Bank Of Marin Bancorp  (NASDAQ: BMRC) Q1 2020 Earnings Call Transcript

Bank Of Marin Bancorp  (BMRC) Q1 2020 earnings call dated Apr. 20, 2020

Corporate Participants:

Andrea Henderson — Director of Marketing

Russell A. Colombo — President, Chief Executive Officer

Tani Girton — Executive Vice President, Chief Financial Officer

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

Tim Myers — Executive Vice President, Commercial Banking

Analysts:

Jeff Rulis — D.A. Davidson — Analyst

Matthew Clark — Piper Sandler — Analyst

Jackie Bohlen — KBW — Analyst

Tim Coffey — Janney — Analyst

Presentation:

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 mode. After the call, we will conduct a question-and-answer session. [Operator Instructions] 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 17th, 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 closure 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.

Russell A. Colombo — President, Chief Executive Officer

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 canceling 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 14th, we have received approximately $322 million in loan relief requests for 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 most 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 layoff or furlough. 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 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 requirement. While we are very well capitalized, our Board of Directors decided on March 20th to suspend our share repurchase program indefinitely in a 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 17th, 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 insight on our financial results.

Tani Girton — Executive Vice President, Chief Financial Officer

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 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 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.

Russell A. Colombo — President, Chief Executive Officer

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 through 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 application since the program launched totaling more than $350 million. We’ve 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.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from the line of Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis — D.A. Davidson — Analyst

Thanks, good morning.

Russell A. Colombo — President, Chief Executive Officer

Good morning, Jeff.

Tani Girton — Executive Vice President, Chief Financial Officer

Good morning.

Jeff Rulis — D.A. Davidson — Analyst

I guess — thanks for the detail on the 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?

Russell A. Colombo — President, Chief Executive Officer

Sure, I’d be happy to. It’s kind of interesting because depending upon the winery, there is still — part of their business is still going fine because its wine clubs, its direct shipments to wine club members, its sale to grocery stores and things like that who are still in business. The part of the business that’s just not — nothing is happening is, of course, tasting room sales and on-premise type sales, which is bars and restaurants, things like that. So that’s off, obviously 100% [Indecipherable]. You know, we — the wineries we — we have a number of wineries and we have wine related businesses — they are certainly off significantly and most of them have applied for PPP because they’re off and they’ve had — their sales are off, but I feel pretty good about that once we get back to whatever the new normal is, once restaurants open again, those wineries are going to be back in business, back to 100%. So it is unique, but it’s not completely zero and eventually tourists will come back to the wine country and start visiting the wine — you know, the tasting rooms, but in the meantime, that part of the business is struggling, that’s for sure.

Jeff Rulis — D.A. Davidson — Analyst

Right and I don’t if there is a figure there, Russ, about, you know, of that 4.7 [Phonetic], is there, you know, a quarter of it is direct shipments or have you thought of it in that — it’s like what portion is on-premise or real hospitality or kind of direct retail?

Russell A. Colombo — President, Chief Executive Officer

You know, every business, every winery is different, but you know, maybe I can ask Beth Reizman, our Chief Credit Officer, is on the line and she may have more specifics on that. Beth?

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

No, actually, many of our clients have all facets of the business where they ship direct, they have wine tasting rooms etc. So we haven’t really broken it down specifically to ones that are just typically wholesaler, direct to consumer, but I think they all — most of them have an aspect of each part that Russ mentions in their business.

Jeff Rulis — D.A. Davidson — 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 of 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?

Russell A. Colombo — President, Chief Executive Officer

Yeah, I’ll answer it and then I’ll ask Tani to jump in. 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 — 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 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 sale?

Tani Girton — Executive Vice President, Chief Financial Officer

Yeah, 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 also that helped the yield on the portfolio and also protects the bank from interest rate risk in this lower interest rate environment.

Jeff Rulis — D.A. Davidson — 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, Chief Financial Officer

Yeah, that was an opportunity that we saw at that point in the quarter. Right now, we’re not looking at anything in particular. We have plenty of liquidity to support the PPP and other programs that we’re running right now and the PPP LF [Phonetic] liquidity facility is out there, if we want to generate funds. So we won’t be selling securities just for liquidity purposes. If we do see opportunities or — we also keep a very close eye on the credit quality of the portfolio. So if we anticipate some sort of credit issue, then we might sell one or two as those come up, but in general, we have a very high credit quality portfolio and don’t do too much of that activity.

Jeff Rulis — D.A. Davidson — Analyst

Okay, great. Thank you. I’ll step back.

Russell A. Colombo — President, Chief Executive Officer

Thanks, Jeff.

Operator

And your next question comes from the line of Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark — Piper Sandler — Analyst

Hi, good morning.

Russell A. Colombo — President, Chief Executive Officer

Good morning.

Matthew Clark — Piper Sandler — 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?

Russell A. Colombo — President, Chief Executive Officer

Yes, it’s a good question. I’m going to ask our Chief Credit Officer, Beth Reizman, to answer that question.

Elizabeth Reizman — Executive Vice President, 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 is continued deterioration, we will take that into account in June especially whichever model we’re under.

Matthew Clark — Piper Sandler — Analyst

Okay and then as you kind of dig deeper on the exposures 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 say sort of sticks around for another three months or so?

Russell A. Colombo — President, Chief Executive Officer

Again, I’ll ask Beth to answer that question.

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

Well, as — we stress our real estate portfolio annually and I think you have numbers as far as clients that requested payment relief, they are indicative of our portfolio, the average LTV was less than 45%. So we are looking at clients on a case-by-case basis if there is a request or if they are 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.

Russell A. Colombo — President, Chief Executive Officer

[Speech Overlap]. Beth, I’ll just add to that. One of the hallmarks of our portfolio is the low loan-to-value that Beth mentioned on our real estate and we have quite a quite a bit of our portfolio secured by real estate. Low loan-to-value, guarantors, and liquidity and I will just say that when — if you look back to the last recession, we came through that really, really well because our borrowers have a commitment to those properties 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, 45% loan-to-value on our portfolio of those stress prop — 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 problems depending on how long this goes on. The problems will intensify I’m sure, but I’m feeling pretty good about the position we’re in and our ability to ride out this crisis.

Tani Girton — Executive Vice President, Chief Financial Officer

May I add a comment to that?

Russell A. Colombo — President, Chief Executive Officer

Sure.

Tani Girton — Executive Vice President, Chief Financial Officer

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 — Piper Sandler — Analyst

Got it and then just on the PPP program. I guess it’s a timing and geography question to some degree, but assuming the $350 million fully funds, which I don’t know what the probability of that is or not and maybe you could help answer that, but assuming it does, with an average loan size under $280,000, it would imply about a 5% origination fee on those balances which would be about $17.5 million of origination fees that I would think you could use to help kind of get through this and it’s over the life of the loan, but — so my question is really around your appetite to hold on to these loans and kind of the timing of those origination fees should you decide to unload them as you submit them to the SBA for getting paid back.

Russell A. Colombo — President, Chief Executive Officer

First of all, in terms of our appetite to hold on to them, they are 1%. So, it’s not the most appealing loan to be 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 it’s kind of spread across. We had anticipated more of an average of, in the 360 [Phonetic], 370 [Phonetic], that was just a guess, but if that was the case, we’re probably averaging more in the 3% range as opposed to 5%, but that’s — it’s still hard to determine at this point. 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 to jump in to address those issues.

Tim Myers — Executive Vice President, Commercial Banking

Sure, thanks Russ. Yeah, I think in terms of the fee income, we really haven’t gotten 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 as we get more guidance from the SBA as 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 of proceeds, what we end up with, but I think our intent at this time is to allow all the forgiveness to take place if it can [Phonetic].

Matthew Clark — Piper Sandler — Analyst

Okay and then do you — is there a sense that it’s going to come through NII. I assume it would, but haven’t confirmation on that.

Russell A. Colombo — President, Chief Executive Officer

That is going to what?

Matthew Clark — Piper Sandler — Analyst

[Speech Overlap] Is your expectation that the — sorry, is your expectation that those origination fees when you do realize and they’ll come through spread revenue, not fee income?

Russell A. Colombo — President, Chief Executive Officer

I’m not sure on that one. Tani, could you answer that?

Tani Girton — Executive Vice President, Chief Financial Officer

Yes, yes, our initial expectation is that, yes, it will come through net interest income and because we are [Technical Issues] at this point in time about what the forgiveness timing will be. What will probably happen is that we will board them, run them through net interest income the same way we do other fees with a life of two years because that’s the maximum maturity on these loans and then if they get forgiven, we would accelerate those fees at the time of forgiveness.

Matthew Clark — Piper Sandler — Analyst

Got it, okay and then just the last one for me on the loan floors, there was a mention 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 move lower, if not all?

Russell A. Colombo — President, Chief Executive Officer

Sure, Tani, do you want to answer that?

Tani Girton — Executive Vice President, Chief Financial Officer

Sure, we have — so the floors — the floor reduction applied to prime business loans mostly because the floors on the home equity loans were already at the lower level. So that’s 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 whole year, it could be somewhere between $750,000 and $1 million in terms of net interest income.

Matthew Clark — Piper Sandler — Analyst

Okay, thank you.

Operator

And your next question comes from the line of Jackie Bohlen with KBW. Please go ahead.

Jackie Bohlen — KBW — Analyst

Hi, good morning everyone.

Russell A. Colombo — President, Chief Executive Officer

Hi, Jackie.

Jackie Bohlen — KBW — 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 securities yields overall next quarter in light of the rate environment and then the purchases you made this quarter.

Russell A. Colombo — President, Chief Executive Officer

Sure, I’ll ask Tani to answer that question.

Tani Girton — Executive Vice President, Chief Financial Officer

Yeah, so, 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 of a portion of the portfolio that we sold and redeployed, maybe an eighth of the portfolio or even less than that, but I think what it does is more slows the decline of the yields on the portfolio as opposed to actually bumping them up.

Jackie Bohlen — KBW — Analyst

Okay and do you have a sense for premium amortization expectations? Just the delta between maybe what happened in the first quarter and what your expectations would be for the second quarter?

Tani Girton — Executive Vice President, Chief Financial Officer

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 — KBW — Analyst

Or just in general, do you expect given the rate movement that happens somewhat later towards the end of the quarter, do you expect premium amortization to pick up in 2Q with payoffs and things like that or is it just, it’s too soon to know.

Tani Girton — Executive Vice President, Chief Financial Officer

Yeah, I think it’s a little too soon to know. I mean I think we have noticed that there were — before things got — 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 prepayments 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 is something that we can share with you all, we will.

Jackie Bohlen — KBW — Analyst

Okay and then in terms just of loan yields, in realizing that activity is impacted by the the shelter-in-place orders that are ongoing, how are you seeing new loan booking yields versus the portfolio?

Russell A. Colombo — President, Chief Executive Officer

That’s a good question. I’m actually going to ask Tim Myers because he’s on the line to answer that question.

Tim Myers — Executive Vice President, Commercial Banking

Yeah, thank you, Russ. I mean they have come down somewhat although not as much I think overall as we expected potentially this last quarter. So I think we’re doing our best to maintain the relationship banking approach and get as much as we can where fair for both parties, but there’s no question there are banks taking advantage of this environment offering rates that I would deem beyond competitive and so we continue to do our best, but there is no question rates have dropped below the portfolio averages.

Jackie Bohlen — KBW — Analyst

Okay, do you have a sense for how much below the averages they are dropping?

Tim Myers — Executive Vice President, Commercial Banking

I don’t have an aggregate number for you, but I can work with Tani to get that for you.

Jackie Bohlen — KBW — Analyst

Okay, thank you and then just one last one, related to incurred loss versus CECL, Beth, you made a comment about looking at the provision and you said whichever model you’re operating under. Is there a possibility that you would look to adopt CECL prior to the end of the national emergency or December 31st, whichever one of those comes first?

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

Russ, is it alright if I answer?

Russell A. Colombo — President, Chief Executive Officer

Yeah, go ahead, Beth.

Elizabeth Reizman — Executive Vice President, 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. It just really depends — it was so difficult to try to implement CECL for the first quarter because it was very, very difficult to forecast — the variable 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 clients. So not a perfect answer, but we’ll see.

Jackie Bohlen — KBW — Analyst

No, no but that’s helpful nonetheless, thank you and the — what is your understanding of how soon — so it’s — let’s just say the national emergency ends on say I don’t know, September 15th, I’m just picking a date. So would you have an adoption then on October 1st? Is that how it works?

Elizabeth Reizman — Executive Vice President, 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 intent 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.

Russell A. Colombo — President, Chief Executive Officer

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 — 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 I just don’t see this happening — this adoption happening before we get to that new normal. It’s just, it’s really difficult to project what the markets are during this time frame.

Jackie Bohlen — KBW — 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. So it sounds like in your mind, the more likely scenario is that we get to December 31st before there’s any sort of a declaration of the end of the emergency that would trigger CECL’s implementation.

Tani Girton — Executive Vice President, Chief Financial Officer

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 or institutions that chose to delay the adoption of CECL. So the mechanics of the adoption are still sort of well 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 — KBW — Analyst

Okay, thank you, Tani, that’s helpful and thank you for taking all my questions and everyone please be well.

Russell A. Colombo — President, Chief Executive Officer

Thank you, you too.

Tani Girton — Executive Vice President, Chief Financial Officer

You too.

Operator

And your next question is from the line of Tim Coffey with Janney. Please go ahead.

Tim Coffey — Janney — Analyst

Thank you, good morning everybody.

Russell A. Colombo — President, Chief Executive Officer

Good morning, Tim.

Tani Girton — Executive Vice President, Chief Financial Officer

Good morning, Tim.

Tim Coffey — Janney — Analyst

Hey, staying on the provision for a moment. The Q factors that you used this quarter, in what way do they compare to what you experienced during the Great Recession? Were they comparable or I mean, did you use the losses that you experienced during the Great Recession to help set the Q factor, kind of some color there please?

Russell A. Colombo — President, Chief Executive Officer

Yes, Beth, would you like to answer that?

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

Sure, so 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 of 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. Does that help?

Tim Coffey — Janney — Analyst

Yeah, it does. So you didn’t use any of the losses experienced in the Great Recession as kind of a base or a starting point for the Q factor this quarter.

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

They are baked into our model.

Tim Coffey — Janney — Analyst

Okay, okay.

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

Historical losses are a calculation in our model. Q factor for what’s occurring kind of outside the historical loss calculation.

Tim Coffey — Janney — Analyst

Sure, okay.

Russell A. Colombo — President, Chief Executive Officer

Tim, I’ll also add — I’ll add one thing and back in the great recession, if you look back with our losses that we experienced, which were frankly relatively minimal, most of them were related to residential development loan, you know, attractive element and so we don’t really have that at all anymore. 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 — Janney — Analyst

Okay, of course and then again, appreciate the details on the portfolio that you believe is exposed to the COVID situation. What percentage of those loans that you identified have either asked for a payment relief or submitted a PPP loan application?

Russell A. Colombo — President, Chief Executive Officer

What percentage of the loans that we ask — that we got — we made loan modifications for as for PPP loans. Is that what you [Speech Overlap].

Tim Coffey — Janney — Analyst

No, what percentage of the 17.7% of your portfolio that’s exposed hotel, retail, things like that requested deferment?

Russell A. Colombo — President, Chief Executive Officer

I don’t know, let me see, Tim, do you know the answer to that one. I don’t think I have that one.

Tim Myers — Executive Vice President, Commercial Banking

I don’t have a precise percentage for that. There is significant crossover between PPP [Phonetic] and the payment relief — the different modes of payment relief, but I don’t have an exact number.

Russell A. Colombo — President, Chief Executive Officer

Tim, as you look at the challenging industries, you can guess that most of them do, I mean dental, hotel, motel, retail properties although we have — when we talk about retail properties, typically we have a borrower who owns some kind of center and we have one that has a drug store in it, 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 strength of the borrower and the liquidity that the borrower has. So it kind of depends.

Tim Coffey — Janney — Analyst

Okay and then in the current environment, Russ, you mean the payoffs that you saw — you experienced this quarter were elevated, I guess with lower rates, you would expect to see more payoffs, but given the uniqueness of the situation, perhaps not. What’s kind of your outlook on that?

Russell A. Colombo — President, Chief Executive Officer

Yeah, I don’t — we had certain payoffs and I’ll have, I mean have Tim kind of address what the payoffs were because frankly, it was more related to construction activity that completed, but this is not an environment we’re going to see a lot of payoffs 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 — their day-to-day as opposed to the financing side. I could be wrong there, but I just don’t think payoffs are going to be substantial this quarter [Indecipherable] third quarter, but Tim, maybe you can give him a little bit of color on the payoff activity last quarter.

Tim Myers — Executive Vice President, Commercial Banking

Sure, yeah, if you look at just the quarter, if you pull out HELOC and TIC type payoffs and just look at the commercial loans that paid off, it was relatively evenly split between assets sold and what we kind of deemed planned or project completion payoffs and within assets sold, a fairly good size chunk of that is the sale of assets underlying construction loans, others just selling properties. On the planned, a significant chunk of that was, we have some large construction clients. We were proposing or entertaining a large construction project to the same borrowers we had a number of term loans that we had and so to manage our exposure to that group of borrowers, we just negotiated they would refi some of those term loans elsewhere and we would focus on the construction loan. So that really made up the bulk of it. There was one material third-party refinance, which I think is more probably what you were aimed at there and we’ve seen a bit of a trend over the last year and a half on mobile home parks, things like that being taken out by non-bank lenders at very aggressive terms that non-recourse, very low rates, interest-only for many years, just areas [Phonetic] where we’re not interested in participating in that or at that level of aggression. So that really makes up the bulk of it. Sorry, go ahead.

Russell A. Colombo — President, Chief Executive Officer

No, I was going to say, Tim, why don’t you give him a little color on your — on payoffs going forward over the next quarter, not numbers, but just what you are thinking at this point.

Tim Myers — Executive Vice President, Commercial Banking

Yeah, I mean I think that planned number is going to subside. That was a unique situation. I think sales I’m expecting to decline. We will have construction projects get wrapped up successfully, but I — this was an elevated number. I don’t expect this level of payoffs going forward.

Tim Coffey — Janney — Analyst

Okay, great. Well, I appreciate all the color. Thank you. And then if we look at kind of non-interest expenses, are there any investments that you had planned for this year that you might be pulling back from or anything that might put downward pressure on that expense number, the core number of course, not the seasonal stuff.

Russell A. Colombo — President, Chief Executive Officer

So the expenses that we have, we obviously, we have a branch that’s moving and that’s going to happen in May, so that we have that, it’s a relatively minor expense frankly because the location we had was pretty well built out anyway. 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. In terms of expansion elsewhere, we’ve been very careful about [Technical Issues] any big project right now because we want to just see how this goes. We do have a branch that’s being built out in Healdsburg. So that’s going to continue. So we didn’t have a lot on the table in terms of big projects, but we’re certainly not entertaining new ideas right now until we get through this crisis.

Tani Girton — Executive Vice President, Chief Financial Officer

And Tim, this is Tani. I would add that due to social distancing and travel restrictions and conference cancellations and any of the events, we do a fair amount of events that have been canceled or postponed. Obviously, those are going to put downward pressure on non-interest expense.

Tim Coffey — Janney — Analyst

Okay, well, great. Thank you very much for your time. Those are all my questions.

Russell A. Colombo — President, Chief Executive Officer

Thanks, Tim.

Operator

[Operator Instructions] We have another question from the line of Jackie Bohlen with KBW. Please go ahead.

Jackie Bohlen — KBW — 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?

Russell A. Colombo — President, Chief Executive Officer

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 were doing all the 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’ll have the same energy and focus during the next — as soon as the next package is approved, which I understand is getting close or 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-winded 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 exempt. So I don’t have — I can’t put a number on it right now, but there will be some of it.

Jackie Bohlen — KBW — Analyst

Okay, all right, thanks.

Operator

And we have no further audio questions at this time.

Russell A. Colombo — President, Chief Executive Officer

Okay, I think there are some email questions for us. So the first question was from David Feaster at Raymond James. So how do you think about non-interest expenses going forward. Can you just talk a little bit about that in light of the revenue headwinds and given the low rate environment and the challenging backdrop, what is a good run rate going forward?

Tani, do you want to expand on that at all?

Tani Girton — Executive Vice President, Chief Financial Officer

Well, 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 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.

Russell A. Colombo — President, Chief Executive Officer

I will also add, Tani had mentioned the fact that there is a lot of, there’s 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, those funds — a lot of those funds are what we’re redirecting to donations to non-profits. We’ve committed money 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 couple of — with a number of municipalities and so in — all-in-all, those things will balance themselves out to a certain extent. While we won’t maybe put on an event, we may just give the money to a non-profit rather than sponsoring the table or something like that. So I think non-interest expenses going forward will be pretty consistent. The makeup will be different but the number will probably be pretty similar.

Let’s see, there’s another question from also David Feaster. Following up on the PPP question, how do you plan to account for those? Do you expect to hold those loans for sale and those fees should run through fees or will it be a loan fee or flow through NII?

I think Tani answered that, but Tani, did you have any comment on that?

Tani Girton — Executive Vice President, Chief Financial Officer

Well, the only other thing I’d say is 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.

Russell A. Colombo — President, Chief Executive Officer

There was 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 industries 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.

Elizabeth Reizman — Executive Vice President, Chief Credit Officer

So I took a look at those loans and they’re really throughout the various industries. There is one large one that in one of those industries, but it’s well secured and good sponsorship behind it and a number of our TDRs are actually past credit. It’s just that there, it’s difficult to eliminate that status.

Russell A. Colombo — President, Chief Executive Officer

Okay and then I think there was one more question from David Feaster of Raymond James. Just curious what you’re hearing from the regulators and auditors in your discussions on the increased provision from Q factors given the ongoing pandemic? Given your asset quality, did they think it was too high or thought it was a good conservative estimate? Just curious what commentary received from regulators or your auditors on the topic?

And that will definitely be Beth to answer that one.

Elizabeth Reizman — Executive Vice President, 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, 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.

Russell A. Colombo — President, Chief Executive Officer

Okay, I think that may be all the questions. If there is no other questions from anyone, I really appreciate your time this morning. We will obviously be in communication on the next — the end of next quarter. Hopefully, the circumstances will be better, but I appreciate your time again this morning and look forward to talking to you next quarter. Thanks.

Operator

[Operator Closing Remarks]