Q3 2020 Bryn Mawr Bank Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to bring more by corporations third quarter 2020 earnings Conference call.
All participants will be much more.
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After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
Oh the talk today, we have Frank <unk>, President and Chief Executive Officer, Mike Harrington Chief Financial Officer.
Actually chief Credit Officer.
Before we begin please be advised that during this conference call management may make forward looking statements.
Fortunately this quarter were labeled forward looking statements and safe Harbor.
Our earnings release and presentation for more information regarding what constitutes a forward looking statement.
All forward looking statements are discussed all forward looking statements discussed during this call are based on management's current beliefs and assumptions and speak only as of the date and time there.
The Corporation does not undertake to update forward looking statements.
For a more complete discussion I'll be assumptions risks and uncertainties related to the business.
First to review the Corporation's filings with the Securities and Exchange Commission located on our website at Www Dot <unk> Dot com.
I'd now like to turn the call for <unk>. Please go ahead Sir.
Thanks, Rocco and I'd like to thank all of you for joining our earnings call today.
As we navigate through the remainder of 2020 I'm immensely proud of how our organization has responded to this dynamic and involving evolving environment.
The company has accomplished so much in 2020, despite cope with my team a testament to our team and our business model like.
I'd like to thank our employees for their extraordinary efforts and our clients for allowing Bryn Mawr trust to serve them. During this would be some cross then at times.
Hard work was recently recognized by James We Newsweek magazine with the award for Best small Bank in Pennsylvania.
Our recent quarterly results are also a great example of the hard work of our team.
Third quarter 2020, we reported net income of $13.2 million or 66 cents diluted earnings per share.
While our net interest income remains under pressure from historically low interest rates or fee income business continued to produce solid results are testament to our diversified business.
This was most notably seen in our wealth insurance and capital markets businesses, all of which grew from the previous quarter.
Specifically related to our wealth business Bryn Mawr Trust company of Delaware recently surpassed $10 billion in assets.
As we discussed on the previous earnings call. We continue to review our expense profile for ways to optimize performance.
One topic that has been trending lately in the banking industry is branch optimization.
We noted last quarter, our plans to execute approximately 33000 square feet of office space.
However, this does not include any of our branches.
During the third quarter, one of our branch leases expired and we made the decision the decision to exit that branch.
Future changes to our retail network are likely given the changing consumer behavior.
Well communicate these changes, including the impact on our financial performance when we completed our planning.
What are the current approach has been to identify and create 15 service centers within our branch network. These costs.
He's client centers, except appointments with clients across all departments of our organization.
He's 15 locations were specifically chosen because of their ease of access for the majority of our clients.
In fact over 90% of our clients are within five miles of each one of these clients service centers.
As we look at our distribution model going forward, we're assessing the efficacy of the client service center structure and we'll continue to factor this data into our strategy as it relates to branches and possible future expansion.
[noise] during this quarter, just third quarter, what we saw several other areas of improvement or capital ratios strengthened at both the bank and holding company many of our.
Many of our asset quality indicators, including net charge offs improved and our liquidity position remained robust.
Furthermore, we continue our progress in transforming operations and technology.
As mentioned previously we partnered with Encino and their unrivaled client on boarding platform to improve our customer experience and radically scream Weiner onboarding processes.
In the fourth quarter, we'll roll out our small business loan origination system.
Third and as you know module, which already includes deposits and consumer lending and will.
And we'll be the first encino client to incorporate auto decision into the well into that worked well so just want exam.
This is just one example of many ways, we are improving our business and positioning positioning ourselves to succeed today and in the future.
We believe there will be future obstacles and challenges, but we're confident in our positioning as we navigate through the current environment.
Finally, I'm proud to announce the board of directors approved or 27 cents per share dividend. This marks our 112 consecutive quarterly dividend.
I'd like to ask my character and discuss some of our third quarter results Mike.
Thank you Frank and good morning, everyone.
For the third quarter 2020, we posted GAAP income of 13.2 million.
Or 66 cents per diluted share.
The main drivers for the quarter included strong fee income from our wealth insurance capital markets and mortgage banking businesses.
As we explained on the previous call tuck.
Tax filing extension this year lives the bulk of our tax fees recorded in wealth line item.
And the second quarter to the third quarter during the third quarter, we earned $557000 and tax fees.
That's the wealth business overall and adjusting for the mitigation payment recorded in the second quarter related to the unwind of the mutual fund.
Revenue was up over 4% for the nine months ended September thirtyth compared to the same curious last year.
Our capital markets Division continues to grow as well by offering new products and services.
Along with helping clients take advantage of current market conditions capital markets revenue grew 11% quarter over quarter and 49% for the nine months ended September Thirtyth 2020, as compared to the same period in 2019.
Net interest income decreased 6.3% from the second quarter.
Well cost on deposits have shown a noticeable decline the same is true for interest on loans.
Our tax equivalent net interest margin decreased from 3.22% to 3.03% quarter over quarter.
The main contributors to the decline.
Included a decrease to our loan yields.
[noise], coupled with a 72% increase from the second quarter and our average cash balances.
We are actively looking to deploy some of our cash reserves, but overall remain prudent as it pertains to excess liquidity during.
Turning to some certain market environment.
We expect the margins just to begin to stabilize at these levels as deposit rates continued to move lower.
Excess cash was deployed.
The provision for the third quarter was 3.6 million.
Slower provision as compared to the second quarter was partly to toward that charge offs and.
And some minor modifications for credit modeling.
Result of this provision was a modest five basis point build and our.
Allowance for credit losses to total loans.
As for your perch, the end of 2020 and think about 20.
2021, and beyond a certain your balance has to the path of the economic recovery.
On certainty of a likely manifest itself in episodic charge off activity and will likely lead to changes in both qualitative and quantitative drivers of our call.
Of our credit losses.
And frankly will provide additional color on the credit credit risk profile later in our presentation.
Compared to the second quarter non interest expenses were up approximately $1 million.
Quarterly increase included higher expenses related to compensation.
Funny advertising and other operating expenses.
Digging a little deeper on expenses the underlying increase in salary and wages was caused by.
Much lower deferrals related to lower loan closings recall, the Pip UK loan originations in the second quarter.
And not higher compensation costs, which trended lower as expected given the workforce actions, we undertook in the second quarter.
Deferred expenses.
An offset the current expenses.
Were lower by $1.1 million and will fluctuate in the future dependent upon loan volume.
Also notable as it relates to expenses in the line item of our.
Other operating expense in the south.
In the second quarter, we released approximately 900000 in reserve for unfunded commitments and subsequently provided for $200000. Our reserve in the third quarter, a swing of $1.1 million.
Regarding liquidity and capital.
Remains a top priority for the organization.
Well cash balances remain high but.
Frequently discuss opportunities to optimize our deposit profile and lower rates, where necessary as can be seen in the 20 basis points decrease in deposit yields quarter over quarter.
As noted earlier, we would expect deposit cost to drift lower in the fourth quarter.
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Capital at both the bank and holding company improved in all areas quarter over quarter and remains well above the level stated to be doing well capitalized.
Monitor capital closely outperformed stress test based on the changing economic scenarios.
We believe we have a firm handle on the possible outcomes and are well positioned to absorb unexpected losses should they occur.
Consistent with our position related to our capital we maintained our dividend and are committed to doing so in the future.
Tom has ample liquidity at the holding company took those to support the bank as a source of strength and pay future dividends.
Stock buybacks were taking a cautious approach and will not be in the market and so we have further information as to the pass of the virus and the resultant impact on the economy and credit risk.
As you'll note on slide six asset quality was generally stable during the quarter.
[laughter].
In the third quarter, and net charge offs to increasing decreased $1.2 million.
As noted earlier the provision was slightly slightly lower in the third quarter and the allowance for credit losses to total portfolio loans increased modestly to 1.53%.
I will now turn it over to our Chief Credit Officer, Lambrecht, who will provide additional commentary on the bank's credit quality and loan portfolio Lam.
Thanks, Mike and good morning, everyone.
As shown on slide seven our portfolio did not change materially during the third quarter and remains diversified across borrower industry and property types. We.
We remain in close communication with many of our borrowers specifically those who may be in more vulnerable sectors. In this current economic environment.
At the end of the third quarter, 13% of our commercial real estate non owner occupied portfolio was in deferral as.
As compared to 28% at the end of the second quarter.
This amount is expected to gradually decline through the end of the year.
Whatever depending on circumstances at our discretion a portion of these loans deferrals may be extended into 2021.
Our leasing portfolio remains a morrison susceptible segment given the difficulties in the market, but we.
But we have seen the percent of deferred transactions dropped from 16% at the end of the second quarter to 6% as of September 30, we.
We remain conservative as we approach this portfolio, which is evident in the nearly 6% provision on total leases.
Charles arms for some of the leasing portfolio may extend into 2021, but to what extent is unknown at the current moment.
As we transition to slide eight we can see a more detailed analysis of our commercial real estate portfolio.
The underlying metrics of these segments have not changed materially from the second quarter.
We continue to review, our loan portfolio and to make changes to risk ratings as necessary.
Again, we're taking a conservative approach in our methodology. This.
This is seen in several of our commercial real estate sectors, including retail and hospitality, where we made additional downgrades during the third quarter.
We believe it is prudent to rate each loan according to the underlying fundamentals of the property along with current market data.
Our trends around lines of credit usage have improved over the last quarter and year to date since the end of the second quarter. Our line of credit usage actually decreased by seven or zero point.
Your 0.7% or $5.4 million.
On slide nine we outlined a detailed schedule of loan deferrals by customer segment at the end of the third quarter approximately 9% of the total portfolio was in a deferral program.
As compared to 21% at the end of the second quarter.
Over the past few months, we have seen this percentage gradually decline and anticipate this will continue as many of these loans come out of their initial 90 day deferrals her or second 90 day deferral term.
However, as previously mentioned at our discretion, we may extend some of these deferral periods for select clients based on certain underlying factors.
In this case, some deferrals could extend into 2021.
However, much of this is dependent on what occurs.
For the remainder of Q4.
During the third quarter, we increased our total criticized loans and leases by $13.9 billion based on updated information. In addition, overviews of the entire portfolio.
As a result, our allowance for credit losses, as a percentage of criticized loans and leases motta.
Modestly decreased from 26.2% to 25.2% quarter over quarter.
Moving on to slide 10 in early September we disclose new deferral information as part of an investor presentation.
This information has been updated as of September Thirtyth.
And is included in slides 12 through 14.
Of the third quarter Investor presentation.
Slide 10 provides a deep deferral summary by loan segment.
As indicated on the slide the peak for deferrals was reached at the end of June and has since declined considerably.
The most shown after September thirtyth or based on our current assumptions, but may change as circumstances progress for our customers.
Slide 11 is it didnt different visual with the information contained in slide 10 on total loan deferrals on.
On this slide is broken out between first and second deferral terms as we move through the fourth quarter, we could see a third deferrals segment that carries into 2021, however to what extent.
He is currently unknown.
Slide 12 shows the deferral information for more on a more granular commercial real estate concentration view.
As I indicated earlier, the retail and hospitality segments are more vulnerable to current market conditions, but.
But we have seen a steady decline in deferral, even under these two segments.
While we anticipate continued volatility in the market.
I share Frank sentiment in our preparedness and the experience of the team to handle any uncertainties that may arise.
And with that I'm going to turn it back over to Frank.
Thanks, Liam and Mike.
Rocco will open the line for questions at this point.
Absolutely Sir.
To answer your question. Please press Star then one on your Touchtone phone.
Using a speaker phone, we actually you. Please pick up your handset pressing the keys to withdraw your question. Please press Star then too.
Our first question comes from Michael Perito with KBW. Please go ahead.
Hey, good morning, guys.
Hey, good morning.
Good morning, Thanks for taking my questions I wanted to first start on the expense.
It's bank side.
Hi.
Have already done or in the process of doing a few things it sounds like there's maybe another smaller items. Some smaller write a brewing as well I guess two part question one near term here, Mike you know I mean any.
Talk to you can provide us on where that expense run rate might settle what you actually think you guys have already and now I'm kind of take place all else equal and that second part just exercise speak about the cost side.
You help us get your head a little bit here I mean, what what is the kind of the main driver. Some of these decisions is there like a an overall cost structure that that you guys think you have to remain at a certain level of profitability in this rate environment or is it really more strategic Justin and trying to make that the platform is as efficient as possible.
It's kind of the delivery of products and services evolves here.
Mike Why don't you take what was the logic the second [laughter] I'm I'm, writing down. The second question go No go ahead Mike.
Yes, I don't know how specific you want.
You want me to get Mike and I'll try to just level set back on Q2, So Q2, and what I said in my prepared remarks is there is a couple of items in there that.
Made those costs.
Look a little bit lower than they actually were so we're really pleased with how things are trending from an expense standpoint, if you make some of those adjustments you know that the actions we took in the workforce actions, we took in the second quarter, but.
They seemed to work through dates and the timing of when that hits really happens in the third and fourth quarter. So we would expect to see the continued benefits of those actions play out through the end of the year and then the full full effect of those actions really manifest themselves in the first quarter of <unk>.
2021.
So other than that I want to rebalance back and forth I'll, let Frank maybe jumping on a.
On the strategic question you asked and then if we can play a factor.
Okay got it seems like when there too.
Yes, Mike let me put it in certain terms I mean, we don't target specific.
Dollar amount, we're looking for expense savings on I think you know from our.
From our perspective, we look across the enterprise and we're we're focused on creating efficiencies.
In a lot of different ways.
First and foremost technology, which you've seen a lot of and you see some of the investments and.
By the time, we have this call next year will be fully baked in with Encino and you should start to see some of those benefits start to play out.
But but we look for those efficiencies and process improvement and it just gets a continuous ongoing process at the bank.
It's like art, just like a lot of the investments we've made strategic investments we've made for a much longer the longer term not to not to quarter to quarter kind of benefit. This is this is a an ongoing.
Discipline that we've tried to instill at the bank of continuously looking for where we can where we can say without impacting obviously client service without.
Creating excessive risk.
I don't know if that helps I mean, I know what you would like a specific target number but we don't we just don't target I know that it's additive.
And.
Sure sure try and kind of how I should kind of think about what you actually took on floor set its helpful. I guess, just my one follow through to close the loop on expenses just.
We think about the timing Mike you mentioned, some some items on like staffing side of comment, but I think something like that the back office exit and maybe that will be.
And they are on that one branch some of that stuff hasn't hit yet from is it fair to say that there's still the other.
While people if we look at that 35.7 million third quarter run rate, there's still at least it would seem like a a million bucks or so there has to come out of it into the next year. The early part first quarter or is it more that track yeah, not all things being equal it should trend lower that's correct, yeah, Chris and all the occupancy OCC and Thats.
What we said about the occupancy actions we took they were they don't happen until the first quarter. So we're still worse actually still occupied buildings, where we're just we're we've mentioned that 33000 square feet that bat that decrease in that run rate expense doesn't happen until Q1, okay.
Okay.
Helpful. Then then switching over to the balance sheet.
Liquidity.
Built up a little bit I mean, it seems like.
Based on your commentary in your prepared remarks that you're expecting some of that to to kind of be maintained here I guess any feedback.
Feedback from customers are thought to me it seems like based on a lot of your peer commentary that that that liquidity is expected to be around for a little bit here at least I mean is that consistent with what you guys are seeing and then if you get a chance to kind of deploy it you know where you are hopeful to kind of move to deploy that cash over the near term if it's gonna stick around for a little bit.
Well the thing we did some first about.
Since the end point or the damn points fluctuate our so the way we've been doing that for just had some funding that matured or weve price. Some funding out of the out of the institution most sat on the wholesale side.
They are trying to drive it out for.
From where as using those.
As using those actions on the pricing side, and then just repaying some maturities sick, but came up.
Okay.
I think we've got we don't.
We don't know it does Mike we're now at a level of precision heres the analysis of how much PPP money still sitting in the institution, but it's a fair amount.
So we know there is there going to be there could potentially be a short term need for are those pursuits could get utilized. So that's one of the reasons were holding some cotton maybe more cash than we normally would and then we're just looking you know.
No, we'll probably get the question about loan growth I think that's going to be we should probably talk about the market at some point, but.
Finally, and try to deploy some of that excess liquidity into loans and then maybe just get some of that investment in the through the investment portfolio instead of having a setting overnight switch, which it did for the most part in the in the third quarter and that's what drove the margin.
Lower and died yeah, we're definitely trying to move that money out into something that's higher earning.
Okay, but so I mean, all else equal I mean, when you say the market should stabilize here I mean, that's kind of like for Q1, Q thing and then where trends from there will depend on the long end of the curve, obviously, but also just how what when you're able to move that liquidity back to a normalized level, yes, yes, and I think the dynamic.
Around that assistant marketplace, and all three of us could comment on this.
It's competitive it's getting sand feels like its getting more competitive theres side, and so that dynamic around new pricing for new loans that that is going to be a variable that.
We're going to shallow how that's this plays out in terms of new volume.
One good piece of news is a new rich nation wherever originating new loans versus where the loan portfolio. The overall yield on the portfolio are getting pretty close.
So at least in the near term and that's why we're.
Getting a little more confident that the March is going to stabilize share because of new volume, we're bringing on as close to the cost of the yield that were that were recorded that revenue that's already on the balance sheet.
Got it.
Really helpful. Because sneak one more in if I can just on the fee side could Frank any more specific thoughts you can give on the outlook for for wealth and and capital markets in insurance I mean, all all three I thought showed really good sequential growth and clearly give you guys. Some add all at a time when rates are really not how.
Thank you I am just curious if you could provide us maybe a little bit more specific update on how the growth opportunities for those look and how we should be thinking about the revenue opportunity in the current environment.
Sharp.
I'm glad you asked the question because I think just ties directly to our strategic plan as it relates to diversifying our revenue streams, but you know we've been talking about now for five or six years and it was.
Obviously, not designed for a pandemic, but it was certainly designed for slow down or time like we're in currently.
No obviously.
You are looking out in the future what I can tell you is how we've gotten to where we are today is through a lot of discipline through execution on a strategic plan that Gen. Crocs has has has really been.
Instrument was instrumental in creating and executing on changing a little bit of the culture of ghost those departments into much more sales focus.
As opposed to show solely client service focus and we see that playing out in the success we've had in growing.
Numbers of accounts, not just a ram, which obviously can't can completely control the fluctuations in the market. So we see a very similar.
Kind of activity in insurance, we did consolidation.
[laughter] multiple acquisitions, we've made over the last couple of years is.
Is fairly well I think baked in this year I think Kim Trubiana, who is the president of our insurance.
Of our insurance group's done an excellent job of.
Now integrating and consolidating those businesses. So I think that gives a lot more renewed focus on the shelves SaaS component of it even in this very difficult time.
So we see that playing out and capital markets has been you know.
And obviously, our our shining light over the last couple of years. It continues to grow we can see see lots of opportunities we've expanded.
Yes, the business just with in within the bank. So we see some real good synergies, obviously, because commercial lending, but in our private banking group with RSP a group I mean, they've been able to really.
Offer a level of sophistication that I think is unrivaled in our peer group and I think that's also what is.
Driving a lot of the results that we see so.
That all being said, it's obviously a continued focus moving into her 21 22 23, because you know from by all accounts, we're going to be in this low interest rate environment for a long time.
That helps.
It does and thank you guys for a particular my questions and providing all the insights I appreciate it.
Ill.
Thanks, Mike.
And our next question today comes from Casey Whitman with Piper Sandler. Please go ahead.
Good morning. This is Charlie House I'm on for Casey today.
Hi, Charlie so.
So I guess the loan growth question Mike.
Before before co that had you guys had spoken about growing cnine at a faster pace than CRT over the longer term.
I'm wondering if that's still.
Still a goal maybe in the near term or on the other side of this crisis or if your stance is changed and then in that vein I guess, what's a reasonable loan growth outlook as we think about 2021.
Frank do you want to take to yes, I mean, the order book certainly.
He certainly is a focus and that it really hasn't changed that's just that's just the continuation or expansion of the diversification of what this bank does so.
So so we are focused on that we're focused on acquiring talent in that area and make sense.
You know going forward, it's really hard to say Hey, you know we're just it's there's such a I wish I had a crystal ball probably wouldn't be talking to you. If we did it just we have no idea, we're being very selective.
Credit at this point in time, just given where we are in the market you know and I think we have to see how.
Current wave plays out and where we are with the virus really as we go into the first and second quarter. So I think that's going to have a lot of impact on you know obviously the balance sheet.
How we look at credit going forward from there.
I don't know, if Mike or Liam want to add anything to it but I just I guess help my parents had yes.
Yes. This is Mike I, just I mentioned it earlier, but just how pricing risk appetite and pricing are going to be really important variables for us to monitor and no risk appetite right now is probably lower than normal and and then pricing against very dynamic right now and getting very competitive that's what we're seeing in the market.
So, yes, I agree with Frank just trying to predict that right now.
It is very challenging and not we're not ready to throw a number out there for 2021 Lambda do you have any.
Hello, I would like to know I'd say.
I would agree with the with both Mike and Frank It's a it's a pretty choppy market and ultimately the opportunities are driven by demand and.
Sure.
We're seeing you know spotty and episodic demand.
Lot of our entrepreneurial clients or you know.
Leading out the pandemic before making big decisions on capital plans or replacing their current banks. So it's a very.
Not entirely frozen market, but it's very choppy in very episodic in terms of our opportunities and again, we need to be selective given the and.
Uncertain economic out you look over the next several quarters.
Understood. That's all very helpful. Thank you and then Liam I had one for you so starting with the uptick in classified loan balances. This quarter of about 20 million that you that you mentioned on the call.
Can you give us and centuri, if there is any sort of like geographic concentration within that bucket and then if those loans had been on deferral I guess, what what the status is there would be helpful.
It would be helpful.
Sure well the bill.
A significant portion of our our criticized and classified loans are in the hospitality and restaurant sector essential.
Essentially the whole book was downgraded in Q2.
So.
The geographic concentration its.
It's all within our footprint there is no no outliers in terms of.
Specifics there.
And.
In terms of the the Q3 stuff it was.
Yes, one medium sized borrower.
In the.
In an industry that is very impacted by.
The work from home.
And.
The rest of it is just.
One off episodic kind of transactions, we haven't seen any wholesale deterioration.
Outside of the stressing in our hospitality and restaurant portfolio.
Understood. Thank you for taking my questions.
And our next question today comes from Christopher Marinac with partners. Please go ahead.
Thanks. Good morning, I also had a question for Lam, which just goes back to the off balance sheet reserve for unfunded commitments did that change at all from June to September.
Yes, yes.
Mike Go ahead Lance yes, it was up 200000.
Right, Okay, yes, and that's separate subsidiary in the ALJ.
Okay perfect.
And then I guess, just a continuation of what you are saying travel on the press, yes, Chris. This is Mike So just to be clear its not end the allowance itself to another so separate liability.
So it runs through that other line, we don't consolidate it.
Correct, that's what I, that's what I thought great. Okay. Thanks for that.
And then Liam do.
Do any of the deferrals come back into criticized or are they already in the criticized classifications at this point I'm, just curious kind of how that plays out in future quarters.
Uh huh.
We took the tech hub of downgrading.
The majority of the second deferral population, but going back to Q1. When this was a dynamic event.
And customers.
We're looking for relief we.
We did not initially downgrade stuff, but we have instituted a series of ongoing portfolio reviews, which is resulted in the big step up in crude class in Q2. So the bulk of those Q2 deferrals are.
Encrypt class.
Well at least a substantial portion and we don't see.
A backlog of stuff that is going to drift into create class because they'll be stuff coming out.
And now some some puts and takes.
Ultimately the outcome there.
There is going to be driven by the economy.
And if.
If if it's steady as she goes with no.
Pete it's kind of shutdown based on public health issues.
Yes, we don't see a lot of movement, but obviously events on the ground are going to change everything.
We are we're watching every day.
Got it thanks for that back on I appreciate it and then just a quick one on Frank you mentioned on the Encino adopting you have some.
Adopting some of the new bezel less.
Bells and whistles. They do can that that can that benefits you in the near term or with the benefits of that piece as encino kind of be a take a couple of quarters to get realized I think it's going to be it's going to be out in a couple of quarters and even a little bit longer I think what it does.
You know it slows down the pace of hiring more sales more than seeing an immediate benefit today, there's actually no I should take that back immediate benefits to our click click to our client and customers are much better experience. It creates a lot of efficiencies internally, but.
Your work through it and as things materialize or as as we grow you're going to see those less hiring at the pace at which we were hiring before because this creates that capacity within a in the system. It also should really free up a lot of time for lenders, that's an immediate impact because of the way this.
System operates fairly there is it's you know less manual less pushing a paper around and more straight through the <unk>.
Some itself.
I don't know Liam you aren't anything to what you're you're really impacted by it more so than than yeah sure.
Sure.
The benefits or as Frank said they are they are largely in the future because there is a learning curve for the people who operate the system both customers and bankers before you can fully realize the efficiencies. So it will be a continual ramp up over the next multiple.
Quarters before were fully optimized.
But it is a it is a.
Especially in our consumer and small business segments, a much faster much more streamlined approach.
Approach to getting stuff done.
But the the the benefit in the future.
Well I mean, I think this ties directly into the into our overall strategy that we we really we really talked about at the end of Q2, which as you know.
Less focus on the traditional retail kind of.
Model and more.
More focus on technology, and we really saw the impact of what we did last year, which is that deposit module and in being in that really seamless you know it.
PPP process from an opening new accounts and PPP. It was virtually all through the Encino you haven't seen a portal so hopefully.
Hopefully those will start to leg in sooner than the commercial one which is going to have the biggest impact, but we'll be through three modules by the end of this fourth quarter and we should start to see some of the benefits hopefully.
Great. Thanks again for all the background this morning.
Sure.
Our next question today comes from Matthew Breese with Stephens, Inc. Please go ahead.
And everybody.
Good morning, good morning.
Just on the on the margin I know that the messaging was was stable I would like to just.
Parse that apart a little bit could you talk about the maturity schedule on the retail time deposit book, a it seems like Thats, where the most repricing opportunity is how fast is that reprice and what are the new rates.
Well the new rates are.
I think our top rate I don't quote me on this but I think it's about 20 basis points to 20 to 30, maybe so when I take a look.
Taking a look at the line item and see what the Delta is there and I hope it happens I think the bulk of that maturity happens in the next nine months.
So that's part of addressing that.
That drifting lower comment.
So what were doing just in our non non maturity side. There is a little bit of room left to move there, but I think we've we've almost at this point, we've done pretty much everything we can do there.
Okay.
And then on the loan yield side I know you mentioned a fairly stable.
Got there what is the incremental new loan yield versus existing and what does that gap.
Hi, it's it's less than 10 basis points at this point.
So we're right around four were just below four and the loan yield I think that's recorded 397 in the press release.
Right around that area for new volume, so, but again I'm hedge.
Hedging all that with the dynamic marketplace. We're operating in so we've been trying to be very disciplined around.
Floors, and spreads and spreads have widened which is good but.
No it's going to be this trade off of if a competition keeps grinding lower in terms of spreads than we would have to make a decision around whatever.
Play in that market or we don't and that's very deceptive.
Shall things play out.
Understood and maybe just going back to the loan growth question I did.
I just want to get a better sense for overall activity I mean, if you feel like you you're not getting the deals is it is it because of its overly competitive or is it just a general lack of activity and if that continues you know for call another couple of quarters.
I know the overall strategies drilling in its commercial more but you know just just in terms of maintaining the overall size of the book could we could we see you go back to you know consumer segments just to maintain the size is that an option.
[noise] Oh, Okay Frank.
Okay, Frank right No go ahead Mike.
Well, it's just going to touch on your your comment around.
Just a commercial side and what's happening there and will.
We're going to continue to evaluate that from a risk appetite standpoint, and as the Lam said earlier some of this demand as well so we've got to issue its well how much demand is there and that's this period of uncertainty and over the longer this last them or will be.
Stuck within this in this period of okay. There to demands out there because the business people don't want to borrow money, they're waiting to see how this plays out. So we got the demand aspect and then on the terms and structure side, we're seeing not just pricing pressure and this this hunger for yield, but then you know just selectively episodic kind of.
Loosening of credit standards Whats your wouldn't expect to happen in this environment. So it's the same dynamic we always see and I think that just puts a puts a lot of uncertainty around there on the commercial side of the house and then ill, let Frank cash or the perfect question, whether we would have a different area. So yes.
Yes, let me just comment a little bit about what Mike said, I mean, I think exactly what what you described is happening at.
And it's good to see that expectation, particularly in institutions that don't have diversified revenue base stretch I mean, and that's the one thing that weve always always relied upon is our credit culture. Its bank and so that's something we're never going to get back we're never going to give up on them. So as Mike was describing you would not expect.
See at a time the time, we're living in right now people with just some of the terms some of the relax you don't relaxing covenants, even even guarantees and things that we're just not comfortable with but.
But you know when you're stretching your going to stretch and it's probably not the right time to do it from our perspective, so as Mike talks about a risk appetite that that is not our risk appetite to take it take risk in the portfolio at this point in time.
What are we going to other segments, we've never really been a consumer lender, that's not been our streets or Forte and I don't know that we would just the time necessarily to jump into it but what it does do is it gives us a unique opportunity to really focus hard on our non interest income segments and we did that if you could just go back and.
Take a look at our history. We 910 11, that's when we really we really jump started our wealth group at that point in time and we've been on a run since then and I think that gives us a lot of opportunity now to focus marketing efforts things like that in those specific specific areas.
Okay, So the capital shift or the capital management shift wouldn't be towards other.
Other portions of the lending.
You know that the loan portfolio consumer wise would be more into fee income areas like BNP, Delaware things like fee income I mean, there could be some of the things we going on on the commercial side, but you know at this point in time, it's just I hate, saying the same thing over and over again, because I feel like were.
We're trying to avoid your question no. We're not it's just we just don't know where we're headed and I think we're taking that very very cautious eye on everything right now until we get a little better clarity and you know who knows.
It was one we're going to have that would be great to say, we're going to have it for the ended the year bigger [laughter] be great. So the day before the election, I mean, who knows at this point in time, when we get that clarity I think that'll. Then then we can start to talk about.
Where we are going to be moving at that point in time.
Understood and then you know capital is up quite a bit Matt.
Just one thing I mean, so as an example of what Franks, describing when CMS office on the residential portfolio growing.
At an accelerated rate as an example.
From a profit perspective, if that helps.
Turning an example.
Right.
Just curious you know if.
Capitals up quite a bit since last quarter, you know the dividend.
Is intact and do you feel more comfortable that front or do you feel comfortable enough to maybe do something even like a buyback.
Curious your thoughts there.
Again, I think you know.
We have very disciplined and if you know thanks to Mike and his team there we're very disciplined capital planning process. We go through that entails looking at every everything at our disposal and it's clearly on the table, but again, it's just about let's get through the next couple of months and then I'd say you know everything is back up for discussion.
And we you know we had just had a board meeting yesterday, we talk about these things all the time. It just we don't feel if we don't feel at this pocket the posture, we're standing in today the industry. The economy the country that it's the right time to start to jump into the buyback mode or to.
Any of those any of the things that are available to us and to get again, a little bit better clarity. So.
So yeah I mean, we've got the capital that's good and I think it's really good if we need it and its if we don't need to do a lot of things. We can do with that in addition to buyback.
And then my last one is just just to go back to the expense discussion is it fair to say that this quarters expense rate.
Which includes the FTD reduction and includes the wind down of BMT advisors.
This is a better so.
Starting point for the you know to to work off of when we reduce that square footage.
Next year, yes, and I appreciate your some of that down aren't seeing the full effect.
The workforce actions either that won't see the full effect of that again on one one so we're starting to see it immediately because some of those actions took place immediately but there was also a lot.
A lot of work works or day, So went all the way through to the end here. So.
Okay.
Yeah I appreciate taking all my questions I know there was a few of them. Thank you.
Thanks, and our next question today comes from Earth.
Scattergood. Please go ahead.
Good morning, guys.
Morning, guys good morning.
Oh, one follow up on the loan growth discussion I appreciate all the commentary you've given so far so far about risk appetite being more cautious, saying and pricing dynamics curious if you can provide any kind of quantitative numbers behind loan pipeline.
September Thirtyth versus maybe June Thirtyth, and also kind of into 2019, and just curious to maybe frame that a change in the borrower demand, but with some some numbers if you have anything handy there.
Well I think we prefer not to give anything forward look.
Anything forward looking I will say this is more anecdotal and my second.
Second ma'am can weigh in but you know pipelines are obviously much lower than they were a year ago.
You know, whether that 50% or 60% or 40, I don't I don't have a precise answer I mean, we do have.
Alone pipeline that we're working but yes definitely demand is much lower than its been Eric and Oh.
Just that's all back to the conversation, we've been having and Oh This morning.
And I think it's fair to say and again without getting into specific numbers.
930 looks better than 630.
For certain and you know the other thing to understand demand has been there.
Not that it hasn't been there. It's just you know these may not be the credits are things, we want to jump into right. At this moment. So we're just trying to be very selective and thoughtful about how we're deploying this this liquidity at this point in time.
Got it that's helpful and just one last one for me and just trying to understand that you kind of maybe your expectations for how to see some model and tax provisioning going forward. So the big change in the big build in reserves. This year came in in one Q as the economic forecast changed and then Doug.
Second quarter and third quarter provisions have been more modest even as you've kind of now made some risk downgrades in the portfolio I think you know Mike in your prepared comments you mentioned you know at some point this or lead.
Lead to some episodic charge offs as those charge offs and losses occur if the economic forecast stays the same.
Good to hear I understand you kind of see some model you would not have to kind of replace reserves at that point, but that reserve start to come back down at that point or you know just trying to understand a reserves and provisioning as the cycle plays out yes.
Yes, I mean I'll answer that I'll Hi, This is Mike and then I'll, let lam speak to that but yes. So.
I think the answer is it could be yes.
So if things stay the same and we moved her time that means we're getting closer to a time when things are normal.
So to the extent there was no charge offs between.
Now and not time than you would naturally expect for they allow.
For the allowance to come down because you would have predicted that you would have had losses right.
So but to the extent those losses happen when they happen.
And how large they are relative to the allowance to serve that that's the interplay between.
Which loan charges off because this is a pool concept. So we're trying to charge us off and then how is that loan accounted for.
As a function of the pool and.
And that's where it gets tricky and that's where we could have good have a charge off and maybe you have to replace some of that just because of the time period. It takes place.
Just.
Because of the way the modeling works and so three if you get this lumpiness [noise].
Are you sat technical term Lumpiness, you could get that from a.
From a provisioning perspective [noise].
Excuse me you could get it from a provisioning perspective based on these based on these one off charge offs and it's going to be the whole.
The whole industry is going to have to deal with us.
Situation, because if it's a because of the way. This works. It's a pooled it's a pooled concept and its a pulled methodology. So lamb do you have anything that no I think that's that's generally correct. It is done on a pool basis.
And there is there's a series of underlying assumptions and it really comes down to how quickly do we revert to the mean right how quickly do we revert to a baseline economy that.
There is one I guess on an uptick.
And what's what's the damage between now and then and frankly, none of the none of the models.
Can factor in some of the extraordinary mitigants out there.
Nobody could model for PPP, nobody could model, where the interagency guidance that allowed for substantial loan deferrals.
Nobody can model for whatever the next round of stimulus looks like and how that flows through to various customer segments. So we are.
Yes, we are watching we are.
You know, we think that the correct path here is to be constructively engaged with clients, who are going to make it right.
Ben It to the extent charge offs have been charge offs happen, but the a b the impact on a CEO.
As all these other.
Macroeconomic drivers that you.
You could have some some some lumpy movements and and we Havent game plan every permutation of what could happen.
But as Mike said, all things being equal to the extent.
The trend of charge offs is.
Reasonably modest.
You could reasonably expect with an improving economy that the hcl would decline overtime.
I appreciate that our response, thanks for taking my questions.
And our next question today comes from Stan what stroke with well known as a company. Please go ahead.
Yes.
Good morning, Thank you Mike Good morning, Stan.
Thanks, I just wanted to touch on a couple of things we've seen across the industry.
Solid sequential loan or deposit growth.
Across the board even in the face of some lower or time in broker deposits.
Can you talk about what you what trends you're seeing in there that showed a pretty significant decline here sequentially.
Right I mean to take that.
Yeah. This is Mike I'm, sorry, Yeah, we I mean, some of what you saw us, but you saw happening where losses are the bulk of what.
The reduction in deposit side that you saw quarter over quarter was really a lot of actions we were taking to just push some excess liquidity out so generally speaking that retail deposit.
Profiles remain pretty much intact and normal for us. So we have a very established pattern seasonality pattern and typically late second quarter third quarter, we actually see some some run off and then we start to see it builds going into the end of the year and we're seeing that pattern play out.
So typically does Uh huh.
In the early part of Q.
Q4 here, so I haven't really seen a huge change.
Change in that pattern or flows or for that matter. So that the large increase in deposits. We've had is really related to.
PPP and that that activity.
Oh I understand that.
Go ahead.
Yes, no no. It was gonna say I think Mike hit the nail on the <unk>.
I don't think we're seeing anything.
Out of the ordinary there go ahead, sorry, I didn't mean to interrupt.
No. That's all right just like Ive seen that I've heard a couple of comments from other Ceos across the country here that you know that even with in the face of the TPP, which obviously drove a good chunk of it in the second quarter.
Yes.
Some of them are a little surprised that the deposits are not going out like some of those.
They're going to do it myself.
So people use cash Vicki.
Great for various purposes.
I just it just seems like you guys are kind of bucked the trend a little bit there.
Yes, keep in mind too our basis, we have a large business.
Base, a lot of a large commercial base of customers.
So I think we just got it maybe it's a little different pattern than it would if were more retail oriented.
Okay and then.
I get a little bit more granularity on the the deferrals in the in the hospitality space is that the bulk of them or that you have a full run there.
Oh.
Well I'll try that.
Is the question is the bulk of the deferrals hospitality or is the bulk of the hospitality book on deferral.
[laughter], either or I guess I I guess, if we just look at the deferrals, which you know came down to about 9% and you're going to have a good chunk of it supposedly run off year over to through November how much of that is hospitality.
The hospitality booking in general is a little under $100 million and probably so.
Certainly more than half of that is his own deferral.
So it's yes that sector of it it was hit as hard as anyone through this and.
Right now all of those deferrals roll off in Q4.
We would anticipate some subset of that to potentially be seeking some incremental to burrow.
Action into.
2021.
Although I would caution folks that deferral doesn't mean necessarily a 100% payment deferral. Some of the deferral activity that has been undertaken and that is being contemplated.
It really is moving folks from an amortizing basis to an interest only basis for a period of time so.
Answer is a big hunk of arc hospitality book was one deferral.
Some have rolled off and resumed.
Payments and the rest will be rolling off deferral.
In Q4.
Subject to any.
Individual properties that may be looking for relief over the winter and into into the spring.
Of course of course that I've got to factor, that's going to take quite a bit of time to get through.
Alright, that's it that's about all I have for now if I have any other questions I'll give you a shout.
Thanks, Sandra Thank you.
And ladies and gentlemen. This concludes the question and answer session I'd like to turn the conference back over to the management team for any final remarks.
Thanks, Rocco and just a quick thank you to all of you for your interest in the bank to our shareholders through our employees and our clients again, the big banks will talk to you next quarter.
Thank you.
Thank you Sir This concludes today's conference. We thank you all for reasons todays presentation. You may now disconnect your lines and have a wonderful day.