Q3 2020 M&T Bank Corp Earnings Call
Thank you for standing by and welcome to the M.T. banks third quarter 2020 earnings Conference call.
At this time all participants have been placed in a listen only mode. Later, we will open the floor for your questions.
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Thank you I will now turn the call over to Don Macleod Director of Investor Relations. Please go ahead.
Thank you Mary and good morning, I'd like to thank everyone for participating in EM and TS third quarter 2020 earnings conference call.
Telephone and through the webcast if you have.
If you have not read the Orange reach we issued this morning may access it along with the financial tables and schedules from our website www Dot MTB dot com by clicking on the Investor Relations link and then on the events and presentations link.
Before we start I'd like to mention that comments made during this call might contain forward looking statements relating to the banking industry and to empty bag Corporation.
Actual results could differ from what is described in those forward looking statements image.
Mm encourages participants to refer to our SEC filings on forms 8-K, 10-K, and 10-Q, including the form 8-K filed today in connection with the earnings release for a discussion of forward looking statements and risk factors now I'd like to introduce our Chief Financial Officer Darren King.
Thanks, Don and good morning, everyone.
As noted in this mornings press release, we were pleased with the improving level of economic activity or markets experienced in the third quarter, particularly in terms of consumer and business spending.
Specifically, we saw strong debit and credit card usage, both by consumers and business, which also manifested in an increase in merchant volumes.
The mortgage market was robust in the third quarter, where we witnessed an uptick in both residential origination volumes and margins.
Our trust business experienced the increase in money fund, we fee waivers, we had been anticipating but those were offset by strong equity and debt markets during the quarter.
Expense trends were in line with our expectations as we continue to exercise diligence in a particularly difficult revenue environment.
Also encouraging are the trends for consumer commercial customers granted some form of COVID-19 for parents and for which have reached its endpoint products.
Approximately 10% have asked for additional relief.
The common equity tier one ratio improved by 31 basis points to 9.81%.
At the same time, the allowance for loan losses grew to 1.79% of loans fuzzy.
Positioning inventory to meet the needs of our customers and communities.
[noise] now lets review our results for the quarter.
Diluted GAAP earnings per common share were $2.75 for the third quarter of 2020, compared with $1.74 cents in the second quarter of 2020 and $3.47 in the third quarter of 2019.
Net income for the quarter was $372 million compared with $241 million in the linked quarter and $480 million in the year ago quarter.
On a GAAP basis Amitiza third quarter results produced an annualized rate of return on average assets of 1.06%.
In an annualized return on average common equity of 9.53%.
This compares with rates of <unk>, 0.71% and 6.13% respectively in the previous quarter.
Included in GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to $3 million or two cents per common share little change from the prior quarter.
Consistent with our long term practice empty provides supplemental reporting of its results on a net operating or tangible basis from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions when they occur.
Amitiza net operating income for the third quarter, which excludes intangible amortization.
Was $375 million compared.
Compared with $244 million in the linked quarter and $484 million in last years third quarter.
Diluted net operating earnings per common share were $2.77 for the recent quarter compared with $1.76 cents in 2022nd quarter and $3.50 in the third quarter of 2019.
Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 1.1% and 13.94% for the recent quarter the.
The comparable returns were <unk>, 0.74% and 9.04%.
In the second quarter of 2020.
In accordance with the SEC guidelines. This mornings press release contains a tabulate reconciliation of GAAP and non-GAAP results, including tangible assets and equity.
Turning to the balance sheet and income statement.
Taxable equivalent net interest income was $947 million in the third quarter of 2020.
Marking a decline of $14 million or 1% from the linked quarter.
That decrease primarily reflects the impact on loan yields from the 20 basis point decline in average one month LIBOR compared to the second quarter.
Higher premium amortization on residential mortgage loans and mortgage backed securities was also a factor.
The net interest margin declined by 18 basis points to 2.95%.
Compared with 3.13%.
In the linked quarter.
Average interest, earning assets increased by $4 billion to $128 billion for the third quarter, primarily reflecting a $4.4 billion increased in funds invested with either the federal Reserve Bank of New York or into resale agreements.
Those investments were funded by a similar increase in deposits approximately evenly divided between interest and non interest bearing DDA.
The increase in cash equivalent investments caused an estimated 10 basis points of pressure on the net interest margin, while having little effect on net interest income.
The lower interest rate environment.
Similarly, the lower average rate on one month LIBOR that I mentioned previously country.
Contributed to approximately four basis points of the margin decline.
The net impact of lower loan yields was somewhat mitigated by a six basis point decrease in the cost of interest bearing deposits.
The accelerated premium amortization on both residential mortgage loans and on mortgage backed securities contributed some three basis points of margin pressure.
All other factors contributed to an additional one basis points of the decline.
For context since the fourth quarter of 2019, the combination of short term liquidity investments primarily placed at the fed and in.
And investment Securities has increased by $9.1 billion, reducing the net interest margin by approximately 25 basis points, while incrementally benefiting net interest income.
Average total loans increased by $413 million or a little less than one half percent compared with the previous quarter.
Looking at loans by category on an average basis compared with the linked quarter.
Commercial and industrial loans declined by $1.4 billion or 5% primary.
Primarily the result of a 1.2 billion dollar decline in vehicle dealer floor plan loans that were.
That reflects the usual seasonal softness.
As well as the delays some dealers are having in replacing inventory being sold.
PPP loans were effectively unchanged from the end of the second quarter at six.
At $6.5 billion.
Commercial real estate loans grew by less than 1% compared with the second quarter.
Residential real estate loans increased by just under $1 billion or 6%, reflecting loans purchased from Ginnie Mae servicing pools pending resolution, partially offset by repayments.
Consumer loans were up by 4%.
Reflecting higher indirect recreation finance loans, partially offset by lower auto loans and home equity lines of credit.
Average core customer deposits, which exclude deposits received at MTS Cayman Islands office and Cds over $250000 grew by $4 billion Prime.
Primarily in interest and non interest checking or.
Or about 4% compared with the second quarter.
Turning to non interest income.
Non interest income totaled $521 million in the third quarter compared with $487 million in the prior quarter.
The recent quarter included $3 million of valuation gains on equity securities largely on our remaining holdings, a PSC preferred stock.
While the second quarter included $7 million of such gains.
Mortgage banking revenues were $153 million in the recent quarter improving from $145 million in the linked quarter.
Residential mortgage loans originated for sale were $1.2 billion in the quarter up 7% from $1.1 billion in the second quarter.
Total residential mortgage banking revenues, including origination and servicing activities were $119 million in the third quarter improved from $111 million in the prior quarter.
The increase reflects the higher volume of loans originated for sale combined with strong gain on sale margins right.
Residential servicing revenues declined very slightly.
Commercial mortgage banking revenues.
Total $34 million encompassing.
Encompassing both originations and servicing and which was little changed from the second quarter.
Trust income was $150 million in the recent quarter down slightly from $152 million in the previous quarter.
Recall that second quarter figures included $5 million of seasonal tax preparation fees.
Aside from that business remained solid with slightly higher money market fund fee waivers offset by continued strong debt capital markets activity.
Service charges on deposit accounts were $91 million improved sharply from $77 million in the second quarter the improvement comes.
The improvement comes primarily from some of the COVID-19 impacted categories on the consumer side there.
The result of higher levels of spending compared to the prior quarter.
Similarly, the $20 million improvement and other revenues from operations compared with the linked quarter reflects a rebound in KOVA 19 impacted payments revenues that are not included in service charges, such as credit card interchange and merchant discount.
With a slight improvement in loan related fees, including syndication.
Turning to expenses.
Operating expenses for the third quarter, which exclude the amortization of intangible assets were $823 million compared with $803 million in the second quarter.
The $20 million linked quarter increase in salaries and benefits reflect the impact of one additional workday during the quarter and higher compensation tied to the uptick in both mortgage banking and trust related activity compared with the prior quarter.
Recall that other costs of operations for each of the first and second quarters included a 10 million. Dollar addition to the valuation allowance on our capitalized mortgage servicing rights.
There was neither in addition, nor release from the valuation allowance during the third quarter.
The efficiency ratio, which excludes intangible amortization from the numerator and securities gains or losses from the denominator was 56.2% in the recent quarter.
Compared with 55.7% in the second quarter and 56.0% in the third quarter of 2019.
Next let's turn to credit.
Net charge offs for the recent quarter amounted to $30 million.
Annualized net charge offs as a percentage of total loans were 12 basis points for the third quarter compared to 29 basis points in the second quarter.
The provision for loan losses in the third quarter amounted to $150 million exceeding net charge offs by $120 million and increasing the allowance for credit losses to $1.8 billion or 1.79% of loans.
The allowance at the end of the third quarter reflects an updated macroeconomic scenario that is different and modestly less severe than those used at the end of the first and second quarters.
Which model the uncertainty of the COVID-19, driven damage to the economy.
The allowance and the related provision in the recent quarter reflect the ongoing impacts of the COVID-19 pandemic on economic activity in the hospitality and retail sectors.
Uncertainty over additional economic stimulus and the ultimate Collectability of commercial real estate loans, where borrowers are requesting repayment forbearance.
Our current macroeconomic forecast uses a number of economic variables with the largest drivers being the unemployment rate and GDP.
Our forecast assumes the quarterly unemployment rate increases to 9% in the fourth quarter of this year.
Led by a sustained high single digit unemployment rate through 2022.
The forecast assumes GDP contracts, 5.1% during 2020 and Ricky.
And recovers to pre recession peak levels by the third quarter of 2022.
Our forecast assumes no additional government stimulus.
Non accrual loans as of September 30.
Amounted to $1.2 billion, an increase of $83 million from the end of June.
At the end of the quarter nonaccrual loans as a percentage of loans was 1.26%.
It is important to keep in mind that some of the usual credit metrics have been affected by the PPP loans on the balance sheet.
Which are zero risk weighted and carry little or no credit risk.
Right.
Excluding the impact of PPP loans.
The ratio of the allowance for credit losses to loans would be 1.91%.
Some are little similarly, the ratio of nonaccrual loans to total loans would be 1.35% and.
Annualized net charge offs as a percentage of total loans would be 13 basis points.
Loans 90 days past due on which we continue to accrue interest were $527 million at the end of the recent quarter.
Of these loans $505 million or 96%, we are guaranteed by government related entities.
Government guaranteed loans under cobot, forbearance, and which we have purchase from servicing pools are generally not reflected in these figures.
Consistent with regulatory and cares act provisions loans that have received some sort of a forbearance whether payment deferrals covenant modifications or other form of relief as a result of COVID-19 related stress for the most part are not yet reflected in our non accrual or delinquency numbers.
A significant majority of commercial loans that were granted COVID-19 payment relief, where for 90 days with the ability for clients to request second 90 days.
For example, substantially all of the $4.2 billion of forbearance as of June Thirtyth given to.
Given to vehicle dealers was for 90 days and less than a $100 million are under some form of forbearance relief at the end of the third quarter.
For the total commercial and industrial portfolio.
Including the aforementioned dealer portfolio loans.
Loans under COVID-19, forbearance have declined by 85%.
To slightly higher than $800 million or about 3% as of September thirtyth.
Customers in the commercial real estate portfolio generally we received 180 day COVID-19 deferrals.
In total deferrals in the CRT portfolio have declined by 41% to $5.1 billion.
Over two thirds of the loans on active forbearance as of September Thirtyth.
That have not reached their endpoint.
Late to the CRT portfolio segments, most impacted by cobot, 19, notably hotels and retail CRT.
We'll know more over the next 60 days or so as the 180 day deferrals reach their end of term.
For the consumer portfolios deferrals declined from just under $700 million at June Thirtyth, two under $150 million or less than 1% at the end of September.
To residential mortgage loans mortgage mortgage loans, we own non government guaranteed loans under deferral amount to $1.6 billion down about 19% from the second quarter.
Total deferrals have increased to $3.3 billion from $2.3 billion 90 days ago.
All of that increase reflects government guaranteed loans purchased from servicing pools that represent no credit risk 70.
All of these figures do not include approximately $10 billion of forbearance on residential mortgage loans, we service for others.
Turning to capital.
Empties common equity tier common equity tier one capital ratio was an estimated 9.81% as of September thirtyth compared to 9.5% at the end of the second quarter.
This reflects the impact of earnings in excess of dividends paid and slightly lower risk weighted assets.
Empty did not repurchase shares during the third quarter and will not be doing so in the fourth quarter.
MTS net income comfortably exceeded its common stock dividend, both for the quarter and under the trailing four quarter calculation outlined by the Federal reserve.
Now turning to the outlook.
Our usual practice is to offer thoughts on the coming year in the January earnings call. After we've completed our planning process. So my remarks today will be somewhat brief.
We're also pleased to see that the economy has improved while recognizing that we're still a long way from conditions. We saw in January and February.
Core commercial loan growth, excluding PPP loans has slowed and we expect those balances to remain flat to slightly down over the remainder of 2020 compared to where we ended the quarter.
Given that the auto manufacturers are still not running at normal levels. We don't expect the normal seasonal rebound in dealer floorplan loans during the fourth quarter.
Our portal for receiving forgiveness requests of PPP loans is open and applications are being processed and sent onto the SP.
Most of the activity so far is on the smaller loans on which the FDA is expediting relief.
The residential mortgage loans, we purchase from servicing pools aren't fully reflected in the third quarter average.
Combined with the potential for further by US we should see modest growth in average residential mortgage loans for the current quarter.
All in we expect modest linked quarter growth in total loans.
More difficult to forecast has been our liquidity assets or short term investments and the deposits at the fed which continued to rise over the past quarter, although at a much slower pace.
As I noted earlier this was primarily the results of.
A further deposit inflows.
Although uncertain at present, we may be approaching the peak and may see declines in the current quarter.
As those deposits and associated short term investments decline, we'd expect that the net interest margin would benefit by about two to three basis points per billion dollars decline with limited impact on net interest income.
With LIBOR, having reached a steady state and our expectation for additional modest downward trends in deposit costs. We expect net interest income to be slightly higher in the final quarter of 2020.
If a significant balance of PPP loans are for given the accelerated recognition of the PPP loan fees would be a further benefit.
We've previously mentioned that the size of the active cash flow hedge position on our floating rate loan portfolio will step up during this quarter.
To be more specific.
The $13.4 billion notional amount of active cash flow hedges will step up to $17.4 billion. This quarter and then remain at those levels for about one year.
The benefit to net interest income is less substantives as the older swaps with higher fixed receive rates mature and forward starting swaps with lower receive rates become active.
Turning to fees.
Residential mortgage applications continue to be strong with rates as low as they are we expect continued solid origination volumes this quarter, but likely with some pressure on margin.
For Trust income, we have seen the increase in waivers of money market mutual funds man.
Management be somewhat offset by strong debt capital markets activity, we expect those waivers will reach a steady state shortly and will persist while the zero rate environment indoors.
Service charge income was boosted by higher levels of customer activity, notably in payments with some.
With some volumes at or even better than pre cobot levels further.
Further upside from the current levels appears likely sorry unlikely.
We have no change to our expense guidance for the remainder of 2020, we continue to expect expenses for the second quarter or second half of the year to be in line with the first half excluding the seasonal factors in this years first quarter.
Any additional loan loss provisioning will be determined by changes to the macroeconomic variables that we see at the end of the year and by the portfolio composition.
Lastly, turning to capital.
We are continuing to build capital levels as limited loan growth and profits in excess of the dividend bolster our capital ratios.
Consistent with the guidance from our regulators, we won't repurchase stock or recommend that the board consider a change to the dividend during the fourth quarter.
Of course, as you're aware, our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth changes in interest rates political events and other macroeconomic factors, which may differ materially from what actually unfolds in the future.
Now, let's open the call up to questions before which Maria will briefly review the instructions.
Thank you the floor is now open for your questions. If you wish to ask a question at this time simply press Star then the number one on your telephone keypad.
In the interest of time, we do ask that you. Please limit yourself to one question you may return to the queue for any follow up questions.
Yes.
Our first question comes from the line of John Clark of Evercore ISI.
Yes.
Good morning.
Morning, John.
On the credit side.
You could give us a little bit more color behind the rationale for the reserve build in the quarter I know you mentioned.
Some of the ongoing uncertainty.
In the backdrop of neuron stimulus. So just curious was there an overlay that you applied are you seeing something.
Pacific There to justify the addition.
Yes sure John.
I guess, if you break down some of the components the big driver obviously is the.
The macroeconomic.
Variables that you run through the model and while they were they were modestly better the out quarters really haven't changed much from what we were looking at in the third quarter and so those really drive the magnitude of the allowance.
At its core and so there is really no change there and then when you look underneath you see some growth in certain segments of the portfolio. So growth in the consumer book and some growth in CRT.
Much of the addition was for that.
And then the other just reflects.
The the.
The uncertainty I guess is the way to put it or some conservatism in the forbearance portfolio what that.
What that ultimately might look like.
Okay. All right. That's helpful. Thanks, and then separately on the credit front can you give us an update on.
The performance trends that you're seeing in your commercial real estate portfolio from a credit perspective, how are you seeing your.
Your borrowers impacted and then to backdrop then are you seeing some stress there in terms of.
Credit performance. Thanks.
Yes, so I guess looking at the commercial real estate portfolio.
The ones that we are most focused on right now the segments were most focused on are the hotel segment and the retail segment.
And those are ones, where there has been.
A significant amount of forbearance in those portfolios and for the most part for those portfolios received 180 day forbearance and so they will start to show themselves over the next 90 days and.
The hotel.
Business continues to be challenged particularly in some of the larger cities.
Where you have a hotel that maybe relies on.
Conferences or food and beverage as part of their business those.
Those ones are probably the most challenged when you get into other segments of the hotel portfolio, where you are.
You are able to get there by current able to drive up we've seen some return of.
[music].
Revenue.
Not all the way back, obviously, where things were but but able to cash flow.
And so we're watching those portfolios as we go through.
Through this quarter, but we were pleased by the reaction we've seen from the customer so far and their ability to manage their expenses down to try.
To try and keep their cash flow at least as close to breakeven as possible.
We continue to feel very positive about the loan to values in the portfolio.
And then in particular, and New York City, which I know it gets a lot of attention I think the average loan to value is less than.
Less than 50% and when I look at you know in New York City.
We have about $42 million of loans outstanding which are two loans that are between 60, and 70% LTV and five loans and $152 million between 50 and 60.
And then the vast majority is less than 50% Ltvs and so when you look at those properties and the values.
There is a lot in invested by the client.
Already in those properties and they have a real strong incentive to figure out how to how to maintain it.
On the retail side, it's a similar.
It's a similar space.
I think retail has been a bit of a challenged industry.
Much before cobot hit and the watching things go online we were seeing.
I mean seeing challenges on pricing and rents and cobot just accelerated that.
But again, when we look at our portfolio and the distribution of the Ltvs again.
Again, skews very low and in particular in New York City Skews.
Also below 50% and one when we look at some of our larger relationships.
They have some ltvs for their multi generational family ownership of properties and their cost bases in some cases is down in the 25% of current values and the tax.
Basis that they have is very low so they also have a very vested interest in protecting those those properties and so long.
Long long winded way of saying Theres Theres certainly stress out there.
But but the declines have been active in adjusting their operations to the environment and.
And then many of them have outside resources and liquidity to help carry the properties.
Well things try and come back to normal so, we'll we'll know a little bit more in 90 days.
But we're very pleased by the actions that our clients have taken so far too to protect their investments.
Our next question comes from the line of Steven Alexopoulos of JP Morgan.
Hey, good morning, Darren Good morning, Stephen.
Morning, Steven.
So on the loans that you purchase out of the Ginnie Mae pools.
The yield on those and you're likely to purchase again at a similar level in fourq.
Yes.
Yes, so in round numbers the yield on those ginnies is about 4%.
Each one will be slightly different but its right around there plus or minus five basis points.
And it's something that we will continue to do.
Just because it makes economic sense to take some of these loans that are being serviced and buy them out. So that we only have to have the carry cost and we don't have to advance of principal and interest too.
To the investors, but I think what you saw in this quarter was a larger than what would be normal uptick in those balances because there were some there was some residual.
Hang over from this the second quarter, where there hadn't been active.
Buyouts happening and so the run rate is probably more in like the 250 to 300 million dollar a month range give or take and there was just a larger uptick this quarter because that hadnt happened very much in the.
In the second quarter.
Okay. That's helpful and I think you also said the purchases were late in the quarter. So we'll see the benefit flow through into Fourq.
From this quarter yet it continues through the quarter, there will be a little bit of an uptick in the in the fourth quarter.
But not as big as what we saw this quarter, Okay all right.
All right. Thanks for taking my question sure.
Our next question comes from the line of Erika Najarian of Bank of America.
Hi, good morning, Gary.
Morning Erika.
Hi, My one question is.
On the contribution from the swap portfolio no Herculon Sinclair in terms of the notional stepping up to 17 billion and I'm wondering if you could give us a sense on what.
Mission was to net interest income from your derivative book in the fourth quarter, sorry in the third quarter and how does that.
You know that progress.
Either on an annual or quarterly basis. However, you want to give it in 2020 lines.
Sure. So I think we talked last quarter.
The hedging, adding about 26 basis points to the to the net interest margin for the quarter was up slightly in the third quarter two.
To about 30.
And what what you'll see going forward is as as we mentioned earlier as the notional goes up but the the.
The coupon to receive fixed comes down the impacts about the same.
We think in the in the fourth quarter and the first quarter of next year and then over time as the start of the swaps that become active have a lower coupon.
The benefit will start to trickle down as we go through.
2021.
And.
Probably a good assumption would be like after you get through the second quarter three basis points, a quarter decrease and the benefit of the of the hedge based on our forecast of what the.
With the balance sheet looks like.
Hi, Thanks.
Thank you.
Our next question comes from the line of Matt O'connor with Deutsche Bank.
Good morning.
I want to follow up on expenses.
Off the call from very good to hear and the guidance for Fourq you have in mind what is that.
A month ago, but.
How sustainable is the expense management that kind of a one time.
Pulling it on some things that isn't all that favorable that kind of from structural changes are a combination of up to him.
Okay.
Yes, Ben.
It's good question when I guess some of the things that I think are sustainable that you really see illuminated in the fourth or the third quarter results. As if you look at the salaries and benefits and you compare them to where they were in the third quarter of last year, you can see they're basically flat theyre up I think about $2 million, but if you look at the other cost of operations.
The ones, which is where the professional services shows up you can see the drop there now some of the drop obviously is because there was impaired.
Impairment that we took in the third quarter of last year that Didnt repeat itself this year, but outside of that you see.
Yes, we've seen a decrease in the professional services line and we've been talking for a number of quarters about the path we've been on to build.
Technology skills and in source, those which would impact the salary and benefit line.
And it took a while for the professional services to come out and so you've seen that that re mixing we've got a little bit more to do and so I think there is some evidence that that is working.
And we can continue to do that which I would I would say is more structural.
A couple of the other big items, obviously are traveling entertainment and advertising and promotion.
I think what we're seeing in the advertising and promotion line.
Line item is that obviously you need to be competitive in the mob.
In the markets that you're advertising in but.
But also we're learning that theres different ways that you can reach customers and prospects.
That might be more cost effective than traditional means and so we'll be continuing to look at that as we go.
As we go forward and being smarter about that and also thinking a lot harder about how much travel we need both.
Both internally for sure and then oftentimes with clients.
I don't think you can get away from face to face interactions in banking, but maybe we don't need quite as much as we've had in the past. So we're looking at how we're how we're doing our business and I think the last thing you see is through the PPP process.
We were able to handle such a massive amount of loan volume in a short period of time I mean, we literally did about three years worth of ESB loans in a week and we did that through changing the process and using more digitization and so we think that there is opportunity to take that.
Our process.
Beyond just business loans into other lending and deposit opening and other operations to.
To drive expenses down and so.
So long story short I think there there's been some.
Things that were gifts so to speak from the pandemic, but it's.
But it's also really got us to rethink and continue on the path of rethinking how we do the work and that offers continuous improvement.
I don't know that Theres, a step change down, but we continue to chisel away and I think thats that would allows us to test.
This low expense growth.
And to get close to positive operating leverage I mean to me to be in this.
In this environment, where we're we've had challenges in revenue and the efficiency ratio. This quarter was the same as last year I think.
I think just speaks to the ability of the of the team to to be disciplined on expenses, which is kind of classic empty.
That's helpful and I'm going to guess you don't want to give explicit 21 guidance on cost but.
No step down, but all for QAD described.
Good.
Implication that there wouldn't be a step up as well so if I had to God I would think seems like.
Seems like you're trying to keep costs relatively flat.
By parts.
Comments together there.
I think thats, a safe assumption will I guess, it will be back with more or detail in January but.
That's certainly a safe assumption.
Okay. Thank you.
Our next question comes from the line of Tennyson of Jefferies.
Hey, Thanks, Good morning, Hey, Derek can I ask you.
How are you can I ask you further on the trust income you said that the the fee waivers would be run rated I think going forward can you just help us understand what was in the third and what the what the step up if any is going to be into the fourth.
Yes, So I think we talked before about maybe $10 million a quarter impact from those fee waivers and I think this quarter, we saw about seven and it was offset by an uptick in.
Some of the loan agency fees that we get because we've been watching the debt markets I think they hit a record for issuance at the end of September and they still at three months ago, and so that activity are.
Our participation in that market.
You saw reflected in some of the agency fees that show up in the interest income line and so in mass.
The impact of those fee waivers on the money fund accounts.
Also we had continued to have strong equity markets and that's impacting AUM positively maybe a little bit better than we might have thought going into.
Going into the quarter and so that also was it was a positive that was an offset and so we'll be on the money fund waivers that we had talked about are basically in there there might be a little bit more to go and then the question will be what happens with some of those other.
Parts of of the trust business and how robust those markets are as we go through the fourth quarter and.
Understood. Thank you and then just a follow up on mortgage can you give a little bit more discussion of just the differences between resi and commercial origination activity. And then also are you still seeing opportunities to buy additional servicing assets you guys have been pretty.
Frequent opportunistic buyers there thanks.
Yes, so I guess most of the action.
For the last couple of quarters has really been in the.
In the consumer space and it's just with rates, where they are there is a lot of re fi activity going on.
And so thats really what's been driving the volume there what what I think has been seen for the last two quarters, both for us and for the industry is that there was so much volume it overwhelmed peoples capacity to handle it and so one of the ways the industry manages.
Capacity is through pricing and so thats why the margins were so so so.
So strong this quarter and last and so what I, what we expect to see in the fourth quarter as we expect to see similar levels of volume.
May be seasonally slower just because of the fourth quarter, but we'll start to see the margins come down we started to see that at the end of the last quarter that.
The gain on sale margin in.
September was down from what it was in July and August and so we expect that trend to continue into the fourth quarter and Thats why we think we'll see a drop in.
In the mortgage fee.
Fee line item.
Commercial things have been been slow really since since cobot hit.
There's just not a lot of activity in the commercial real estate space its.
Third quarter I think for the last couple of years has been.
Blow up quarter for us in the commercial real estate sector. This.
This year was the notable exception.
And we don't see that changing into the fourth quarter is just a slowdown in activity there.
Okay. Thanks, a lot.
Sure thing.
Our next question comes from the line of Saul Martinez.
Hey, guys.
I wanted to parse through some of the moving parts on on net interest income. So I think in response to Eric his question.
You mentioned Darrin that the protection from the hedges were about 30.
We're about 30, bips, which by my calculations amount to roughly $95 million.
Just to clarify then your guidance for an eye in the fourth quarter that assumes that that level of protection more or less stay flat theres no incremental benefit and you're also assuming no PPP forgiveness in that in that outlook is that correct.
Right Okay.
Okay and then.
Just following up there.
You kind of painted a picture.
On the outlook into 21 for the benefit sort of trickling down gradually in so.
Especially in the latter part of the year, but your your disclosure show that you're I think that the average weighted average maturity is about 1.3 years on the swap book or was that in the second quarter, which would seem to imply that there would be.
Some more material step down in protection at some point between now and.
So year end 22, I mean, I guess, how should we.
Read that and and think about that is there going to be more of a cliff effect on the hedge protection that you get.
Late next year into 2002, I, just just maybe a little bit more color in terms of how that how that evolved not just.
During the course of 21, but looking out over the life of.
Of those hedges.
Yes, I guess, so when when you think about the hedging that we did in the.
And the way we constructed the portfolio, we were always adding a consistent level with the exception. Obviously this this next 12 months.
Of.
Forward, starting swaps and so the idea was to keep the outstanding notional amount fairly consistent through time and really what starts to happen as each month, one swap falls off in a new one starts and it would be reflective of the rate environment at the time at which we entered into that agreement and so we are in the.
Spot now, where we were entering these agreements and the the curve was.
Positively sloping and rates were higher and overtime.
You saw those received fixed coupons come down and so the third theres not really a cliff per se, but more a continual gradual decline as you know each month.
Some swaps go inactive and forward starting ones become active and that brings the average received fixed coupon. That's in place in any month declining through 2021 and into 2022, and then as the duration of the swap portfolio will.
Certain because those rates really fell down at the end of 2019 and then at the start of 2020.
There wasnt a benefit that we saw in.
In continuing to add forward, starting swaps to lock in rates.
50, or 25 basis points that we continue to believe that zero is for all intents and purposes. The practical floor right now and that negative rates are not a huge consideration.
Of the fed and so weve.
We've slowed down in the in the hedging and you'll see that it gradually.
Goes away through the next 24 months just the ERP.
Just a point of clarification the weighted average maturity is not from the reporting date, but from the start date of the forward starting swaps at the end of it okay.
Okay. So okay. So it's.
So it's not it's not 1.3 years necessarily.
On from now from now Okay.
From when they always have a forward starting swaps come on come on board.
Okay.
Yes, I guess the second let me just pivot quickly to two second question. This theory book.
180 days were bearings I think you mentioned.
$5.1 billion in two thirds of that you know.
I guess exiting the initial deferral period.
So couple of questions. There do you have any expectations as to what percentage of that we will ask for second modification and how do you expect to account for additional modification do you anticipate taking advantage of the cures Act for 132, not classified as a TDR or.
Will you.
Say these loans.
These loans or had been a modification for extended period and hence we think there should be treated as TDR, even with some of the I guess the negative implications for risk weighted assets and other things I'm just curious how you know.
What you're expecting there and how you plan to account for it.
Yet.
So I guess a couple of things.
Obviously, it's hard to predict exactly what will happen with each of these portfolios as we go but I look at what we've seen so far and so.
I mentioned that the.
I see and I portfolio was going to be down.
Two.
About $800 million of.
Loans still in forbearance, the bulk of that is really folks who havent reached there at the end of their current term when I look at it.
There's.
In the floor plan dealers that were in forbearance, I mean, basically 98% of them have gone back to pain when I look at the rest of the Cnine portfolio.
About 90% have gone back to paying and there has been some dream decrease in the commercial real estate portfolio levels of forbearance and when I.
And when I look at folks who have come up four to the end of their time period, so far about.
About 80% of them have gone back.
Back on onto their normal payment schedule and so you know from what we've seen so far about 20%.
I've gone back or.
I have asked for some extension of their forbearance.
We get to the to the next group that will come up.
I think it's.
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It's a tougher segment and so.
I'm not sure I'm bold enough to say it'll be 20%.
But the trends that we've seen are are positive and we know that there are a number of clients that we've talked to that to actually plan to resume payments because they have outside liquidity in the wherewithal to to go back.
To go back and maintaining their.
Their loans.
As a as it relates to how that will be handled mean each each loan.
Loan in each client will be treated individually and considered individually and we'll look at.
Our you know first of all are they are they looking for some kind of.
Change to their terms and if they are are we getting anything back we might be able to get an interest reserve may be able to get a little bit of equity you might get a different rate and so the combination of those things will help us go through our determination of whether we think it's it qualifies as a TDR or needs to go on non accrual.
Bill, but I think it's safe to say that there will be an uptick in those categories.
As we go into the fourth quarter and first quarter of next year.
Okay. So it'll be treated on an individual basis than that okay. That's that's yes. That's helpful. Yes, we go through our normal portfolio assessment and grading process.
Okay, great and presumably reserve for it already.
So we've set of the summer that yes, yes, okay, great. Thanks, so much.
No problem.
Our next question comes from the line of Bill Carcache of Wolfe Research.
Thanks, Good morning Darren.
While we've seen some improvements and metrics like unemployment in GDP in.
Outlook. There is helpful. Some of the CR unit CRD metrics have been going the other way can you give us a little bit more color on what your outlook is contemplating for some of those key drivers for.
Formats, some of the industry forecasts.
It's like vacancy rates continue to rise and commercial real estate prices continued to decline as we look out to 2021.
Understand that Shouldnt have an impact on your soul allowance as long as it contemplates that degradation, but it would be helpful to understand a bit better with what your expectations are possible.
Yes.
Yes.
One of the most important parts of this is understanding not just what's going on but how the loan was underwritten to start and so when when you look at a lot of our real estate portfolio and I'll speak to multifamily.
We take into account the current rents and we don't assume that their rent increases when we underwrite we take into account.
The current vacancy, but we underwrite to a higher level of vacant season than what exists and another really important element is just the interest rate and that is the interest rates drop that creates a lot of capacity.
To support these properties and so.
A lot of those factors will also help maintain.
Collateral values and so we've seen.
We've seen vacancy tick up one of the places obviously, we watch a lot is in is in New York City.
And we've seen no rent collections in the 90% to 95% range, so feel pretty good about that.
Third there hasn't really been much that's traded in terms of values to think about commercial real estate price index, which the crappy would be an important ella.
Element in the seasonal modeling and so we haven't seen.
Much there.
Those so those factors.
Rent changes, we would look at and look at the vacancy rate in the realizable rent.
As we forecast cash flows for each of these.
Individual borrowers and think through whether or not.
Whether or not they are running at a deficit or not or they are able to adjust their expense base and then what outside resources they have to.
Maybe come in and maintain the properties and it'd be a similar viewpoint on the hotel portfolio.
Obviously slightly different where you're looking at revpar and you're looking at.
At occupancy rates.
And again, we've seen you know it depends on the geography, some some uptick.
New York has been been a little bit more of a challenge.
But we see that in office.
Also so far rent collections or are holding up and strong and people are going back into the into the city lease you're hearing announcements on particularly from the tech sector of space being.
Being under contract and so.
I guess.
Little bit of a long winded answer to say that when we look at the trends in these portfolios, we're not seeing a severe degradation, it's gradual and what weve watched so far we've seen the clients doing a very good job of adjusting their business to be able to manage the cash flow and where are they.
They don't do that they often.
They often have the outside liquidity to be able to to maintain.
To maintain the property and I guess the question really is how how how much.
How much liquidity do they have and how long can they sustain it.
In this environment.
That's really helpful. Thanks Darren.
I can squeeze in one last one beyond the hedging benefits that you've discussed.
Can you give a bit more color on the loan and securities portfolio pay downs on on your back book, perhaps by product possible, what's the yield differential between.
Paying down will that you're deploying into today.
I guess when you look at the.
I'll take the loan book separate from the Securities book and on the Securities Book, We've basically run it for not a lot of duration risk and certain.
And certainly not a lot of credit risk and it's as we've described it as a barbell where theres been.
A significant amount invested in one year treasuries or less and then.
Another significant amount in mortgage backed securities.
And with the mortgage backed securities as they pay down we havent been buying additional securities at this point, just given where rates are and those dollars are basically going into cash and so thats part of part of the cash build.
Interesting when you look at the loan portfolios.
What we've seen in the last 90 days and probably started a little bit earlier is that the the margins on new business have been increasing and so when we look at the returns that are being generated on new loans.
Over the last 120 days they are higher than what's in the book and so between floors going.
In into loans, where the floors are actually active the day the loan starts and.
And some firming in the pricing, we're actually starting to see roll on margins higher than roll off margins in the loan book and so when you get it will take a little while for for that to start to shift the whole portfolio, but as you get out into 2022 and beyond Easter.
You start to see a greater proportion of that benefit.
In the loan yields and the loan margin and so.
It's it's encouraging to see.
Where things are heading at least based on on the last 90 days.
Very helpful. Thanks again.
Our next question comes from the line of Brian Klock Keith.
Good morning, Darren and Don.
Hey, Jim Brian.
I'm good I'm, good Hey, real quick.
On the fee income you talked about the deposit service charges snapping back.
Nicely in the quarter.
When I look at the other revenues from operations I mean can you give us.
Give us a little color on whats going on in Eric's. It feels like the overall level is sort of back to pre co bid. If you get rid of the bayview from the first quarter.
Was there anything in there when you look at Bali or the discount merchant discount Hey, the insurance revenues or is there anything in there that you can give us color to that is that one no seven similar run ratable into before.
Yes sure Brian.
By and large when you look through the components in that category.
We have seen strong snap back in merchant discount and credit card.
They are pretty much back to pre cobot levels fully was pretty consistent.
As with some of the underwriting.
No loan fees are were up quarter over quarter, but not back to pre corporate level, and obviously thats a function of what's going on with the.
Activity in the market and then sometimes in that line item. There are some some theres some lumpiness of things that happen.
We were I guess.
That line item close to where we were we average I've seen some quarters, where it's $20 million higher than than what we had before and last quarter. It was particularly low so.
It might be.
It might be a little bit high from from where we might run rate in the fourth quarter, but there's still some some spots where there is softness some softness in.
In insurance and some some softness still on some of the fees were not all not quite all the way back to.
Pre cobot levels on on loan fees and merchant card.
Got it that and then just a quick follow up same question on the other side the other miscellaneous costs.
Like they were down a little bit lower than the run rate over the last few quarters and usually the fourth quarter has like.
Like the professional services or the accounting accruals and stuff like that that might be in there.
So should we expect that wanted to be kind of back up to sort of add.
Sort of average level. The first is the 165 that within the third quarter.
I think.
I think that the spot. We're at now is probably pretty reasonable for where we are in the fourth quarter.
Barring the only other thing that goes through there that create some lumpiness as theres been litigation costs are.
MSR impairment or.
Well me when we took the write down on the asset manager that we we sold that goes through that that line item, so kind of holding that step aside.
I think were give or take a few million bucks in the right zone of where that will be for the fourth quarter.
Got it great. Thanks for your time appreciate it sure Brian.
Sure Brian.
Ladies and gentlemen, we have time for one more question. Our final question will come from the line of Smart Cassidy of RBC.
Hi, Derik.
Morning, Gerard I doing.
Good.
We've taken.
A question to wrap up can you give us a.
Comment on what you're thinking about for next year when capital action plans, obviously, the fed to suspend the buyback so all the banks like your size, but what are you guys thinking should the gate get lifted and second if it's not lifted until let's say the sort of new quarter mix.
This year in your capital really is starting to accumulate is a Dutch auction tender offer a consideration to bring it up to get all the stock at once.
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So I guess.
The first part of a leaves a Dutch auction thing for for a second I really thought much about a Dutch auction to be honest with you.
I appreciate it was not a great questions.
On.
On deployment of capital.
Well, obviously have to wait and see.
What comes from from the fed through the Resubmission process that we're all going through right now and and you know if the fed actually allows the SCB framework to be effective.
Generally our thought process on capital deployment really isn't changing and that the first place we want to deploy capitals in the service of our customers and the communities, we do business and.
And we've got.
The liquidity.
As you can clearly see on the balance sheet and we keep capital so that we're in a position to be able to lend and support growth in the communities and so hopefully we'll see we'll see some of that.
And as I mentioned before I really like the returns that I'm seeing on on some of the business right now.
After that we'll obviously hope the group, we're maintaining our income and so we can maintain the dividend.
And then we'll look at what other alternatives, we have to deploy the capital. It to me. The most important thing is we'll try and return it if we've got excess and were allowed to.
But but really the key of how we've always run the bank is to make sure that we don't take the capital that we believe to be excess and consider it free.
So.
If we sit on the capital is inefficient and we'd certainly rather not do that but investing in low return.
Businesses are low return loans, then you are stuck in that position.
And that lowers your overall returns for the for the organization you're stuck with that for the length of that asset and so we do that from time to time to win new prospects and customers, but we wouldn't want to make a practice out of deploying capital into into low return.
Businesses and so we'll see what the what the alternatives are.
And we will continue to manage it the way, we always have which is to be thoughtful stewards of capital and make sure.
Capital and make sure we're focused on returns.
And then just as a follow up question.
Clearly you and your peers have indicated that many of your customers in both of their liquidity in their deposit accounts because of these uncertain times can you.
Can you compare this to the EU, we own nine time period, because we had the same phenomenon of customers building up liquidity, how long did it take do you recall to help those customers bring those.
That's down to a more normal level and where do you see this cycle is it going to be as long as it was at the Oviedo night.
Well Mike.
My Crystal ball is as good as yours Gerard but.
You know I guess I I look at at the level of liquidity that we have this time I think people are smarter. This time than they were last time I think the industry.
Not the banking industry per se, but but the customers. We bank have been a lot quicker to build liquidity have been a lot quicker to adjust their business operations to the revenue environment and Thats why weve seen that build up in on the.
I think part of what you're seeing in the liquidity also is the lack of alternatives of places where they can invest their excess cash right and that that doesn't make a lot of sense to have it in suite right. Now if you are a larger middle market client doesn't make sense to keep it in time and money market accounts, if you're a small business or consumer.
Because there is no right there and so we're seeing it all sit liquids.
What I think starts to happen is as things improve you'll see.
You'll see some of that get deployed in hiring in building inventory.
And you'll see some of that get deployed into higher returning.
Asset classes from the customer's perspective.
It to the extent that they've got excess.
And how long that takes I think will be some combination of how quickly we see GDP recover and how quickly we see interest rate movement up from here I guess I just keep in mind that last time. It took us until we probably got to 75 or 100 basis points on fed funds before people start.
To to really move and pay attention to moving dollars.
Out of.
Savings and tie our savings and interest checking in checking into higher yielding types of products. So I think I think it's we're thinking it's here for for a while I'm kind of next 12 months hopefully not much longer but we'll see how the economy goes.
Great I appreciate all the color. Thank you.
And I would like to turn the floor back over to management for any additional or closing remarks.
Again, thank you all for participating today and as always if clarification, if any of the items on the call or news release is necessary. Please contact our Investor Relations Department at area Code 71684 to 5138, Thank you and goodbye.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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