeing with a lot of borrowers that have very strong liquidity and balance sheets that want to have and do swap transactions that they're looking at what's likely to occur. So we're at all time lows in interest rates and what's likely to occur is maybe not tomorrow, maybe not in a year, maybe not in five years, who knows. Higher rates at a certain point or at least normalized rates. So borrowers, look at the opportunity for flexibility swaps to give them that flexibility.

So I still think -- look it may not be significant. I think it will end up being a very good year for us in swaps and I think, it will just continue as the economy recovers. So we're bullish -- we're bullish on the swap business but we're cognizant of it. We still maintain that credit appetite, that's a little bit more conservative. So we're making sure we cover the basis on both sides.

Collyn Gilbert -- KBW -- Analyst

Okay. That's helpful. And this is the last question maybe Chris sort of big picture or Joe, you too on the lending side. But, are you seeing just sort of, anecdotally differences among how your business borrowers are operating and then will respond when the economy starts to open again like from the geographies of what you're doing in New York City versus New Jersey versus Philly, any sort of interesting takeaways there as to how you might see each of those markets come back post COVID?

Christopher D. Maher -- President and Chief Executive Officer

Yeah. There's certainly been some interesting things that you would pull out of the data that you might not have expected. So the number two category requesting PPP loans from us, for example, was the healthcare category, which -- when you start to think about the dislocation in cash flows and healthcare whether it's a hospital or a doctor's practice these -- the stopping of elective procedures, and all that has really disrupted healthcare cash flows, which you might not have expected going into this. So we're seeing, and we're seeing other things, we had a high-end jewelry retailer that was preparing for something like this had plenty of cash and doesn't need any help which we thought would have been one of the first people on the list to ask for help.

In terms of regions, there's certainly a difference, given the impact of the pandemic has impacted, for example, the New York City area much more than Philadelphia at least thus far, but the theme we're hearing across all of our markets, when you talk to or call them our smartest most liquid and best prepared commercial clients, they sense that it's going to be a good time to make investments at some point in the next year or two, but they are not interested in getting involved until there is more clarity around economic conditions.

So I think there will be a wave of people that are on the sidelines today, there's a lot of cash out there that are more than happy to make investments going forward. But they're not going to step into the market share. So the smartest people that we're talking to are waiting and watching, they plan to be jumping in and investing. I think that will happen at some point in 2020 and that's the opportunity where we just can't tell what loan growth might be, I'll say this. I think the credit appetite in our communities later in 2020 and going into 2021 is going to be very strong. So provided those are reasonable credit request, there could be an opportunity for us to continue to show organic loan growth, but we've got to wait and see how that -- how that unfolds.

Collyn Gilbert -- KBW -- Analyst

Okay. Maybe doesn't -- maybe sounds fairly similar to the bank stock investor and how they're thinking about the market. Anyway OK, that's helpful color. I will leave it there. Thanks guys.

Christopher D. Maher -- President and Chief Executive Officer

Thanks, Collyn.

Operator

Our next question will come from Erik Zwick with Boenning and Scattergood. Please go ahead.

Erik Zwick -- Boenning and Scattergood -- Analyst

Good afternoon, everyone.

Christopher D. Maher -- President and Chief Executive Officer

Hey, Eric.

Erik Zwick -- Boenning and Scattergood -- Analyst

First question, just curious if you have an expectation for what percentage of the PPP loans will ultimately be forgiven and then secondly, when -- what quarter you would potentially record the associated accelerated indices.

Christopher D. Maher -- President and Chief Executive Officer

I'll take the first question, kind of anybody's guess on what percent would be forgiven. But we think it's a -- probably pretty high percent. I think the folks that are accessing the PPP program are doing so because they plan to maintain their payrolls. There'll be eligible for forgiveness and will file to do so, and we expect a significant effort to help our customers do that in -- it's going to be honest, before you know it those forgiveness requests are going to start to hit in just a few weeks. The reason I'm a little bit tempered on it is we've had more than one story from a client who is apply for taken the SBA PPP funding, has called their employees, asked them to come back to work and their employees have declined.

And as you can imagine for all the right reasons, the unemployment supplement that Grace was talking about earlier. In some cases means an hourly worker earns the same or better staying on unemployment then they would, coming back to work. So the financial incentive is not there and they've got concerns about coming to work in an environment that's kind of rough today. So I think if there is an issue around forgiveness, it's going to be for those businesses, who had difficulty getting their folks into work so they could pay them and qualify for forgiveness. So I think that's where that lie.

Erik Zwick -- Boenning and Scattergood -- Analyst

Understood. I appreciate that.

Christopher D. Maher -- President and Chief Executive Officer

The second part of your question but I'm sorry, I forgot what it...

Erik Zwick -- Boenning and Scattergood -- Analyst

Yeah. It was in terms of what quarter you would potentially expect to record the accelerated fee once they're forgiven.

Christopher D. Maher -- President and Chief Executive Officer

I think you're going to see the majority of that in the next couple of quarters but -- and then with a tail after that. So I think if you're getting two-thirds or three quarters of that in the next two quarters, it's probably around the right tempo.

Erik Zwick -- Boenning and Scattergood -- Analyst

Great. And then just looking at the -- the trends of the loan yields. Both the pipeline yield and the origination yields. It looks like the residential real estate yields have held up better relative to commercial and home equity and curious if that's something specific to you -- your customers or if that's a reflection of some of the dislocation that we've heard about in the secondary market for residential mortgage loans.

Christopher D. Maher -- President and Chief Executive Officer

I think that's true in residential, there has been a dislocation, you still kind of well stepping back from the corresponding business. So there are fewer players out there. But there is a broader thing going on as well. Most of our peers and we've done the same thing have instituted pricing floors because we're just not -- we're simply not interested in making long-term loans at today's interest rates. So that historical relationship between say the 10-year treasury in residential rates or even the five-year treasury in commercial rates is the credit spreads have widened. So I think, you're going to see better pricing than the yield curve would expect you to see in this market.

Erik Zwick -- Boenning and Scattergood -- Analyst

Thanks. And then just last question from me, in terms of the 949,000 charge-offs. As you're thinking, you guys got a higher risk residential loans. Any color you could provide there with these loans particularly related to COVID developments are they previously criticized just kind of curious how that played out?

Christopher D. Maher -- President and Chief Executive Officer

Those are all pre-COVID issues and we've just adopted a position, it goes back a couple of years now, where if -- especially in the consumer world if things start to slide, we don't want to be part of them and obviously we sell them at a loss. But we would rather get them off the balance sheet, sometimes your first loss is your best loss. But no matter what, we knew we had to make room, so we expected a cycle shift. We didn't expect this but in this cycle shift, you don't want to have to fire sale assets. So what you do is you make room on your balance sheet so that when you've got good borrowers, you can work through things with them. So it goes back a couple of years now, we've -- as soon as we had a pool of loans we could dispose off-- we would dispose off them and cut our losses and move on, so...

Erik Zwick -- Boenning and Scattergood -- Analyst

Great. Thank you for taking all my questions.

Christopher D. Maher -- President and Chief Executive Officer

All right. Thank you, Erik.

Operator

[Operator Instructions] Our next question will come from Louis Feldman with Wells Fargo Asset Management. Please go ahead.

Louis Feldman -- Analyst

Good day.

Christopher D. Maher -- President and Chief Executive Officer

Hi, Louis. How are you?

Louis Feldman -- Analyst

Pretty good. Little cloudy out here today and as Yogi Bear said, it gets late early out here. Mike, quick question for you. Given the stock price adjustment and stuff have you talked with your auditors about impairment -- goodwill impairments at this point?

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

We have, Louis, we've gone through that analysis, given the stock price and some other issues related to COVID, we thought that might be triggering events so we've done, we usually do that analysis annually in August, but we did it just recently and it was -- we concluded that there was no impairment and our auditors agree with that.

Louis Feldman -- Analyst

Okay. Great. Thank you.

Christopher D. Maher -- President and Chief Executive Officer

Thanks, Louis.

Operator

Our next question will come from Stan Westhoff with Walthausen & Company. Please go ahead.

Stan Westhoff -- Walthausen & Company -- Analyst

Good morning. I guess afternoon at this point. Just to get off on a different topic and funding costs. I mean, you had a pretty good jump on your deposit costs and obviously a lot of that came over from the acquisitions, where are we standing now or what are your plans to try to reduce some of the -- those I guess really the big spot was the savings account rate jumped up 30 basis points here.

Christopher D. Maher -- President and Chief Executive Officer

Yeah. So the -- that was driven entirely by the acquisition of Two River and Country that had higher deposit rate structures that OceanFirst legacy had before that we brought them in. We typically do adjust rates as we go through acquisitions. We're always reasonably careful to do that over time as we get to know those customer bases and not kind of shock them with a lot of rate reductions.

So we began reducing rates in earnest in those, in those two portfolios. Probably late in the first quarter. So you wouldn't see much of it in the overall deposit costs, but I think as Joe said earlier, we expect to be able to reduce the deposit cost of legacy OceanFirst but also the Country and Two River acquired deposit portfolios over the course of this quarter. So, and we look forward -- looking forward to that help the stabilization of margin. So there is room to bring those down and you'll see that coming down.

Stan Westhoff -- Walthausen & Company -- Analyst

Okay. Yeah. I was hoping to hear something that about -- along those lines. And then I guess, not to beat a dead horse as much with this -- this whole CECL stuff. Did I get that right that basically the quantitatives part of that model actually suggested at least a very small increase in the provision and you decided to add to that with that $7 million.

Christopher D. Maher -- President and Chief Executive Officer

Yeah. It's ironic, you're actually right so well obviously there was a day one adjustment right where we had to gross up different methodology. But after we grossed up, there's really two things that happened during the quarter. The first thing is our loan mix changed and loan mix has a lot to do with provisioning because different loans have different experience levels. The second thing that happened is every -- every quarter you add to your history changes loss history, and we added another quarter of low losses to our history. So the quantitative numbers shifted down because our loss rate actually continue to come down and then it shifted again because the composition of loans were very different.

So I guess, all else equal, we would have had the possibility of a contraction in the allowance, not counting the day 1, we certainly didn't think that was appropriate given economic conditions. The other thing is that CECL drives off an economic model, every bank has -- some banks use their own projections, we don't have, we're too small to have a group of economists here at the bank and probably thank god for that, but we have purchased the services of -- we use Oxford analytics. They provide us with our economic forecast, their forecast was more benign than a number of other forecasts we saw in the market, so we wanted to calibrate for that to and say that the quantitative model was the inputs into that the economic inputs were rather benign. So we using the qualitative adjustments we're able to adjust it to some of the other more draconian forecast economic conditions.

Stan Westhoff -- Walthausen & Company -- Analyst

Got you. I guess can you share what the, I guess the, because I know I've been understanding unemployment number is a big factor in this. Can you share what the unemployment number was that was post going to that model?

Christopher D. Maher -- President and Chief Executive Officer

I'd like to get away from sharing individual numbers because there is a lot of numbers in there. The unemployment numbers, one -- the GDP numbers and other, but there's a whole bunch of other numbers that go into it.

Stan Westhoff -- Walthausen & Company -- Analyst

Of course.

Christopher D. Maher -- President and Chief Executive Officer

Probably, somewhere around the range of 50. So once we start giving one or another, you start to go down a slippery slope. I will tell you though that the Oxford number was lower than most other estimates and that's the reason that we put on the qualitative reserve.

Stan Westhoff -- Walthausen & Company -- Analyst

Okay. That's kind of what I was going to point out, obviously that sounded like this is more -- of just trying to get a degree factor in there. Okay, that's all I have for the time. Thank you very much and be safe.

Operator

[Operator Instructions] Our next question will come from Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi -- Piper Sandler -- Analyst

Thanks. Just one quick follow-up. I'm wondering how we should think about the increase in delinquencies, linked quarter, is that just kind of bouncing around, is that COVID related and should turn likely into the firm in at some point, because with 30-day greater past due, it would seem that would imply I guess February which would seem to be early to be COVID related, but just how do we think about that?

Christopher D. Maher -- President and Chief Executive Officer

Yes. So you're exactly right, Frank, some of that we think is driven, we think, hopefully the majority of it by COVID. There is a strong overlap between forbearance requests and delinquencies, because we only started soliciting forbearance request on March 16 and then we do -- we're credit underwriting them. So there is a credit process before we actually declare forbearance. There's other small number that's related to the 1231 number was OceanFirst only, and the 331 number includes Two River and Country, so just a larger loan book. But we would look to by the end of the second quarter have those moderate because of forbearance request.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. And then just my -- to bring the idea that those ran into issues in February, and because I've seen this in a lot of banks actually just haven't asked the question yet. Do you think it's just people saw the writing on the wall and then just in a -- an attempt to cash preservation, they missed the February payment and truly is something that's COVID related?

Christopher D. Maher -- President and Chief Executive Officer

Yeah. I think this is where geography may have a big difference. So we operate kind of in the epicenter unfortunately right now of where the heaviest COVID cases are in the US. So if you were in New York, if you were in North Jersey some of those early issues drove sentiment. I will say this, that the going through year-end delinquencies trended really positively, our weighted average risk ratings on loans before COVID was all very good news. In fact, some of those restaurant hotel businesses that have issues today had among their best years ever in 2019. So that helped a little bit, but it is a big change in sentiment.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. Great. Thank you.

Christopher D. Maher -- President and Chief Executive Officer

Thanks, Frank.

Operator

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

Christopher D. Maher -- President and Chief Executive Officer

All right. Thank you. With that I'd like to thank everyone for their participation in the call this morning. And now this afternoon. We face a very troubled economy in the coming quarters and nobody has a crystal ball. But our company has been around since 1902 for a reason. We take conservative risk positions, we're strongly profitable and we maintain ample capital levels. We look forward to talking again after our second quarter results are posted in July. Thanks again. Stay safe.

Operator

[Operator Closing Remarks]

Duration: 93 minutes

Call participants:

Jill A. Hewitt -- Senior Vice President, Director of Investor Relations & Corporate Communications

Christopher D. Maher -- President and Chief Executive Officer

Joseph J. Lebel -- Executive Vice President and Chief Operating Officer

Grace M. Vallacchi -- Chief Risk Officer

Michael J. Fitzpatrick -- Executive Vice President and Chief Financial Officer

Louis Feldman -- Analyst

Frank Schiraldi -- Piper Sandler -- Analyst

Matthew Breese -- Stephens -- Analyst

Christopher Marinac -- FIG Partners -- Analst

Russell Gunther -- D.A. Davidson -- Analyst

Collyn Gilbert -- KBW -- Analyst

Erik Zwick -- Boenning and Scattergood -- Analyst

Stan Westhoff -- Walthausen & Company -- Analyst

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