Good day and welcome to the Berkshire Hills Bancorp, Inc First Quarter 2020 Earnings Release Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. David Gonci, Capital Markets Director. Please go ahead..

Thank you. Good morning and thank you for joining this discussion of first quarter results. Our news release is available on the investor relations section of our website at berkshirebank.com and will be furnished to the SEC.

Supplemental information about our operations and our COVID response is included in an information presentation at our website ir.berkshirebank.com. And we may refer to this in our remarks. We are conducting our earnings call today, from remote locations. We hope this goes smoothly and we apologize in advance for any audio challenges that might occur.

Our remarks will include forward-looking statements, and actual results could differ materially from those statements.For detail on related factors, please see our earnings release and our most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed on this conference call.

References to non-GAAP measures are only provided to assist you in understanding our results and our performance trends and should not be relied on as financial measures of actual results or future projections.

A comparison and reconciliation to GAAP measures is included in our news release.And with that, I’ll turn the call over to CEO, Richard Marotta..

Thank you, David. Good morning, everyone, and thank you for joining us today for our first quarter earnings call.

With me this morning are Jamie Moses, our CFO; Sean Gray, our President; Georgia Melas, our Chief Credit Officer; George Bacigalupo, our Commercial Leader; Greg Lindenmuth, our Chief Risk Officer, and Malia Lazu, our Chief Experience and Culture Officer.

I will start by talking about our response to the COVID pandemic situation.The pandemic is behind most of the top and bottom line changes to our financial results. More importantly, I appreciate how we do business and how we respond to the urgent needs of our customers and our community.

Our 1,600 employees have worked with extraordinary flexibility and focus to meet the health and economic challenges that we face. I gave them my thanks for their dedication and demonstration of our culture. We quickly shifted through that now, 86% of our non-branch staff are working remotely from home.

We have set careful rules to protect our in-office employees and customer-facing staff. Our computing and telecommunication systems have served us well. And we’re well positioned to maintain current operations for as long as needed.

Our materials describe our participation in the paycheck protection program, and I’m proud of the role providing needed funds to support paychecks, across our markets.Meanwhile, we are working to help current borrowers who have saw a tempered to payment relief and there is more information on this, in our release.

And all of our COVID responses were paying extra attention to disadvantaged person to help minimize, where we can, the harms from the pandemic to our most vulnerable population.

We are in a position to respond strongly to the pandemic because of our operating and financial strength, buttressed by our culture and vision as a 21st Century community bank. As you know, we focused last year on strengthening our company and improving our community focus.

We improved our efficiency, further automated our service channels, expanded our touch point with customers and community partners, innovated with outreach to under-banked urban communities, strengthened our capital liquidity and maintained our credit and financial disciplines.

We are stepping up our support now with our own resources, despite the margin pressures we expect from the Fed’s actions to lower interest rates.

It is, therefore, given that our current year operating profitability will be impacted.We won’t be giving specific earnings guidance and we are withdrawing any previous forward-looking statements about our operating or financial objectives. We intend to operate thoughtfully and responsibly, as we balance the interest of all of our stakeholders.

I want to comment on the large loan loss provision, which resulted in a loss for the first quarter.

The new CECL accounting standard require that we, charge current quarterly earnings for projected credit losses, even though we have no such losses to date.The loan loss provision is a non-cash charge for future loan loss and that may or may not happen, and it has no material impact on our total regulatory capital ratio.

We’re adhering to our credit discipline and our loan performance remained solid, during the quarter. Also during the quarter, we resolved a problem, commercial real estate loan that we had previously commented on.

We have been gradually tightening our credit management in prior quarters, as part of our strategic repositioning, as the credit cycle continue to age. We are actively working with our borrowers, as appropriate to provide forbearance to support their liquidity and maintain employment and operations during this shutdown.

These liquidity measures are intended to be short-term and are viewed by us and the regulators, as lowering credit risk and helping to protect our borrowers from the impact of government restrictions.With that, I will ask Jamie to review our financial results..

Thanks, Richard. We reported a loss of $0.40 a share, which is net of a non-cash $0.69 charge for the loan loss provision. Core EPS for the quarter was a $0.07 loss, which excludes the impact from discontinued operations, in addition to securities losses.

As Richard noted, much of the impact on our operations was due directly and indirectly to the pandemic and our response to it.Our earnings release and our information presentation discuss the implementation of CECL on January 1 and the impact of the pandemic on the loan loss provision under that new model, as of quarter end.

At March 31, our allowance measured 122 basis points compared to loans, which is considerably higher than the 67 basis point allowance at year-end 2019. Due to the CECL accounting impacts, we have introduced a new non-GAAP measure of core pre-provision net revenue or PPNR. This looks at core income before provision and taxes.

Core PPNR decreased by $18 million quarter-over-quarter, including the following impacts. A $5 million decrease in net interest income, which included a $2 million reduction in accretion, which is now posted to the credit loss allowance.

The remaining $3 million decrease was due to the changes in volume, mix and rate that resulted from the changes in our business and business environment during the quarter.Our core non-interest income decreased by $6 million, $3 million of that change was related to the impact of changes in credit spreads on our swap book.

We also had a $2 million charge to adjust the fair value of our taxi medallion loans. Additionally, our swap fees and SBA loan origination revenue were down, which offset the benefit of seasonal revenues in wealth and insurance.

Our core non-interest expense increased by $7 million quarter-over-quarter, of that increase, $3 million is related to regular seasonal changes in payroll and occupancy, along with the impact of FDIC insurance premiums.

There was a $2 million increase in loan expenses quarter-over-quarter and a $2 million increase in technology investment in the quarter to further reinforce our internal systems and digital offerings.

We expect our total expenses to be a couple of million dollars higher in quarter two, related to the PPP program and then moderate back to Q1 levels in the back half of the year.Our spending takes into account the investments we feel are appropriate for our long-term strategy of future-proofing the institution.

Our net interest margin decreased by 9 basis points, including CECL-related accounting impacts, as you know, our balance sheet is asset-sensitive. The reduction of interest rates resulting from monetary response to the pandemic occurred near the end of the first quarter.

We anticipate that there will be further margin pressure due to our asset sensitivity, as we proceed through the year. We generally expect loan balances to further decline this year due to planned runoff of non-relationship business.

The main exception is the PPP loan program, where we are in the process of funding our $650 million Phase 1 pipeline of loan approvals. The PPP loans are lower-yielding and most of them are expected to be repaid by the SBA in the third quarter.

We estimate that we will receive about $20 million in fees from the SBA for these loans, which will be deferred and amortized into interest income.We expect to recognize most of this, when loans are repaid in the third quarter.

This will provide a short-term bump to the margin, while the longer-term trend will continue to be impacted by compression due to lower interest rates. Deposits were generally steady through much of the first quarter and are expected to remain steady through the year.

We temporarily closed about 20 of our 130 branches for the safety of our employees and customers, but we continue to cover the markets well with our branches in conjunction with our Mybankers and digital platforms.To sum up this discussion of core PPNR, a lot of things combined to bring us to the reported number in Q1.

While we expect a onetime bump from the PPP loans in the third quarter, a further recovery of the core PPNR will depend on overall recovery in public health and business conditions, which are unpredictable at this time. Similarly, the future provision expense will depend on these future conditions.

We anticipate that our tax rate will be in the 15% area, going forward, although this too will be affected by the pace of recovery and any further provision expense or valuation-related impacts. The two non-core items for the quarter were also affected by the pandemic.

Stock market decline translated into a largely unrealized loss in our equity securities portfolio. Most of these securities remained in a net unrealized gain position at quarter end.

As you know, stock market conditions are improving so far in the second quarter.The other major non-core item was the loss on discontinued national mortgage banking operations. This loss was driven primarily, by a write-down of MSRs due to the pandemic impact, as well as severance accruals, as we transitioned staff in Q2 under our sale agreement.

As you know, we have been working on the sale of these operations over the last year, and the pandemic made the completion of the sale, extra challenging.

These operations will be gone by year end, based on our sale agreement and related plans, and we are targeting that this non-core loss will sharply narrow in the second quarter and then tail off through year end.Returning for a moment, to the balance sheet, our liquidity metrics continued to improve in the first quarter.

We are well positioned to fund the PPP loans in the second quarter and to support the business that we expect. While our common equity was reduced in the first quarter by the CECL and pandemic charges, this impact was moderated by the internal capital generation from our core PPNR.

While our capital is strongly positioned, we recognize the importance of preserving our capital to support our communities through these uncertain times. We did not repurchase shares in the first quarter, and the existing stock buyback authorization expired on March 31 and is not being extended at this time.

Our dividend is well supported by our operations and is an important source of support for our equity stakeholders. The board plans to declare and pay our normal quarterly dividend, later during the quarter.This completes my remarks. And I will turn the call back to Richard..

Thanks, Jamie. To review the quarter, the pandemic impact on our core PPNR and on the non-core charges, reduced our GAAP income and then the pandemic loss provision, resulted in a bottom line loss. We moved our liquidity and capital metrics forward and strongly built our loan loss reserve.

It’ll helped that to move toward starting to reopen in our markets will reduce any further pressure on our core PPNR and give us an opportunity to begin to advance that measure, when economic recovery is more firmly established.

Meanwhile, we aim to continue to invest in our 21st Century community bank strategies, which will include important long-run benefits to our communities and to us.

We appreciate the cooperative spirit that we have seen across our footprint, and we will continue to do our part to be a responsible and constructive partner, as we move forward.This completes our prepared remarks and I invite the operator to now open the lines for any questions..

[Operator instructions] And our first question today comes from Mark Fitzgibbon from Piper Sandler. Please go ahead..

Hey, everybody. Good morning. Hello, Jamie, just to follow-up on one of the points you made on the effective tax rate at 15%, going forward. I think, last quarter, you had suggested it would be 20%.

Is the effective rate lower because you are doing additional tax credit investments or because of the operating loss this quarter or something else?.

Yes, thanks Mark. It’s because of the operating loss this quarter..

Okay.

And so you would expect that to stay at sort of 15% for the remainder of the year, is that right?.

Yes, that’s right. We are suggesting 15% at this point, yes..

Okay, great.

And then secondly, I wanted, if you could share with us what assets under management were, at the start of the quarter and the end of the quarter?.

Mark, I don’t have that info, in front of me, handy. Obviously, there going to be smaller, due to the impacts of the market. Sean, if you have that? Otherwise, Mark, I can get back to you on that..

Okay.

And then turning to credit, I guess, I was curious of the $1.3 billion of forbearance you gave, was that concentrated in any particular part of your footprint or geography?.

Yes, Mark, I am going to turn that over to George Bacigalupo to answer that question..

Mark, I would say that, no, geographically, I think, we saw a fairly evenly spread throughout our many states that we do business in. If you look at the different sectors, clearly, sectors such as hospitality and retail, foodservice, entertainment, etc., are the ones that have obviously been impacted severely.

In many cases, businesses that have been required to shut down, etc. So, we communicated directly, through our relationship managers with all of our customers to determine what the appropriate response was. In many cases, we provided modifications and deferments, typically, for 90 days. We try to keep it fairly short.

So, we will continue to have those conversations and reassess over the coming weeks, whether or not 90 days will be sufficient for those businesses, that are allowed to operate and get back to a sense of normalcy, or for those that remain closed or have other situations, we could see some go beyond that period.

But we are staying on top of our customers with our relationship managers and feel like we have a pretty good sense, as this develops, but it’s a little too early to tell in the process what’s going to happen, beyond the current situation..

Do you have a feel yet for which sectors you think are likely to see the most loss content, during these difficult time period?.

Did you say loss, in terms of credit losses?.

Yes.

I mean ultimate credit losses do you have a feel for the segments that you think are likely to see the greatest loss content?.

Yes. I mean, I can pass that over to Georgia Melas on credit. But from my standpoint, I think, it’s too early to tell. I think, we do have conservative underwriting.

So, we have been – our impacted sectors, I think we have resilient customers who are going to be able to get through this and get back without having credit losses or ultimate disruption on their business.

But Georgia, would you like to add anything to that?.

Yes. Thanks, George. Yes, Mark, I agree with everything, that George just said. It is a little bit early. But if you look at Slide 8 in our presentation, we basically listed the higher impact sectors, starting with hospitality, leisure and restaurants. Those are obviously the three top ones that we are keeping a very close eye on..

And then lastly and I know this is a hard question to answer, but based on what you know today, how are you thinking about provisioning, in say, the second quarter? And again, I know, there’s a lot of variables and it’s certainly hard to forecast, but it’s even harder from our perspective to forecast? So any or guidance will be much appreciated..

Yes. Mark, I think, Jamie, maybe you are closer to that from a CECL perspective..

Yes. Thanks, Richard. As you say, it’s tough to predict, Mark. I guess, the right way to think about it, at the moment is the forecast that we’re looking at so far, right now, here in early May our projected worse conditions than what we saw at the end of the quarter. Obviously, that can change as we go forward.

So, I would expect that there would be some kind of build based on what we see today, how much that is, is going to be entirely dependent on what those forecasts look like, at the end of the quarter. And just to get to your AUM number, we were $1.31 billion. At year end, we are $1.14 billion, today..

Great. Thank you..

Thanks Mark..

And our next question comes from Laurie Hunsicker with Compass Point. Please go ahead..

Yes, hi. Good morning..

Good morning..

I just wondered if, well, I guess, two things. One, I wanted to just talk about credit. But two, just quickly, on the margin, I just want to make sure, that I’m thinking about this the right way. Obviously, I understand, Jamie, what you’re saying, directional on pressure.

But it looks like, to your accretion income of round numbers, the 3.1, call it, 11 basis points was outsized.

And so if that cut in half theoretically, we could see the core margin tracking in the low 29, am I thinking about that the right way, or do you have any further guidance, you can help me with there?.

Yes, Laurie. I think, you’re thinking about that the right way. The margin question is a complicated one. Overall, it’s difficult to predict at the moment because of the effect of the PPP loans, right? So it’s going to be dependent upon timing of repayment of those and acceleration of the fees that are amortized into the net interest income number.

So, we’re anticipating putting around $650 million or so of very low-yielding loans on the balance sheet. So I think you are going to see an outsized decline, in NIM, in Q2 and then a pretty big pop in Q3 as we amortize all those fees into one quarter and then sort of moderating back into Q4.

I think, the underlying balance sheet is going to see another decrease in Q2, based on a full quarter of near zero interest rates. And then we should expect to see some expansion of that, albeit small expansion in the back half of the year on the underlying..

Got it. Okay. And then, when you say the fees to pop to 3Q, I thought, the processing fee income was taken over the life of the loans..

It is. So, it’s a great question. So, we expect actually that most of these loans will be forgiven and repaid off, in Q3, after the sort of eight-week period, that the hereof support portion of these loans is forgiven..

Perfect. Got it. Okay, great. And then I just wanted to switch over to Slide 8. Appreciate the detail here, just hoping for maybe a little bit more. Starting with, on these different line items, if you have it, and if not, I can follow-up with you offline.

Do you have the percentage, with which each category is real estate secured? And then just maybe help us out with the LTVs, at least on the hospitality, the leisure and the restaurants.

If they are largely real estate secured, or are they largely C&I, or what can you share with us?.

Yes. Laurie, this is Richard. So, I think, the best personal answer to that would be Georgia and/or Greg.

So, Georgia, why don’t you start?.

Okay, thanks. Laurie, yes, we can just go through them and take them in order. I mean, hospitality, the bulk of that, this $248 million is going to be real estate secured. Moving down to the leisure segment, approximately $265 million, $266 million of that is Firestone-related. So, obviously, that will be secured by equipment.

The remaining piece is really broken out, among, amusement, recreation, some golf courses. So, I don’t have the breakout for how much of that remaining piece is real estate secured, but there will be some real estate in there. Moving on to restaurants, it’s roughly 60% of that exposure is real estate secured.

And as far as retail goes, the bulk of that is probably – is going to be real estate secured. Again, I don’t have the exact amount, but the bulk of it will be. Healthcare, when we look at our healthcare exposure, that’s a mix of skilled nursing and assisted living, which is roughly half of that number, and that is real estate secured.

The remaining half is a combination of medical practices, hospitals, and that would be a mix of real estate and equipment and all assets secured. And then lastly, the construction book is all real estate secured..

Yes. Super, super helpful.

And then, if you know it on Slide 8, do you know how much of this loan grouping is out of your footprint?.

Well, Firestone, obviously, has a national footprint. So, a portion, probably the majority of their balances, the $266 million, will be at a footprint. So, with the exception of that, everything else is primarily in footprint..

Okay, great. Okay. And then just to clarify, you don’t have any oil and gas exposure.

Is that correct?.

Oil and gas is minimal. It’s about, I want to say 2%, 2.5% of the commercial portfolio..

Okay, so – okay, so, that’s around $40 million, okay..

No..

And then….

I am sorry, go ahead..

Is that correct? Your oil and gas is around $40 million?.

No, no, 2.5% of the commercial book. So, it’s about $150 million..

Oh, okay. I’m sorry..

Sorry. Yes, I didn’t hear you clearly. I apologize..

Okay. And then, also transportation, I didn’t see that on the slide.

Can you help us think about what your transportation exposure is? And then, I guess, specifically within that, if you can just update us on the aircraft leasing? And then also the taxi, which I know is pretty small, but just if you can help us think about where that is on a net basis..

Well, transportation is minimal. I don’t have the exact number in front of me, but we have minimal exposure into that space. Aircraft balances are about $100 million. And the Medallion portfolio, I think, as was outlined in the deck, is down to $4.9 million at the end of March..

$4.9 million. Okay, great. And then just last question.

Leverage loans, do you have a balance on what your leverage loans are?.

Yes. That’s also minimal. That is roughly $200 million..

$200 million. Okay, great. Thank you. I’ll leave it there..

Thank you..

Thank you..

And our next question comes from Dave Bishop with D.A. Davidson. Please go ahead..

Yes. Good morning. Quick follow-up on – Jamie, I think, you gave some of the pushes and pulls that occurred this quarter, within the fee income segment.

I’m just curious, how should we think about the second quarter and me – here on out – how much of a rebound would be driven by, maybe, an improvement in terms of credit spreads versus interest rates versus other metrics.

How should we – just curious how should we think about some of the various segments and light on it, within fee income?.

Yes. Thanks, Dave. So, I think, the right way to think about it is improvement in business conditions in the overall health of our markets and the economy. The fee income is going to be highly dependent upon our ability to generate loans and so swap fees, our ability to generate loans, as part of 44 BC, which is our SBA operations.

And then, the credit spreads are going to be important, in terms of those back-to-back swaps, where we mark at fair value. So, at the moment, I don’t see any deterioration in those things, from the end of the quarter. But I think, that’s – those are going to be the drivers of where fee income sort of goes for the rest of the year.

I think, it’s really just macro driven..

Got it. And then on the flipside, you noted some of the increases in operating expenses. Just maybe walk through what really were the inflationary pressures, I guess, more from the technology and communication size, as well as in other expenses.

I might have missed some of that detail?.

Yes. So, in my remarks, I talked a little bit about this. We had, call it, $3 million or so is seasonal expense increases, which includes payroll taxes and occupancy expense, things like that. But then also, we don’t have the benefit of the FDIC rebates from Q4, anymore. So, about $3 million of that increase is due to those things.

We had a $2 million increase in loan expenses, quarter-over-quarter as well. So, those type of things are – we have loan workout expense. So, a large chunk of that was driven by the commercial real estate loan that we referenced in our earlier comments. So, that was a chunk of those things.

And then we also have just appraisals and insurance and just sort of general expenses, associated with the normal operations. So, there’s a bit of an increase there, relative to Q4. And then we had $1.5 million or so, close to $2 million in technology investment.

We continue to think that we – it’s important to build out our digital channels to support mobile banking, support our online channels. And we also had some expenses, related to internal systems and things like that, that we need in order to help service customers and service people.

So, those – I’d say, that’s the general broad – general terms, speaking about what expenses did during the quarter..

Anything specific on occupancy, I just noticed that, that sort of ticked up. I don’t know, if that was seasonal or what.

Related to weather and is this sort of a good run rate for the – at the about $11 million per quarter?.

Yes. I think, that’s a decent run rate. You had it exactly right. It’s a seasonal pickup. And I think, we should – you should think of it as that $11 million or so as the right run rate there..

Got it.

And then remind me – and turning back to the margin, in terms of the commercial portfolio, how much of that is floating with short-term LIBOR or prime?.

That’s just about $3 billion, Dave, a little bit under $2.7 billion..

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

Thanks. Good morning, everyone..

How are you doing, Collyn?.

Maybe if we could – good. Maybe if we could start with the loan book.

And just kind of give us an update on where you are, in terms of portfolios that are in rundown mode? And then, what portfolios you are kind of expecting to grow and then just kind of what the organic pipeline looks like?.

Georgia, do you want to take that one?.

Sure. I would say our pipeline is less than it has traditionally been because primarily, last quarter, we spent, first, working on the deferral program, which so many of our customers were impacted. And then, once, that was being worked on, the PPP program became important. And so, we’ve been focused on that.

So, we are continuing to support our customers with their opportunities, and we continue to make good on commitments that were in place, prior to the COVID situation hitting. But I would say, we’ve been, primarily, focused on assisting our customers and not as aggressively looking for new opportunities.

Hopefully, as the markets get reset, later this year, we’ll be able to focus more on strengthening opportunities in the market..

Okay.

And then, what about books that are in runoff mode and kind of what you’re expecting to just intentionally run off?.

Yes. Well, it’s – I’ll turn it over to Jamie to talk about some of the portfolios for sale. As far as our organic commercial business, we continue to put a lot of resources into our business banking operations, which we feel, has great opportunity to grow, as well as asset-based lending. Some of our C&I business is doing well.

And commercial real estate is, I’d say, is not in a growth mode as much as it’s re-pricing some of the volume that’s running off. But in terms of businesses like the aircraft, I’ll turn that over to Jamie..

Yes. Thanks, George. Yes, okay, sorry, Richard. Thanks. So, in terms of the runoff portfolio as we are speaking primarily here of the indirect auto portfolio and the aircraft portfolio, aircraft was at $100 million at quarter-end, and the indirect auto was right around $320 million at quarter-end.

So, that’s down from last year, when we started talking about these runoff portfolios or potential sales of the portfolios, we were at $175 million on the aircraft, so down $75 million now. And we are at right around 500 or so in the indirect auto, so almost 200 down, from that point..

And Collyn, the only thing I would add to that is that as we look through the book, we are looking for the non-relationship sectors and Jamie just highlighted some of those. But I would also indicate where it’s just a pure credit facility that there is no relationship or a participant.

Those are the ones that we – as the opportunity arises, we are walking away from those. And as George said, really putting it into relationships and that is primarily the business banking in the communities that we serve.

And then also, as George said the ABL, which is where you really truly build a holistic relationship, not only with the company, but also with the owners and the folks that operate the company..

Okay, okay. And then just along those lines. So, first choice, you’re in agreement to sell that business, before year end.

So, we see the discontinued ops on the fees and expenses, but just curious about balance sheet implications, just want to make sure that I understand that? And then also kind of what you’re thinking about your core residential mortgage book and then, mortgage banking activity, going forward?.

So Collyn, I think, the first part of that question, I think, Jamie would answer, and then I would ask Sean to get into the second piece of your question. So, Jamie, why don’t you start off with the – basically, the scale and what it does from a balance sheet perspective for FCLS, perfect for FCLS..

Yes. Thanks, Richard. So, Collyn, I think that what you are going to see is that the balances or the balance sheet impact of FCLS sale, you’ll see all of that – or virtually, all of that happen in Q2, as we move forward.

There are still some non-core expenses associated with that discontinued operations because we are in the process of winding down our pipeline. So, you’ll still see expenses associated with salaries, leases and things like that in Q2. And it continues to moderate and get smaller and smaller, as we go through the rest of the year.

So, I think that’s generally how we are going to be thinking about FCLS on a go forward. And so, I’ll kick it over to Sean now in terms of the residential – or the mortgage lending on a go forward..

Sure. Like Richard mentioned, it’s going to be relationship residential mortgage lending. Just from a pipeline perspective, we’re at about 75 million, currently. We will continue to target a 75% to 80% held-for-sale mix.

And the relationships will be our bank customers, our depository customers, folks that are working with our mud bankers in our private banking. But it will be a complementary product with the appropriate mix of purchase and held for sale..

Okay, okay. And then just shifting gears to the fee comment. Jamie, I just want to make sure, I understand. So, if we look at it on a core basis. So, this quarter, I think, swap and SBA fees were down.

I presume, just given, a low amount of activity that you would expect those continue to trend down, going forward as well?.

Yes. I think, that’s the right way to think about it. Without loan generation, there’s likely not to be swaps associated with those loans. And depending on the business environment, it’s tough to see that there would be a lot of SBA activity as well.

The only thing that’s different, I guess, I wouldn’t expect a – at this moment in time, I’ll say it this way. I wouldn’t expect a fair market value hit to our back-to-back swap book, based on credit in Q2 relative to Q1. So, I don’t think, we would have that negative $3 million hit there. But otherwise, I think it’s – I think, the comment still stands.

It’s the general conditions in the economy are going to be the things that allow those fees to come back..

Okay, okay.

And then just shifting the credit for a minute, so just in terms of the Firestone exposure, so the 266 million, can you just remind us what of that is just kind of the – where the collateral is, the carnival equipment?.

Yes, Collyn.

Georgia, why don’t you take that one?.

Yes, Collyn. In regards to the Firestone, carnival is only one component of their business lines. I mean, they have fitness, they have laundry they have location-based vending. So, the carnival is probably, maybe 20%, I would say, of the overall 266 million. And that’s a guess..

Okay.

And then, can you just also – just remind us, I know, you’ve given it before, but what the historical loss levels have been, within the Firestone and maybe where their peak losses were?.

When you say – are you asking specifically, like, for historical charge-off information?.

Yes..

Okay. Well, I have it for this quarter. Charge-offs for this quarter are at 439, versus last quarter, 311..

Okay. And do you have anything, just kind of a longer-term metrics that you can offer for what they’ve done..

As far as historical charge-off you mean again?.

Yes, yes, yes..

Yes. I can probably – let’s take a quick look. I do have the number..

I mean, I guess – while you’re looking for that, Georgia, I guess, I’m asking the question because I would think, broadly, that this might be the one segment, where just from a collateral standpoint, you might see some higher risks and just given where their exposures are.

If that’s not the case, and that’s not how you’re seeing it, I’d welcome clarification on how we should be thinking about it differently?.

No. No, absolutely. I don’t disagree with you. I mean, but just looking back historically, I mean, this quarter, it’s 439,000. Over the last four quarters, it was 262, back in June. It was actually a recovery in the third quarter, and it was about 100,000 in January..

Hey, Collyn, this is Richard. So, I guess, just a couple of maybe touch points. And I do not have the numbers in front of me. So, I’m going off of memory. The last – a dramatic economic downturn, they actually fared very well, for a couple of reasons.

One is, it’s a cheap way of entertainment, a lot of the things they’re in, and they were able to bounce back pretty quickly. This, the pandemic we’re in, is a little problematic. We’re trying to figure, how problematic that is because of social distancing and all of those issues and when all that stuff starts to shake out.

So, anecdotically, their historic charge-off levels have been very good, through the last couple of cycles. This cycle is just different, and it’s not only for them, I think, it’s for everyone.

It’s just – it’s going to be a strange, strange world, as we kind of climb out of this thing with all the social distancing as a phasing in, and this thing could come back in the fall and all those things. So, we will get you the historic numbers, but obviously, we are watching that very closely..

Okay, okay. And then just to tie up the credit – my credit question.

Jamie, is there any – can you give us any sort of color as to how your provision build reserve fell this quarter, how it was allocated among loan segments?.

Sorry, Collyn. Yes. I think, we have that in our slides here..

Is it okay?.

Yes, give me just a second. We can talk through it..

I think if it’s in the slide deck, I will pull it. I just I did not see it on it..

You know what, Collyn, actually, we – yes, it’s actually not in the deck. Sorry, that was maybe in a different version we have. So, we have not given those impacts out at that detailed level. So, we don’t have that for public consumption there. And I guess – yes, I guess. That’s – I will say we are not prepared to give that to people..

Okay, no worries. And then I guess just kind of taking it back, all into sort of the expense discussion, right? So you are guiding – expenses were much higher this quarter, at least than I was projecting and it sounds like you are expecting expenses to go up again and continuing to invest in the business. I mean, I get it.

I just – I am curious how you balance that with continued shrinkage in the loan book and then other challenges that are, obviously, facing the economy, the company, all that kind of stuff.

I just kind of just want to understand sort of the thoughts around the continued expense creep or expected expense creep?.

Yes. I’ll….

Go ahead, Richard..

No, I was just going to say – and then I’ll kick it over to Jamie. I think, the initial pop off is going to be directly because of the PPP program.

One of the things that it is a balancing act, the future proof, from a technology perspective of the company, the investments we made last year and in the beginning of this year has actually closing, but instead, as we had to close branches and even the branches that are open, are open on and a limited, either our basis or drive it through or whatever.

So, that helped us provide the services, required from the communities and our clients. But those are things that we do talk about. And so, as we’re starting to shrink this bank, we’re looking at what – we’re all – we have to look at from an expense perspective.

So, again, the short run, and I think, Jamie walked through the difference between fourth quarter and first quarter and some of it was the rebates went there and seasonal and then what we anticipate in the next quarter or so is really driven or driven by PPP.

So, Jamie, any more detail?.

Yes, Collyn, that’s I would say pretty much exactly the same way as Richard did. He hit the high points there. The increase in expenses in Q2 is PPP-related. We expect those to then – those expenses to go away in Q3 and Q4. So, we would expect Q3 and Q4 to be back down to around the $70 million, $71 million number..

Okay, okay. And then just the expenses tie to PPP, is that just – is that additional – is that mostly compensation related, or just curious, what the drivers of.

Yes. Yes, you got it, Collyn. So, our entire bank, or a large chunk of our entire bank really, really pulled together working day and night on getting applications in, getting funded, getting them on the system, really, really working hard. So, there’s going to be some compensation bumps based on that.

And then, there are just fees and other things like that that we have to outsource some documentation fees and things like that, that we are looking at as well. But you had it right from the beginning, it’s mostly compensation..

Okay very good. I will leave it there. Thanks everyone..

Thank you..

And our next question returns to David Bishop from D.A. Davidson. Please go ahead..

Yes, thank you.

A quick follow-up, just one final question on Firestone, do you happen to have how much is in modification or deferral right now?.

Yes. David, I do have that. Roughly about 80% of their portfolio is in the process..

80%, I’m sorry?.

Yes, 80%, roughly..

Got it.

And how is that being handled, is it P&I, is it principal-only, interest-only, just curious about the specific on that portfolio?.

The majority is P&I, that’s for 90 days..

Great. Thank you..

Sure.

And ladies and gentlemen, this will conclude our question-and-answer session. I’d like to turn the conference back over to Richard Marotta for any closing remarks..

We thank you all for your interest in our organization. I look forward to joining here again to present our second quarter results in July. Thank you..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time. Have a great day..