Fulton Financial Corporation (FULT) Q1 2021 Results - Earnings Call
Fulton Financial Corporation (NASDAQ:FULT) Q1 2021 Earnings Conference Call April 21, 2021 10:00 AM ET
Company Participants
Matt Jozwiak - Director, Investor Relations
Phil Wenger - Chairman and Chief Executive Officer
Curt Myers - President and Chief Operating Officer
Mark McCollom - Chief Financial Officer
Conference Call Participants
Frank Schiraldi - Piper Sandler
Daniel Tamayo - Raymond James
Erik Zwick - Boenning & Scattergood
Russell Gunther - Davidson
Operator
Good morning, ladies and gentlemen and welcome to the Fulton Financial First Quarter 2021 Results. [Operator Instructions] I would now like to turn the conference over to your host, Matt Jozwiak, Director of Investor Relations. Thank you. Sir, please go ahead.
Matt Jozwiak
Good morning and thanks for joining us for Fulton Financial’s conference call and webcast to discuss our earnings for the first quarter of 2021. Your host for today’s conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil are Curt Myers, President and Chief Operating Officer and Mark McCollom, Chief Financial Officer.
Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found in the presentation page under the Investor Relations website.
On this call, representatives of Fulton may make forward-looking statements with respect to Fulton’s financial condition, results of operation and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors and actual results could differ materially. Please refer to the Safe Harbor statement on forward-looking statements in our earnings release and on Slide 2 of today’s presentation for additional information regarding these risks, uncertainties and other factors. Fulton undertakes no obligation, other than as required by law, to update or revise any forward-looking statements. In discussing Fulton’s performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton’s earnings announcement released yesterday in Slides 11 and 12 in today’s presentation for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.
Now, I would like to turn the call over to your host, Phil Wenger.
Phil Wenger
Thanks, Matt and good morning everyone. I will begin today’s call by sharing a high-level overview of the quarter. Then we will hear Curt’s thoughts on our business performance and Mark will follow Curt and he will discuss the details of our financial performance. And after that, we will be happy to take your questions.
The Fulton’s performance was solid in the first quarter of 2021. In fact, our earnings per share of $0.43 in the first quarter, was a quarterly record for us, surpassing our previous record of $0.38 per share, which was in the third quarter of 2020. Though the lasting presence of COVID-19 and the prolonged low interest rate environment have brought some challenges, our customers and our team members continue to meet those challenges. Throughout the past year, Fulton has continuously worked to serve our customers while keeping everyone safe. Our financial centers remained accessible and customers escalated their use of our telephone, digital and online platforms. So, our banking and financial services delivery remained largely uninterrupted.
In terms of our back office and operations staff, team members whose rules could be performed offsite worked remotely whenever possible to reduce the direct contact that could potentially spread the virus. Now as the vaccine rollout continues throughout the world, we are seeing our communities plan to have more fully open and we are cautiously optimistic about the reopening of the economy and the markets we serve.
As we look forward, we have been carefully developing our own plans to bring more employees back to our offices. Late last week, we shared our timetable for doing this with our team members letting them know we plan to bring more people back on site in September. This is the first time we have offered a specific timetable for returning more of the team to our offices and it is contingent upon the continued successful vaccine rollout, the loosening of government requirements and the communities we serve and the advice of health experts at the national and local levels. We plan to use the months between now and September to clearly communicate how the return process will work. While most of our employees will perform some amount of onsite work, some will continue to work remotely for the longer term. We want to do our part to enable every team member to achieve peak performance no matter where they sit. Last quarter, I shared some updates on the Small Business Administration’s Paycheck Protection Program, or PPP, and I am pleased to report we continue to realize volume that has exceeded our expectations. And we also continue to support All CARES Act’s initiatives.
In terms of other highlights in the first quarter, order loans grew modestly because of the impact of the Wave 3 PPP loans. Deposit growth continues to be extraordinarily strong and we continue to be encouraged by our asset quality performance through the pandemic, as Curt and Mark will discuss in a few minutes. Our mortgage business continues to be a strong performer and the pipeline remains elevated. Our wealth management business also continues to be growing and a significant contributor to non-interest income. This line of business delivered record income during the quarter on an all-time high in assets under management and administration. In March, we announced a restructuring of our balance sheet that will help manage our interest rate risk profile. This had a minimal impact to earnings in the first quarter. However, it will meaningfully enhance net interest income as we move forward. And Mark will discuss this in further detail in a few minutes.
Despite the pandemic-related challenges, we remain fully focused on our strategic priorities. These include achieving growth, enhancing our technology and increasing our efficiency. One way in which we are growing is by moving forward with plans to open additional financial centers in our two priority urban markets, Philadelphia and Baltimore. In 2021, we remain focused on efficiency and investment in technology, which we believe are closely linked. We currently have a number of technology system replacements and upgrades in progress. These include new platforms for consumer loan origination and mortgage servicing. In addition, we are making a significant upgrade to a new customer relationship management or CRM system and we are fully integrating that system in our sales and service processes.
Now, I will turn things over to Curt for more detail on our business results.
Curt Myers
Thank you, Phil and good morning everyone. As Phil noted, our first quarter performance produced solid results and I would like to share some detail on several key areas. Loan growth for the quarter was modest as we experienced strong growth in residential mortgage originations and generated PPP Wave 3 performance that exceeded our expectations. These results were offset by continued line of credit utilization headwinds and greater than expected residential mortgage prepayments.
First, let me touch on PPP. We continue to support our small business customers by both satisfying forgiveness requests and processing Wave 3 applications. As I mentioned on last quarter’s call, we anticipated between $500 million and $600 million in total Wave 3 PPP funding. As of the end of the first quarter, we were at $685 million and we expect to modestly exceed $700 million from the program before it expires. This is well beyond our expectations. At this point, applications continue to come in, but at a significantly reduced pace. We continue to also work diligently to support our Wave 1 and 2 customers with their forgiveness request. In the first quarter, we successfully processed $579 million of PPP forgiveness requests and have remaining Wave 1 and 2 outstanding balance of approximately $1 billion.
Turning to commercial loans, balances declined $48 million or 0.4% on a linked quarter basis, excluding PPP loans. Originations were down modestly from the fourth quarter as we – and we experienced continued decline in line utilization. These factors combined to contribute to the slight pullback in overall commercial balances. Looking forward, our commercial loan pipeline at March 31 was up approximately 9% versus year end 2020. However, it was down 10% year-over-year.
In consumer lending, our loan balances grew $45 million or 0.9% linked quarter on an ending balance basis. This growth was driven primarily by growth in residential mortgages in spite of the elevated refinance activities. Our mortgage pipeline remains very strong and we continue to be optimistic about our growth targets as we enter the traditional home buying season. As we mentioned in prior quarters, our asset-sensitive balance sheet provides room to continue growing this segment of high-quality in-market residential mortgages. Overall, we anticipate loan origination levels to continue at a rate that is adequate to support the annual net interest income guidance in our outlook that Mark will discuss in a few minutes.
Turning to deposits, growth for the quarter far exceeded our expectations. We had anticipated a modest decline in deposits as we actively managed deposit costs down. However, strong customer liquidity has continued to drive our balances higher and government stimulus payments provided significant inflows during the quarter. Total deposits grew approximately $800 million on a linked quarter basis with growth in virtually all non-maturity categories. More specifically, non-interest-bearing demand deposits drove this growth, increasing $515 million or 7.9% on a linked quarter basis. Total deposits are up $4 billion on a year-over-year basis. During the quarter, we continued to actively manage our deposit costs down. As a result, deposit costs declined 5 basis points linked quarter and now total deposit costs have dropped to 18 basis points. In addition, we have made further pricing adjustments to our earnings credit rates on commercial accounts.
Moving on to fee income, excluding the B2B gain on sale, our fee-based businesses delivered growth in revenue on a linked quarter and year-over-year basis. As Phil mentioned, our Wealth Management business continues to perform well as we add new customers and equity markets continue to move higher. We also have a full quarter’s impact of Benefit works and investment advisory and retirement plan service firm we acquired in the fourth quarter of 2020. Our assets under management and administration grew to $13.1 billion at quarter end, up from $12.8 billion last quarter and $11.8 billion at the end of the first quarter of 2020. This drove record quarterly income for the second quarter in a row.
Mortgage banking revenues declined modestly linked quarter when excluding the MSR write-up. However, these revenues are up 26% on a year-over-year basis. Our mortgage banking business remains strong as we continue to experience elevated origination activity and historically strong gain on sales spreads. Total residential mortgage originations for the first quarter of 2021 were $714 million, an increase of 89% from the same period last year. Purchase activity represents approximately 49% of total originations and remains relatively consistent with recent quarters. Our mortgage pipeline remains strong and has increased from year-end and year-over-year levels. Capital markets revenue, which are primarily commercial loan interest rate swap fees, declined in the first quarter. This decline was in line with moderately lower commercial originations during the quarter.
Moving to credit, despite a challenging COVID-19 environment, our asset quality remains relatively stable. Delinquent loans declined on a linked quarter and year-over-year basis. Loans on non-accrual increased slightly, however, has remained relatively stable since prior to the beginning of the pandemic. In terms of net charge-offs, after two quarters of net recoveries, we had $6.1 million in net charge-offs for the quarter, which was 14 basis points when excluding PPP balances.
On Slide 14, we have again provided updated loan deferral trends through March 31, 2021. Commercial deferrals declined to approximately $153 million, down from $200 million at the end of the year and stand at approximately 1.1% of the commercial portfolio. Consumer loans on deferral and forbearance also declined and are now at $94 million, down from $130 million at year end. These stand at approximately 1.9% of the consumer portfolio. In previous calls, we noted selected industries we believe may have more risk due to COVID-19. Slide 15 provides an updated summary of these selected industries. Our credit outlook remains cautiously optimistic for the remainder of 2021.
Now I will turn the call over to Mark to discuss our financial results in a little more detail.
Mark McCollom
Thank you, Curt, and good morning, to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the fourth quarter of 2020. Starting on Slide 3, earnings per diluted share this quarter were $0.43 on net income available to common shareholders of $70.5 million. This is $0.13 higher than the fourth quarter of 2020. Our first quarter performance included a lower provision for credit losses and higher net interest income. We also reported higher non-interest income and higher non-interest expense, largely due to a balance sheet restructuring I will discuss in more detail in a minute.
Moving to Slide 4, our net interest income was $164 million, a $3 million increase linked quarter, primarily due to additional fees earned on PPP loans forgiven during the quarter. As Curt noted, during the quarter, we originated $685 million of new PPP loans, and this was offset by forgiveness of $579 million of PPP loans that were originated in 2020. The latest round of PPP loans have a larger average fee, 4.54% due to a smaller average loan size for this wave of funding. As of March 31, we have approximately $45 million of PPP loan fees yet to be recognized, $15 million from 2020 originations and $30 million from our first quarter originations. We grew our investment portfolio $272 million during the first quarter as we selectively redeployed some of our excess cash into mortgage-backed securities as the yield curve steepened during the quarter.
As Curt noted, the latest round of government stimulus fueled deposit growth during the quarter, and our first quarter saw deposits grow by approximately $800 million. We continue to manage our deposit mix and our cost of deposits for the quarter was now only 18 basis points, a decline of 5 basis points linked quarter. We would expect our deposit cost to migrate moderately lower in future quarters as we have approximately $775 million of CDs maturing over the next 2 quarters at costs that were approximately 100 basis points higher than current market costs. Our average loan to deposit ratio declined during the quarter from 91.4% to 89.9%.
During the quarter, Fulton completed a balance sheet restructuring, which reduced our interest rate risk and improved several of our performance metrics going forward. This restructuring was detailed in an 8-K filed on March 30 and is summarized on Slide 5. It included the sale of our Visa Class B shares at a gain of $34 million. This gain was offset by losses on the extinguishment of higher cost debt, which included the prepayment of $535 million of long-term FHLB advances at a cost of 1.78%, the tender of $75 million of subordinated debt at a rate of 4.5% and the tender of $60 million of senior notes at a rate of 3.6%. So, when you add those up, we removed $670 million of liabilities at a cost of 2.25% and paid these off with cash that was currently yielding 8 basis points to 10 basis points.
We also entered into $500 million of notional value received fixed interest rate swaps during the quarter. Those have 69 basis points of positive carry currently. So overall, this restructuring reduces our interest rate risk and improves our net interest income by approximately $17 million on an annualized basis. The impact to 2021 is incorporated into the updated guidance I will provide at the end of my remarks. Our net interest margin for the first quarter was 2.79% versus 2.75% in the fourth quarter. The 4 basis points of linked quarter increase largely resulted from PPP loan forgiveness and the related fee income recognition.
Turning to credit, our first quarter provision for credit losses was a negative $5.5 million versus $6 million for the fourth quarter and $44 million a year ago. As you know, the adoption of CECL as well as the impact of COVID had a significant impact on our allowance for credit losses in the first half of 2020. But as economic forecasts have improved in recent periods, it has reduced the amount needed in our allowance for credit losses. As always, this could change in future periods based on new loan origination volumes, our loan mix, net charge-off activity and updated economic projections.
Slide 6 also provides you with our normal quarterly credit metrics, which do not contain any noteworthy trends or surprises. Moving to Slide 7, non-interest income, excluding those security gains, were $62 million, up $6 million from $56 million last quarter and up $7 million from $55 million a year ago. Fee-based revenues were strong and were driven by outperformance in mortgage banking and wealth management. Mortgage banking revenues benefited from a $6 million reversal of a mortgage servicing rights reserve that was established in 2020. Our remaining mortgage servicing rights impairment reserve is $4.4 million at March 31. Wealth management revenues were $17 million for the quarter, an increase of 11% from the fourth quarter and an increase of 15% from the prior year.
Moving to Slide 8, our non-interest expenses were $178 million in the first quarter, up $24 million linked quarter. However, in the first quarter, we had incurred $33 million in debt extinguishment costs related to our balance sheet restructuring. And in the fourth quarter of 2020, we have incurred $15 million of expenses related to cost savings initiatives. So excluding these items from each period, our core expenses increased approximately $5 million due to higher benefits costs, seasonal occupancy costs and higher incentive compensation accruals compared to the prior quarter. Our effective tax rate was 16% for the quarter compared to 10% in the fourth quarter of 2020 as a result of higher pretax earnings.
Slide 9 gives you more detail on our capital ratios. The balance sheet restructuring did have a modest impact to total risk-based capital due to the reduction in subordinated debt, but all other capital ratios improved slightly. Our liquidity remains very strong. We also announced a new $75 million share repurchase during the quarter, but did not repurchase any shares under that program during the first quarter.
Lastly, we would like to provide our updated guidance for 2020. This updated guidance reflects the impact of our balance sheet restructuring, the current wave of PPP as well as other items that are now known to us as of March 31. We expect our net interest income for the year to be in the range of $640 million to $660 million. We expect our provision for credit losses to be in the range of $20 million to $40 million for the year. We expect our non-interest income to be in the range of $220 million to $230 million. And lastly, overall, we expect operating expenses, excluding charges related to the balance sheet restructuring to be in the range of $555 million to $575 million for the year.
And with that, I will now turn the call over to the operator for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question is from Frank Schiraldi of Piper Sandler. Your line is open.
Frank Schiraldi
Good morning.
Mark McCollom
Good morning Frank.
Frank Schiraldi
I wondered just, Mark, you mentioned the updated guide obviously includes the balance sheet restructuring and the second – or the latest round of PPP. The interest rate picture has also improved a bit. I am wondering if that provides some potential upside, do you think to NII guide or is that just not impactful enough unless the short end moves and is that already baked into updated guide?
Mark McCollom
Yes. On the short end of the curve definitely impacts us a lot more than the long and would. We did take advantage in the first quarter, as I noted, and put some money to work in the investment portfolio out of cash. But we are still sitting, obviously, on a lot of excess liquidity. Our expectation is that the tenure is going to stay relatively range-bound to where it is right now. And candidly, the trade-off is if we invest too much into the investment portfolio today, then at some point in the future, when PPP funds are burned through, we think we are going to start to see line utilization draws happening again, and we would rather use our liquidity for our core loan growth other than putting too much in the investment portfolio at this point.
Frank Schiraldi
Okay. So, does the guide then just sort of assume the securities book is kind of flattish at these levels or is there some of that excess cash gets redirected through the rest of the year?
Mark McCollom
No. I would expect for the balance of the year, the securities book will stay relatively range bound, unless if we would see an opportunity if the tenure would pop up to 180 again temporarily, we could put a little bit of work there. But I would expect it to stay relatively consistent as a percentage of the balance sheet.
Frank Schiraldi
Okay. And then just thinking about reserve levels, I mean it seems like this could be a fairly – I mean, it’s still early in the year, but it seems like it could be a fairly normal year in terms of charge-off levels. And so as qualitative factors continue to normalize, do you think there is opportunity for additional reserve release, I guess where is a good level to assume the reserve to loan ratio could move back to, is it where it was with CECL day 1, Mark, can you just give us a little – your thoughts there?
Mark McCollom
Yes. We went from 99 basis points to 120 basis points when CECL was first implemented. And then we – and then – or I am sorry, to 140 basis points. And then we went from 140 basis points up to our current level as a result of COVID. Do I think it can drift down to day 1 CECL again, yes, I do. But again, that’s obviously dependent – that’s assuming our business mix stays the same. That assumes that our pace of growth stays relatively the same as well as what we were historically. But I think there is definitely opportunity for that to happen, Frank, just it’s obviously hard to predict the timing.
Frank Schiraldi
Sure, okay. Thank you.
Mark McCollom
Thank you.
Operator
Your next question is from Daniel Tamayo of Raymond James. Your line is open.
Daniel Tamayo
Good morning guys. I am not sure if I missed this or not, but did you provide the – I mean you gave some fee numbers from PPP, but did you provide the impact that had on the margin in the first quarter?
Mark McCollom
Yes. So the way to think about the margin, I mean, what I can share you is that our fee income totals, Danny, were $19.4 million in the first quarter, that’s up from $14 million in the fourth quarter. But we also saw increased excess liquidity in the first quarter. To me, when you are talking about the effect of PPP and the margin, you really have to consider both size, you need to think about the fees, but then you also need to think about the fact that we are sitting on some excess liquidity. If both of those would normalize, the impact is about 7 basis points in the first quarter.
Daniel Tamayo
Okay, that’s helpful. And then maybe if you can talk a little bit about the assumptions embedded in your net interest income guidance within the NIM and then maybe on the balance sheet as well?
Mark McCollom
Well, yes, I mean we were intentional when we gave our guidance to not provide NIM guidance for the year, because the timing and the volatility with PPP makes it a little bit harder to predict balance sheet size. And I think as you have seen from the whole industry, the whole industry is sitting on a crush of excess liquidity that wasn’t even there back when that fourth quarter guidance was originally put out. So, I can comment that our guide does include our current assumptions on PPP. We assume that, as I said earlier, we have $14 million, $14.7 million of Wave 1 and 2 fees yet to be amortized. And then with the new originations that have just come on, we have a little over $30 million. So, you have $45 million of fees that still need to be recognized. I would anticipate of that remaining $1 billion that somewhere between 80% and 90% of that gets forgiven and is off the books by the end of the year. How much of the new originations, which is approximately $700 million, how much of that comes off by the end of the year is a little bit more of a wildcard. But our assumptions on that are baked into the guidance. What’s also baked into that guidance, again, would be the full year – well or the stub year impact of the restructuring, which really didn’t take place until the last 2 weeks of March. So you really didn’t see any material impact of that in the first quarter. But you’ll see a 9 months effect of that $17 million would be factored into ‘21. And then the full year impact of that restructuring would be factored into 2022.
Daniel Tamayo
Okay. That’s terrific. And then I guess last thing here on the balance sheet restructuring you mentioned reducing asset sensitivity a bit, but coming into the quarter pretty strong given the increase in deposits. So how does the bank from an asset-sensitive perspective now relative to maybe before COVID or this increase in asset sensitivity. How would you guys expect to benefit from rising short-term rates relative to prior periods?
Mark McCollom
It’s a great question. And the answer is, with everything we’ve done, we’re really just kind of treading water. I mean, we’ve reduced our asset sensitivity slightly. But then remember, every time you get excess liquidity, if you got a non-maturity deposit and it’s sitting in overnight cash, that’s inherently very asset-sensitive because that non-maturity deposit, even if it’s government stimulus, it’s going to be sticking around for a little bit of time. So our asset sensitivity would have gone up a lot more had we not done this. This is reined it back into acceptable levels. But depending on that dynamic of how quickly as loans get forgiven on our books, I mean you’re taking off a loan and replacing that with cash. So unless that cash gets used and unless your balance sheet shrinks, both in terms of excess cash and in deposits, that is going to increase asset sensitivity a little bit more. So we are still very well positioned to benefit from rising rates.
Daniel Tamayo
I appreciate all the color, Mark.
Operator
Your next question is from Erik Zwick from Boenning & Scattergood. Your line is open.
Phil Wenger
Hey, Erik. Good morning.
Erik Zwick
Good morning guys.
Phil Wenger
Hey, Erik, we can’t hear you. If you were on mute by any chance?
Erik Zwick
How about now?
Phil Wenger
It’s better.
Erik Zwick
Okay. Great. Sorry, sorry about that. Maybe first, just a question for Mark on the non-interest expense outlook for the year, if I remove the restructuring charges from the first quarter and then kind of annualize that level of kind of $145 million in a quarterly rate kind of coming towards the top end of that range. Just curious, you mentioned investing in new branches, some of the urban markets, the tech investments. Just curious where is the opportunity potentially improve from that quarterly run rate that would get you closer to the bottom end of that outlook range?
Mark McCollom
Yes, you should definitely, great question, Erik. You should definitely not be taking that number and just kind of multiplying by 4. In the first quarter, we had some items that definitely won’t repeat. We did have some bonus payments that were just related to our frontline personnel for all the great work they have done throughout COVID. There was some kind of final true-ups of some of our 2020 bonus plans. I referenced snow removal. It was a tougher winter this year for us than some prior years. And just in terms of the number of incidents, not necessarily the amount of snowfall but the number of incidents, which increased cost there. And if you look at our five-quarter trend on occupancy expense, because of that seasonality, both in terms of heating as well as snow removal, the first quarter always tends to be our highest level. So when you strip those things out, the reason – and if you look at what our guide was a quarter ago, versus what it is now, we increased it by about $5 million, and that increase was really the amount that would be attributable to bonus accrual adjustments for this year’s plans.
Erik Zwick
Thanks. That’s helpful. And then one for maybe Phil or Curt and then for our prepared comments, you mentioned that you’re expecting loan growth to support the NII guide. Just curious where you’re seeing opportunities to grow? I mean I spoken to a couple of smaller banks in your market, and they are still seeing pretty tepid loan growth. So I’m curious if maybe it’s just your access to some larger customers, but maybe just access to some of the urban markets that might present more opportunities. Where do you see the opportunities for improved loan growth this year?
Phil Wenger
Yes. So we’re seeing opportunities across all our markets, maybe a little more in the urban markets. It’s really hard to grow your loan portfolio ex PPP when all that PPP money is coming in and a lot of it’s paying down lines. So as that disappears and people start using their lines of credits like they have in the past, we see just great opportunity for growth there. So we’re still entertaining a lot of requests and we are settling. It’s just hard to show growth when that PPP money is coming in.
Curt Myers
Yes, Erik, this is Curt. Just one point to that, just linked quarter, the line of credit utilization headwind that we had was over $100 million just linked quarter. So – and for the 18 months, it’s been $700 million if we would get back to kind of normal long-term utilization rates.
Erik Zwick
Got it. Thanks for the color there. And then just one last one, thinking about the mortgage banking line and if I exclude the impact from the mortgage servicing assets valuation of what the run rate was maybe kind of $8 million or so. I’m just curious thoughts going forward. We’re entering the peak home selling season. It seems like inventories definitely shortened with the increase in 10-year yield. I’m guessing a refi maybe starts to tail off a little bit. Just curious what you’re thinking in terms of what you can generate from that business line.
Phil Wenger
Yes. We see that business continuing to be strong. We are putting loans on the balance sheet. So it depends if you look at fee income or if you look at the balance sheet growth, that operation really funds and fuels both of those. So we expect seasonal improvement just moving from first quarter into then the normal higher home buying season. But the business remains strong for us. We continue to have really high gain on sale spreads and we expect them to moderate over time, it will really depend on the pace of that margin moderating, but we still see strong volume.
Erik Zwick
Great. Thanks for taking my questions today.
Phil Wenger
Thank you.
Operator
Your next question is from Russell Gunther from Davidson. Your line is open.
Russell Gunther
Let me just first start, if I could, on the NII guide. One other follow-up, please. So the $640 million to $660 million, you guys mentioned includes PPP assumptions. Do you have a number for how much of that $45 million of remaining fees is included in that guide?
Mark McCollom
Well, we’re not providing that specific guidance. But again, what I can tell you is that of the $15 million that relates to the first wave, we’re assuming that between 80% and 90% of those loans, so it’s about $1 billion left on our balance sheet. We’re assuming that, that comes off by the end of the year. Now keep in mind that one of the other things that’s going to create more volatility, not just for us but for everybody who’s participating in Wave 3, these Wave 3 loans are actually accreted that the fee is accreted over 5 years because it’s a 5-year note unlike the first wave, which were a 2-year note. So the $30 million of fees that we have yet to be recognized from this current wave, those are going to be – until they start being forgiven, there is going to be a little bit lower amount that’s going to be coming in on a more normalized basis until the forgiveness process starts. We would expect these Wave 3 forgiveness would start in the third quarter, in the middle of the third quarter.
Russell Gunther
Okay. That’s helpful. Thanks a lot. And then just following up on Erik’s question on the loan growth expectations, I know you don’t put too fine a point on it and talked about some of the geographic contributors, but how about mix for the year? I know you mentioned portfolio some residential real estate, but the organic growth that you do show, do you have a sense for how that might contribute from the different loan verticals.
Curt Myers
Yes, Russell, it’s Curt. We do still see residential mortgage continuing to be a significant provider of growth as it has, and we have the ability to balance sheet that activity and that activity is strong. On the commercial side, we continue to focus on being diversified in our portfolio. So we really are trying to grow each segment, and we feel that mix is going to be very similar to what we’ve experienced over the last three to five quarters. So you’ll have a mix of C&I and CRE driving the commercial growth.
Russell Gunther
Okay. Great. Thank you. And then just last one for me. You mentioned the $75 million buyback authorization. Could you discuss your appetite to buy back stock at current levels?
Phil Wenger
At current levels, Russell, we run a model and just look at that, like what the earn-back will be on that dilution. So obviously, as the stock price goes up, and you’re buying at a higher premium to tangible book value increases the earn-back length. So we want to continue to have that out there as one tool in the toolbox, But at current levels, I think it would be unlikely that we tap it. But that’s going to ultimately be a question of what other opportunities are there to use capital for which would include organic growth, it would include inorganic growth using cash as a component in M&A transactions as well.
Russell Gunther
Got it. Great. Thanks Mark. Thanks guys for taking my questions. That’s it for me.
Mark McCollom
Thanks, Russell.
Operator
Your next question is from Zach Westerlind from Stephens. Your line is open.
Zach Westerlind
Hey, guys. It’s Zach Westerlind here covering from Matt Breese. How are you?
Phil Wenger
Hi, Zack. How are you doing?
Zach Westerlind
Good. Just to go back to the margin really quickly. I was just hoping that you could provide a little color on incremental loan yields coming on the book and what new deposit costs are kind of looking like?
Phil Wenger
What I can share is we do – without answering your question directly, but what I would share is that I had stated in the last quarter’s earnings call, which I know you or Matt was on, I said that we expect within the next quarter or so to be at our trough on margin on a core basis. And I would say that with the balance sheet restructuring that we’ve just affected, we do feel confident that on a go-forward basis, if you stripped out the impact of PPP other than on a core basis now, we are out of floor and should expect to see some modest margin expansion going forward. The only wildcard in that, again, is going to be what that utilization of excess deposit from PPP on the time of that.
Zach Westerlind
Great. I appreciate that. And I know you talked a little bit about asset sensitivity of the loan book. Are you able to share what percentage of the loan book is floating and how much of that is at the loan for if you’re able to share that?
Phil Wenger
Yes. So when we look at it today, our loan book appears on the surface to be 31% fixed rate, but that includes PPP. So when you strip out PPP, the fixed rate of our loan portfolio is about 23%. And so we would still be then about 77% between adjustable and variable and if you – in total, we have about $12.6 billion of loans that are tied to either prime or LIBOR, so about two-thirds of the loan book.
Zach Westerlind
Great. I appreciate that. And then last one for me, just kind of on the M&A landscape, while obviously, we’ve seen some pretty big deals in your market in lately. Just kind of curious about if how these larger deals are impacting the conversations have conversations been picking up, slowing down? Or just any color you’re willing to share on that front.
Curt Myers
I would just say, over the last 6 months, conversations have picked up.
Zach Westerlind
Perfect. That’s it for me. Thanks for taking my questions.
Phil Wenger
Thank you.
Curt Myers
Thanks, Zach.
Operator
I’m showing no further questions at this time. I would now like to turn the conference back to you, Phil Wenger.
Phil Wenger
Well, thank you again for joining us today, and we hope you’ll be able to be with us when we discuss second quarter results in July. Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. Have a wonderful day. You may all disconnect.
