Q3 2020 Valley National Bancorp Earnings Call
[music], ladies and gentlemen, thank you for standing by and welcome to the Valley National Bancorp third quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode.
So to speak or presentation, there will be a question and answer session.
The question during the session joining depressed.
One on the telephone please be advised that Chase conference maybe recorded if you require any further.
Any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today traditionally head of Investor Relations. Please go ahead Sir.
[music].
Good morning, and welcome to valleys third quarter 2020 earnings Conference call.
Presenting on behalf of Bally today.
And CEO <unk> Robinson, Chief Financial Officer, Mike Hagadorn, and Chief Banking Officer, Tom I had danza.
Before we begin I would like to make everyone aware that our quarterly earnings release and supporting documents can be found on our company website at valley Dot Com.
When discussing our results we refer to non-GAAP measures, which may exclude certain items from reported results. Please refer to today's earnings release for reconciliations of these non-GAAP measures.
Additionally, I would like to highlight slide two of our earnings presentation and remind you that comments made during this call may contain forward looking statements relating to valley National Bancorp, the banking industry and the impact of the COVID-19 pandemic.
Valley encourages all participants to refer to our SEC filings, including those found on form 8-K, 10-Q, and 10-K for a complete discussion of forward looking statements with that I will turn the call over to IRA Robbins.
Thank you Travis and welcome.
Welcome to all the participants on the call.
This morning, I will update you on valleys strong performance and offer my perspective on recent successes and opportunities.
Mike will provide additional details on the financial results before we open the call to your questions.
In the third quarter of 2020, we reported net income of $102 million and earnings per share of 25 cents.
Exclusive of a modest charge associated with debt prepayment adjusted earnings were 104 million, representing the highest level of quarterly earnings in valleys entire history.
These are extraordinary results against the backdrop of the global health Pandemics, a near zero interest rate environment and general economic uncertainty.
We've achieved these results by building a diverse and strong balance sheet.
<unk> corporate culture focused on customer service and responsiveness.
On an adjusted basis, our pre provision net revenue increased 2% from the second quarter.
This growth reflected strong fee income and continued interest expense reductions, which offset asset you'll pressures.
This quarter's adjusted pre provision net revenue as a percentage of average assets was 1.71% up from 1.68% in the prior quarter and 1.46% in the third quarter of 2019.
That interest margin pressure across the banking industry has weighed on profitability our ability to preserve our net interest margin and drive higher profitability is exceptionally unique.
We have also benefited from a focus on positive operating leverage.
Our adjusted efficiency ratio declined to 46.6% from 53.5% in the third quarter of 2019.
This improvement was achieved through 27% year over year revenue growth, which exceeded our adjusted expense growth by over two and a half times.
Well, our financial performance has improved significantly the backdrop remains challenging and future operating leverage will be dependent on our ability to identify and execute on incremental cost savings and revenue opportunities.
In addition to strong financial results. We are pleased to report a significant reduction in our active loan deferrals.
As of September Thirtyth, we had less than $1.1 billion of loans on active deferral, representing 3.3% of our total loan portfolio.
This compares to an active deferral level of 8% in July and 12% in May.
There has been significant focus on the Metro New York City economy in recent quarters, we were.
We remain confident in our conservative lending philosophy, and the strength of our borrowing base.
In a few minutes, Mike will walk you through our exposure to this market and the strong underwriting metrics that support our conviction.
Our credit metrics beyond deferrals improved during the quarter as well.
Well were $31 million provision was approximately 25% lower than the second quarter. Our reserve coverage ratio continues to grow.
Our recent earnings momentum has positively demonstrated our ability to generate organic capital.
Despite a significant reserve build and cash dividend, we have grown tangible book value by 8% in the last 12 months, our tangible common equity ratio has increased to 7.3% from 6.7% a year ago.
We acknowledge that the operating environment remains challenging and the economic outlook is uncertain.
And 2020, we have harvested low hanging fruit on the funding side of the balance sheet.
We will explore additional opportunities to reduce funding costs and offset continued asset yield pressure.
Our fee income results in the swap and mortgage banking businesses have been extremely strong this year, but may normalize going forward.
Expense controls remain a key focus and we will need to work harder to identify cost reduction opportunities in some cases by leveraging new technologies and solutions.
On the credit side, we continue to believe that our conservative underwriting philosophy positions us to outperform in periods of economic stress.
In summary, we are extremely proud of our recent financial results that's.
That said, we know that we will need to work harder than ever to maintain this high performance I'm confident that our team is up to the task.
Now I'd like to turn the call over to Mike Hagadorn for some of the quarters additional financial highlights.
Thank you IRA turning to.
Turning to slide five you can see that valleys reported net interest margin increased to 3.01% from 3% in the second quarter 2020.
The sequential basis, our cost of interest bearing liabilities improved by 16 basis points, 2.8%.
Interest expense declined by approximately 18%.
At the same time, our earning asset yields declined 12 basis points to 3.58%.
On the asset side, we have reduced the impact of broader yield pressures with mix shifts towards loans and away from lower yielding cash and securities.
Our ability to generate funding cost reductions in both our deposit and wholesale portfolios has enabled us to absorb asset yield pressures to this point.
Well the significant amount of our repricing opportunity has been captured slide six identifies the amount of retail Cds expected to mature in the next 12 months at rates well above current offering rates.
Specifically over the next three quarters, we have nearly 4.5 billion retail maturing Cds at an average cost of 1%.
Towards the ended the quarter, we paid off $50 million of wholesale funding the carried at 3.7% cost it was set to mature in 2022.
Going forward, we may utilize a portion of our remaining liquidity to redeem other high cost liabilities.
As a result of our repricing and liquidity deployment levers. We continue to believe that we will outperform peers from a net interest margin perspective going forward.
The bottom left chart of slide seven illustrates the significant downward trend in our interest bearing deposit costs since the third quarter of 2019.
And this time RCD in interest bearing non maturity deposits have declined by 137 basis points and 94 basis points respectively.
We believe there is additional room to reduce interest bearing non maturity deposit costs. In addition to the CD repricing benefit that we identified on the prior slide.
From a balance perspective total deposits declined slightly from the prior quarter due to the ongoing utilization of P. P. P funds.
Excluding the run off of over 400 million of PPP related deposits during the quarter sequential deposit growth was approximately 1%.
Noninterest bearing deposit generation remained strong with balances increasing approximately 2.5% exclusive of P. P. P.
In recent quarters, we have discussed the ongoing customer rotation from Cds into lower cost transaction accounts.
This trend continued in the quarter with interest bearing transaction balances, increasing 6% to more than offset a 9% decline in CD balances.
Earlier this year, we bolstered our liquidity position to prepare for the uncertainty of the current environment.
On June 30, 2020, we held nearly 2 billion of cash and equivalents on our balance sheet.
As our understanding of the pandemic has evolved and the economic impacts come into focus we began to utilize some of this liquidity.
By September Thirtyth, our cash position had declined to approximately $1 billion.
As mentioned, we may utilize some of our remaining liquidity to pay off wholesale liabilities.
Slide eight you chose our loan portfolio and the asset yield pressure that we're experiencing along with other banks in the industry.
During the quarter loan yields declined 13 basis points.
However on a positive note as you can see in the chart new origination yields were effectively unchanged at 3.26%.
Loan origination volume also increased 9% from the second quarter and spreads on new originations expanded 20 basis points.
Our new loan spreads are currently at their widest level since the second quarter 2019.
Total loans of 32.4 billion include roughly 2.3 billion of outstanding PPP loans at the end of the quarter.
Exclusive of P. P. Our loan portfolio has increased approximately 2% on an annualized basis since the end of 2018.
We continued to see consistent activity in our core commercial real estate segments.
This quarter saw a rebound in consumer lending activity, which helped to stabilize balances in those portfolios as well.
Slide nine provides additional insight into our commercial real estate portfolio, which is well diversified in terms of both collateral and geography.
Over the last few quarters. There has been an increased external focus on Metro New York and Manhattan specifically.
As you can see you only 5% of our creep portfolio is tied to non multi family properties in Manhattan.
The bottom table illustrates key underwriting metrics for the portfolio by geography.
I would highlight our low weighted average LTV of 56% for the portfolio and 50% for non core properties in Manhattan.
We remain confident in our underwriting and believe we are well positioned to navigate the current environment from a credit perspective.
Moving to slide 10, our noninterest income increased 10% from the linked quarter, driven primarily by strength in loan sale gains and swap revenue.
Fee income ticked up to 14.8% of total revenue from 13.7% in the prior quarter.
We remain focused on growing diverse revenue streams overtime and enhancing customer adoption of the various financial products that we offer.
Swap fees were over 19 million during the quarter as we originated back to back swaps on over 550 million of notional loans.
Our borrowers continue to demand the interest rate protection provided by our swap offerings.
Net residential mortgage gain on sale income increased approximately 60% sequentially, reflecting both higher loan sell volumes and gain on sale margin expansion.
Residential loans sold exceeded 300 million for the period.
From 240 million in the linked quarter, while the gain on sale margin increased over 50 basis points to 3.79%.
Slide 11 provides an overview of our quarterly operating expenses and the continued improvement in our adjusted efficiency ratio.
Our expenses on both the reported and adjusted basis increased modestly from the prior quarter.
Adjusted expenses exclusive of de Minimis merger charges, a $2.4 million charge for debt extinguishment.
The $3 million for tax amortization totaled 155 million.
This was up 1.6 million or approximately 1% from the prior quarter.
Expenses associated with COVID-19 declined to 1.2 million from above $2 million in each of the prior two quarters.
The ongoing expenses related to enhance cleaning and sanitation efforts, which are likely to persist for the duration of the pandemic.
Our adjusted efficiency ratio continued to improve coming in at 46.6% versus 46.8% in the second quarter as I.
As I remember and on a year over year basis, we have generated 27% revenue growth with only an 11% increase in adjusted operating expenses.
We remain focused on expense control and more specifically positive operating leverage as revenue pressures continue to build across the industry.
On slide 12, we provide an overview of the evolution of our branch count.
We recognize that many banks have announced react to branch closures to combat revenue headwinds.
Valley, we consistently evaluate our branch network to ensure that we are best positioned to efficiently meet our clients' needs.
This proactive approach has resulted in a significant improvement in our average branch size and efficiency since 2015.
We anticipate closing an additional 10 branches over the next few months and we'll continue to evaluate additional opportunities to streamline our delivery channels.
Turning to slide 13 in asset quality, our allowance for credit losses increased approximately 15, million% to 1.03% of loans from 0.99% in the second quarter.
Our allowance represents 1.11% of non PPP loans and has more than doubled from the end of 2019.
The quarter's reserve build reflects a $31 million provision and nearly $15 million of net charge offs in line with the prior quarter.
Charge offs in the quarter included approximately 6 million for the taxi medallion portfolio as valuations continue to decline.
There was an additional $6 million charge off for a senile loan that has experienced trouble prior to the onset of COVID-19. This loan was fully reserved as of June thirtyth.
On the bottom left you can see the buildup of our allowance as compared to the prior quarter. The net increase in the allowance is primarily the result of management's qualitative assessment of ongoing risk associated with Cowen.
Well, the Moody's economic forecasts that support our seasonal model have improved since the summer it became clear at the end of the third quarter that the Moody's baseline scenario did not fully accounted for the increased likelihood that a federal stimulus bill would be passed in the near term.
In response, we conservatively shifted our model weightings away from the baseline and more towards Moody's adverse and prolonged recession scenarios.
The shift resulted in a more adverse economic outlook and higher provision.
Our model now reflects modest GDP declines through the first half of 2021.
Despite the re waiting our unemployment projections are slightly more optimistic than in the second quarter. As a result of an improved outlook in each of the Moody's centers that we utilize.
We continue to believe that future provisioning activity will be largely dependent on the degree that economic outcomes tracked our expectations.
Non accrual loans declined nearly 20 million or 9% in the quarter driven primarily by a reduction in the CNS segment.
As a percentage of total loans non accruals declined 2.59 per cent from 0.65% in the second quarter.
We also saw significant improvement in our accruing past due loans, which represented <unk>, 0.26% of loans in the third quarter as compared to <unk>, 0.29% in the second quarter.
Slide 14 illustrates the consistent growth in our tangible book value and the ongoing improvement in our capital ratios.
Tangible book value has increased 8% in the last 12 months driven by our increased earnings power.
Our tangible common equity ratio increased to 7.3% from 6.98% in the second quarter.
This reflects our strong earnings and the utilization of some excess liquidity during the quarter.
We estimate that our 2.3 billion of PPP loans reduced our TC eat a total asset ratio by approximately 45 basis points in the quarter.
On a year over year basis, we have also seen a significant improvement in our regulatory capital ratios.
We remain confident in our capital levels and believe that the consistent growth in our risk based ratios illustrate our improving ability to increase our capital levels on an organic basis.
With that I will turn the call back over to Ivor for some closing comments.
Thanks, Mike.
I am extremely proud of values results for the quarter and on a year to date basis.
Our flexible and diverse balance sheet has enabled us to preserve our net interest margin in the face of a challenging interest rate environment.
Our positive operating leverage and the dramatic improvement in our efficiency ratio is a testament to the innovative and responsive culture and body by our team.
We remain confident in our credit underwriting and the strength of our loan portfolio.
I look forward to continued success for the remainder of the year and into 2021.
With that I'd now like to turn the call back over to the operator to begin <unk>. Thank you.
As a reminder to ask the question you'll need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Frank should Rd of Piper Sandler Your line is now open.
Good morning.
Sounds like a well it seems like you know you are certainly ahead of peers in terms of cost initiatives. I mean, you guys talked a little bit about branch consolidation and Mike. You mentioned are not are you mention as well positive operating leverage just wondering your thoughts you know going forward, how confident you are and being able to deliver a positive.
Bopper operating leverage given the tough revenue environment and if you you know you think you can keep for example, the efficiency ratio below 50.
50%.
In the future here.
Thanks. Thanks for the question Frank I think at Valley deftly become the culture as to how we think about expenses throughout the entire organization and it's a way forward for us as to how we think about innovating and the use of technology. We have been very proactive as to how we think about that overall expense base here, we didn't need koby to tell us that the expenses.
I needed to change that it was really a change is based on customer behavior as well as the opportunities presented from technology. So we think we're definitely are ahead of where our peers are and have a good path forward as to how we're looking at the expense base like Sir something on that.
Yeah, the only thing I would say is.
Don't lose sight of the fact on the opportunities that we still have to reprice our term funding costs as well that's shown on page six of our investor presentation under our 12 month forward maturity schedule.
And relative to the industry, we believe that this advantage for us and the results and managing operating leverage to two point fivex as demonstrated that we've taken full advantage of that as we've tried to defend the NIM in this challenging environment.
And then just one follow up if I could on on capital or just wondering if you know you guys mentioned a given liquidity on the balance sheet. You you do have the potential for additional payoffs on the wholesale side I'd imagine, it's not necessarily significant capital levels.
No I think you might do further there, but just wondering how your thoughts on on capital levels have maybe evolved and where you think at this point what is the right sort of Tc ratio for for valley to operate out in the future.
Yeah, I think we had previously given guidance I think around 725 was inappropriate Tc that to I T. A number for us.
I think as we think about capital, it's really about the optionality and the flexibility that we have moving forward I think there's a lot of strategic initiatives within the organization that we haven't had any appropriate capital levels to support those initiatives is really where the focus is at this point, so as opposed to being pinned down and telling you at 750 760 or whatever that specific number may be I think.
We think about capital, it's really that Optionality. There is so many opportunities in this organization today and having the appropriate capital levels for that is really where were focused.
I would just add that you know the focus on growing organic capital is very strong as just as cultural.
In our company as our desire for operating leverage as well and improvements in expenses as evidence of that when you look at our T.C.E. levels and you take into account what PPP is done to that which we estimate at 45 basis points combined with where we're at on sea EG. One today both of those are the highest in the last 40 quarters.
So we've clearly turned a corner and made some significant progress.
Sure Okay.
Okay.
Changed for the the guide.
God I read in terms of you mentioned in the past seven a quarter I mean, there's no change to thinking that that number is.
Has changed significantly.
I don't think giving a guide right now is appropriate for US I think maybe we will consider as we move forward, but I think just highlighting mikes point.
On an absolute basis look where we are today versus where we were four or 567 years ago. It's an unbelievable base as to where we are and you layer on top of that the fact that we have the PPNR a 1.71% today on an adjusted basis the amount of organic capital that were originating today is tremendous so once again I think it just goes back to the tremendous amount of API.
10 years, we have within the organization supported by the organic growth that we're doing which is something valley hasn't historically had.
Okay, Alright, great. Thank you.
Thanks Frank.
Thank you and the interest autonomy asks that you ask one question and one follow up any additional questions. Please reenter the queue. Our next question comes from Steven Alexopoulos of JP Morgan. Your line is now open.
Hi, Good morning, this is Alex on for Steve.
My first question is on loan growth you had loan growth.
You had loan growth in commercial real estate this quarter and you mentioned in the release.
Controlled growth can you explain what you mean by this and what you look at to qualify for this and also how is the pipeline looking into the fourth quarter for commercial real estate. Thanks.
Thanks, Alex This is Tom I have to answer.
Hi controlled growth what we mean is that we do a lot of business with existing customers. You know people have been through various economic cycles. Historically, it's been 60% existing customers, 40%, new and it's probably increased to 70 30 since the pandemic increased.
Our focus is on relationship driven business, a very diversified were very granular our average real estate loan is still under 4 million. Our average Cnine loan is still under 1 million, we're diversified markets, where not heavy in Manhattan were heavier in the suburbs.
And we'll continue to focus on that relationship relationship driven business, our conservative underwriting standards will be maintained through all of this we will not stretch to grow our pipeline pre pandemic probably were in that 2 billion range did likely did down 15% from that.
That level now we believe they will grow modestly but stay at that 1.6 $1.7 billion a level going forward.
Thank you and then the question on NIM out of your time deposits you have savings deposits at 36 basis points and then in the last year or interest rate environment, you're in the low Thirtys do you think you can go below this 30 basis point range. This time around.
You know I won't give guidance on a specific number but I would say this that the processes that we have set up to benchmark ourselves against the market and then react quickly but our.
Or probably the strongest they've ever been in the company's history. So I feel fairly confident that if the market will allow for that we're poised and can quickly react and we're constantly doing this to make sure that we're still competitive.
And that were not overpaying on that source of funding.
Thank you.
Thank you and our next question comes from Collyn Gilbert of KBW. Your line is now open.
Thanks, Good morning, guys.
I want to call like just along the lines of margin.
Can you give us some great disclosures, there and obviously you've made significant headway on the funding side, but I think and you pointed this out one of the interesting points that the loan origination yields seem to be flat to Q.
Just talk a little bit about that or maybe Tom if you weigh in on that as well.
Do you think that you know.
Loan yields have kind of bottomed and spreads are widening a bit I know you referenced that your new spreads are up over a year ago, but just kind of some color around kind of loan pricing and and if you perhaps seen a bottom in where.
Loan yields are.
It's hard to predict if we've seen the bottom, but we have implemented floors in all of our loans and that has helped on those spreads will continue to do that it's also responsiveness youre. The those customers that 70% that use us all the time they've come to us because we can get it done and they recognize the value.
In today's market of paying for that performance. So we'll continue that have floors will continue to aggressively bringing deposits due to fund this and the good news is the spreads are going up and the quality of the loans and the level of leverage is going down so we're kind of see it.
On both the quality and returned front, we think it'll continue but it's hard to predict.
It's still competitive for high quality loans still have a lot of competition today.
Okay, that's great I will I'll stick to my one question and get back in the queue. Thanks guys.
Thank you and our next question comes from Stephen Dunn of RBC capital markets. Your line is now open.
Hey, good morning, guys.
Just on your your hotel hospitality deferrals kind of picked up a little bit is that primarily around the New York area and.
Just do you have any latest occupancy.
The six on that versus the year ago.
To put it in context, the hotel portfolio in total is about 500 million and 15% 75 million is on deferral.
The uptick is coming mostly out of Florida, which we have a primary our portfolio of hotels and we don't.
We don't really have much New York, New Jersey. So we're not we're not seeing the same experience there I do want to point out that going into the pandemic the loan to values on these portfolios for less than 60%. It's all real estate secured we have PGS on all the increase in this particular quarter was to waste.
Specific borrow who is highly liquid has the wherewithal to sustain this and also has revenue and resources that are not tied to the hotel business.
And the same experience on on restaurant, though that's a little bit more spread out New York, New Jersey, and Florida, but we see a significant decline.
Those deferrals were down to about 60 million in total.
And loan to value going into the pandemic was 60% on that portfolio. It's all real estate secured we have PGC, we don't expect it to get any worse.
Got it I appreciate the color on that.
And then just going back on the margin maybe.
Maybe Mike you can handle this one your shirt short term and long term borrowings ticked a little higher this quarter what was what's the driver behind that was it.
Was it just lower cost borrowings rolling off and then you know should.
Should we expect this to go a little higher in the fourth quarter with us what the 1.2 billion rolling off.
Sure. So the short term borrowings are exactly as you said that's at some maturities there long term side is the impact of having the sub debt issuance for an entire quarter. So I.
So I think thats probably fairly.
Fairly self explanatory, what I would say on the remaining.
The funding side the non.
Debt related funding side, if you go to page six in the IP and you look at those rates, especially in the first second and third quarter of 21.
As of this morning, FHLB advance rates as a proxy range between 39 and 45 basis points. So you can see there's still a lot of leverage.
For us to reprice and on the maturing CD book, which is FHLB is not a good proxy.
We know with offering rates today, there's two things going on there one people are seeking greater liquidity, so as their Cds mature they will transition into a transaction account. So we have seen that its increased our deposits overall and second the availability for longer term CD rates, even if you put them out there.
Customers are not going to take that and given the absolute levels of rates and so when they do.
[music].
Re sign up for a new CD, it's at a much lower rate and our retention there has been very strong as well.
Got it appreciate thank you Mike.
[music].
Thank you and our next question comes from Matthew Breese of Stephens incorporated your line is now open.
Good morning.
Good morning.
I was hoping could you quantify total PPP income for the quarter and then Mike I know you characterize the margin outlook in terms of you know you think you will outperform peers, but I guess I.
Perhaps that's open to interpretation.
Could you maybe characterize the margin outlook in terms of whether you think you can remain stable or or expand from here.
Hey, Matt This is Tom I'll handle the income for the quarter and then Mike will talk about so the margin again.
The third quarter income from PTP was about 14.8 million 5.7 million of that is from interest 9.1 is from fees.
And I think if I understand your question on NIM. It was related to my prepared remarks around the relative advantage that we have to peer. So I think it's like motherhood and Apple pie to say that Theres NIM compression in the market I mean, thats absolutely going on the things that are encouraging to us that weve already visited about.
How are the fact that our new loan originations have seemingly flattened out with second quarter, yet to be determined whether that continues but as Tom mentioned have.
Having floors on our loans and having greater discipline in this environment.
It seems to be an advantage and then I would just couple that again with the funding side as I mentioned earlier, we still have opportunities here and you can see both the dollars and the rate.
And the rates on the IP on page six.
Okay, and then I would lastly, say you know on especially on new originations the spread on new originations on the lending side or a 20 basis points higher so.
We've seen a better loan and have been a better spread in this market.
Understood and then.
And then in terms of you know expenses you have 10 branches being cut in the fourth quarter was hoping for maybe if you could quantify what the expenses tied to that are and then you know just thinking about the longer term expense outlook do you feel like this kind of $155 million range is appropriate for this environment.
Yes, so on the 10 branches that we have.
That we announced that we would close and Weve achieved regulatory approval correct regulatory.
Regulatory approval.
We estimate the full year 21 cost savings to be between three and $4 million.
Thank you and again, ladies and gentlemen, if you would like to ask a question at this time. Please press Star then one on your touched on telephone and we do have a follow up question from calling Gilbert of KBW. Your line is now open.
Thanks, Okay, just to follow up on the expense question and getting a little bit more granular on it just curious on how specifically the professional fee line is going to trend and and will that kind of stay elevated as you guys are looking at some of these technology investments and technology initiatives or does that come down.
And then I just also to on a on that line just curious about your outlook for mortgage banking.
Yeah, I'll take maybe a little different tack on I will address the specific question on professional fees, but let me kind of give you a.
Give you a little more color. It is somewhat in the earnings release as well related to expenses. So the adjusted expenses in the third quarter were 155 million and as we said earlier, that's a 1% increase.
Against two to 20, but there's a couple of.
Things in there that you need to consider.
First there is 5.1 million increase in compensation and benefit related expenses, but we think that that's mostly due to medical and employer four one k. expenses, because we're a self funded plan and I think at this juncture independent make we're starting to see some of our employee base and our and our covered individuals under our plan.
Get medical treatment for things that were delayed early in the pandemic and they're going back to their doctor. So I think thats first and foremost there was also a decline in our compensation related deferred loan costs due to just absolute lower loan volumes. That's just how it works.
And then there was a modest incentive accrual as well increase as it relates to professional fees as we've talked about our core system improvements around here and all the things we're doing in technology. It stands to reason over time, but those costs will increase and we do have a lot of consulting related expense.
Right now that's not capitalized just because of where we're at in the lifecycle of those projects. So they get more of that expense gets expensed up front and then once you get past that you'll see more of that going into being capitalized.
Okay. So I called the ball to just to follow up on Mikes point I think the real focus here is on the operating leverage and I think maintaining an expense base that supports the growth of the organization ends and where we are is really important today, but the focus is on making sure that we're generating positive operating leverage I think that two and a half.
Times that we did.
This period reflects where we think we're going to able to continue that path as you know we really as we guide.
Really as we guide forward on them.
On the mortgage banking I think.
Obviously, its a function of where interest rates are today I think Tom alluded to earlier that pipelines remain really strong and we think there is going to be significant growth there, but it really reflects the diverse business model that we've created here.
It's something that we think is as long as interest rates remain favorable that we'll be able to benefit from.
Okay, Okay, great I'll leave it there thanks guys.
Thanks.
Thank you and ladies and gentlemen, this does conclude our question and answer session I would now like to turn the call back over to IRA Robbins for any closing remarks.
Once again, we thank you for joining us today and look forward to continuing the path forward for us. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].