Q3 2020 Fulton Financial Corp Earnings Call
The star one on your telephone please be advised that today's conference maybe recorded if you require any further assistance. Please press Star then zero I would like to hand, the conference over to one of your speakers today Mr., Matt Joe's lack Sir please go ahead.
Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss earnings for the third quarter of 2020. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer, joining Phil or current Myers, President and Chief operating Officer, and Mark Mccollum Chief financial.
Officer.
Our comments today will refer to the financial information and related slide presentation included with our earnings announcement, which we released at approximately 430 P.M. yesterday afternoon.
These documents can be found on our website at F. you L. T dot com by clicking on Investor Relations and then on news.
The slides can also be found on the presentations page under the Investor Relations website.
On this call Representatives of Fulton May make forward looking statements with respect to fulton's financial condition results of operations and business.
These statements are not guarantees of future performance and are subject to risks uncertainties and other factors and actual results could differ materially. Please.
Please refer to the Safe Harbor statement on forward looking statements in our earnings release and on slide two of todays presentation for additional information regarding these risks uncertainties and other factors.
Fulton undertakes no obligation other than as required by law to update or revise any forward looking statements in discussing Fultons performance Representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fultons earnings announcement released yesterday.
In slides 11, and 12 of those non-GAAP financial measures to the most comparable GAAP measures now I would like to turn the call over to your host Phil Wenger.
Thanks, Matt Good morning, everyone and thank you for joining us today.
Today, we will follow our usual call format, beginning with some prepared remarks.
First I'll provide a high level overview of the quarter. Our next Curt will share some thoughts on our business performance and.
And then Mark will discuss the details of our financial performance.
And after that we'll be happy to take your questions.
We were pleased with our results for the third quarter. They were stronger than we had anticipated in both our consumer and commercial lines of business.
We achieved these results despite the impact cobot nine.
19 continues to have.
On our nation and on many of the communities, we serve and despite the challenges.
Though interest rate environment in which we were operating.
Specifically.
During the third quarter loan.
Loan growth fee income net interest income and credit quality exceeded our expectations.
Our mortgage business saw a record quarter and wealth management provided another bright spot.
We also saw a positive loan deferral trends and improvements in some of our credit metrics.
Curt and Mark will share more details on these areas in a few minutes.
In terms of other milestones a few weeks ago, we reached a final settlement with the FCC to fully resolve and then right and then investigation that has been ongoing for a number of years.
This settlement puts the investigation behind that behind Us and it is in the best long term interests of our team our customers and our shareholders.
In early October we announced plans to consolidate 21 financial centres in January.
2021.
These centers are located in Pennsylvania, New Jersey, Maryland and.
And include five limited service locations.
Over the last five years, we have reduced our NIM or number of financial centers by about 20%. In addition to.
In addition to these consolidations in December we will be charging our operating model change excuse me changing our operating model at a number of other financial centers.
At these centers, we will move from traditional open lobby access to appointment banking and either drive or walk up service.
You may remember that we had implemented this format at nearly all of our branches last spring at the onset of the COVID-19 pandemic.
With very positive results as our customers appreciated having the opportunity to schedule an appointment for a time that is convenient for them.
We also added technology solutions and as a result more customers are now conducting their business banking business Jude digitally.
Effective December seven we will have traditional open lobby access at 155 centers and another 47 centers or embrace the appointment drive up walk up model I just described.
While these changes are part of our continuing branch optimization effort. They are also part of a much larger initiative.
In the third quarter Fulton conducted a companywide strategic operating expense review.
This was prompted largely due due to the prolonged and continuing effects of code 19, and the fact that we are expect expecting to be in this low interest rate environment for the next couple of years.
In addition, we are very aware that the pandemic has accelerated the timetable for some of the activities we had already begun.
These include developing technology and digital tools for employees and customers.
Therefore, we needed to find a way to invest resources in these key areas at a faster pace than we had originally planned.
As a result of this review we are making a variety of changes that we expect to result in a $25 million annual savings in operating costs.
Changes include a financial center consolidations and format changes I just mentioned.
In addition, we have some realignments and optimizations in a variety of business lines and functions and.
And some position eliminations.
Mark will share more detail in a few minutes.
These decisions while difficult or net.
Our necessary to help ensure that the company remained strong over the longer term.
Now I'd like to turn things over to Curt Meyers, who will shed more light on our business performance.
Thank you Phil and good morning, everyone as.
As Phil noted, our third quarter performance surpassed our expectations and I'd like to share some of the detail on the results we achieved in several key areas are.
Our overall loan growth trends for the quarter improved from the second quarter, reflecting progress in the reopening of our regional economy, a strong residential mortgage market and continued business development activities.
Excluding PPP loans commercial loan balances increased $118 million for the quarter on an ending balance basis, even with a modest decrease in line utilization.
Looking forward our commercial loan pipeline at September 32020 is down 9% from a year ago. However, the team has adjusted to the current environment and we would expect the pace of originations in the fourth quarter to be consistent with the third quarter and sufficient to generate the loan growth in our outlook.
In consumer lending our loan balances grew $175 million linked quarter on an ending balance basis.
Residential mortgage results continue to be very strong producing linked quarter ending.
Loan balance growth of approximately 7% or $200 million despite significant refinance activity.
Given our asset sensitive balance sheet and the high quality nature of these residential borrowers we have room to continue growing this segment on our balance sheet for the next several quarters and we expect to do so.
Deposit growth exceeded our expectations for the quarter as non interest bearing demand deposits grew 2.2%.
We also saw seasonal inflows of municipal deposits slightly more than prior years.
Overall deposits grew 846 million on an ending balance basis with growth occurring across checking savings and money market categories.
We also continue to reprice, our deposits and deposit costs declined seven basis points during the quarter down from 36 basis points to 29 basis points moving.
Moving on to fee income the strong fee based revenues, we saw in the quarter were driven by performance in three specific areas.
First the mortgage company had a record third quarter coming on the heels of a record second quarter. This was fueled by both originations and historically strong gain on sale spreads.
Total residential mortgage originations for the third quarter of 2020 were $960 million, an increase of 82% from the same period last year, our mortgage pipeline sits at 902 million at quarter end.
Next our wealth management business also performed better than we had anticipated as the stock market edged higher for most of the quarter and we continued to benefit from a high level of recurring fee business, our assets under management and administration grew to 11.8 billion at quarter end.
And finally transaction related revenues also performed well with commercial merchant and card revenues up 17% linked quarter.
Consumer credit card revenues also improved slightly from the second quarter levels, posting our strongest revenue in the past four quarters.
Moving to credit certain metrics showed improvement over the quarter, our nonperforming loans as a percentage of assets declined both linked quarter and year over year.
Net charge offs were a net recovery of 2.4 million down from a $4 million charge off last quarter. This was fueled by some large recoveries.
In mid September we filed an 8-K, which provided commercial loan default trends through August 30, Onest. We have updated these trends through September 30, and have included residential trends on slide 14 of this presentation.
Second round commercial PNR deferrals, now total $346 million or approximately 2.5% of commercial loans outstanding. This is down 84% from the highest point.
Our second round commercial deferrals hotel loans make up a $186 million or 51% of the hotel balance as you can see on the additional additional details on slide 16 of this presentation.
As a reminder, we have reevaluated and reviewed each individual credit in the hotel portfolio.
We have also provided several additional slides on other segments of our commercial portfolio, which we believe are more at risk due to cove at 19.
While it is still too early to predict the ultimate credit outcome. In these segments. We are pleased with the overall deferral trends.
Lastly, in our consumer portfolio, we're just starting to reach the expiration of many deferrals as residential mortgage Forbearances were initially granted for 180 days that.
The total amount of residential loans under first round forbearance totaled $230 million or 7.5% of the residential mortgage portfolio.
Of that amount 179 million has expired and only $82 million, having opted for a second round forbearance term we.
We expect to know a lot more about this portfolio over the next quarter is 51 million of our first round residential mortgage forbearances have yet to expire.
Despite these very positive near term credit trends our outlook remains cautious for the next few quarters. It is still too early to fully assess the impact of COVID-19 on our regional economy.
And while our loan deferral trends are favorable certain segments of our portfolio would be affected by a second wave of COVID-19 that lengthens the full reopening of the markets we serve.
Now I would like to turn the call over to Mark to discuss our financial results in a bit more detail.
Thank you Kurt and good morning to everyone on the call unless I note otherwise the quarterly comparisons I will discuss with the second quarter of 2020.
Starting on slide three earnings per diluted share. This quarter were 38 cents on net income of $61.6 million.
Contributing to this quarters performance was a lower provision for credit losses.
In addition, our fee income was also very strong and our operating expenses were at the low end of our guidance exceeding our expectations.
Our net interest income was also at the top end of our quarterly guidance.
Moving to slide four our net interest income was $154.1 million.
A slight increase of 1.4 million linked quarter.
Stronger loan growth linked quarter and higher overall interest, earning assets combined to produce this result.
Our net interest margin for the third quarter was 2.70% versus 2.81% in the second quarter.
The 11 basis points of linked quarter compression in our net interest margin was inline with our internal expectations and was driven by continued excess liquidity as well as new asset yields.
Deposits some of which resulted from PPP loans continue to remain in our bank and our third quarter also saw average municipal deposits grow by approximately $340 million slightly more than prior years.
As a result, our average loan to deposit ratio declined during the quarter from 95.1% to 92.6%.
Turning to credit our third quarter provision for credit losses was $7 million versus $20 million for the second quarter and $2 million a year ago. This.
This decrease in our provision linked quarter was driven by our assessment of the economic outlook at September 30 versus the prior quarter as well as the net loan recoveries, we experienced during the quarter.
Our seasonal methodology utilizes moody's for the macro economic assumptions that drive our models and we also consider an employee qualitative overlays to our models based on a comprehensive review of additional financial and economic data.
Nonperforming loans as a percentage of total loans, excluding loans originated under PPP were unchanged at 83 basis points linked quarter compared to 81 basis points, a year ago, and including PPP loans remained stable at 75 basis points on a linked quarter basis.
The allowance for credit losses related to loans at September Thirtyth was 1.56% as a percent of total loan balances, excluding PPP loans, an increase of three basis points from the prior quarter.
The allowance for credit loss coverage ratio as a percentage of nonperforming loans was 188% at September Thirtyth, a slight increase from 183% last quarter.
Moving to slide six noninterest income excluding securities gains was 63 million up $10 million from $53 million last quarter, and 8 million from $55 million a year ago.
This result was in line with our recent refresh guidance and was driven by record performance in mortgage banking as well as solid results in wealth management revenues as well as commercial card and merchant revenues.
Mortgage banking revenues were at an all time high with $17 million for the quarter up 7 million from last quarter's record pace as it was.
As a result of lower interest rates driving higher prepayments in refinances, we recorded a $1.5 million impairment charge to our mortgage servicing rights asset during the quarter, which decreased mortgage banking income.
This impairment charge was $5.1 million lower than the mortgage servicing rights impairment charge, we recorded in the second quarter.
With respect to mortgage loans that we originate for sale, our new commitments were $608 million for the quarter up from $573 million last quarter and our gain on sale spread of 3.20% for new mortgage commitments was higher than 2.89% last quarter as strong.
Long demand for mortgage assets has continued.
Wealth management revenues were $15 million for the quarter, an increase of $1.5 million from prior quarter and an increase of 1.1 million from the prior year.
Consumer and commercial card based and merchant revenues were also up linked quarter as the gradual reopening of the economy appears to be influencing consumer and business spending.
Moving to slide seven our non interest expenses were $139 million in the third quarter down 3.4 million linked quarter.
As you may recall in the second quarter, we recognized a 3 million dollar charge for prepayment penalties on FHLB advances.
As Phil noted in the third quarter, we recorded a $1.5 million of charges for a legal settlement with the SEC.
And we are now implementing many of the findings from these strategic operating expense review the Phil referenced.
These initiatives are expected to result in the following outcomes the CLO.
The closure of 21 financial centres in January the renegotiation of certain vendor contracts and reductions in several other expense categories.
In total we expect this initiative will reduce our operating expenses by $25 million on an annual basis.
We anticipate reinvesting a portion of these savings in 2021 in order to accelerate the digital transformation of our company.
We believe that we should be able to realize approximately $4 million of these savings in the first quarter of 2021 with the remainder of the savings expected to be realized beginning in the middle of the year.
We plan to continue making normal ongoing investments in our franchise in 2021 in several of these initiatives have been in flight throughout 2020.
However in total we believe this expense initiative will result in 2021 core operating expenses lower than our projected 2020 core expenses.
The expense initiative is expected to result in charges totaling between $17 million and 19 million pre tax.
The timing for this estimated charge is shown in the chart on page eight of our materials.
Employee severance fixed asset write offs and lease termination charges account for the majority of these costs.
Our effective tax rate was 13% for the quarter compared to 14% in the second quarter of 2020. This is slightly higher than our outlook due to higher pretax earnings.
Slide nine gives you more detail on our capital ratios, we continue to maintain sufficient capital and liquidity to maintain our shareholder dividend, which is our intention.
We have suspended share repurchases since March and we do not anticipate evaluating further repurchases until the economic outlook is clearer most likely into 2021.
Lastly, we would like to provide our thoughts about forward guidance for the fourth quarter.
In terms of loans for the fourth quarter, we expect our overall loan balances, including PPP loans to be plus or minus 1% to 2%.
We're currently assuming approximately 10% of our PPP loans are forgiven in the fourth quarter.
Excluding PPP, we would expect loan growth to be in the low single digits.
We would expect deposits to decline, 3% to 5% in the fourth quarter with seasonal municipal deposit outflows as well as modest PPP deposit runoff driving this result.
We expect our net interest income to be in the range of $153 million to $158 million for the fourth quarter, which includes $3 million to $4 million attributable to PPP loan forgiveness.
We expect our non interest income to be in the range of 57 to 62 million.
Mortgage banking should continue to be a bright spot as our pipeline is very strong at the end of the third quarter and gain on sale margins remain historically high.
Overall, we expect core operating expenses to be consistent with the third quarter in the range of 139 to 142 million.
Charges related to our expense savings initiatives are expected to be between 16 and $17 million pretax in the fourth quarter with the remaining charges between zero and 1 million pre tax being recognized in the first quarter of 2021.
Lastly, we expect our effective tax rate to be between 14, and a half and 15.5% for the fourth quarter.
With that we'll now turn the call over to the operator for questions Michelle.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telethon. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key to prevent any background noise. We ask that you. Please. Please your line on mute once your question has been stated.
Our first question comes from the line of.
Chris Mcgratty with KBW. Your line is open. Please go ahead.
Hey, good morning, everybody.
Morning, Chris.
Mark maybe I can start with you.
Sure I got the expense guidance.
Correct for.
For the pro forma.
I think you said 20.
2021 expenses will be lower than 2020.
I guess I'm wondering if what the starting base for 2020 is that the reported year to date plus the guide or are you adjusting for.
As the chart pre pay in Q2 and litigation in Q3, I'm just trying to what's what's my starting point to judge the decline.
Yes for the starting point the judge take our expenses through nine months of 425, then were San add 139 to 142 on top of that so if you add say 140 that would get you to 565 as your starting point.
Okay, and then your expectations, you'll be inside of that for 21.
Yes, I got it.
In terms of.
The deposit growth and the margin implications so deposit growth like like a lot of banks has been very strong.
I'm interested in where spot rates are today, and whether there might be anything further to do with the liability structure, either pushing out higher cost Cds or borrowings to support the margin this environment.
Sure, Yes, so Chris so we lowered our deposit cost from 36 basis points in the second quarter to 29 basis points for the.
For the third quarter for the month of September we were at 27 basis points. So.
So we do think we will continue to grind that number lower as.
As I've reported for the last several quarters, we continue to see going out over the next four quarters, just over 1.6 billion of Cds that will reprice.
When I look at the average cost of those Cds versus our current replacement yields for comparable terms were about a 115 to 120 basis points lower.
Going in each quarter for those Cds that will mature.
So we think there is still room to.
Two two to grind that a little bit lower obviously, a wildcard in all of this is going to be when we initially put PPP loans in place those are funded with zero cost da's on our books, we've seen $2 billion gross in zero cost da's year over year, so how much of that sticks over the next couple.
Blue quarters here, what would remain the one wildcard to total liability costs.
That's great. Thanks, maybe just one technical and then ill hop back then interest income guide that's not a fully tax.
Thats not a fully taxable equivalent GAAP basis, right 153 to one.
That is correct, Okay, and then on the taxes, a lot's been given.
A lot of your time and give it about potential tax increases if we see a change in administration.
Can you walk me through how youre thinking about proportional increases in your tax rate as compared to what happened a few years back when when rates went down.
Well I think until until we get to a point, where we'll obviously be giving guidance next quarter on our tax rate for next year and at that point will what will know certainly the outcome of the presidential election, and we'll have a clearer picture I mean, each each side is putting together programs of what taxes would look like.
But until we actually have an election result will be given that guidance next quarter, okay, but nothing nothing structurally changed in the way you've done.
Management over the past couple of years. So I guess you the prior as a proxy reasonable no no. Yes, we don't anticipate any wholesale changes to enable our tax strategies as a result of taxes staying where they are we're going back up.
Thanks Mark.
Thank you and our next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is open. Please go ahead.
Good morning.
Greg just.
Just.
Just wanted to follow up on the efficiency program.
Unless I missed it I believe you obviously talked about re.
Reinvesting into digital.
I don't think you gave what what percentage of that $25 million expect to fall to the bottom line and I guess, if you haven't is that just still sore.
Still sort of a bit to be decided and and what kind of governors can you put around maybe.
Obviously put you put a ceiling on what expenses would be next year, but.
But but any more color you can give on on percentages would be helpful.
Yes sure Frank This is mark good morning.
We would we would anticipate of that $25 million.
No that somewhere between half to two thirds of that would drop to the bottom line.
And we'll have more guidance on that.
As we can.
Complete our fourth quarter and have a clear picture one we have a bunch of technology projects already in flight.
Some others that will start next year. So what we'll have we'll have a clearer picture on that to provide next quarter, but but at this early stage I would say, we would expect to lose hit half to two thirds of that expense savings should drop to the bottom line.
Right.
I appreciate it and then just a quick.
Just a quick follow up there in terms of the expense base, obviously, what we saw this quarter minus the litigation charge and then what are you guys guidance you next quarter.
Is there any sort of you know sizeable.
Co vid recovery related expense that you would.
Put in those quarters that might come out.
Once we get through this tough environment.
No I think it was going to be some things that offset each other frankly in the last quarter. We had some bonuses that we paid to our frontline personnel.
Continued this quarter, but I would say that as we would see a gradual reopening of the economy and a rebranding of our employee base you would see going into next year certain costs like.
Teeny and.
Even even utilities costs than paper cost printer costs things like that.
Would all tend to go up a little bit so I think those would tend to offset.
Gotcha, Okay, and then just.
Last question on the provision and how it's always tough to to look forward here and give any sort of color on that front, but as you think of things.
With the furloughs coming down to smaller pool as you have there now.
And you'd had with the recoveries.
Hello.
Relative to last quarter, you still saw some reserve modest reserve builds is it.
Is it reasonable to assume that builds are over at this point and what is your your thoughts on when if we start to see elevated charge offs, which I assume we will industry wide is that more of a four Q event or more of a 2021 event.
Estimation.
Well Frank.
Frank This is Phil and.
You know I think provisioning going forward is going to depend so much on when we really come out of this and.
And.
So if.
We get a vaccine in the first half of next year.
[music].
I think.
I think you could.
Go to the point, where we are building anymore I.
It it's just so up in the air.
We feel comfortable right now with where we are.
What was the last part of that question.
When you expect.
Elevated I assume we're going to see some elevated charge offs in the industry.
I think there are 2021 event.
Okay. So it sounds like from your comments, Phil It's certainly too early to release reserves.
And then it sounds like we could see.
Maybe continued modest builds to be conservative here.
Until where where some of the uncertainty comes out of the macro environment is.
More fair.
I think Thats fair okay.
Okay.
All right great. Thanks.
Thank you and our next question comes from the line of Kenya to Mayo with Raymond James Your line is open. Please go ahead.
Good morning, everybody then.
Then fit in.
Just want to kind of touch on the maybe.
Maybe the other side of this.
Of this crisis as you get back to you.
Looking for.
Central acquisition.
What gives you comfort.
In terms of the environment to get.
More active in those discussions or to get more comfortable with with the loan.
The loan books of potential buyers.
Yeah, well I think you hit it on the head.
We.
Need to be more confident that we can.
Understand somebody's loan book.
And we need to feel confident that.
We've turned a corner in the pandemic and.
And that things are going to get worse.
So.
Im not sure we will be able to understand the loan book until we know that.
Okay that makes sense.
And then Mark maybe for you on on the margin.
I look at your guidance kind of assumes we'll have more core pressure here.
Peers going forward.
Kind of putting aside the.
The impact of PPP.
Assuming we were we were not to get any kind of steepening of the yield curve.
Do you envision that were near.
Bottom for the margin of the next few quarters or how are you thinking about the trajectory of the of the core NIM from here.
Yes, if you strip out ERP.
The most important thing to focus on is just been the excess liquidity.
Pre pandemic, Danny we were averaging about two to 300 million of excess cash.
You can see here in our numbers in the third quarter, our cash and due from other banks was between 1.2 1.3 billion this past quarter.
So so that if we would just have that and take out about $600 million.
Of that excess liquidity.
That actually would have added back about seven basis points to margin. This quarter you know so.
So.
As we continue to see excess liquidity wind down and.
And so as Kurt referenced in his comments, we are going to.
Take a little bit of that excess cash.
Cash and.
Put it to work in our loan portfolio, we have really strong FICO scores in market loans with that or are customers that we previously chosen to sell into the secondary market over the next couple of quarters, we might take a little bit of that production and put that on balance sheet, what that might do is just sort of maintaining the less.
We will have loan growth than you've seen in that resi because the next two quarters tend to be slower quarters in the mortgage business, but by portfolio in a little bit more that production that will.
Give us a little bit of a head start to 2021. So if you strip PPP is going to create a lot of noise over the next three quarters with the loan forgiveness taking place.
But excluding that yes, I think we're I think we're pretty close to the trough now on margins and then.
It's going to be a slow build back from there.
Very helpful. Thanks, Mark.
Okay. Thank you and our next question comes from the line of Eric mix with getting in Canada. Your line is open. Please go ahead.
Good morning, everyone.
Hey morning here.
Maybe just first a follow up on something you just mentioned there mark in terms of PPP loans partner.
Potentially getting forgiveness. It sounds like you think maybe a bulk of those happen over the next.
Three quarters or so what are you seeing so far I guess do you have any updated stats in terms of the number of your borrowers that have submitted for forgiveness. So far how fast those are coming back and then.
I guess, you think is kind of wrapped up by end of Twoq 21 for the most parts.
Eric Kurt doesn't give you a little more color on on that we have a little more than 10% of.
Of our PPP loans that or do that internal our process for forgiveness have been submitted to the FDA.
To the best of our knowledge, we don't have any forgiveness grants, we don't think thats happened really anywhere across the country.
This point so we are building as customers request that forgiveness through our process. So that we're ready to go when SP a stock.
It starts to provide forgiveness right a little over 10% right now.
Thanks for that color there Curt and then looking at slide 15 in the slide deck I appreciate that breakout.
Hi risks.
Industries, and we mentioned.
And when we Didnt have the discussion three months ago kind of any second deferral requests are going through a kind of a full underwriting process as you do that and I imagine kind of talk to the customers as well how are those discussions going are these customers specifically in kind of hotels foodservice is kind of arson entertainments are they optimistic that.
I guess, if we get some sort of resolution with the vaccine or something that by back end of next year, they can be up and running and viable businesses again or some of these business owners thinking about close.
Closing up shop, and then moving on at this point curious how the.
Any kind of color commentary you could add there.
Yes, we specifically have worked through the hotel portfolio, we've given you.
Additional information on that you can see in the special mention category. The hotel portfolio really is the bulk of the increase overall so were monitoring that portfolio. We've reviewed each individual credit.
On and we're monitoring that closely just general color from all of our customers. They are adapting to the current environment. They are true.
Trying to generate as much cash flow as they can to navigate through this we will have certain borrowers that do not make it make it through that but.
But overall.
Customers are really trying to find a way to navigate through hopefully this shorter term environment.
And have you been asking for additional collateral pledges or anything along those lines as youve kind of gone through this process yes.
Yes, as we work through our second round deferrals. They we've had a process for credit underwriting overall in order to obtain a second round a deferral, we either had to be comfortable with the credit or the customer had to provide credit enhancement.
Either collateral guarantees cash flow support to be granted that second round deferral. So yes, we are working through all of that really with all customers.
And then last one from me just on the tax rate expectation for Fourq that rate is a little bit higher than what we've seen after the first three quarters of this year is that due to just maybe potentially a higher mix of taxable revenue based on what you're expecting or something else pushing that higher.
Yes, yes, thats. It arrogance is this really a higher taxable revenue.
Thanks for taking my questions guys.
Thank you there thank you.
Thank you and our next question comes from the line of Russell Gunther with D.A. Davidson. Your line is open. Please go ahead.
Hey, good morning, guys at or I want us to file I wanted to follow up on the digital transformation and get a sense for.
What are some of the initiatives and projects that you expect to roll out with the deliverables would be there and then just sort of bigger picture how you'd characterize this investment is this an attempt to get ahead of that.
Tech curve and digital offering curve versus peers is it a bit of a catch up just how do you how do you think about.
Where where you're spending this money in and why.
Russell as Curt Thanks for that question.
We have invested significantly over the last five years in tech in technology. So we view this as a continuation and acceleration of the pace.
Of that investment as we move forward so things that we owed on the roadmap that maybe we wouldn't get too for 12 or 18 months, we're trying to accelerate that.
As quickly as we can.
One specific area is electronic signatures and documentation and things like that we're on a journey to get all of that electronic we're going to do that as fast as we can most of the technologies, we would just be continuing to invest and develop versus.
Versus any new specific technology, as we feel pretty good about where we stand relative.
Relative to the peer group in.
Customer technology capability and internal technology enablement.
Thanks, Greg I appreciate your thoughts on that and then the last question was just a follow up to the comments on expectations around.
Core commercial growth in the fourth quarter being sustainable just.
Any comment on the drivers of that.
Whether in particular geography or product and then.
To the extent you have a view on how 2021 organic commercial is shaping up as the appreciate it. Thank you guys.
Just overall in commercial loan growth, though we continue to grow in most markets. Our team has remained focused on business development.
In all of our markets.
We hope to not have the headwind of line utilization reductions so if that stable or maybe provide some benefit in the fourth quarter that that will certainly help. So we really expect the fourth quarter to be more like the third quarter.
Where typically we get a ramp up in the fourth quarter, we're expecting at least stable and if we can get that to ramp up a little faster than the third quarter that'd be great.
Hey, Thanks, guys Thats it for me.
And thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
And our next question comes from the line of Matthew Breese with Stephens, Inc. Your line is open. Please go ahead.
Good morning, everybody.
Running just curious what was the what was the total income from the PPP program this quarter.
So PPP you have two components, it's a 1% interest rate and then our accretion of the fee is two and a half million per month, because it adds one and a half to the coupon so take.
Take $2 billion at a 2.5% yield and that's how we think about it.
Got it okay.
And then just thinking about the growth outlook.
You discuss mortgage continuing to be a driver there.
As it has been how much of the loan portfolio are you willing to dedicate to residential mortgage given your commercial background.
Yes, yes, when you look at our asset sensitivity, we have plenty of room, we're one of the more asset sensitive banks.
In our peer group.
So we think that it's.
Appropriate for us to be able to add incrementally to what we've done historically to take off 50 to 100 million a quarter.
In fixed rate residential production and put those on the books over the next couple of quarters, I mean, it's not going to be a sea change but.
We think theres room to have some.
Some incremental growth in that asset class, Okay, and then just tying that back into the the mortgage gain on sale production. I think you said total originations. This quarter were 902 million is it right that you sold what was it 600 or so is that correct.
That was that that was the lock amount was.
Was that was the six so a.
Okay and then.
And is that kind of break down.
Production of 900 million as the current pipeline and roughly two thirds of that being sold is that we should we expect for.
For Q as well.
Yes, I think in in Fourq, you can end up seeing a little bit more of that shift to be on balance sheet and a little bit less sold okay and then.
And then just I know you've made a lot of investments on the mortgage banking front.
And clearly that's reflected in the last two quarters.
Of gain on sale revenues should we think about.
Not just next quarter, but 2021 2022.
Much more market share in the mortgage market have you have you have you taken just trying.
Just trying to think of scale versus.
Just a huge influx of mortgage refined production and should we expect.
Mortgage banking revenues to come in at call it.
12 million on a quarterly basis going forward.
Just a follow up on the growth, we have and continued to outpace the mortgage banking associations market in.
Info. So we do think that we are picking up market share across the board. Our team is relatively stable. We have just over 100 mortgage originators and we would continue to add to that as we can attract good strong talent and grow the business.
Really expect it to be incremental from.
From where we're at on a business standpoint.
For fourth generation of new business, and then to speak about the revenues met I mean, we are for the third quarter. Our gain on sale spread was 320 basis points, which is exactly double what it was a year ago third quarter last year, we were 161 basis points, though.
Yes, I mean, how long do we stay at these elevated levels as there continues to be just a clamoring for yield out there thats driving up being on sale spreads is anybody's guess what.
With this lower for longer you would think that those gain on sale spreads will stay higher but at some point you do reach a saturation point no we had little over half of our production in the third quarter was purchase money, 40% originations, 52% purchase money. So.
So we still think there is there is some room, but at some point you have to assume there's going to be normalization of gain on sale spreads.
But does that happen in 2021 or two that drift into 2022 that would be anybody's guess.
Okay.
And then just last one for me the.
The interest rate swap fee income line has been incredibly resilient over the last few quarters.
Could you give us a sense for what the pipeline there looks like and if you can you think you can sustain this kind of four and a half to $5 million run rate.
That that activity correlates to commercial originations most predominantly.
And we do expect to be able to hold that consistent as we originate commercial loans consistent with the prior couple.
Prior couple of quarters got it.
Got it okay, great Thats, all I had thanks for taking my questions.
Okay. Thank you and I'm showing no further questions at this time and I would like to hand, the conference back over to the Wagner for any closing remarks.
Well. Thank you all for joining US today, we hope you'll be able to be with us when we discuss fourth quarter results in January.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great day.
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