OceanFirst Financial Corp. (OCFC) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the OceanFirst Financial Corp. Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Jill Hewitt, Investor Relations Officer. Please go ahead.

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

Thank you, Jill, and good morning to all who have been able to join our first quarter 2020 earnings conference call today. This morning, I'm joined by our Chief Operating Officer, Joe Lebel; Chief Risk Officer, Grace Vallacchi; and Chief Financial Officer, Mike Fitzpatrick.As always, we appreciate your interest in our performance and are pleased to be able to discuss our operating results with you. This morning, we have a number of topics to cover that relate to the quarter. Our recent acquisitions and of course updates regarding the impact of the pandemic on our business. After that, we look forward to taking your questions.In terms of financial results for the first quarter, GAAP diluted earnings per share were $0.27. Quarterly reported earnings were impacted by a number of unusual items that total $10.4 million net of income tax. These items related primarily to the adoption of the CECL loan loss standard and the dual acquisitions completed on January 1. As a result, we picked core earnings at $0.45 a share.Looking past some of the unusual items for the quarter, underlying financial performance was strong as demonstrated by expanding margins and increase in non-interest income and well controlled operating expenses. The earnings strength of the franchise is critically important as we move into an environment of substantial economic uncertainty.Regarding capital management for the quarter, the board declared a quarterly cash dividend of $0.17, the company’s 93rd consecutive quarterly cash dividends. $0.17 dividend represents a conservative 38% payout of core earnings.As you will recall, we maintained relatively low payout ratio over the past few years to prepare our balance sheet for a shift in the credit cycle. This allows us to maintain the common dividend, while continuing you provide degree of capital flexibility. There are no plans to reduce or eliminate our common dividend at the present time.Capital levels remain strong with tangible capital assets to total assets of 8.9%. At the current earnings rate, we expect to build capital levels for the duration of 2020. Early in the year, the company was able to repurchase 648,851 shares of common stock, but suspended repurchases on February 28 as the global impact of the pandemic became apparent.Share repurchases are possible in the future, but we will preserve capital until the full impact of the pandemic is well understood. The company is slightly more than 2 million shares remaining in the current share repurchase program. Just a quick note regarding tangible book value per share, which now reflects the impact of the Two River and Country Bank acquisitions.Tangible book value per share decreased by about 3%, primarily driven by the consideration paid for the dual acquisitions completed in January. The book value dilution is slightly more favorable than the estimate provided when these transactions were announced in August of last year and should accelerate the tangible book value per share in that period.Turning to the income statement, the first quarter demonstrated strong performance in net interest income, healthy fee income driven by swaps and well managed expenses. Included in the core operating expense number is $1 million of expenses related to the pandemic. These pandemic related expenses should moderate in future quarters.Even without fully realizing the efficiencies from the twin acquisition, the core efficiency ratio remained close to 55%. Joe will provide more detail regarding funding costs, but the stabilization of net interest margins also bodes well for future quarters. Later in the call, Grace will walk you through credit provisioning and the impact of CECL and the pandemic.Our decision to implement CECL requires some additional discussion. As you may recall, I’ve been vocal regarding the pitfalls related to CECL and strongly advocated that the new standard be set aside given the unprecedented economic shock the world is facing. Unfortunately, the policy action taken regarding CECL has made things even worse. By offering an optional deferment, we have created a few new issues.First, banks deferring CECL may be considered to have more precarious balance sheets. Second, securities guidelines require the disclosure of impacts related to upcoming accounting changes. The banks electing to defer CECL have some responsibility to share the CECL estimates anyway.And finally, the idea that the deferral would require a future restatement of prior period financials is the icing on the CECL cake. We have a high quality of loan portfolio and a strong capital position and determined that it would be best to just move forward as planned. I guess every crisis experiences an accounting issue and 2008 was the application of mark-to-market and for the pandemic it will be CECL.Asset quality is especially important as we move into unfamiliar economic environments. As discussed on previous calls, we've been pruning the balance sheet of higher risk loans for quite some time and we continue to sell higher risk loans in the first quarter. First quarter loan sales were responsible for 82% of our net charge-offs for the quarter helping drive down the level of non-performing assets to just $16.6 million or a mere 16 basis points of non-performing assets to total assets.In fact, other real estate owned amounted to less than $500,000 at quarter-end. Given economic conditions, we expect these figures to grow in the upcoming quarters, but our balance sheet provides the critical room to work with our clients during the challenging time.Regarding the pandemic, we’ve provided several supplemental slides to our quarterly earnings release. These slides include important details regarding forbearance programs and our efforts to serve as a conduit for the SBA’s PPP program. I won’t repeat the discussion from our March 24 pandemic investor call. However, I will assure you that the bank was early to respond the pandemic.We continue to address operating conditions in a wide variety of ways. We remained open for business, our assisting customers, and are prepared to operate in a socially distanced world for extended period of time.Our operating discipline and strong digital solutions allowed OceanFirst to address forbearance and crisis response quickly and effectively. By applying our forbearance experience in Hurricane Sandy, we've been working with clients to address forbearance requests since March 16.Over the past several weeks, we have had thousands of conversations with businesses and consumers that have resulted in request to defer payments or $1.1 billion worth of loans. Our deferral experience indicates that forbearance loans perform quite well when their pre-crisis credit risk attributes are conservative.Grace will talk you through our supplements slides, which demonstrate the quality of the loans requesting temporary forbearance. Joe will discuss lending activities, including our participation in the SBA PPP program. However, I want to quickly highlight the importance of having dedicated substantial resources over the past several years to build out our digital banking platform.To put our efforts in perspective, OceanFirst was not an active SBA lender when the CARES Act was signed on March 27, less than one month ago. I’ll say that again, OceanFirst did not have an SBA department nor had we originated an SBA loan. Our SBA portfolio related exclusively to loans acquired for the purchase of other banks.In recognizing the critical importance of this program for our clients, we responded quickly by simultaneously building a digital application interface or working with the SBA to activate the SBA license we acquired on January 1 as a result of the Two River acquisition.By April 3, we were channeling hundreds of digital PPP applications from our clients into our nCino commercial loan system for processing. Our first successful submission to the SBA generated SBA approvals on Sunday, April 5. The week of April 6 was dedicated to developing a custom-built electronic closing package that would comply with somewhat fluid SBA guidance.On April 14, we began closing these loans electronically becoming among the first banks in our market to disperse funds. Through today, we have secured SBA approval for 1,568 loans totaling $350 million, which will fund over 36,000 jobs in our communities. Delivering for our clients was possible because of our extraordinary commercial lending team. Of course, they were supported by amazing information technology professionals where the tools, skills, and experience to respond promptly.Before I turn the call over to Joe and Grace, I want to acknowledge the recent decrease in our share price. We know the entire banking industry has been impacted, but every OceanFirst employee is also a shareholder. We share a common goal to create shareholder value and know that the decisions we make in times of crisis are especially important.Our efforts in the upcoming quarters will focus on helping our customers through an incredibly challenging time. Assisting our customers in their recovery will protect and preserve the assets of the bank and build the bank’s reputation in our communities. The combination of the strong balance sheet and stellar community reputation represent the path to building shareholder value over time.At this point, I’ll turn the discussion over to Joe to provide more details regarding operating conditions and some additional color regarding many of the initiatives I’ve outlined.

Thanks Chris. Loan originations of $426 million drove loan growth of $158 million for the quarter. Year-over-year originations were up 63%. Commercial lending closings were strong at $267 million with quarterly commercial growth of $165 million. New York and Philadelphia continued to process as they closed $170 million in the quarter. I’ll note that the quarter had very little loan originations from Country and Two River as expected after an acquisition. The closings have occurred in April and their pipelines are building.Our swap fee income had a strong quarter with over $4 million in revenue and while we expect revenue to be bumpy due to volume and economic conditions, we anticipate a solid year in swaps to offset reductions in other fee business.Our residential real estate continued its solid performance with a $149 million in closings. The total pipeline at $525 million at quarter-end was at an all-time high with record commercial and residential activity. We anticipate a solid second quarter in loan activity and while there could be some fall-out due to the uncertain economic environment, we remain confident in our underwriting risk appetite.While Grace will provide much more detail on credit metrics in her comments to follow, I’ll note that we are re-underwriting every commercial pipeline transaction as we approach closing to be sure the underlying business is healthy and cash flows are intact.In the residential business, we have also gone back a second time in re-verified income and job status prior to closing. We’ve also increased minimum down payments for purchases and eliminated cash-out refinances for vacation homes and investment properties also reducing loan-to-value limits on equity lines and loans.Moving to the net interest margin, we saw our core net interest margin improvement of 1 basis point and a reported net interest margin expansion of 4 basis points. The reported figure includes purchase accounting accretion and modest pre-payment fees. The additions of Country Bank and Two River Community Bank loan portfolios help to keep margins stable despite the affect of prior rate cuts, Fed cuts in lower weighted average originations.Our cost of deposits increased 6 basis points to70 basis points due to deposit cost from the acquired Country Bank and Two River Community Bank. OceanFirst legacy saw a reduced weighted average cost of deposits of 2 basis points in the quarter to 60 basis points, while the weighted average cost of deposits at Two River was 87 basis points and the Country Bank deposits 146 basis points.We expect the cost of deposits in all portfolios to decrease in the second quarter due to continued re-pricing. Expenses were well managed and as Chris noted, included approximately $1 million in COVID-19 related expenditures, most of which represents pandemic bonuses paid to branch staff and back office personnel. We remain confident in our quarterly expense run rate, but cautious given the economic outlook.We expect to spend as necessary in digital acquisition, cyber security, and other important initiatives, including in the safety and protection of employees, customers, and visitors to our facilities. While we will be vigilant with our management of expenses, now is not the time to save a few dollars at the expense of the health and safety of our staff, our customers, and our community.Merger integration for two of our community bank remains on track with a mid-May systems conversion and branch consolidation as scheduled. As previously noted, we will be closing five legacy OceanFirst Branches the same weekend. I will note that the majority of the closure expenses related to the branch consolidation are in the first quarter expense number. Closings will occur in Q2 and we will see the financial efficiencies beginning in Q4.In regard to Country Bank, we’ve elected to delay their systems integration date and will not make a decision on our revised date until mid-year. Since there are no branch consolidations involved in the country, the run rate and upcoming cost savings are not as significant. In regard to daily branch operations, you may recall we were one of the first banks to close the branches and limit activity to drive to teller transactions only.As we now begin to focus on the return to work in a new normal environment, we expect to begin by focusing on the return of full-service banking utilizing a hub-and-spoke methodology. Full service would be available at certain geographically specific hub-branches, which surround the export branches limited in hours or closed inside traffic while remaining open at the drive-throughs.We are exploring abbreviated schedules as well using both customers and employees back into its safe environment over time. We will employ safety protocols, which will include the use of personal protection equipment. Chris provided some overview comments on the paycheck protection program, commonly referred to as PPP.Let me provide you a few more details to date. We’ve electronically distributed over 3,000 applications for assistance receiving back more than 2,500 and were able to secure SBA approval for almost 1,600 prior to the first round of funding being exhausted. These approved loans represent $349 million in loans to businesses employing over 36,000 workers.We remain driven to approve the remaining requests in our queue when the SBA program is reloaded with the goal of supporting loans approaching $500 million and over 53,000 jobs between the loans we’ve done so far and the requests we have announced. And just to note on funding of the short-term loans, if needed, we will utilize borrowings from the Federal Reserve allocated to PPP pledged loans at a cost of 35 basis points, which will help to offset any funding cost of liquidity needs and has the added benefit of capital protection.With that, I’ll turn the call over to Grace.

Thank you, Joe. As Chris mentioned, I’ll discuss CECL adoption and the components of the increase in our allowance for credit losses, as well as provide an update on our customers seeking debt relief. I would like to preface these remarks however with some contextual comments regarding our preparedness for the current environment. OceanFirst has long had a conservative credit culture and strong earnings stream. This is borne out by the stress test results we shared during our investor call last month.You may recall that this stress test included a severely adverse scenario that approximated the severe adverse case in the most recent CCAR guidelines. Our model indicates an ability to observe over $300 million of credit costs over a nine quarter period while maintaining our profitability, our ability to pay dividends and our capital ratios well above both bank policy and regulatory minimums.We certainly hope that the level of fiscal intervention will result in a far less [owners environment], but we believe the balance sheet is prepared for a shock. These results are not an accident. Over the past several years management has focused on building a fortress balance sheet in anticipation of the next credit cycle.These actions included maintaining our credit underwriting discipline, despite increasingly liberal market terms and a focus on credit risk management practices that ensured safe and sound growth. Evidence of our efforts is the widely diversified credit portfolio, as well as our risk selection. We have not participated in the leverage loan market, energy sector credits, credit card finance, automobile loans, or equipment finance.He will even land loans are not eligible totaling just $19 million or just [one quarter of 1%] of total loans. While we could not predict what would trigger the next credit stress events, this management team has been through several credit cycles over the course of careers and these experiences have taught us that preparation is the best defense for times like this.With that context, I’ll turn to the primary components of the increase in our allowance for credit losses. The components I'll discuss are outlined in more detail on the slides that accompanied last night's earnings release. In summary, our transition from the incurred loss methodology to CECL resulted in an aggregate $15.6 million or 92% increase to loan reserves between December 31 and March 31.Now, to break this change into components, our December 31, 2019 ending allowance balance was $16.9 million. We added a day one CECL mark of $4.2 million, Two River and Country acquisition CECL marks of $5.4 million, funded net charge offs of $1.1 million, and then added to the CECL reserve to address the expected economic deterioration related to COVID-19. The COVID addition was driven by $7.2 million of qualitative factor adjustments.During the first quarter, our loan growth was centered in portfolios with historically very low loss rates. This combined with further declines in loss rates and almost all of our loan portfolios would have resulted in a net contraction of $1.2 million in Legacy OceanFirst reserve requirements despite net loan growth. These figures reflect the current risk rating distribution of our portfolio.CECL models are quantitatively driven and historical loss rates and portfolio composition are key drivers of the allowance balance. We have focused our lending activities in lower risk assets and subsequently have benefited from a very low level of credit losses for many years. These facts drive the [allowance math].Acknowledging the unprecedented economic challenge ahead and the quantitative reserve limitations, we expanded the total reserve by adding qualitative reserves related to COVID that totaled $7.2 million. This $7.2 million qualitative factor adjustment is intended to set aside reserves to account for the likelihood of risk related migration as the impact of the pandemic becomes clearer. This represents our best estimate at this time of expected future credit losses from the pandemic.It’s too soon to know the depth and duration of the economic impact. The nature and breadth of economic stimulus is not yet fully known, nor is the mitigating effect these programs will have on the economy and individual borrowers. As the impacts become clearer, we expect the risk ratings on certain loans to deteriorate. This shift may result in increased quantitative results, which could be funded by decreases in qualitative results over time. This again represents our best estimate at this time of expected future credit losses from the pandemic.I'll add what we learn from our experience during Hurricane Sandy. The forbearance loans performed reasonably well. In that case, our initial Sandy reserve was $1.8 million, yet net charge offs related to Sandy totaled less than $500,000. Of course the pandemic is a different and much broader event, and could be more protracted or severe than Sandy. While very difficult to assess, at least now our collateral remains intact and undamaged and can return to productive use more quickly than real estate destroyed by natural disaster.Active acquirers like OceanFirst also maintain purchase accounting marks related to acquired-loan portfolios, even following the implementation of CECL. While these balance sheet marks exist outside the allowance for credit losses, they represent a different element of credit reserve. As a result of the seven whole bank acquisitions made by OceanFirst, we maintain a net amortized credit mark of $38 million that is in addition to our $32 million allowance. We believe that these two figures should be viewed in concert.Real estate values are by far the most important indicator of future losses for us and our low loan to value should partially protect us, even in the event of a substantial decline in real estate values. This reality was evident during the great recession when our peak annual loss rate was just 57 basis points.Our stable earnings stream is currently sufficient to fund the level of future provisions that could be driven by risk rating migration, additional qualitative factor adjustments, and net charge of activity. As I mentioned, our low historical loss rates are largely due to our conservative risk selection and both individual loans, as well as overall portfolio composition.Again, we have no exposure to the energy airline or equipment leasing industries. We’re not a credit card lender and have not participated in the leveraged loan market. We don't maintain a consumer auto mobile portfolio. So, it’s comforting not to have to consider lease residual valuations. Even land loans are conservative $19 million or less than 20 basis points of total assets.Next, I want to share some information on those borrowers that are seeking forbearance. To date, our early and active outreach has resulted in $775 million of commercial loan forbearance requests. These credits have a strong pre-pandemic risk profile, which is 5% [rated special mention] or substandard and 93% never delinquent over the past 24 months.A full 96% of this exposure is secured by real estate with a very low weighted average loan to value of just 55% and strong debt service coverage of 1.9 times. In aggregate, these borrowers are well-positioned to whether the current economic conditions. Our commercial forbearance requests are centered in the accommodation and food services industry and commercial real estate secured by retail properties.No other industry comprises more than 5% of total forbearance requests or more than 5% of total capital. [Indiscernible] quarter of our forbearance requests are from borrowers in the accommodation in food service industry. This includes restaurants of $92 million and hotels of $110 million or 1.2 and 1.4 of total loans respectively.In aggregate, our accommodation and food services credits have a weighted average loan to value of 52% and weighted average debt service coverage of 2.6 times. This includes [The Irish Pub] portfolio at Country Bank of $69 million or our real estate collateral has a weighted average loan to value of just 44%.The commercial real estate request secured by retail properties totaled $106 million. These credits have a weighted average loan to value of 53% and debt service coverage of 1.8 times. We've also received over 1,100 residential debt relief requests totaling $311 million. These credits also have a strong pre-pandemic risk profile. The current weighted average FICO score is 742 on these borrowers, and the weighted average LTV is 70%.Furthermore, almost 90% of these loans have never made a late payment over the life of their loan. You can see why this segment of low LTV and high FICO loans with exceptional payment histories has not caused for undue concern. Returning to our credit risk profile more broadly, I’d like to point out that our allowance for credit losses now exceeds non-performing loans by a measure of 1.8 times.When compared to 2008, our starting point for this crisis includes a more diverse loan portfolio, stronger profitability, a lower dividend payout ratio, and approximately 250 basis points higher capital levels. In short, we believe we are prepared for the storm.I’ll now turn it back over to Chris.

Thanks Grace. At this point, Mike, Joe, Grace, and I would be pleased to take some questions.

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

Good morning and hope everyone is well.

Thanks Frank. You too.

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

Thank you, Frank. It’s – you know it’s a difficult time for all of us, so any of – us and our peers to estimate, you know, what the impact of this pandemic might be. Look, if we thought that we could put aside more reserves and responsibly do that, we would have done that and I’m very cautious not to send a message that hey, we’ve taken some giant reserve now. Don't worry about it for the rest of the crisis. I don’t think any of us know exactly what the duration and the depth of the crisis will be.I think the important point that I would stress is that taking a really healthy provision as large as we’ve taken ever, almost $10 million for the quarter, we still maintain our ROA, core ROA over 1%, so we can continue to fund provisions as needed. It’s very hard to tell what we will need, so, you know, we do look at this as the data comes. We’re going to be data-driven. So, I will say that while the aggregate number of forbearances is something that gives you pause, as we've had conversations with our borrowers, I think they’ve been very productive discussions about how their businesses will fair and, you know, we went into this and I think like many banks, our clients got through 2008.They have very low levels of leverage, they put cash aside; in many cases, their request for forbearance is a precaution. You know it’s not that they don't have any cash to pay us, it’s they’re trying to preserve their liquidity because they know they’ve got to restart their businesses in – hopefully 90 days or, you know, somewhere in that time frame. So I think, Frank, you characterized it reasonably well. I would expect elevated provisions during the course of the pandemic, but I don't think there are anything that should overly concern us given our earnings stream in our starting position.I’ll also point out that, you know, our composition of loans is different than many peers and we really have avoided – we’ve avoided a lot of asset classes that carry higher provisioning. If you think about, you know, credit cards, they typically run 800 basis points. So, if you have any of those on your balance sheet that’s going to drive more significant reserve. Almost everything we have is real estate secured and the LTVs are quite low, so we could have non-performers, but the actual charge-offs over the courses of the pandemic maybe lower than you think.

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

Yes. Good morning, Frank. You know I think – I tried to refer to some of that in my comments in the sense that we’re trying to – looking at everyone these a little differently as you would expect, we’re making sure that the underlying criteria still meet, you know, what was our credit standard and what maybe even a little bit tighter credit standard at the moment. And I think from the loan growth perspective, we’re focusing on the big strong CRE types of credits that you may see. We’ve recently financed – approved two financings for Amazon warehouses. We’re in the process of doing some other credit tenants such as Walgreens, CBS.The kind of stuff where you’re not going to make a killing and spread, but what you know is that you’re going to put assets on at – that the right levers position with bonafide strong historical cash flows. And I think as you go forward, I mentioned I think the second quarter will be fine just because of what’s in the pipeline. I think we’ll see some fall-out, but I do think the second quarter will be okay. But I think it’s hard to forecast going forward, right. I mean it – we just don't know how things will occur. It really just depends on how the pandemic plays out and not only consumer, but also our commercial customer confidence.

I think you might have mentioned loan-to-values, has that, you know, underwriting standards in terms of the loan-to-values you’re willing to go up to has that changed meaningfully?

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

Right, okay. Thank you.

Thank you.

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

Hey, good morning.

Good morning, Matt.

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

Yes. So they’re very different processes on the consumer and the commercial side. So, when we had this experience during Sandy as well, on the consumer side, you’re dealing with lower dollar amounts and the burden for someone to provide paperwork in the middle of whatever crisis they’re going through is pretty rough. You know, you can’t take someone who may have a family tragedy, you know, playing out in front of them and say, hey, look, we like to tax returns.So, on the consumer side, our rule is very clear. If you're willing to certify that you have a COVID-19 issue and you need forbearance you’re going to get it and we’re going to put you on forbearance and then, you know, as we re-look at those in 90 days, we’ll have a deeper conversation over the reasons that you might need forbearance. And I think that that's appropriate. I think if you consider the kinds of folks that have been impacted we just don't feel that re-underwriting those is appropriate.However, so that we understand the risk profile of what we’re doing, we are capturing information like the FICO score at the point the forbearance is granted so that we can understand the degree of deterioration that might hit this segment and make sure we’re reserving appropriately as time goes on. So, we’re collecting information, but a consumer forbearance request is reasonably automatic. It’s a little different when you shift to commercial, and we also want to be accommodating.We want to make sure that people have been impacted by COIVD, but you’ll also recognize that there is a lot of commercial borrowers who jump at the chance to go, you know, interest-only for a period of time and that they may or may not have had a significant impact to their business. So in that case, we are asking for minimal, but, you know, some reasonable documentation about what's going in the business. Again, this is about, you know, making sure that our forbearances are thoughtful and are prudent.So, let’s take the case of commercial real estate, we’re asking for new [rent rolls] so we understand how much deterioration there's been in the rent roll and look, we have cases where if you’re covering at two times your debt service and now you're covering it 1.5% times your debt service, you know, we’re probably having a conversation saying that a forbearance is not appropriate. But if your rents are down and you can pay a principal but not interesting, we may put you on IO and etcetera, so – and its dual purpose as well.First, we want to throttle the amount of forbearances we grant so there is a credit approval required. And the second thing is this is the kind of data we will need during the course of the year to understand how much credit risk we’re facing. So, it's an important point to pull that in. The $775 million worth of requests that we noted earlier, there’s a few hundred million that we’ve been able to take action on in [for Baron]. I would expect to get through the rest of it in the coming weeks and make those decisions, but we’re just – you know as you can appreciate, we’re just getting rent rolls for April for many of the commercial real estate. So, it’s two different analysis and hopefully that helps.

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

Yes. So look, I can – we can shares some of what or highlight of what we’ve shared to-date, which is if you take a look at the consumer book, the fact that the FICOs are in the 740s is extremely encouraging and the reason for that is FICO has driven, I think it is a misconception that’s driven just by late payments. It's driven a lot by credit utilization, so you don’t wind up within 740 FICO score if you're tapped out, right, if you got all your credit lines pulled down.So, these are customers that liquidity that are probably frightened about what's going on in economic environment to try to preserve cash. They don't understand how long they’re going to be out of work, so, you know, any piece of help they can get. So, I’m not terribly concerned on the consumer side although the duration of time that people are out of work is going to play into this. On the commercial side, it's too early to tell. So, we’re collecting information, but I think it will be too early to go out and make broad statements. I will say that when you think about how to assess the risk.If you go back to our March 24 call, we wanted to make sure we disclosed to everyone our concentrations in sectors where there could be a risk. Now it’s much more important to look at who's requesting forbearance, where they are coming, and you know, we went out and this is just our position. We proactively called our commercial clients in high risk segments and said, what’s going on, do you need help? Talk to us; tell us what’s going on. And we wanted to pull those forbearances out quickly. I don’t want to wait until someone misses a payment to start a forbearance conversation.So, I think if you look in the slides, the supplement slides, we showed you the unit trend in request for forbearance and at least for this wave, it appears to be moderating for both consumer and commercial. So look, we don’t know how long the pandemic is going to last and how the restart efforts are going to go, but we think we have the majority of the forbearance request are reflected in the numbers we’re sharing with you today and there’s not going to be say, anther $1 billion coming toward the next 30 days. We think we’ve got good handle on the [tempo].

Understood, okay. And then, on the provision, you know, I understand that it's very hard to predict what can happen here, but maybe you can just set the stage in terms of the framework. You know as we think about the underlying assumptions, if we go from an unemployment, you know, forecast and we take it from 5% to 10%, you know, is the next incremental 5% if we got to 15? Is that as painful as the first? Or is there some – you know does this soften as you go higher? Or is there any sort of way you could frame that for us?

I think there’s two key attributes you have to remember in reserving. The first is the probability of the fall, and then the second is the loss given to fall. So things like the unemployment rate do affect the former. They don't necessarily affect the latter, although they may. It’s really hard to tell if it’s really in. I don't think it's as sharp, and you know, Grace can give you a little more formation when I’m done about kind of having looked at the model, but in a portfolio like ours where the vast majority of loans are real estate secured and you have some presumption to real estate values staying in the same range, and let’s say they’re going to stay where they are, you’re actual losses, the charge-offs are going to be lower than you might expect.So, I think for a balance sheet like ours it would not be unusual to see an elevation in non-performing loans. Unlike we saw in the credit – in the last credit cycle in 2008, our peak non-performing loans crested at, you know, 300 basis points or so, but our worst year of charge-offs, which is 58 basis points. So, I think we may have a bunch of loans that we’re dealing with, but the actual risk to capital and earnings and the balance sheet maybe lighter than that. Grace, I think you can add to the way we’re – the model works.

The only thing that I would add is that what’s unusual about this situation is that, you know, the model and many CECL models are based off of historical correlations between things like unemployment and GDP going back decades, but given the measures that are being taken by the federal government, for instance, the supplemental $600,000 payment for unemployment, we really don't know how strongly those correlations will hold. We would think that it will be mitigated somewhat by that. You know a lot of people are actually making more money on unemployment than they did as an hourly worker. So, you know that all kind of remains to be seen. That’s the only thing I would besides what Chris said.

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

It’s getting better. So, we had a couple of our state New Jersey and now Pennsylvania going to electronic notary, which is a new thing for them. By and large, the counties have been pretty good, so we were initially concerned that, you know, title might be a [logjam] or something like that for real estate transactions. You know, they’re a little slower, but they continued to function. Probably the area where we still see significant concern is around anything related to construction.So, you know, construction has been shut down or discretionary construction in many of the areas we operate in although there are some carve outs like residential properties we have, you know, fewer than say five contractors involved. The process of appraisals, the process of inspections, the ongoing management of that segment has been more problematic. But, you know, we’re observing – I guess Pennsylvania will restart construction to a certain degree in a couple of weeks and, you know, we may see New York and New Jersey go to that as soon as well. So right now, that’s where we’re seeing. We seeing it in inspections, CEOs, there’s municipal inspectors being out on the job.

Got it, okay. That’s all I had. Appreciate taking my questions. Thank you.

Thanks Matt.

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

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

That’s correct. Yes, that’s correct and I would point to the numbered ratio that $7 million worth of the allowance we took is not quantitatively driven its qualitatively driven, so we knew that the model was producing a number that we thought was light compared to what – you know what our expectations were. So, that set aside, we’ll cover some migration of loans as they kind of burn down. The other thing is that look, there's no reason to believe that Sandy will be exactly like this – they are very different situations.Although in Sandy, we had the destruction of collateral. We had, you know, real estate destroyed in some cases, you know, completely destroyed and our forbearance loans at that point had a 1.2% charge-off rate on the consumer side, and interestingly, we had no commercial charge-offs related to Sandy. So, you know, and we’ve tried to be a careful and conservative lender, so – look, it was not the kind of broad-based issue we’re facing now with the pandemic, but there wasn’t $2.5 trillion flooding into the economy either nor where there unemployment programs like they are today. So, it’s a tough time, but our quantitative reserves would have been about $7 million lower. We upped them with a qualitative reserve because we knew we needed to put some additional funds aside for margin.

And then, two follow-up questions, can you remind us how the fair value mark evolves over time? Does that kind of go down quickly the next couple quarters? Or will it be slow?

Chris, it’s Mike. It’s accretive back into income over the life of the loan, but it’s based on a level of yield that it’s – so it’s more at front end of the loan. So, even though it's probably over the last – the next four years, most of it comes in and then it’s kind of a long tail for that will accrete back in the income over the next several years.

Great. So, we can still use that as a sort of factor reserve almost as if you, just like you said in the slides?

Yes, I think if you use it as a pool, you know, you consider $38 million being accreted back in the income and you could use that to reallocate that into the credit losses if needed.

Great. and then, last question just on the Fed’s kind of upcoming mainstream lending facilities, is that something that might apply to your commercial borrowers just say any early read on that?

You know they’re small number of credits that would be of the size and nature to qualify for a mainstream program. So, we may have a few loans that we would add related to that, but it would be, for us, a much small event in the PPP program.

Got it. Thanks Chris and thank you everyone.

Thanks Chris.

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

Hey, good morning, guys.

Good morning, Russell.

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

I think that’s an area, Russell that is highly comparable to what we went through in Sandy because even though people who come to the beach while the restaurants, hotels were just unavailable for use in the season following Sandy remember? Sandy hit late October, early November. Very few businesses were able to completely reopen by the following May or, you know, they’ve might reopened it part.We expect a weak summer season this year just because of social distancing requirements and we think it may hopefully, you know, based on the numbers maybe the second half of the season be better than first. And usually July and August are more important to these summer resort towns than say in May and June. I guess where I would think about it is probably limp through this season it will be okay. We have the other benefit, which we saw after 9/11, which is when people don't want to get on a plane they want to get in a car and something and around 25% of the U.S. population is within a tanker gas of the Jersey Shore Resorts.So, you know, I think that there'll be some element that will support us this year and then I wouldn’t be surprised if next year, and, you know, God willing, we have a vaccine and things are a little better shape, next year could be a really roaring year for the shore. So, I think a weak year this year, possible very strong next year and the advantage we have is, we don’t have to rebuild these places. You know there were cases where literally the entire building was gone and there was nothing but sand, and you know, you needed a lot of help to get something rebuilt and productively deploy. Some cases took two or three seasons.

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

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

Yes. No, I appreciate you confirming that, and you know, and here is hoping for a better result. I’ve got my heart set on spring late weekends this summer, so we're all pulling for the same thing out. I wanted to follow up on questions for the loan growth, and Joe, your comments, what are you guys assuming for kind of pull-through rates within commercial and resi, obviously, a different situation, the historical? And then is there enough visibility to the re-commit to a net organic loan growth of $50 million to $100 million? Or just how do you see that shaking out throughout the remainder of the year?

So, I’ll take it in stages, Russell. I think the resi business, you know, with the underwriting criteria that we've always had and then just, as I mentioned earlier, the focus on making sure that the new transactions that are going on are the right transactions and verifying all the income and job status and all that kind of good stuff, we tend to see a very strong pull-through rate typically in 90s, and look, the pipeline has still been very strong.Do I think we'll all fall out? Sure. Is there some concern that we talked about just trying to get stuff through the pipe? Yes. What we’ve done though I think is what we’ve always done, which is stick to what we do well in terms of the type of properties we finance, the expectation for down payment. So, I think that – and look, we haven’t seen a significant fall out, if anything we’ve continued to see a lot of volume and our rates today, are not at the bottom. A lot of the very large banks are markedly lower than us in rate for other reasons, I don’t know why. But – so that I think is an answer on the resi side.On the commercial side, I think it’s a little harder to predict, although I’ll tell you that with the addition of Philadelphia and New York to our legacy markets, it’s really allowed us – and we’ve seen a quarter-over-quarter. Philadelphia will have a good quarter, the New York will have a good quarter, that legacy market will have a good quarter. So, I do believe we’re going to still see opportunities, and as I mentioned earlier, our focus on really strong underlying credit CRE or strong operating businesses in our markets that we know, believe or not, we’re going to get some new business out of the opportunities and some of the things we’ve done in the PPP program.We’ve reacted quickly; we’ve gotten a lot of kudos even from customers or non-customers that we didn’t do the PPP they referred, how quickly we reacted to our own client base. So I think that we’re going to see more fall out there, it’s hard to predict the number, but I think that we’ll be successful. In terms of committing to a loan growth, I think it’s a harder dynamic, right. I think the second quarter will see loan growth barring us deciding to – you know to sell some pools in residential just for liquidity, but I think it’s a harder dynamic to determine whether or not we’re going to see that. It’s hard to forecast in the third and fourth quarter.

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

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

Okay, great. Thank you, guys. That’s it for me.

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

Thanks. Good morning, everyone.

Good morning, Collyn.

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

Look, one of the reasons to be really good about the PPP program is it improved the liquidity of your commercial clients. So, every dollar we can get out to them to help fund their payrolls is going to strengthen their businesses, and in the long run, that’s going to strengthen their ability to work with us. So, there's a virtuous cycle here where at the end of the day, keeping our businesses afloat is only good for us, right. And we’re also doing it – you know, obviously protecting jobs in our community if banks are closely correlated with their communities. If communities are fine, you’re fine. And if it’s not, you know, you can’t do that much to change it, so, you know, we looked at that.We also – you know, we got a tremendous outpouring of requests from non-customers. We accommodated a few as we could, but I think that this is going to be one of those reputational moments for both banks and look, we’re not the only bank that did a great job with PPP, a lot of our peers have a done a wonderful job as well, but some haven't been able to deliver and I would tell you that banking was a commodity business three months ago; it’s not a commodity business today.People understand it. You know, I’ve even had a couple cases where people said, look, I need to give you guys a call in 30 days when this comes down, we need to move over to you because we’re disappointed with our bank. So – and thanks for your comments about us getting PPP going. A lot of our staff is up to, you know, 24/7. We’re working straight through the night to make sure we got this done because we knew is that important for our community.

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

Yes, and there is an overlap there.

Okay.

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

Okay. Do you happen to know off-hand or have the number either number of borrowers or dollars size where there was overlap between the two programs?

I don't have that handy. Maybe we’ll get that to you after the call.

Okay, that’s fine. It’s just – again not a question I have for others, but I just started thinking about that, okay. And then, just lastly, Joe, you had indicated in your opening comments just, you know, you mentioned swap activity was strongest quarter, but yet I think you’d indicated that you thought that overall activity would still be strong for the year there, and I guess I'm a little surprised by that in just the thought that that activity would sort of come to a screeching halt. Can you just kind of walk through sort of how you’re thinking about that business line and what activity you would need to see, you know, within your commercial borrower base just to drive that?

Yes. I think you for us, you know, adopting the product little over a year ago after I’d say probably a few years of clients saying this is – you know we – a lot us that have been familiar with swaps in the past from prior companies look forward to the opportunity and when we have the depth and breadth to be able to do it on our own. So, adopting it was good, a lot of clients were excited to have it. Its open new doors for us and I think I mentioned that, you know, swap income could be choppy, right, quarter-over-quarter depending on what you get done.I think what we’re seeing with a lot of borrowers that have very strong liquidity and balance sheets that want to have and do swap transactions is they're looking at what’s likely to occur. So, we’re at all-time lows in interest rates and what’s likely to occur is maybe not tomorrow, maybe not near, maybe not in five years, who knows, higher rates at a certain point or at least normalized rates, so borrowers look at the opportunity for flexibility swaps to give them that flexibility.So I still think, look, it may not be significant. I think it will end up being a very good year for us in swaps and I think it will just continue as the economy recovers. So, we’re bullish – we’re bullish on the swap business, but we’re cognizant of it. You know we still maintain that credit appetite that’s a little bit more conservative, so we’re making sure we cover the basis on both sides.

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

Yes, there’s certainly been some interesting things that you pull out of data that you might not have expected. So, the Number 2 category requesting PPP loans from us, for example, was a healthcare category, which – you know when you start to think about the dislocation in cash flows in healthcare whether it's a hospital or a doctors practice, you know, these – the stopping of elective procedures all that is really disruptive healthcare cash flows, which you might not have expected going into this. So, we’re seeing – and we’re seeing other things. You know we had a high-end jewelry retailer that was preparing for something like this, had plenty of cash and doesn't need any help, which we felt would have been one of the first people on the list to ask for help.In terms of regions, there’s certainly a difference given the impact of the pandemic has impacted, for example the New York City area much more than Philadelphia at least thus far. But, the theme we’re hearing across all of our markets when you talk to, I’ll call them our smartest most liquid and best prepared commercial clients. They sense that it’s going to be a good time to make investments at some point in the next year or two, but they are not interested in getting involved until there’s more clarity around economic conditions.So, I think there will be a wave of people that are on the sidelines today. There’s a lot of cash out there that are more than happy to make investments going forward, but they’re not going to step into the market share. So, the smartest people that we’re talking to are waiting and watching, they plan to be jumping in an investing. I think that will happen at some point in 2020 and that’s the opportunity where we just can't tell what loan growth might be.I’ll say this, I think the credit appetite in our communities later in 2020 and going into 2021 is going to be very strong. So, provided those are reasonable credit requests, there could be an opportunity for us to continue to show organic loan growth, but we’ve got to wait and see how that unfolds.

Okay. Maybe sounds fairly similar to the bank's stock investor and how they’re thinking about the market. Anyway, okay that’s helpful color. I will leave it there. Thanks guys.

Thanks Collyn.

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

Good afternoon, everyone.

Hi, Erik.

First question, just curious if you have an expectation for what percentage of the PPP loans will ultimately be forgiven? And then secondly when – what quarter you would potentially record the associated accelerated fee?

I’ll take the first question. It’s kind of anybody's guess as on what percent would be forgiven, but we think it’s probably a pretty high percent. I think the folks that are accessing the PPP program are doing so because they plan to maintain their payrolls. They’ll be eligible for forgiveness and will file to do so, and we expect the significant effort to help our customers do that and it’s going to be honest before you know it, those forgiveness requests are going to start to hit just in a few weeks.The reason I am a little bit tempered on it is we’ve had more than one story from a client who is applied for, taken the SBA, PPP funding, has called the employees asked them to come back to work and their employees have declined, and as you can imagine, for all the right reasons, the unemployment supplement that Grace was talking about earlier in some cases means an hourly worker earns the same or better staying on unemployment then they would coming back to work. So, the financial incentive is not there and they’ve got concerns about coming to work in an environment that’s kind of rough today. So, I think if there is an issue around forgiveness it’s going to be for those businesses who had difficulty getting their folks into work so they could pay them and qualify for their forgiveness.So, I think that’s where that [indiscernible].

Understood. I appreciate that.

The second part of your question, but I'm sorry I [indiscernible].

It was in terms of what quarter you would potentially expect to record the accelerated fee once they are forgiven?

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

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

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

Thanks. And then just last question from me, in terms of the 949,000 charge-offs as I think you guys caught at high-risk residential loans, any color you could provide there with these loans, particularly related to COVID developments or are they previously criticized, just kind of curious how that played out?

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

Great. Thank you for taking all my questions.

Alright. Thank you, Erik.

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

Good day.

Hi, Louis, how are you?

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

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

Okay, great. Thank you.

Thanks Louis.

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

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

Yes. That was driven entirely by the acquisition of Two River and Country that had higher deposit rate structures than OceanFirst Legacy had before that we brought them in. We typically do adjust rates as we go through acquisitions. We’re always, you know reasonably careful to do that over time as we get to know those customer basis and not kind of shocked them with a lot of rate reductions. So, we began reducing rates in earnest in those two portfolios, probably late in the first quarter. So, you wouldn't see much of it in the overall deposit costs, but I think as Joe said earlier, we expect to be able to reduce the deposit cost of Legacy OceanFirst, but also the Country and Two River acquired deposit portfolios over the course of this quarter. So, and we’re looking forward to that to help the stabilization of margin. So there is room to bring those down and you’ll see that coming down.

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

Yes. It’s ironic you’re actually right. So, well obviously there was a day one adjustment, right? Where we had to gross up different methodology, but after we grossed up there’s really two things that happened during the quarter. The first thing is, our loan mix changed and loan mix has a lot to do with provisioning because different loans have different experience levels. The second thing that happened is every quarter you add to your history, changes your lost history, and we added another quarter of low losses to our history, so the quantitative numbers shifted down because our loss rate actually continued to come down and then it shifted again because the composition of loans were very different.So, I guess all else equal, we would have had the possibility of a contraction [indiscernible] that counted to day one. And we certainly didn’t think that was appropriate given economic conditions. The other thing is that CECL drives open economic model. Every bank has – you know some banks use their own projects, we don’t have, we’re too small to have a group of economists here at the bank and probably thank God for that, but we have purchased the services of, we use Oxford analytics.They provide us with our economic forecast. Their forecast was more benign than a number of other forecasts we saw in the market, so we wanted to calibrate for that to and say that the quantitative model was, the inputs into that, the economic inputs were rather benign, so we’ve been using the qualitative adjustments were able to adjust to some of the more draconian forecasts ahead of economic conditions.

Got you. I guess can you share with the, I guess, because I know – I have been understanding the unemployment number is a big factor in this, can you share with the unemployment number was that was supposed to go into that model?

I would like to get away from sharing individual numbers because there’s a lot of numbers in there. The unemployment number is one, the GDP number is another, but there is a whole bunch of other numbers that go into it. They’ll be somewhere around the range of 50. So, once we start giving one or another, you know you start [indiscernible] I will tell you though that the Oxford number was lower than most other estimates and that’s the reason that we put on the qualitative reserve.

Well that’s kind of what I was kind of pointing at, obviously it sounded like this was lower, I was just trying to get a degree factor in there. Okay. That’s all I have for the time. Thank you very much and be safe.

Thank you.

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

Just one quick follow-up. Wondering how we should think about the increase in delinquencies linked quarter, is that just kind of bouncing around, is that COVID-related and should turn likely into deferments at some point? Because you have a 30 days greater past due, it would seem that would imply, I guess February which would seem to be early to be COVID-related, but just how do we think about that?

You’re exactly right Frank, some of that we think is driven, we think open the majority of it by COVID, there is a strong overlap between forbearance requests and delinquencies because we only started soliciting forbearance requests on March 16, and then we do – we’re credit underwriting them. So, if there is a credit process before we actually declare forbearance. There is another small number that’s related to the [12.31 number] with OceanFirst only and the [3.31 number] includes Two River and Country, so just a larger loan book, but we would look to, by the end of the second quarter have those moderate because of forbearance requests.

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

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

Right. Okay. Great, thank you.

Thanks Frank.

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

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

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.