Earnings Call Transcript
Bank of Marin Bancorp (BMRC)
Earnings Call Transcript - BMRC Q1 2020
Andrea Henderson, Director of Marketing
Good morning and thank you for joining the Bank of Marin Bancorp’s Earnings Call for the First Quarter Ended March 31, 2020. I am Andrea Henderson, Director of Marketing for Bank of Marin. During the presentation all participants will be in a listen-only model. As a reminder, this conference is being recorded on April 20, 2020. Joining us on the call today are Russ Colombo, President and CEO; 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, April 17, 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 and Tani, along with Chief Credit Officer, Beth Reizman; and Tim Myers, Head of Commercial Banking will be available to answer your questions. And now, I’d like to turn the call over to Russ Colombo.
Russ Colombo, President and CEO
Thank you, Andrea. Good morning and welcome to the call. Before we begin, I hope everyone is healthy and safe. I especially want to express my gratitude to essential workers who continue to provide much needed resources to local communities in Northern California and across the nation. As you know, the world has changed dramatically and the situation remains very challenging. Fortunately, Bank of Marin is well capitalized, and we have ample liquidity and resources to help our clients manage through these trying times. We are participating in the small business administration paycheck protection program, which provides low interest loans to small businesses to cover payroll expenses and other overhead costs. To date, we have received approximately 1,300 applications for an estimated total of $350 million. We were able to submit and receive SBA approval for a meaningful portion of those applications prior to the SBA’s suspension of the program. We continue to process customer applications internally and remain poised to submit them for approval as soon as the program is restarted. In an effort to ease the financial burden on our customers, we are waiving all ATM and overdraft fees, and cancelling early withdrawal penalties for CDs when allowed by law. We are also providing 120 days of payment relief to borrowers with hardship requests and have reduced interest rate floors on prime-based business loans. As of April 14, we have received approximately $322 million in loan relief requests or conversion to interest only or payment deferral. 93% are secured by real estate with loan-to-value ratios averaging less than 45%, and $129 million are linked to industries mostly impacted by California’s shelter-in-place order. Our loan portfolio exposure to the most affected industries includes 10.4% retail properties and businesses, 4.6% wine-related, and 2.7% hospitality. Transportation, dental, recreation, and entertainment combined represent less than 1.5% of the total portfolio. The health of our employees and customers is also a top priority. Bank of Marin has deployed safety protocols such as enhanced branch cleaning and strict social distancing policies. While we have modified branch hours, we have retained all of our employees at full pay with no layoffs or furloughs. Although many employees are currently working from home, we have seasoned banking teams in all of our markets and they are dedicated to helping our clients weather this storm. Additionally, we are encouraging our customers to use ATM, digital banking, and telephone banking services, all of which are available 24/7. Now, I’ll turn to our first quarter results. We maintained strong lending levels and generated net income of $7.2 million with diluted earnings per share of $0.53. Total loans of $1.8 billion were up slightly from our record fourth quarter of 2019. Deposits held steady at $2.3 billion, and our cost of deposits remained very low at 21 basis points. Non-interest-bearing deposits comprised 49% of total deposits. We posted a total risk-based capital ratio of 15.3%, well in excess of regulatory requirements. While we are very well capitalized, our Board of Directors decided on March 20 to suspend our share repurchase program indefinitely in precautionary response to the pandemic. The Board plans to monitor the situation closely and reinstate the program when appropriate. Mostly unrelated to the effects of the coronavirus non-accrual loans increased by $1.4 million in the first quarter to $1.6 million or 0.09% of total loans. Classified loans increased by $2.1 million from the prior quarter to $12.1 million, but we’re still down relative to the first quarter of 2019. The credit impacts from the COVID-19 crisis will take time to materialize. Our bank is not immune to the significant economic pressures associated with the pandemic, but we are confident in our conservative lending philosophy and strong historic asset quality performance. Finally, because of our continued profitability, our Board of Directors declared a cash dividend of $0.23 per share on April 17, 2020. This represents the 60th consecutive quarterly dividend paid by Bank of Marin Bancorp. With that, I will turn it over to Tani for additional insights on our financial results.
Tani Girton, Executive Vice President & CFO
Thank you, Russ, and good morning everyone. As Russ noted, we generated $7.2 million in net income and diluted earnings per share of $0.53 in the first quarter of 2020 compared to $9.1 million and $0.66 respectively in the prior quarter. Net interest income totaled $24.1 million in the first quarter compared to $23.9 million in the prior quarter. Despite lower loan yields and one less day in the quarter, net interest income exceeded that of the fourth quarter of 2019, due to a larger earning asset base, accelerated accretion on a called investment security, and money market deposit rate reduction. The tax-equivalent net interest margin was 3.88% in the first quarter compared to 3.82% in the prior quarter. Accelerated accretion on the called investment security added 7 basis points to the first quarter margin. We have postponed the adoption of the current expected credit loss accounting standard or CECL in accordance with the accounting release provision in the CARES Act that allows banks to delay implementation until the end of the national emergency or December 31, whichever occurs first. We recorded a $2.2 million loan loss provision in the first quarter under the incurred loss model. This was unusual for Bank of Marin and up from $500,000 the previous quarter reflecting adjustments to qualitative factors for the economic uncertainties raised by the COVID-19 pandemic. Non-interest income was $3.1 million in the first quarter of 2020, an increase from $2.3 million in the prior quarter primarily due to $800,000 in gains on the sale of investment security. The first quarter typically includes some seasonal expenses and this year was no exception. Non-interest expense totaled $15.5 million, compared to $13.3 million in the prior quarter. The increase was primarily due to $1.7 million higher salary and benefit expenses related to January resets of 401K matching and payroll taxes, 2019 bonus accrual true-ups, 401K matching on bonus payments, and stock-based compensation which included $388,000 for participants meeting retirement eligibility criteria. Other increases included four additional full-time equivalent staff and $102,000 provision for off-balance sheet commitments. The Bank delivered a return on assets of 1.09% and a return on equity of 8.54% in the first quarter of 2020. We are pleased with our continued profitability and prepared to leverage our operating strength in support of our customers during the COVID-19 crisis. Now, Russ would like to share some closing comments with you.
Russ Colombo, President and CEO
Thank you, Tani. No one can predict the length and severity of the pandemic or the extent of its impact on our lives and local economy. However, Bank of Marin has a strong capital position, a high-quality loan portfolio with excellent credit metrics, and a low-cost deposit base. For more than 30 years these factors have allowed us to support our customers and communities in good times and bad. We will navigate through the crisis in the same way together. Before we open it for questions, I wanted to provide our latest numbers for the Paycheck Protection Program. Bank of Marin has collected over 1,300 applications since the program launched, closing more than $350 million. We processed close to 250 loans before the SBA stopped accepting applications, most of which will fund today. Now, we will open up the line for questions.
Operator, Operator
Your first question is from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis, Analyst
Thanks, good morning.
Russ Colombo, President and CEO
Good morning, Jeff.
Tani Girton, Executive Vice President & CFO
Good morning.
Jeff Rulis, Analyst
I guess – thanks for the detail on sort of the portfolio exposure in those categories. I guess the wine-related business is maybe a little more unique to you and others, I guess. Could you walk through just the segment kind of those operations that can continue or cannot within the wine industry and what’s your kind of view on how that industry progresses?
Russ Colombo, President and CEO
I’d be happy to. It’s interesting because depending on the winery, part of their business is still doing well due to wine clubs, direct shipments to members, and sales to grocery stores that remain open. However, tasting room sales and on-premise sales, which include bars and restaurants, have obviously dropped to zero. We have several wineries and wine-related businesses that are significantly affected, and most have applied for the Paycheck Protection Program due to their declining sales. I feel optimistic about their recovery. Once we adapt to whatever the new normal will be and restaurants reopen, those wineries will be back in business at full capacity. It’s a unique situation, but it’s not entirely bleak. Eventually, tourists will return to the wine country and start visiting wineries and tasting rooms again. In the meantime, that segment of the business is certainly struggling.
Jeff Rulis, Analyst
Right. And I know there is a figure there Russ about, you know, of that 4.7, is there – you know a quarter of it is direct shipments or have you thought of it in that – like what portion is on premise or, you know, real hospitality or kind of direct retail?
Russ Colombo, President and CEO
You know every business – every winery is different, but, you know, maybe I can ask Beth Reizman, our Chief Credit Officer who is on the line and she may have more specifics on that. Beth?
Beth Reizman, Chief Credit Officer
No, actually many of our clients have all facets of the business where they ship direct; they have a wine tasting room, etcetera. So, we haven’t really broken it down specifically to ones that are just typically wholesale or direct-to-consumer, but I think they all – most of them have an aspect of each part that Russ mentioned in their business.
Jeff Rulis, Analyst
Okay, thank you. Maybe shifting gears to the fee income side, you mentioned the waiving of fees; I guess the first part of that question is what impact did you see in the first quarter of waiving your fees or if that came very late and didn't see much impact and so that translates to – you know the outlook on fee income expecting maybe investment gains that you booked in the quarter to stop?
Russ Colombo, President and CEO
Yes, I’ll answer it, and I’ll ask Tani to jump in. You know the impact is minimal in the first quarter because it was towards the end of the quarter that that was all put in place, so there’s not going to be a lot in the first quarter. Second quarter certainly will have an impact on earnings. As you know, we are – you know our fee income relative to our net interest margin spread is relatively small, so it’s not going to have a big an impact I think as others might, but you know, so – but it’s the right thing to do at this point in time, so we have no problem making those changes. But Tani, did you want to make any comments in terms of the gains on sales?
Tani Girton, Executive Vice President & CFO
Yes, in terms of the gain on sale, what we sold were some shorter duration mortgage-backed securities that we felt as we were approaching the interest rate cuts or the stressed environment were subjected to higher prepayment risk, and so their duration would shorten even further, and we were able to sell those at a gain and then redeploy much of those funds into longer duration, high credit quality municipal securities, which we did; and that helped the yield on the portfolio and also protects the Bank from interest rate risk in this lower interest rate environment.
Jeff Rulis, Analyst
And any thoughts on further security sales or you just kind of took a pretty good chunk of it in the quarter?
Tani Girton, Executive Vice President & CFO
Yes, that was an opportunity we identified earlier in the quarter. Currently, we are not focusing on any specific opportunities. We have ample liquidity to support the PPP and other programs we are managing, and the PPP liquidity facility is available if we need to raise funds. Therefore, we will not sell securities solely for liquidity reasons. Should we notice any opportunities, we closely monitor the credit quality of our portfolio. If we anticipate any credit issues, we may sell a few securities if necessary, but overall, we maintain a high credit quality portfolio and engage in minimal selling activity.
Jeff Rulis, Analyst
Okay, great. Thank you all. I’ll step back.
Russ Colombo, President and CEO
Thanks, Jeff.
Operator, Operator
And your next question comes from the line of Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark, Analyst
Hi, good morning.
Russ Colombo, President and CEO
Good morning.
Matthew Clark, Analyst
On the reserve build this quarter, knowing you guys delayed CECL, were you able to kind of consider the subsequent deterioration in the overall economy here in April or was it really as of 3/31? I guess what I'm getting at is whether or not we might see some additional reserve build here at least in the near term?
Russ Colombo, President and CEO
Yes, good question. I’m going to ask our Chief Credit Officer, Beth Reizman, to answer that question.
Beth Reizman, Chief Credit Officer
So, we use our incurred loss model, which is the existing model that we’re using prior to the conversion of CECL. So we looked at where we were as of 3/31. However, there was already deterioration definitely in the market. We had, as Russ had indicated, numerous clients request payment relief, so for that reason we adjusted our economic factors. That said, if there’s continued deterioration, we will take that into account in June, especially whichever model we’re under.
Matthew Clark, Analyst
Okay. And then, as you kind of dig deeper on the exposure that you have that are most at risk in this environment, have you run a stress test internally to try to get a sense for what the potential loss content could be if this environment phase, you know, if it sticks around for another three months or so?
Russ Colombo, President and CEO
Again, I’ll ask Beth to answer that question.
Beth Reizman, Chief Credit Officer
So, as we stress our real estate portfolio annually and I’d say you have numbers as far as clients that requested payment relief, they’re indicative of our portfolio. The average loan-to-value was less than 45%. So, we are looking at clients on a case-by-case basis if there’s a request or if they’re experiencing financial difficulty, but the overall portfolio is very well secured and we are a relationship bank and our credit generally have very strong sponsorship behind them as well in the form of guarantees.
Matthew Clark, Analyst
Okay, great.
Russ Colombo, President and CEO
I’ll just add to it – Matthew, I’ll just add to that, you know, one of the hallmarks of our portfolio is the low loan-to-value that Beth mentioned on our real estate and the – you know we have quite a bit of our portfolio secured by the real estate, low loan-to-value guarantors and liquidity and I will just say that if you look back to the last recession, we came through that really well because our borrowers have a commitment to those property, and when there was a problem, they fixed the problem as opposed to the bank inheriting the problem, and I think that continues to be the case. As Beth mentioned, you know, 45% loan-to-value on our – on the portfolio of the stress – you know those that we gave loan modifications to is indicative of the strength of that part of the portfolio and the strength of the total portfolio because that’s the portion that asked for help, the rest did not. So, I’m feeling very good about it going forward. Of course, everyone is going to have problem depending upon how long this goes on, you know, the problems will intensify I’m sure, but I'm feeling pretty good about the position we’re in and our ability to write out this crisis.
Tani Girton, Executive Vice President & CFO
Russ, may I add a comment to that?
Russ Colombo, President and CEO
Sure.
Tani Girton, Executive Vice President & CFO
So, I do want to emphasize that $2.2 million is a very large provision for Bank of Marin and even in the incurred loss model, as Beth said, there is a projection, not a projection, but a factor in the qualitative factors for the unknown associated with COVID-19. So, while we don't have the forward-looking aspect of the CECL model incorporated, there is a significant chunk of uncertainty associated with COVID-19 that is embedded in the provision that we took, which is why it was so large.
Matthew Clark, Analyst
Got it. Regarding the PPP program, there are timing and geography considerations, but assuming the $350 million is fully funded, I’m unsure of the likelihood of that. If it does happen, with an average loan size below $280,000, it would suggest about a 5% origination fee on those balances, potentially amounting to $17.5 million in origination fees. I think this could assist in managing the situation. However, my main question revolves around the timing of these loans and the origination fees should you choose to sell them as you submit them to the SBA for reimbursement.
Russ Colombo, President and CEO
First of all in terms of – I have to try to hold on to them, 1% seems the most appealing loans that you are holding, there is a fee related. You know, we don't know exactly what the fee income will be. It’s such a big number of loans that – you know it’s kind of spread across. We had anticipated more of an average here in 360, 370 that was just a guess, but if that was the case, we’re probably having – you know averaging more in 3% range as opposed to 5%, but that’s – it’s still hard to determine at this point. You know, I am going to ask Tim Myers at this point to jump in. Tim is in commercial banking have been really shepherding this whole program through and have been very hard at work. So, let me ask Tim jump in to address those issues.
Tim Myers, Head of Commercial Banking
Sure. Thanks Russ. Yes, I think in terms of the fee income, we really haven’t gone to the part of trying to calculate based on the size of each individual application and the volume of that in its entirety. As Russ also pointed out, these are going to stay on the books at 1% if they do. So, our intent is, you know, as we get more guidance from the SBA is to follow the forgiveness process and we have a platform we acquired to help with the application through documentation, submission, tracking, and forgiveness phase, I think we’re waiting for additional guidance on how to go about that, but our intent is to, you know, once we’re able to start processing that for our customers, and certainly, there may be somewhere depending on how the money is spent or how they view that application or use the proceeds where we end up with, but I think our intent at this time is to allow all the forgiveness to take place.
Matthew Clark, Analyst
Okay. And do you – is your sense that is going to come through and I assume it would, but any confirmation on it?
Russ Colombo, President and CEO
That is going to what?
Matthew Clark, Analyst
Is your expectation that the, sorry, the – is your expectation then those origination fees when you do realize and will come through spread revenue and not fee income pretty naturally?
Russ Colombo, President and CEO
I’m not sure on that one, I – Tani could you answer that?
Tani Girton, Executive Vice President & CFO
Our initial expectation is that it will come through net interest income. Since we are unsure about the timing of forgiveness, we anticipate that we will account for them in net interest income similarly to other fees over a two-year period, as that is the maximum maturity on these loans. If they are forgiven, we would then accelerate the recognition of those fees at the time of forgiveness.
Matthew Clark, Analyst
Got it, okay. And then, just last one for me on the loan floors as I mentioned of lowering floors, I guess can you give us a sense for the magnitude of floors that you have and I guess the percentage that might, you know, move lower, if not all?
Russ Colombo, President and CEO
Sure. Tani, do you want to answer it?
Tani Girton, Executive Vice President & CFO
Sure. We have – the floor reduction apply to prime business loans mostly because the floors on the home equity loans were already at the lower level, so that’s, you know, somewhere between 10% and 15% of the portfolio, but some of those loans were at higher floors that we reduced and some were not. So, I can't tell you what the impact on net interest margin would be, but what I can say is that it looks like – you know if we applied it for a full year, it could be, you know, somewhere between $750,000 and $1 million in terms of net interest income.
Matthew Clark, Analyst
Okay, thank you.
Operator, Operator
And your next question comes from the line of Jackie Bohlen with KBW. Please go ahead.
Jackie Bohlen, Analyst
Hi, good morning, everyone.
Russ Colombo, President and CEO
Hi, Jackie.
Jackie Bohlen, Analyst
Curious about premium amortization, expectations for next quarter, I know you did a little bit of portfolio positioning to avoid some of that coming through, but do you have just a sense on what you would expect in 2Q and how you’re thinking about security yield overall next quarter in light of the rate environment and then the purchases you made this quarter?
Russ Colombo, President and CEO
Sure. I’ll ask Tani to answer that question.
Tani Girton, Executive Vice President & CFO
Yes, so – yes, the 7 basis points related to the – I’d say that the security yields are pretty much stable other than that 7 basis points for the accretion. You know it wasn't too significant as a portion of the portfolio that we sold and redeployed, you know, maybe an eighth of the portfolio or even less than that, but I think what it does is more flows the decline of the yields on the portfolio as opposed to actually pumping them up.
Jackie Bohlen, Analyst
Okay. And do you have a sense for any amortization expectations, just that delta between maybe what happened in the first quarter and what your expectations would be for the second quarter?
Tani Girton, Executive Vice President & CFO
I don't know the answer to that question. You mean the delta between the portfolio pre-transactions and post transactions on premium amortization?
Jackie Bohlen, Analyst
Or just in general, you know, do you expect given the rate movement that happened, you know, somewhat later towards the end of the quarter? Do you expect premium amortization to pick up in 2Q with pay-offs some things like that? Or is it just, you know, too soon to know?
Tani Girton, Executive Vice President & CFO
Yes, I think it's a little too soon to know. I mean I think we have noticed that there were – before things got – you know before the shelter in place orders were in place and people started to realize the full impacts of what's going on, we did see some increase in pre-payments on the mortgage side, but that seems to be anecdotally slowing a little bit, so it's really hard to make a projection on that, but I’ll look at it, Jackie, and if there's something that we can share with you all, we will.
Jackie Bohlen, Analyst
Okay. Okay, and then in terms just of loan yields, in realizing, you know, that activity is impacted by the, you know, the shelter in place orders that are ongoing how are you seeing new loans booking yield versus the portfolio?
Russ Colombo, President and CEO
That’s a good question. I'm actually going to ask Tim Myers because he’s on the line so to answer that question.
Tim Myers, Head of Commercial Banking
Yes, thank you, Russ. I believe they have decreased somewhat, although not as much as we potentially expected in the last quarter. We are doing our best to maintain our relationship banking approach and maximize benefits for both parties. However, there is no doubt that some banks are taking advantage of the current environment by offering rates that I would consider excessively competitive. We will continue to do our best, but it is clear that rates have fallen below the portfolio averages.
Jackie Bohlen, Analyst
Okay. Do you have a sense for how much below the averages are dropping?
Tim Myers, Head of Commercial Banking
I don't have an arrogant number for you, but I can work with Tani to get that for you.
Jackie Bohlen, Analyst
Okay. Thank you. And then just one last one, related to incurred loss versus CECL, you know, Beth, you made comments about looking at the provision and you said whichever model your operating under, is there a possibility that you would look to adopt CECL prior to the end of the national emergency or December 31 whichever one of those comes first?
Beth Reizman, Chief Credit Officer
Russ, is it alright if I answer?
Russ Colombo, President and CEO
Yes, go ahead Beth.
Beth Reizman, Chief Credit Officer
I doubt we’d adopt it before the end of the national emergency. We, I would believe, would stay under the incurred loss model, but that’s something we will discuss internally to just really depend. It was so difficult to try to implement CECL for, you know, the first quarter because it was very, very difficult to forecast. The variables just kept changing almost daily, and so that’s what makes it very, very difficult as well as we deployed our resources really to focus on our client. So, not a perfect answer, but, you know, we’ll see.
Jackie Bohlen, Analyst
No, no. But that’s helpful nonetheless, thank you. And what is your understanding of how soon? So, let’s just say the national emergency ends on say, I don’t know, September 15, I’m just picking a date, so would you have an adoption then on October 1, is that how it works?
Beth Reizman, Chief Credit Officer
I might defer to Tani on that, but we’re going to be ready for a scenario like that. That’s our intent internally. We don't want to be – you know to have it end and not be ready, so our intended is to be ready because we were basically almost there. We just had to fine-tune a couple of things. And again, it was the forecasting that was the real issue with the – just uncertainty in the economy and the constant changing of the projection by various entities.
Russ Colombo, President and CEO
You know, Jackie, I’m going to add to that too. I don't think you’re going to have a day when the national emergency ends. I think it's a time period and I don't – because I don't think we’re – you know from my understanding, I don’t think we’re going to have a time when, hey, this is over, we can all get back to normal. This is going to gradually come in, so it’s going to be difficult to pick a date and say okay, now is the day we need to implement this. So, I think that over the next six to nine months, it's going to be a very gradual return to whatever the new normal is. And so, you know, I just don't see this happening – this adoption happening before we get to that new normal, right. It’s just – it's really difficult to project what the markets are during this time frame.
Jackie Bohlen, Analyst
Okay, understood. And I mean that's my assumption as well that the new normal is going to take a very long time to – you know for all of us to figure out what that is.
Russ Colombo, President and CEO
Sure, sure.
Jackie Bohlen, Analyst
So it sounds like in your mind the more likely scenario is that we get to December 31 before there's any sort of a declaration of the end of the emergency that would trigger CECL's implementation?
Russ Colombo, President and CEO
Correct.
Tani Girton, Executive Vice President & CFO
And Jackie, this is Tani. If I can add, we don't have actually clear guidance out of FASB in terms of how this will be adopted for institutions that chose to delay the adoption of CECL. So, the mechanics of the adoption are still, you know, sort of what's the best we can guess based on what we know now, but they haven't actually come out with clear guidance, and if they do, obviously, that will influence what we need to do going forward.
Jackie Bohlen, Analyst
Okay. Thank you, Tani. That’s helpful and thank you for taking all my questions and everyone please be well.
Russ Colombo, President and CEO
Thank you. You too.
Tani Girton, Executive Vice President & CFO
You too.
Operator, Operator
And your next question is from the line of Tim Coffey with Janney. Please go ahead.
Tim Coffey, Analyst
Thank you. Good morning, everybody.
Russ Colombo, President and CEO
Good morning, Tim.
Tani Girton, Executive Vice President & CFO
Good morning, Tim.
Tim Coffey, Analyst
Can you elaborate on the Q factors you used this quarter and how they compare to what you encountered during the Great Recession? Were they similar, or did you draw on the losses from that period to help determine the Q factors?
Russ Colombo, President and CEO
Beth, would you like to answer that?
Beth Reizman, Chief Credit Officer
Sure. So the two – in the incurred loss model, the historical losses which are based on our history is – that’s a set figure that we can't touch. It’s a calculated figure. Q-factors are used to adjust for what is occurring in the market today or in the economy today that is not shown by our historical losses, and so, that’s what we looked at and we adjusted our Q-factors, qualitative factors for what was occurring due to the pandemic. So, is that helpful?
Tim Coffey, Analyst
Yes, it does. So, you didn’t use any of the losses experienced from the Great Recession as kind of a base or a starting point for the Q-factor this quarter?
Beth Reizman, Chief Credit Officer
They are baked into our model.
Tim Coffey, Analyst
Okay, okay. I understand.
Beth Reizman, Chief Credit Officer
Q factor accounts for what’s occurring kind of outside the historical loss calculation.
Tim Coffey, Analyst
Sure, okay.
Russ Colombo, President and CEO
Tim, I’ll also add – I’ll add one thing and back in the Great Recession, if you look back what our losses that we experienced, which were frankly relatively minimal, most of them were related to, you know, residential development loan, you know, track development. And so, we don't really have that at all anymore and so it’s not comparable at all because it was so tied to the mortgage industry and to the development of residential homes and this is so different that it’s hard to compare.
Tim Coffey, Analyst
Okay, of course. And then I appreciate the details on the portfolio that you people have exposed to the COVID situation, what percentage of those loans that you identified have either asked for payment relief or submitted a PPP loan application?
Russ Colombo, President and CEO
What percentage of the loans for which we made modifications are related to PPP loans?
Tim Myers, Head of Commercial Banking
Oh! I see. I don't know. Let me see, Tim, do you know the answer to that one? I don’t think I have that one.
Russ Colombo, President and CEO
You know, Tim, as you look at the challenging industries, you can guess that most do. I mean potential hotel, motel, retail properties, although we have – you know we have – when we talk about retail properties, typically, is we have a borrower who owns some kind of a center and we have – you know we have one that has a drugstore, which is doing just fine, so we don’t make payment – we didn’t make any modifications on that loan, yet the same borrower has something that has – let’s say a restaurant in it, we might make a modification there. So it’s – every situation is different depending upon the type of property and also the – the strength of the borrower, and you know, the – the liquidity that their borrower has, so it kind of depends.
Tim Coffey, Analyst
Okay. And then, just in the current environment, Russ, you mean the pay-offs that you experienced this quarter were elevated, you know, I guess with lower rates you would expect to see more pay-offs, but given the uniqueness of the situation perhaps not, what’s kind of your outlook on that?
Russ Colombo, President and CEO
Yes, I don’t – you know we had certain pay-offs and I will ask Tim kind of address the – what the pay-offs were because frankly it was more related to construction activity that completed, but, you know, I don’t – this is not an environment we’re going to see a lot of pay-offs right now because I don't think because I think we’re going to – you’re going to see people more focusing on their business as – you know their day-to-day as opposed to the financing side. I could be wrong there, but I just don't think pay-offs are going to be substantial this quarter.
Tim Myers, Head of Commercial Banking
Sure. Yes, if you look at just a quarter, you know, if you pull out HELOC and TIC type pay-offs and just look at the commercial loans that paid off, it was relatively evenly split between assets sold and what we kind of deemed plant or project completion pay-offs, and with an asset sold, you know, fairly a good sized chunk of that is the sale of assets underlying construction loans, others just selling properties. On the planned, a significant chunk of that was – you know we have some large construction clients. We are proposing or entertaining a large construction project to the same borrowers. We had a number of terms loans that we had, and so, to manage our exposure to that group of borrowers, we, you know, just negotiated they would refinance some of those term loans elsewhere and we would focus on the construction loan. So that really made, you know, up the bulk of that. There was one material third-party refinance, which I think is more probably what you are aimed at there and we’ve seen a bit of a trend over the last year and a half on mobile home parks and things like that being taken out by non-bank lenders at very aggressive terms that, you know, non-recourse, very low rates, interest-only for many years, just, you now, areas where we're not interested in and participating in with that level of aggression. So that really makes up the bulk of it, sorry go ahead.
Russ Colombo, President and CEO
You know, I was going to say, Tim, why don’t you give him a little color on pay-offs going forward over the next quarter, not the number, but just what you’re thinking at this point?
Tim Myers, Head of Commercial Banking
Yes, I mean I think that planned number is going to subside. That was a unique situation. I think sales, I'm expecting to decline. You know we will have construction projects get wrapped up successfully, but I – this was an elevated number. I don't expect this level of pay-offs going forward.
Tim Coffey, Analyst
Okay, great. Well, I appreciate all the color. Thank you. And then, if we look at kind of the non-interest expenses, are there any investments that you had planned for this year that you might be pulling back from or anything that put downward pressure on that expense number, the core number, of course, not the seasonal stuff?
Russ Colombo, President and CEO
You know the expenses that we have, you know, we’re – obviously, we have branch that’s moving and that’s going to happen in May, so we have that. Its relatively minor expense frankly because we – the location we had was pretty well built out anyway. You know the expenses for the most part, new projects, we’ve kind of put on hold in terms of anything new whether it’s technology or otherwise, we’re just kind of focusing on getting through this situation right now. You know we do have a branch that’s being built out in Hallsberg. So, that’s going to continue. So, we didn't have a lot on the table in terms of big project, but we’re certainly not entertaining new ideas right now until we get through this crisis.
Tani Girton, Executive Vice President & CFO
And Tim, this is Tani. I would add that, you know, due to social distancing and travel restrictions and conference cancellations and any of the events we do, a fair amount of those events that have been canceled or postponed, obviously, those are going to put downward pressure on non-interest expense.
Tim Coffey, Analyst
Okay. Well, great. Thank you very much for your time. Those were all my questions.
Russ Colombo, President and CEO
Thanks Tim.
Operator, Operator
We have another question from Jackie Bohlen with KBW. Please go ahead.
Jackie Bohlen, Analyst
Hi, thanks for taking my follow-up. Just one quick one, I meant to ask do you expect any noticeable overtime to run through with PPP?
Russ Colombo, President and CEO
We will have overtime because we have had a team working on this literally day and night and when we – we did get – it took us a little while to get approved because we were not an SBA lender. So, when – we didn’t get approved until last week and when we got approved, we had to – we are doing all background work to submit as soon as we got that approved, but we couldn't submit anything. So, once we got the approval, the team worked literally till 2:30 in the morning submitting these applications to the SBA and until the well ran dry, so to speak. That being said, we will have the same energy and focus during the next – as soon as the next package is approved, which I understand is getting closer. I haven’t seen recently, but that’s what I heard this morning and if that – once that happens that team is going to be working day and night too. So that’s a long-awaited answer to say, there will be some overtime because not all of these people that are working on it are exempt employees, some are not exact. So, I don't have – I can’t put a number on it right now, but there will be some of it.
Jackie Bohlen, Analyst
Okay. Alright, thanks.
Russ Colombo, President and CEO
Sure.
Operator, Operator
And we have no further audio questions at this time.
Russ Colombo, President and CEO
Okay. I think there are some emailing questions for us. So the first question was from David Feaster from Raymond James. How do you think about non-interest expenses going forward? We just talked a little bit about that in light of the revenue headwinds and given low rate environment and a challenging backdrop, what is the good run rate going forward. Tani, do you want to expand on that at all?
Tani Girton, Executive Vice President & CFO
So I think, you know, if you take out the first quarter noise that we get all of the time, I think we’re at a pretty decent run rate right now. So, as Russ said, I don't think we have any large new, you know, investments that are either staying on or being canceled and we do have some downward pressure associated with reduced events and social contact, but on the other hand, the overtime associated with the PPP. So, I think in general though, if you take out the first quarter noise, you’ve got a pretty decent base to start from.
Russ Colombo, President and CEO
You know, we also had – and Tani has mentioned the fact that there is a lot of events that we participate in that we have in terms of customer events, things of that nature, which have gotten put on hold at least for the time being and probably canceled for this year. However, that – those funds – a lot of those funds are what we’re redirecting to donations through non-profits. We’ve made – we’ve committed money to the – to a number of different municipalities who are making grants to customers in the market to help them through this crisis and our bank has taken a pretty active role with a couple of – with a number of municipalities. And so, all-in-all, those things will balance themselves out to certain extent. While we won’t maybe put on an event, we may just give the money to the non-profit rather than sponsoring the table or something like that. So, I think non-interest expenses will, going forward, be pretty consistent. The makeup will be different, but the number will probably be pretty similar. There's another question from – also from David Feaster. Following up on the PPP question, how do you plan to account for those? Or do you expect to hold those loans for sale and those fees should run through fees or will it be a loan fear flow through NII? I think Tani answered that, but Tani, do you have any comment on that?
Tani Girton, Executive Vice President & CFO
Well the only other thing I would say is, you know just to remember Tim’s emphasis on the point that these loans can be forgiven if the borrower in fact uses the funds for the intended purpose and so our top priority is to assist our customers with getting forgiveness on those loans. So, when that occurs then the SBA would repay the loan as opposed to the borrower.
Russ Colombo, President and CEO
There is another question from Elizabeth, Park Capital. And the question is, are any of the TDRs on the book approximately $11.1 million related to the industry’s most effective, most likely affected by the COVID? More detail on the composition of that credit bucket. So, I’ll ask Beth Reizman to comment on that.
Beth Reizman, Chief Credit Officer
So, I took a look at those loans and they are really throughout the various industries. There is one large one that – in one of those industries, but it is well secured and good sponsorship behind it and you know number of our TDRs are actually past credit. It’s just that they are – it is difficult to eliminate that status.
Russ Colombo, President and CEO
Okay. There’s one more question from David Feaster of Raymond James. I'm curious about what you’re hearing from regulators and auditors regarding the increased provision due to the ongoing pandemic. Considering your asset quality, did they believe the provision was too high? I thought it was a reasonable conservative estimate. I'm interested in any commentary you’ve received from regulators or your auditors on this topic, and I look forward to your response.
Beth Reizman, Chief Credit Officer
So, we’ve had numerous conversations with our auditors during the process, both myself and Tani and they are in agreement with where our provision was and felt it was appropriate. I have not spoken with the regulators at this point in time, I don’t know if Tani has or Russ.
Russ Colombo, President and CEO
Okay. I think that maybe all the questions. If there is no other questions from anyone, I really appreciate your time this morning. We will obviously be in communication as – on the next – at the end of the next quarter, hopefully the circumstances would be better, but I appreciate your time again this morning and look forward to talking to you next quarter. Thanks.
Operator, Operator
And this concludes today’s conference call. You may now disconnect.