WSFS Financial Corporation (WSFS) Q1 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Bryn Mawr Bank Corporation First Quarter 2020 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. Please note this event is being recorded. At this time, I would like to turn the conference over to Mr. Mike Harrington, Chief Financial Officer. Mr. Harrington, please go ahead.

Thank you, Jamie. Thanks everyone for joining us today. I hope you had a chance to review our most recent earnings release and presentation. Both of these documents are available on our website at bmt.com in the Investor Relations section. We will be referring to the presentation during the course of this conference call. On the call with me today are Frank Leto, President and CEO and Liam Brickley, Chief Credit Officer. Before we begin, please be advised that during the course of this conference call, management may make forward-looking statements which are not based on historical facts. Please refer to the disclaimer labeled forward-looking statements and Safe Harbor in our earnings release for more information regarding what constitutes a forward-looking statement. All forward-looking statements discussed during this call are based on management's current beliefs and assumptions and speak only as to the date and time they are made. The Corporation does not undertake to update forward-looking statements. For a more complete discussion of the assumptions, risks, and uncertainties related to our business, you are encouraged to review our filings with the Securities and Exchange Commission located on our website. I would now like to turn the call over to Frank.

Thanks Mike. And I'd like to thank all of you for joining our conference call today. So, let's begin by addressing our response to the COVID-19 pandemic. In January, when news began to surface of the virus, the topic became a regular item of discussion internally. As potential impacts of the virus began to emerge, we declared the virus an incident and convened our incident assessment team. That team assessed the situation within a few days, elevated the issue to our crisis management team. Crisis management team which comprised of executives and members of our senior management across the organization and chaired by our Chief Risk Officer, Patrick Killeen immediately convened and initiated our business contingency plan, a component of which includes actions related to pandemics. While, none of us could have predicted this exact scenario, we've routinely planned and prepared for situations such as this. Crisis management team was tasked with further assessing the situation and providing recommendations to executive management in addition to following the playbook outlined in our pandemic plan. Among the many actions, two priorities included ensuring the safety of our employees and customers as well as testing and stressing our remote capabilities to handle additional users on our remote private network. As of today, nearly all of our back office support and many of our client-facing employees in lending, wealth, and insurance groups are working from home. This comprises approximately 70% of our total workforce. I want to emphasize that technology investments we've made and spoken about the past several years have allowed us to complete this transition seamlessly and to a degree I never imagined. Other actions we've taken to-date including closing all branch lobbies and reducing our branch hours of operations to further protect our clients and employees and adding a virtual format capability to our Annual Meeting which convened last week. As things began to "normalize in April", the crisis management team continued to meet frequently to monitor and react to specific situations. While the risks in the current marketplace are vast and ever changing, we believe our largest risks are in the operations, financial health, credit, and reputation areas. From an operational risk standpoint, business disruption, loss of personnel, third-party reliability, cybersecurity, and the inability to meet our client and community needs are key focal points. Crisis management team works along -- works alongside the executive management group to quickly and effectively respond to the hurdles we face. We have reallocated resources across the organization where necessary to meet increasing demand of our clients and communities. Managing financial risk starts well before the crisis. We have sound practices in place including frequent stress testing; implementing strategies to protect our margin, and evaluating liquidity position -- our located in position on a daily basis. Our job now is to leverage our financial strength and skills to successfully navigate this unprecedented environment. We have to be keen on economic conditions including interest rates sensitivity, meeting our funding obligations, and continuing to invest in opportunities to support the business. While Liam Brickley, our Chief Credit Officer will discuss our credit profile momentarily, I will add that we have been very proactive with clients engaging their response to the market. We are aggressively monitoring high risk segments of our loan portfolio and acting where needed. Our 131-year reputation is one which we take great pride. Bryn Mawr Trust has helped and continues to help our clients and communities to build a legacy in which we all share. Banks are at the forefront of this pandemic and we are working very hard to help those in need. Today, we're working extensively to create managed solutions for our clients and communities. One area of focus over the last few weeks has been the SBA's paycheck protection program. As of the close of Friday, we received thousands of online requests and over 1,600 applications were submitted. To-date, over 700 applications have been approved with SBA authorization for a total dollar amount over $220 million to be funded through the bank. Although the program's funding has been exhausted, we're proud of how our team pulled together to design and implement a process needed to handle this immense influx of activity and we continue to process the applications we received in case the program receives additional funding. More information on all of the relief programs are available -- can be found on our website or in our investor presentation released yesterday. While each day brings new challenges and opportunities, we are confident in our organization's ability to come out the other side stronger than ever. I'd like to now turn over to Mike to discuss our first quarter results.

Thank you, Frank. For the first quarter of 2020, we posted a net loss of $11.2 million, negative $0.56 per diluted share. Main driver of the loss for the quarter was our implementation of CECL and the recording of the associated provision for credit losses is reflective of the current economic conditions brought on by the COVID-19 pandemic. We're experiencing economic conditions unlike any we have ever seen, and the future path of economic activity is highly uncertain. Credit loss modeling purposes historical data may not be relevant in calculating credit losses. For example, Pennsylvania unemployment, a key driver of losses in our allowance model is expected to exceed historical highs shortly, as return on normal levels is subject to a great degree of variability. The management team in the spirit of the accounting guidance, prescribed under CECL made efforts to estimate the allowance by leveraging historical loss data and its correlation to economic data such as unemployment, in combination with our stress testing modeling and qualitative factors to arrive at assessment as of March 31st, 2020. We believe our allowance as stated represents a reasonable estimate of future credit losses as of the reporting date, acknowledging that the estimate will be subject to change as the path of economic activity becomes clear. Setting aside the provision expense discussion, our business activity was strong during the first quarter. We saw our net interest income increase by 1% from the fourth quarter as loan growth which increased 2.1% from the prior quarter, and strategies we use to defend the margin help mitigate the effect of lower interest rates. Our fee income continues to be a consistent source of earnings for the bank. As fixed fee wealth assets have grown over the years, meeting the impact of the market sell off late in the quarter. As anticipated, our non-interest expenses were flat quarter-over-quarter, despite the recording of a $3 million reserve for unfunded loan commitments related to the change in the credit risk environment associated with the pandemic. Our tax equivalent net interest margin increased from 3.36% to 3.38% quarter-over-quarter. This is a direct result of the strategies we applied to manage the margin including the thoughtful reduction of costs paid on over $500 million in deposits and modifying pricing on loans to reflect the inherent risk of lending in this environment. We had also position our borrowing portfolios in more short-term with the majority -- in the overnight market. We evaluate our liquidity position on a daily basis, and we view our options accessible to us frequently. The Bank has significant liquidity available at the Federal Home Loan Bank, and to a lesser degree the Federal Reserve. We also have multiple options for other wholesale deposit channels, but the introduction of the paycheck protection program the Fed has made available an additional avenue for liquidity to support funding these loans. We expect to avail ourselves of this funding. Our investment portfolio is also a source of liquidity and it's very liquid and high quality. Capital at both the bank and the corporation remains well above our internal targets and levels needed to be deemed well capitalized. We manage capital our levels by contemplate various economic scenarios, stress testing as a fundamental tool we utilize to understand the scope of our capital and liquidity positions under the most severe circumstances. And this modeling helps inform the amount of capital we quote in normal times. This modeling, they will be put to the test, as we are obviously living stress scenario. In light of the developments surrounding COVID-19, we brought share buybacks in March. At that point, we had repurchased 207,000 shares during the first quarter of 2020. As the environment evolves, we will reevaluate capital and liquidity positions and decide on capital actions. Regarding our shareholder dividend, you may have seen, we approved the $0.26 per share dividend yesterday. I should note on slide 8, asset quality is fairly stable in the quarter with the exception of leases where we elected to charge off all 60 plus days on liquidation in anticipation at least credits in anticipation that these credits will experiences -- experienced distress in the current environment. Also depicted as the increasing provision costs related to adoption institution. This slide depicts more detail with regards to the implementation of CECL, and the changes in the allowance of a major alongside, as shown on the Turkey adoption CECL January 1, represented a modest increase in the allowance of only 14%. Subsequent to January 1, the future state of the economy can be much more tenuous. The emergence of depend on it, and this is reflected in the allowance calculation as a quarter end, also with the increase in reserve for unfunded commitment as I noted earlier. Before I turn it over to Liam. I wanted to note that, we have withdrawn all guidance as it relates to our business activity for 2020 given the uncertainty of the current environment. And I'll pass it off to our Chief Credit Officer, Liam Brickley for a discussion with the bank's loan portfolio.

Thanks Mike. Credit has always been a key focus as Bryn Mawr regardless of the economic environment. The Bank has always had a reputation for being responsive, consistent and conservative as it relates to credit. Our team is currently spending considerable length of time, literally every day of the week working with new and existing clients to help them during this uncertain period. As outlined on slide 10, our portfolio is diversified across both borrower and property types. We continue to actively review all areas of the credit portfolio with a focus on those segments that are more vulnerable to current market conditions. Specifically, we are actively working with clients in our commercial business and our commercial real estate non-owner occupied segment. We also have an outreach program for our consumer segment. Further, the bank has a lease portfolio that accounts for roughly 5% of total loans. While this segment is susceptible to downturns in the economy, is diversified by borrower, industry and geography, with borrowers in all 50 states in Washington D.C. We do anticipate losses in the space given economic conditions, which is partially reflected in the provision for the quarter. We are working with clients across the retail, multifamily flex, office and hospitality spaces in our commercial real estate business. We have many long-term relationships with sponsors, who supported their projects through prior economic cycles. And it's worth noting that, we are primarily recourse lender. As indicated on slide 11, entering the crisis, the CRE portfolio was granular with reasonable LTV’s across all property types. The bank as modest and granular exposure to vulnerable industries, including restaurants, manufacturing and energy, and we do not anticipate significant losses in those areas. We have not seen a significant increase in the utilization under our line of credit. From December 31 through March 31, our commercial line of credit usage increased by approximately 2% or $16 million. In response to the pandemic, we've developed several relief programs to assist our clients through these hard times. The programs are consistent with the guidance issued by the Federal Reserve Bank and the Federal Accounting Standards Board. Participants in the federal programs come from our C&I, our small business and our commercial real estate portfolios. Commercial deferral decisions to make one client at a time based on current the conditions with the client and the impact of the virus on their business model. For commercial and small businesses, our program offers deferral of all payments or modification to an interest only structure for a period of three months. With a one-time bank option which allows us to extend these deferrals for an additional three months, if conditions prove that to be necessary. To date, we have over 240 commercial participants, with a total loan balance of approximately $500 million taking advantage of these deferral programs. For our consumer clients, we offer a six month full payment holiday consistent with various guidance statements by the Fed and Fannie Mae. To date, we have 140 consumer clients with total loan balance of $25 million utilizing these short term payment holidays. We are also actively engaged in the SBA Paycheck Protection Program as Frank detailed earlier. As Mike mentioned, we are living in an environment that none of us have seen in the past. However, our conservative nature over the years leading up to this pandemic, has allowed us to be well positioned to mitigate future losses. We remain vigilant and confident in our management team, and their experience in navigating through these uncertain economic environments. And with that, I'll turn it back to Frank.

Thanks, Liam, and thanks, Mike, and Thank you again. With that, I think we'll open up the call to questions. So I'll turn it back to the operator.

[Operator Instructions] And our first question today comes from Michael Perito from KBW. Please go ahead with your question.

Hey, good morning, guys. Thanks for hosting the call this quarter.

Hey, good morning, Mike.

I want to maybe start on the kind of the credit and provision discussion here and you know, I realize it's a little difficult but you know, the -- the dance we're trying to work with over here to figure out you know, kind of relative credit exposures and the new slides are helpful, but I was wondering, if maybe Mike or Liam, you guys could break out a little bit more about some of the economic assumptions that drove on, you know, the large provision in the quarter that you guys are assuming I think you mentioned in prepared remarks, Mike, that you thought it was a reasonable assumption of how you see it today, I thought maybe, it'd be helpful to just kind of expand on some of those more specific assumptions. So we can kind of compare them to ours and our models and see how they could change going forward.

Sure. Why don't I start and then I will let, if Liam wants to add anything, he is welcome to do that. The primary driver in our CECL model the way it was builds as Pennsylvania unemployment, which is what I mentioned in my prepared remarks. And right now, Mike, we're assuming that that unemployment rate hits its max, which is around 9%. And that was achieved back in the last financial crisis. So, we assume it trends up to about 9% almost immediately to the tune where they are now. And it stays there for a quarter and then it starts to revert back to a long-term historical mean, which just for ease of conversation is around 6%. So, over the next six quarters, we're assuming unemployment is 9% and then trending down to 6% and then it stays at 6% thereafter for modeling purposes. And that's the model was built fundamentally built off of unemployment that was the highest correlated macroeconomic factor that correlated to charge-offs. And so that trajectory of unemployment then generates the charge-off figures that -- for the need for provision of the allowance figures which we’re displaying here. On the other thing we baked into the model as we recognize it that these pay holidays are in place. So it's not likely we're going to see a lot of charge-offs in the next few quarters, because of these payment holidays. So, some of that chart of activity will also happens later. So we factor that in as well from a cash flow perspective. And other than that, I think that's really at the heart of what we're expecting right now are at least what's factored into the model. Liam, do you have anything you want to add?

The only other thing I would point out is in the development of our CECL modeling through the last crisis the last 15 years the firm has had fairly minimal losses in the C&I space. And we use peer benchmarking data in building the model, frankly, because we had inadequate beds to build any kind of replicable model. So that is another driver in some of the downside assumptions here.

That's helpful efficient, Liam. That also -- that's also the leases are also built have some of that.

Yes. Now that makes sense and that's helpful guys. I guess there’s a follow-up, so if we're trying to think about this maybe a little oversimplification, but if the unemployment rate plays out as you guys have punched into the CECL model, how does the reserve then kind of stabilized in this level near term and then moved down later depending on charge-offs. Obviously, I know there's a wide range of possible outcomes, but if we just assume the assumptions you made today are correct, is that how you would expected to react over the next year or so?

I’ll answer. I mean, if what we had projected here turns into the reality then that's the charge-offs work their way through the portfolio given the amount of provision that was required on a go forward basis that would last. But there's so much -- Mike, there's so much variability related to that.

Yes. I know…

…and the forward statement about it, because it's just impossible to know right now. That's my opinion. So and this is what we wrestled with in coming up and landing where we did. Also probably should say two things or just embellish on the my comments related to that I made my prepared comments as we also compared this result in allowance to stress testing we do. So, we do a lot of stress testing that's outside of this process. Compare those results, what we're seeing here as a distant a check or a separate model and a third-party, but just another view of this environment. And we also did a few overlays on some of the categories, so and metrics and categories that were focused on into the retail sector, of course, so we did add some qualitative adjustments to a few of the sectors that you're seeing here on slide nine in order to account for the uncertainty related just to the credit profile, some of the sectors on a go forward basis especially retail would be a good example of that.

Okay. And then just one last question on the credit topic. Just have you guys seen any real significant changes in kind of commercial or residential real estate values in your markets deck, given everything going on? Or has that not really materialized yet?

It's too early to make an assessment there. Trading activity was very brisk up through the end of February and then just went through did stop. So, the long-term implication on values and pricing is going to play out, but we have no empirical data to point anything right now on price softness.

Okay. And then just switching gears one last question for you Mike just on the margin. It was pretty resilient this quarter, but obviously there was a pretty dramatic move lower in short-term rates that occurred in the first quarter. I was just curious if you had any kind of near-term thoughts on how that dynamic might play out presumably as some of the liability repricing opportunities dwindles, but there could be some pursued longer legs and asset pressures, although, I know credit spreads haven't been horrible so I was just curious maybe you can provide some updated commentary around margin, given everything we saw at the end of the first quarter?

Well, on the asset side, I think one we're going to have the dynamic of the PPP loans and those being added to our balance sheet and it's what that actual yield ends up being will be depend on the length of the average, like the lives of those assets, which you determine how quickly they repay. I guess, the thing we're maybe surprised about it related to your question was deposit funding we thought maybe it would fall further than it has, but you -- I’m not sure many of you know on the call that LIBOR really hasn't moved down in lockstep actually widened out relative to Fed funds. So, we haven't seen kind of a wholesale market reprice as much as we may have as expected and that's holding deposit pricing up maybe a little bit higher than we thought. So, with that with some -- if that were normalized, I think we might have some potential to lower deposit costs. But right now, we're being as I said very thoughtful about that because we obviously want to chase liquidity out of the institution right now. So the whole marketplace is kind of still supporting a fairly high deposit costs higher than we would have expected given the decrease in the Fed funds rate.

Okay. That's helpful, guys. Again, thank you for hosting the call this quarter, and I hope you and all your families and employees stay safe and talk more soon.

Likewise thanks Mike.

Thanks Mike.

And our next question comes from Erik Zwick from Boenning & Scattergood. Please go with your question.

Good morning guys.

Good morning

Good morning.

First, Mike maybe if I can follow-up on the commentary you made about kind of your CECL model being based off the Pennsylvania unemployment rate and mentioning that over time it trends down to kind of that 6% level, which is as you see it a long-term average. I'm curious if that 6% was also what you were using, say call it as of January 1st of this year given that that's your view of the long-term average or were you was the starting point at that point kind of a more where it had been running and that's kind of 4.5% range as I kind of just look at some stats here?

Right. That's a good question Eric. So the -- yes, so starting point was the current rate as of that point in time. And then we held that -- we held the model holds out for a number of quarters. And then the model begins to revert to the long-term average is just how it was structured so that when we made our adjustment on January 1, your point that that's what the employment path was at that point in time.

Okay. So, like a 4.5% range somewhere in that, so essentially it would have been that we've kind of

Yes. Also I think it's 5.8% is the long-term average check though I could get you to that number if you need it, but it is something….

Okay. So, you were using the long-term average as of January 1?

Right. Exactly.

Got you. Okay. Got you.

Yes. We were starting at actual trending to the long-term at…

The current, yes.

Okay. Thanks to the clarity there.

It’s a reversion -- we’re using a reversion methodology. So it starts with the current and reverts back to the mean. And it does that over a period of time that we select based on historic data around when employment reverts to its mean. So we've done a study of employment data in Pennsylvania and then we gets back to of the model.

Right. That's helpful. Switching gears and looking kind of at that the wealth management revenue and trying to think about what that run rate could be going forward with regard to I think it's about approximately 40% of that wealth management AUM where fees are based on account market value. Are those fees calculated based on a period in balance or an average for the quarter?

Well, of the focus -- the majority are at a quarter end. So the majority of that these are a function of quarter and although we do calculations and intra quarter, the bulk of its quarter end for the market based AUM.

Okay. And then in terms of the net interest margin, you mentioned kind of an impact from the participation in the SBA PPP program will depend on kind of that the average life of those loans. For those that do meet the qualifications for being forgiven, will you record any accelerated fees? Will that come through though the margin as well?

Yes, I'm assuming -- yes, it'll -- right now, our expectation is it will come through the margin. So, the fee that we collect will be treated like FAS-91 fee, it will accrete that as the loan is paying. And then when the loan pays off, a portion of that fee would be accreted income to the margin. So, if this ends up being 90 day loans or 180-day loans, as we present them for forgiveness or repayment, we'll record that fee.

Great. Thank you so much for taking my questions.

But to give you some statistics around that, we're at about $6.5 million in fees. We haven't collected those fees from the SBA, but that's what we expect to collect once we present that bill.

Great. Thank you.

Thanks Erik.

And our next question comes from Joe [Indiscernible] Group. Please go ahead with your question.

Morning, everyone.

Morning.

Just building on one of the prior questions just to confirm Mike, so was the prior high in the Pennsylvania unemployment rate during the Great Recession that drove your forecast and not any sort of official projections for Pennsylvania unemployment for this specific situation. Is that right?

Correct. Yes, and I think that number is 8.8%.

Okay. And then are there any projections I guess at this point for Pennsylvania unemployment from any other various local forecasters, someone you respect you've seen at this point?

We did not seek -- we didn't know there's -- we don't have any forecasts from any of the government or agencies. The other information we looked at was just generally available forecasts from -- like the Bloomberg consensus forecast, we looked at one of the big four accounting organizations had a forecast. We just worked with that to that to see hey, does this make sense relative to what we're assuming for Pennsylvania, but the answer to your specific questions is no Joe.

Okay. And then I guess on that same topic, Mike, some banks have given reserve projections or the additions to the reserve that will be required if the macro situation were to worsen from here. So, do you have some assumptions for expected reserve build that say Pennsylvania unemployment or some projection that you would wrote that you think is reliable goes to say 15% or 20% or so?

Not -- no. Not that we're prepared to provide Joe. We have -- I mean, when we modeled this, we ran this model for weeks. Give our team credit for putting up with the multiple versions that we came up with, but the model -- as you get into -- I will say this, we get into unemployment numbers that are in excess of anything that's ever been recorded is my -- at least are the way our model system, the model starts to lose some of its value because it just has trouble solving or the losses you're going to experience is just has no reference point to fall back on.

And what roughly percentage of the provision allocation would you say was driven by the unemployment projection that you used? Is it like 70% [Indiscernible]?

Yes, I don't -- I'd say I'd say two-thirds of it. Liam, feel free to weigh in. I think just stop there--

Yes, I think roughly two-thirds of the bump-up were directly correlated with the unemployment number, and it's actually possibly higher than that.

Yes. But you're saying Mike if reliable forecasters in the past are 20% unemployment projection, you take two-thirds of the provision that you allocated this quarter and kind of double it? I mean -- like you the model falls apart at certain levels is that--?

Yes, I think Joe, the one of the many wildcards; we don't know the impact of government programs that are being rolled out here. So, one of the reasons we just tend to fall to -- I mean, Pennsylvania unemployment probably be in the teens, right? I mean, this state itself has I think the highest number of unemployment -- highest percentage of its workforce is applied for unemployment, some statistic like that. So, we were just applied, we didn't just default to okay, well, let's apply an 18% unemployment rate, and have that trend back down over however many quarters. The overlay report on it is no, but just use the high, let's assume these government programs provide support from a credit perspective and see how that plays out. So, that's why this looking for so much uncertainty related this, generally, the situation that, -- but that's the methodology we use is we are trying to factor in all the stimulus that's being provided and adjust for that the best we can.

Got you. Okay. And then the near-term outlook for the wealth business, it would seem from your comments that maybe the bulk of the hit you expect to take in that business. This overall as you maybe took in the first quarter, or is that not fair to say?

Well, the actually the business itself performed really well in Q1 had net growth, net client, asset growth, so with that got swamped by the -- by just the general market downdraft and that the impact on the AUM. So the business activity was very good. And we're really pleased with that. So, to the extent that, we don't see the market move like it did in the first quarter, again, then we should see some stabilization of the seizure. And then we're also -- we normally this time you're going to tax prep season, I think some of that those dollars might be pushed or pushed out into the future quarter. But I would think it would stabilize us and maybe we don't move a whole lot from where we were and at the end of March, I don't know exactly when the lows were, but we've certainly bounced back from there hasn't been that one.

Yes. So, that's why I was think maybe, it's the reverse this quarter where you get a market object on that 40% that's mark to account market value, the market increase hold, and maybe a client activity declines a bit. It's kind of net-net the same thing, or is that too simplistic?

Well, we hope for the best like we don't test new lows in the CRE. Yes, your logic is sound.

Okay. And then last one for me. Whether the economic conditions that might lead you to reevaluate the dividends?

Well, we're just going to work on that. We're going to look at that every quarter. I mean, right now, we paid a dividend this quarter, or comments around our capital and the adequacy of that, we feel very good about the position we're in. We held the capital and normal times for times like this. So, we've got a lot of cash at the holding company, should have gone 90 round numbers -- $90 million of cash. There is a lot of people passively to pay dividends. I think though, my opinion that things deteriorate more than they already have from here, then just something we're going to have to evaluate then. But, Frank a pine on that as well.

Yes. I agree with Mike's comment. I think we just have to -- firstly, we just want to see how things play out this point.

Got it. Thank you, guys.

Thanks.

[Operator Instructions] Our next question comes from Christopher Marinac from Janney Montgomery. Please go ahead with your question.

Hey, thanks. Good morning.

Good morning.

So a follow-up question. I guess given -- given the charge offs that you took on leasing and C&I. What does that portend in terms of where the classified and other risk grades go for those when we see that? And then should you have less charge-offs next quarter, just give us what you see now.

Liam, you want to take that?

Yes, sure. We are not anticipating a high volume of charge offs in Q2, largely because the volume of clients experiencing distress and taking advantage of the payment holiday programs will potentially mask some underlying weakness. That's most notably true in that leasing portfolio. So, we don't foresee a rapid change in the charge-off activity. And in terms of credit class, we went in to the crisis in relatively good shape. We evaluate our larger clients on a consistent basis with a view toward both their cash flows and the underlying collateral value. And we will make real-time risk rating adjustments as the facts begin to present themselves. So, right now the credit class numbers are pretty consistent what they've been for the last several quarters with no significant migration. And we'll have to see about how the economy impacts the client base and adjustments will be made based on facts when they start to come in.

Okay. So, do you--

[Indiscernible]. Go ahead. Go ahead Chris.

I was just going to ask about you do the downgrades drive further provision expense or some of that already factored into kind of what you've built here for 331?

Mike?

I think it's fair to say that our -- the 331 adjustment takes into account our -- any anticipated downgrades in the next quarter or two.

Okay. That's helpful.

I'm sorry Mike. You were you were starting to say.

No, just -- I mean we -- this provision was a little bit higher because we were proactive with -- as Liam mentioned -- and you noted on leases. We just we wanted to get out ahead of that knowing that that category you know they weren't those leases because they were already sort of chronically delinquent and qualify for a pay holiday, so we just wanted to get out ahead of that from some of these charge off perspective.

And then do you have a sense of kind of deposit retention as you go through? I know you had some deposits that were supposed to leave the quarter before the crisis started?

Yes, we had that we had one large deposit we knew was going to roll out and that's really if you look at look at our numbers at a high level that was -- that's the variance otherwise the deposit base is extremely stable. And as I noted we're continuing to monitor the market, we were able to do some things from our pricing standpoint, but we're being thoughtful about that and monitoring the competitive market. So, we'll see that there's additional opportunity there, but it's not something we're trying to optimize price right now. We're more focused on liquidity and ensuring that we stay in a really strong liquidity position.

Great. Thanks for taking our questions.

And our next question is a follow up from Michael Perito from KBW. Please go ahead with your question.

Hey guys. Just one quick follow-up. I want to ask about operating expenses going forward. Frank you made the comment in your prepared remarks that some technology stuff you guys done has already paid off and obviously, the expenses were fairly flat quarter-on-quarter and I think that was kind of in line with the plan that you guys laid out in your Investor Day. I was just curious if you surprised me with an update on the outlook on expenses especially given kind of the rapidly changing revenue environment?

Mike, you want to -- let me say Mike, I mean this is Frank, let me just -- I mean obviously, you hit the nail on the head Mike in the sense that there was a focus for the first quarter -- focus for 2020 was leveling out that expense line after we had that expense build you know with the hires we made in a couple of the -- in the technology investments which as I said earlier paid off. It doesn't change that dramatically and maybe we shift and we have to focus, but I think it's going to take a little while for it to play out just how much of an impact all this is going to have on the operating environment -- or operating expenses for our facilities for a number of these areas. So, Mike, I don't know if you want to add -- Mike Harrington if you want to add something?

No, I think that's -- that's exactly right. We'll have to just wait and see where things go Mike. In the quarter I just -- I did note this in my prepared remarks that the operating expenses that would have been down a few million dollars, but embedded in that -- in those expense lines, in the other line is the reserve we had -- we made a reserve for unfunded commitments. That was about $3 million, so that was very innovative and down a couple million dollars quarter-over-quarter.

There is some level of that every quarter though right or not -- is there any sense you can give us on to how elevated that was as we think going forward?

The reserve?

Yes.

Yes, I mean, normally that's only I would say a few hundred thousand dollars, don't quote me on that, but it's a very minor number. I mean that something like--

--500 on average?

I mean it was only as of December 31st $360,000. That's on slide nine, a slide that's up now. We moved that up under CECL to $1.2 million and that number would have been I think fairly static. I would have not -- there probably would have been hardly any additions to that if it wasn't for the current -- this current environment we're operating in right now.

So, there's at least a couple million of the unfunded commitment build in the first quarter, in the other expense line that that most likely will not recur. I guess obviously it could change it but --

Yes.

Okay. And then generally speaking you still feel pretty good about that.

Yes, -- go ahead.

Sorry, Mike to interrupt.

I was just going to say basically on the rest outside of that you still feel fairly reasonably confident that that there's the investments you made putting you in good position and there should be nothing down the pike that really accelerates the expense growth meaningfully outside of maybe COVID-19 items that could impact.

If we don't see anything at this point.

Great. Thank you guys for taking the additional question.

Sure. No problem.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

This is Frank again and I just wanted to thank everybody for taking the time in this uncertain environment to listen to our conference call today. We hope everybody will be healthy and safe going forward. We look forward to talking to you all in the coming months. Thanks.

Ladies and gentlemen that does conclude today's conference call. Thank you for joining. You may now disconnect your lines.