Earnings Call Transcript
Bank of Marin Bancorp (BMRC)
Earnings Call Transcript - BMRC Q3 2020
Andrea Henderson, Director of Marketing
Good morning, and thank you for joining the Bank of Marin Bancorp’s Earnings Call for the Third Quarter Ended September 30, 2020. I'm Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation, all participants will be in a listen-only mode. After the call, we will conduct a question-and-answer session. This conference call is being recorded on October 26, 2020. Joining us on the call today are Russ Colombo, President and CEO; Tim Myers, Executive Vice President and Chief Operating Officer; and Tani Girton, Executive Vice President and Chief Financial Officer. Our earnings press release, which we issued this morning, can be found on our website at bankofmarin.com, where this call is also being webcast. Before we get started, I want to emphasize that the discussion on this call is based on information we know as of Friday, October 23, 2020, and may contain forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties, please review the forward-looking statements disclosure in our earnings press release as well as our SEC filings. Following our prepared remarks, Russ, Tim, and Tani, along with the Chief Credit Officer, Beth Reizman, will be available to answer your questions. And now, I'd like to turn the call over to Russ Colombo.
Russell Colombo, President and CEO
Thank you, Andrea. Good morning, and welcome to the call. I hope you and your families are healthy and safe. We reported solid third-quarter results, demonstrating Bank of Marin’s disciplined risk management, the strength of our deposit franchise, and capital base. Our bank has committed to proactively working with clients to address financing needs. We and our clients have acclimated to the current environment. The vast majority of our borrowers who temporarily deferred loan payments because of the pandemic have resumed normal payments. Our overall credit quality remains excellent, with classified and non-accrual loans declining in the third quarter from the low levels we reported a quarter earlier. Before I discuss the highlights in the quarter, I want to note that we also remain committed to our employees and community. To help address expenses and challenges linked to the pandemic, we made payments of $1,200 to every employee in the third quarter, totaling $360,000, with executive management directing their payments to non-profit organizations of their choice. Additionally, we made contributions of $360,000 to ensure equitable access to remote learning resources for underserved students in Marin, Napa, and Sonoma counties, as well as the City of Alameda. Turning to our results, in the third quarter, Bank of Marin generated net income of $7.5 million, with diluted earnings per share of $0.55. Total loans held steady at $6.1 billion as we balance our commitment to sound underwriting with our bankers' uninterrupted efforts to serve existing clients and continue to win new bids. Total deposits decreased by $210.6 million in the third quarter, totaling $2.6 billion, primarily due to normal fluctuations in some of our large business accounts and the transfer of balances to the deposit network as part of our ongoing liquidity management. The average cost of deposits remained steady at 9 basis points, reflecting the low rate environment in our proven relationship banking model. Non-interest-bearing deposits represented 64% of total deposits, compared to 52% of total deposits in the second quarter. Our total risk-based capital ratio was 16.1% at September 30, well above the regulatory well-capitalized levels. Non-accrual loans totaled $1.4 million, or 0.7% of the loan portfolio as of September 30, compared to $1.6 million, or 0.08% in the second quarter. Classified loans increased by $2.5 million in the prior quarter to $11 million, primarily due to an upgrade in the risk rating for a commercial real estate loan. In light of our continued capital strength and improvements in the economic environment, on October 23, the Board of Directors approved the reactivation of the $25 million share repurchase program that was suspended on March 20, 2020, as part of our early pandemic response. Finally, reflecting our continued and reliable profitability, the Board of Directors declared a cash dividend of $0.23 per share on October 23. This marks the 62nd consecutive quarterly dividend paid by Bank of Marin Bancorp. The dividend is payable on November 13 to shareholders of record as of the close of business on November 6. In summary, our loan portfolio and balance sheet remain strong in our markets, while impacted by the pandemic, are showing great resilience. Our more than 30 years of managing through various cycles will help us effectively execute for our clients, communities, and shareholders in the near-term and position Bank of Marin for continued growth in the post-pandemic era. Tim will now provide more detail on our loan modification program and an update on PPP.
Timothy Myers, Executive Vice President and Chief Operating Officer
Thank you, Russ. As we reported last quarter, thanks to the dedication of our committed team, the Bank successfully helped almost 2,000 companies secure funding through the SBA Paycheck Protection Program. We are now preparing to launch the forgiveness portion of the program with a secure online portal as soon as the FDA and the Treasury Department finalize their guidance on the process. In the meantime, we're in regular communication with all of these customers and look forward to helping them complete the final phase of the program. As Russ noted, the number of borrowers in need of loan payment relief declined markedly in the third quarter. Only $47 million of the original $389 million in loans receiving payment relief need continued assistance as of October 19. Of these new loans, 37% are in the education industry, 33% are hospitality or tourism-related, and 26% are split evenly between retail-oriented commercial real estate and health clubs. It is important to note that 97% of these remaining balances are secured by real estate, with loan-to-value ratios averaging 42%. While California's wildfire season has again been challenging for many communities in Northern California, fortunately, Bank of Marin and our clients have been minimally impacted. Tani will discuss the trends in net interest margin in greater detail later. But I want to note the yields on new loan production held steady during the third quarter. The dollar-weighted average interest rate on new loans was similar to those made for all of 2020. While that averages approximately 50 basis points below all loans made in 2019, we are working hard to mitigate the effects of this declining rate environment. Finally, to amplify Russ's comment, we have adapted to life amidst the pandemic. We are operating business as usual in this environment. We continue to attract talent and develop strategic opportunities to expand and grow our businesses, and we are poised for stronger growth in coming quarters. We remain optimistic about our teams in new markets, such as Walnut Creek and San Mateo, while continuing to pursue growth opportunities in our more established market. With that, I will turn it over to Tani for additional insight on our financial results.
Tani Girton, Executive Vice President and Chief Financial Officer
Thank you, Tim, and good morning, everyone. Once again, Bank of Marin produced strong results for our shareholders in the third quarter of 2020. We generated net income of $7.5 million and diluted earnings per share of $0.55. The decline in earnings per share from $0.69 for 2019 was primarily due to the economic impact of the pandemic and the historically low-interest rate environment. Because of the potential for long-term impact on the economy, the 2020 provision for loan losses exceeded what was recorded in the first nine months of 2020 by $5.1 million. However, our credit quality remained strong, as Tim and Russ outlined earlier. Net interest income was $24.6 million in the third quarter, compared to $24.4 million in the prior quarter and $24.2 million a year ago. The increase from the prior quarter was due mostly to SBA PPP loan income and an additional day of interest income in the quarter, partially offset by lower-yielding non-PPP loans and investment securities. The tax-equivalent net interest margin was 3.44% in the third quarter, 9 basis points lower than the prior quarter and 60 basis points lower than the third quarter of 2019. The year-to-date tax-equivalent net interest margin was 3.59%, which is 44 basis points lower than 2019 due to the lower interest rate environment and SBA PPP loans. Non-accrual loans represented only 0.07% of the bank’s loan portfolio at September 30. We reported loan loss provisions totaling $1.25 million in the third quarter and $2 million in the second quarter, primarily due to adjustments to qualitative factors related to the pandemic. We also booked a $248,000 provision for losses on off-balance sheet commitments. As discussed in prior quarters, we postponed the adoption of the current expected credit loss accounting standard or CECL in accordance with the accounting relief provisions of the CARES Act. We will adopt CECL on December 31, 2020, at which time we will report a cumulative adjustment to retained earnings in our financial statements, net of taxes, based on economic forecasts and other assumptions as of January 1, 2020. That adjustment will result in an increase to our allowance for credit losses of approximately $1.6 million and an increase to the allowance for off-balance sheet commitments of approximately $122,000. With this, we will also recognize the difference between the allowance for credit losses calculated under the CECL model as of September 30, 2020, and the allowance for credit losses calculated under the incurred loss model as of September 30. This difference will be recognized as a provision for credit losses and a provision for credit losses on off-balance sheet commitments as applicable. Non-interest income of $1.8 million in both the second and third quarters was down from $2.7 million in the third quarter a year ago. The year-over-year third quarter decrease was largely due to a $562,000 benefit collected in bank-owned life insurance policies in 2019. Lower ATM fees and service charges on deposit accounts, as well as increased dividends on FHLB stock and lower fee income from sales to deposit networks in the third quarter of 2020, all contributed to the decrease. The efficiency ratio of 57.82% reflects continued expenses in the quarter. Third-quarter non-interest expense of $15.2 million increased by $1.1 million in the second quarter and $1 million a year ago. The increase from the second quarter was primarily due to the $890,000 in deferred loan origination costs related to PPP in the second quarter and higher charitable contributions in the third quarter. The increases in expenses from the third quarter of 2020 included higher charitable contributions, annual merit increases, provisions for loan losses on off-balance sheet commitments, and FDIC. The Bank delivered a return on assets of 0.98% and a return on equity of 8.37% in the third quarter. While there is no clear answer to the pandemic yet, we are confident that our proven relationship banking model, low-cost deposit base, and expenses will enable us to deliver steady, consistent results with high asset quality and reliable performance. And now, Russ would like to share some closing comments.
Russell Colombo, President and CEO
Thank you, Tani. I want to conclude by emphasizing that we are confident in the strength of our loan portfolio, which is consistently supported by disciplined underwriting, conservative loan-to-value ratios, and personal guarantees. Our very low and declining levels of classified and non-accrual loans amplify this. Our exposure to the industries most affected by the pandemic is relatively small. And among clients initially impacted, most have adjusted to this new climate and are again making payments as usual, as evidenced by a steep decline in payment relief data. Of the fewer than 15 borrowers who continue to defer loan payments, we anticipate that the vast majority will work through this and do pay. We know every single one of these clients very well. We're in close contact and helping each of them navigate remaining challenges. In summary, Bank of Marin continues to execute our guidance related to banking, disciplined fundamentals, and community commitment. These principles have served our communities and our shareholders exceptionally well for three decades, and we are confident that they will continue to do so as we weather this pandemic and position the bank for growth alongside our customers in 2021. Thank you for your time this morning, and now we will open it up for your questions.
Operator, Operator
Thank you. This concludes the prepared remarks. We now have a question from the line of Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis, Analyst
Thanks. Good morning.
Russell Colombo, President and CEO
Good morning, Jeff.
Jeff Rulis, Analyst
First question on expenses and really strategy. I think you've seen peer banks with more vocal branch consolidation plans or expense management; you've run a pretty lean bank as it is. But wanted to get a sense for your strategy of balancing expense management with what I think you also alluded to about some opportunities or reinvestment as well. So it's a broad strategic question, but then maybe it narrows down to Tani on – you've had some charitable contributions, but how does that narrow into the kind of expense run rate ahead? Thanks.
Russell Colombo, President and CEO
Well, I'll take a shot first and then I'll pass it over to Tani. But we’re very focused on expenses. I think the pandemic has shown all of us that we could probably be more efficient, and we can utilize this – there are opportunities to have a portion of our workforce remote. And you know that, that will certainly help us move forward. It's not all of it, because we obviously need to be close to our customers and in direct contact with them. So going forward, we will take opportunities to utilize certain positions remotely, because there are many benefits. There are benefits in attracting people who don't necessarily have to live in the area. Number two, you don't have to have real estate for that, which can be more efficient. The other thing we’re looking at is that the pandemic has, in many cases, forced people who were comfortable with technology to utilize technology more. As for branch business, they aren't as great. We look at opportunities to potentially consolidate branches and things of that nature. And I think there's plenty of savings like that. If we did any of that, we would reallocate our workforce; we don't look at any layoffs at all, but there's always opportunity for people to be reassigned from branch to branch. We’ve also been looking at reducing our space for many years. Our biggest branch is Corte Madera, which is about 2,200 square feet. We’ve been looking at keeping our branch locations small, with our smallest locations about 1,400 square feet in Tiburon. So, yes, we're always looking for opportunities to keep expenses down and utilize opportunities like remote workforce. But I’ll ask Tani to follow-up on that.
Tani Girton, Executive Vice President and Chief Financial Officer
Yes. Thanks, Russ. And good morning, Jeff. I think that the charitable contributions are now recognized in their own line on the financial statements, as it was a material amount this quarter. We are looking at further charitable contributions in the next couple of quarters. That also balances with lower expenses for travel and other things due to the pandemic. So there is a bit of a trade-off there. When you look at the expense base, the detail we laid out in the earnings release is indicative of where we'll be in the future.
Jeff Rulis, Analyst
Okay. I appreciate that. I just wanted to touch on the reactivation of the buyback. In your comments, it seems like, while there's no end to the pandemic, it's a growing comfort or visibility that seems indicated with the buyback language. In terms of capital usage, it seems like that's going to be a near-term lower execution type option relative to seeking M&A. Any follow-up comments on capital usage would be great.
Russell Colombo, President and CEO
Sure. I'll briefly comment, and I'll again ask Tani to talk about capital. We had a buyback in place that we suspended back in March, because it was the right thing to do at that point, given the uncertainty. But when we look at our portfolio, the deferments have all dropped significantly, and everything is left, so we know every one of these borrowers well. Most of the loans that are on some kind of deferral have real estate collateral, and the average is well under 50%. So we feel pretty comfortable at this point that the loan portfolio is in good shape. Despite the pandemic, our customers are performing. We don’t have a big percentage of our portfolio in what we call risk areas. Therefore, we feel comfortable with reinstating the stock repurchase plan. Tani, would you like to add anything?
Tani Girton, Executive Vice President and Chief Financial Officer
Great. Thanks, Russ. Yes. We continue to have profitability, so our capital base continues to grow. We want to ensure that we are deploying our capital in the most efficient way possible. M&A continues to remain a priority, and we are watching for opportunities that may arise from the pandemic or for other reasons. We believe we have sufficient capital to cover both share repurchases and potential M&A. We run a capital plan five years forward, twice a year, to account for expected dividends and dividend growth, as well as share repurchases and potential M&A to ensure we have sufficient capital going forward.
Jeff Rulis, Analyst
Thank you. Just one quick housekeeping question, Tani. The increase, the $1.6 million in the ACL, can we expect to see that on 12/31? Or is it as a January 1 adjustment?
Tani Girton, Executive Vice President and Chief Financial Officer
That will come in on December 31, and that is the adoption adjustment that takes into account the difference between CECL and the incurred loss model as of January 1, 2020, but it will be booked in the fourth quarter.
Jeff Rulis, Analyst
Fair enough. Thank you.
Operator, Operator
Our next question comes from the line of Matthew Clark from Piper Sandler. Please proceed with your question.
Matthew Clark, Analyst
Hey, good morning.
Russell Colombo, President and CEO
Good morning, Matt. How are you doing?
Matthew Clark, Analyst
On the off-balance-sheet strategy, can you just touch on the rationale there? Your loans were flattish on an end-of-period basis, but obviously, your core deposits were down, I think, 8% or so. Just any color on the strategy there and whether or not you can estimate how much in the way of basis points you might have earned by pushing that off-balance sheet?
Russell Colombo, President and CEO
I'll ask Tani to answer that question.
Tani Girton, Executive Vice President and Chief Financial Officer
Sure, thanks. Hi, Matthew. Yes, we typically push significant deposits off-balance sheet for liquidity management if we have excess liquidity, while also anticipating potential fluctuations in volatility and liquidity, we don't earn that much incremental, but we do earn some incremental, and every basis point counts right now, because we're not earning a lot at the Fed either. Typically, we bring those back at the end of each quarter. However, this quarter we decided not to do that, because there is a lot of liquidity in the banking system, and we were concerned that the deposit networks wouldn't be able to place it again after quarter-end if we went back out with that chunk of money and said we wanted it placed. So we opted to keep it off-balance sheet for quarter-end.
Matthew Clark, Analyst
Okay, great. I noticed your classified numbers came down. I think you upgraded a credit. Can you provide a sense for what the watchlist did in the quarter, just knowing it's not in that number?
Russell Colombo, President and CEO
Let me ask our Chief Credit Officer, Beth Reizman, to answer that question.
Elizabeth Reizman, Chief Credit Officer
Hello, this is Beth Reizman. Our classified loans did go down. We have seen any loans that were on a payment relief classified as watch. Those have actually declined as the payment relief has paid off. We’ve had some special mention increase, but we do that any time we feel there's potential weakness in a credit that we want to watch a little more closely. We don't feel that any of these credits would be moving toward a classified substandard rating.
Matthew Clark, Analyst
Okay, great. Could you share thoughts around the broader Bay Area and activity in general concerning commercial real estate?
Russell Colombo, President and CEO
I can answer that. The commercial real estate market is certainly in question. People are looking at that and seeing what's going to happen. A lot of what drives commercial real estate prices, especially in San Francisco and the peninsula, is technology. We've seen many announcements from tech companies where they have decided to keep employees remote. A lot of these companies have said remote until the end of June, others have said they plan to keep a remote workforce going forward. So if they push some of their real estate out and sublet that, it will impact the market. We don’t know how much impact it will have, but it will have an impact. The good news is we've always had a conservative approach to commercial real estate. As you can see, particularly in those credits we have, the average loan-to-value ratio is 41% on the commercial real estate secured. We are in a position to benefit from the way we've historically underwritten. While I think there's going to be impacts in the commercial real estate market across the Bay Area, we are now in a strong position because of our underwriting practices, historically. Some folks have said we've been a bit too conservative in the past, but that has proven wise as we navigate these challenging times. Over our 30 years, we've had net losses of $220,000 across the board on commercial real estate.
Matthew Clark, Analyst
Great. Last one for me, just on the pipeline and how that has changed, maybe year-over-year or linked quarter? Are you starting to see some of your borrowers take advantage of opportunities, or is it still too early?
Russell Colombo, President and CEO
Let me ask Tim Myers, our Chief Operating Officer, to answer that question.
Timothy Myers, Executive Vice President and Chief Operating Officer
Hi, Matthew. Yes, thanks, Russ. There’s no question it's down at this point from the same period last year. Though customers have been resilient, we have some folks in new markets like San Mateo and Walnut Creek who are doing their best in this environment to acquire new clients. We also continue to get some activity from our existing portfolio. So it's too early to tell exactly how that plays out. While we love to see it higher, it has remained somewhat resilient, which has been nice.
Operator, Operator
Our next question comes from the line of David Feaster with Raymond James. Please proceed with your question.
David Feaster, Analyst
Hi, good morning, everybody.
Russell Colombo, President and CEO
Good morning, David. How are you?
David Feaster, Analyst
I just wanted to follow-up on the commentary about loan prices. You're having tremendous success on pricing new loans that were down only 50 basis points year-over-year despite the 150 basis point decline in rates. I'm curious about the competitive landscape and what yields on new loans look like. Where do you think you differentiate versus your peers in maintaining pricing?
Russell Colombo, President and CEO
I'm going to ask Tim Myers to answer that, but I'll make one quick comment. Our model is relationship-based. While we do compete on price, we also build relationships where the relationship and the ability to talk to your banker has significant value. This model has historically served us well. While it may sound cliché, our customers are very loyal to us. We hope that our good relationships can help us maintain our pricing better than others. How much that is? Who knows. In an environment like this, pricing gets very compacted. Tim, can you talk more about the market in general?
Timothy Myers, Executive Vice President and Chief Operating Officer
Yes, thanks, Russ. Every deal is a competitive bid situation right now, and it is a highly competitive market. I’ve seen rates on fairly long-duration money that I've never seen before. We never chase the bottom, but we do our best, as Russ mentioned, to leverage our industry expertise or our relationship banking when we present proposals. Every deal we pursue has that discussion. We don't just pursue loans for the sake of it. We focus on offering value in various ways. I expect the market to remain competitive, especially when you're selective with your borrowers and credit profiles. We will maintain that discipline as we emphasize relationship banking.
Tani Girton, Executive Vice President and Chief Financial Officer
Russ, can we add one point to that?
Russell Colombo, President and CEO
Sure, go ahead, Tani.
Tani Girton, Executive Vice President and Chief Financial Officer
It's crucial to note that we were very proactive in lowering floors on existing loans when the pandemic began. This decision has produced a significant amount of goodwill with our customers.
David Feaster, Analyst
That's a helpful perspective. So given all this combined: with deposit initiatives to deploy some of the excess liquidity, the dispensability on the loan pricing side, along with loan growth, how do you think this translates into your margin? Any thoughts on the margin going forward?
Russell Colombo, President and CEO
It's hard to project rate movements. Do we know if we’re at the bottom? I kind of hope so. I don't know how much lower we can go. The problem is, we have positive deposits at 9 basis points now, so that can't get much lower. Competitive factors can drive banks to do unwise things. At some point, we just have to say we can't participate in that. We aim to have solid relationships with our borrowers so they keep their financing with us. However, no one knows how things will play out. Tim, do you have anything to add?
Timothy Myers, Executive Vice President and Chief Operating Officer
No, that’s it.
Tani Girton, Executive Vice President and Chief Financial Officer
This is Tani. I think the volatility will be unpredictable, considering forgiveness will significantly affect performance parameters. The timing of forgiveness is also hard to predict. When it occurs, it will have a considerable impact.
David Feaster, Analyst
That makes sense. I’m glad to hear there hasn't been any real impact from the wildfires. I wanted to get your thoughts on the wine industry in your portfolio. What are you seeing there? Is there an opportunity to drive loan growth as wineries recover?
Russell Colombo, President and CEO
I’ll make general comments about the industry, and Tim has specifics on borrowers. I've talked to various wineries about the fires. Many wineries have let their grapes drop to the ground due to concerns about tainting their products. Particularly for high-end wineries, compromising standards is not an option. There is concern about the 2020 crop and what it will produce. I think it will yield low production across the board. Fortunately, our borrowers were minimally impacted by the fires. Unfortunately, we had one borrower whose property burned shortly after selling to a new buyer, but most of our other wineries managed to come through this fairly well. Tim can provide more specifics.
Timothy Myers, Executive Vice President and Chief Operating Officer
David, as Russ mentioned, our clients have dodged a bullet with these fires. Some negatives in this round have been offset by positives with both the pandemic and the fires. It’s important to note that this year's crop will be impacted; however, the bulk wine market may see increased support prices given reduced yields. Many of our wineries rely on direct-to-consumer sales, and they've adapted well despite challenges in tasting room activity. It remains to be seen how tourism will fluctuate, but overall, the latter has provided some resilience.
Russell Colombo, President and CEO
I'd add that wineries are taking this opportunity to reduce inventories. This rationalization means they aren’t forced to move. If a winery cannot offload all their inventory, then they might see discounting practices. This is a real—if not 'good'—opportunity to manage their offerings.
David Feaster, Analyst
That makes sense. Thank you very much.
Russell Colombo, President and CEO
Thank you, David.
Operator, Operator
Our next question comes from the line of Tim Coffey with Janney. Please proceed with your question.
Timothy Coffey, Analyst
Great. Thanks, everybody, for hosting this conference call. I wanted to drill down on commercial real estate. We’re seeing a bit of a slowdown in investment that now implies your loan originations might hover around the $50 million level going forward?
Russell Colombo, President and CEO
I’m sorry, I didn’t quite understand what $50 million target means.
Timothy Coffey, Analyst
Sure, the slower growth in commercial real estate investing.
Russell Colombo, President and CEO
That’s difficult to predict. A lot depends on the timing and opportunities we see. We are actively pursuing several opportunities. However, it’s hard to ascertain if that will result in increases in originations, especially as many deals have long lead times.
Timothy Coffey, Analyst
Okay.
Tani Girton, Executive Vice President and Chief Financial Officer
I will defer to Tim for more detailed insights.
Timothy Myers, Executive Vice President and Chief Operating Officer
Sure. We’re currently beta testing our forgiveness process. We've been waiting for finalization of many interim rules and guidance concerning payroll calculations. We have wanted to avoid starting the process if borrowers don't get full forgiveness. Therefore, we have hesitated until we are certain.
Timothy Coffey, Analyst
Sure. Is the expectation that you'll have some loans committed by year-end?
Timothy Myers, Executive Vice President and Chief Operating Officer
We hope so, but we’re trying to wait for clarity from Congress. Nevertheless, we have been actively preparing.
Timothy Coffey, Analyst
Okay. No, that's helpful. Thank you.
Operator, Operator
Our next question comes from the line of Jackie Bohlen with KBW. Please proceed with your question.
Jacquelynne Bohlen, Analyst
Hi, good morning, everyone.
Russell Colombo, President and CEO
Good morning, Jackie.
Jacquelynne Bohlen, Analyst
I wanted to touch on fees. I know last quarter you discussed waiving many of those still. Are you planning to continue this through the end of the pandemic, or might we see a rebound in fees sooner?
Russell Colombo, President and CEO
Tim, why don’t you address that?
Timothy Myers, Executive Vice President and Chief Operating Officer
Certainly, we’re trying to maintain support for our customers during this difficult time. The short answer to your question is that we'll continue to monitor the situation. We'll revert to fair practices as soon as it's prudent while considering the impacts on borrowers.
Jacquelynne Bohlen, Analyst
Thank you for the update. Also, regarding balance sheet liquidity, you had proactive actions at 9/30 to keep some of that off-balance sheet. What are customer behaviors indicating so far in this quarter for potential inflows or outflows in Q4?
Russell Colombo, President and CEO
Tim?
Timothy Myers, Executive Vice President and Chief Operating Officer
It’s really a mixed bag, Jackie. We’ve had some deposits from PPP findings that have resulted in large paydowns. We have large accounts that fluctuate significantly month-to-month. These ins and outs aren't always mutually exclusive. A lot of debt is being paid down; that has been a larger loan payoff category this year compared to previous years. People are very conservative. I expect this trend to continue, which will impact loan utilization as well.
Jacquelynne Bohlen, Analyst
Yes, that is helpful. Lastly, regarding the CECL adjustment, will that all flow through in the fourth quarter’s provision expense?
Tani Girton, Executive Vice President and Chief Financial Officer
That will flow through the fourth quarter provision expense.
Jacquelynne Bohlen, Analyst
Okay, great. Thank you, everyone.
Russell Colombo, President and CEO
Thank you for your participation. We look forward to speaking with you again next quarter, as we review our year-end results. Thank you for your attendance.