Q3 2021 M&T Bank Corp Earnings Call

[music].

Good day, and thank you for standing by and welcome to the M and T Bank third quarter 2021 earnings Conference call. Currently all phone participants have been placed in a listen only mode. Following management's prepared remarks, we will open the call for your questions. If you have a question at that time. Please press star one.

Your telephone keypad.

If you wish to remove yourself from the queue press the pound key we do ask that you. Please pickup your handset to optimal sound quality. Please be advised that today's conference is being recorded.

Lastly, if you should need operator assistance at any time, Please press star zero I would now like to hand.

I hand, the call over to Don Macleod. Please go ahead.

Thank you and good morning.

I'd like to thank everyone for participating in <unk> third quarter 2021 earnings conference call, both by telephone and through the webcast. If you would.

I have not read the earnings release, we issued this morning, you may access it along with the financial tables and schedules from.

Our web site Www dot MTBE dot com by clicking on the Investor Relations link and then on the events and presentations link.

Also before we start I'd like to mention that today's presentation may contain forward looking information.

Cautionary statements about this information as well as reconciliations of non-GAAP financial measures.

<unk> are included in today's earnings release materials, as well as our SEC filings and other investor materials.

These materials are all available on our Investor Relations webpage, and we encourage participants to refer to them for a complete discussion of forward looking statements and risk factors. These statements speak only as of the date made an empty undertakes no.

No obligation to update them.

Now I'll turn the call over to our Chief Financial Officer, Darren King.

Thanks, Don and good morning, everyone.

As we noted in this morning's press release, the favorable results, we reported for the quarter highlight the strength and diversity of <unk> business model in the current challenging environment.

Revenue.

In our fee generating businesses, with particularly strong, including mortgage banking trust and brokerage and payments.

Credit trends are stable to improving illustrated by net charge offs above half hour long term average.

Modest reserve release, and little change in the level of non accrual loans.

And alignment.

With the strong revenue trends and the improved profitability over the last year instead.

Incentive compensation is rising as well.

We'll offer some details on that in a moment.

Lastly, our capital levels continue to rise.

CET one ratio is near a record high as we await the closing of the peoples United merger.

Now, let's review our results for the quarter.

Diluted GAAP earnings per common share were $3 69 for the third quarter of 2021 <unk>.

Improved from $3 41 in the second quarter of 2021 and $2 75.

In the third quarter of 2020.

Net income.

<unk> for the quarter was $495 million compared with $458 million in the linked quarter and $372 million in the year ago quarter.

On a GAAP basis <unk> third quarter results produced an annualized rate of return on average assets of $1 two 8%.

And an.

Return on average common equity of $12 one 6%.

This compares with rates of one, 2% and 11, 55% respectively in the previous quarter.

Included in GAAP results in the recent quarter were after tax expenses from the amortization of intangible assets amounting to.

$2 or <unk> <unk> per common share little change from the prior quarter.

Also included in the quarter's results were merger related charges of $9 million.

<unk> to <unk> proposed acquisition of peoples United Financial.

This amounted to $7 million after tax or <unk> <unk> per.

2 million share.

Results for this year's second quarter included $4 million of such charges amounting to $3 million after tax effect or.

<unk> <unk> per common share.

Consistent with our long term practice <unk> provides supplemental reporting of its results on a net operating or tangible.

Your comments from which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions.

<unk> net operating income for the third quarter, which excludes intangible amortization and the merger related.

Bases.

Was $504 million.

Compare that with $463 million in the linked quarter and $375 million in last year's third quarter.

Diluted net operating earnings per common share were $3 76 for the recent quarter improved from.

Expenditures 45 in 2021 second quarter.

Up from $2 77.

In the third quarter of 2020.

Net operating income yielded annualized rates of return on average tangible assets and average tangible common shareholders' equity of 134%.

317, 5% to 4% for the recent quarter.

The comparable returns were 127% and $16, 6% to 8% in the second quarter of 2021.

In accordance with the SEC guidelines. This morning's press release contains a tabular reconciliation of GAAP and non-GAAP results.

<unk>, including tangible assets and equity.

Let's take a look at some of the details that drove our results.

Taxable equivalent net interest income was $971 million in the third quarter of 2021.

Paired with $946 million in the linked quarter.

Higher income.

From PPP loans accounted for the majority of the $25 million quarter over quarter increase in net interest income as the second round of PPP loans began to receive forgiveness from the small business administration.

The net interest margin for the past quarter was $2 two excuse me 274%.

Down just three basis points from 277% in the linked quarter.

We estimate that the higher balance of cash on deposit at the Federal reserve contributed about 13 basis points of pressure to the margin.

Largely offsetting that was the higher income from PPP loans, both scheduled amortization.

Amortization and accelerated recognition of fees from forgiven loans, which added an estimated 10 basis points to the margin.

All other factors, including lower income from hedges slightly lower cost of deposits and an additional accrual day netted to zero impact.

Compared with the.

The second quarter of 2021.

Average interest, earning assets increased by 3%.

Reflecting a 22% increase in money market placements, primarily cash on deposit with the fed.

And a 3% decline in investment securities.

Average loans outstanding declined.

<unk> about 3% compared with the previous quarter.

Looking at the loans by category Corey.

On an average basis compared with the linked quarter.

Overall, commercial and industrial loans declined by $3 3 billion or 12%.

The primary driver was a $2 4 billion decline in PPP loans.

Dealer floor plan loans declined by $803 million, reflecting the ongoing impact from vehicle production and inventory issues seen across the industry.

All other C&I loans were.

Were little changed from the prior quarter.

Commercial real estate loans were also little changed from the second quarter.

Residential real estate loans declined by just under 4%.

There are a few moving parts underlying that figure that are worth highlighting.

Balanced decreased.

<unk> due to normal prepayments and principal amortization, including the Hudson City portfolio drove some of the decrease as well as reporting of loans previously purchased from Ginnie Mae servicing pools.

Offset those were offset by retention of new home production, which will be a bigger factor in the fourth quarter.

Consumer loans were up 3%.

Consistent with recent quarters and continuing to be led by growth in indirect auto and recreational finance loans.

On an end of period basis total loans were down 4%.

Reflecting most of the same factors I just mentioned.

The 11% decline.

<unk> and C&I loans include a decline of PPP loans outstanding to two 2 billion.

At September 30.

Average core customer deposits, which exclude Cds over $250000 increased 2% or $2 $8 billion.

Compared with the second quarter.

That figure includes $3 8 billion.

Of non interest bearing deposits, partially offset by lower interest checking deposits.

Turning to noninterest income.

Noninterest income totaled $569 million in the third quarter.

<unk> compared with $514 million in the linked quarter.

The recent quarter included an insignificant valuation gain.

On equity Securities largely on our remaining holdings of GSE preferred stock while the prior quarter included $11 million of valuation losses.

Mortgage banking revenues were $160 million in the recent quarter compared with $133 million in the linked quarter.

Revenues for our residential mortgage business, including both origination and servicing activities were $110 million in the third quarter compared with 90.

$98 million in the prior quarter.

Residential mortgage loans originated for sale were down about 7% to $1 1 billion when compared with the second quarter.

However, the lower volume was more than offset by higher gain on sale margins.

Commercial mortgage banking revenues.

We're $50 million in the third quarter compared with $35 million in the linked quarter.

Those results reflect a strong originations quarter combined with prepayment fees on loans previously securitized.

Trust income was $157 million in the recent quarter compared with 160.

In dollars in the previous quarter.

Recall that the second quarter's results included $4 million of seasonal fees arising from tax preparation work, we undertake for clients, which did not recur in the third quarter.

Also in conjunction with the transfer of Mt's retail brokerage and advisory business.

Three of the platform of LPL financial and mid June of this year about $10 million in revenues associated with managed investment accounts previously classified as trust income are now included in brokerage services income.

Service charges on deposit accounts were $105 million compared.

Compared with 99.

$10 in the second quarter.

The primary driver of the increase was customer payments related activity.

Turning to expenses.

Operating expenses for the third quarter, which exclude the amortization of intangible assets and merger related expenses previously mentioned.

$888 million.

Comparable figure was $859 million in the linked quarter.

Salaries and benefits were $510 million for the quarter compared with $479 million in the prior quarter.

As was the case in previous quarters this year.

9 million salaries and benefits reflect revenue generation in certain business lines and incentive compensation associated with that revenue.

Notably commercial mortgage banking and trust.

Also at the enterprise level, we are accruing the corporate incentives at a higher rate in 2021, reflecting our expectation that <unk> full.

The higher earnings and profits will be higher than they were in 2020.

Other cost of operations in the recent quarter included $5 million.

From the accelerated amortization of capitalized mortgage servicing rights as a result of the prepayments of previously securitized commercial.

Full year that we referenced earlier.

Lastly year over year growth in trust income and assets under management in our retirement business has carried with it an increase in the share of those fees paid to sub advisors, which are included in other cost of operations.

Also recall.

Average loans at the other cost of operations for the second quarter included an $8 million addition to the valuation allowance for our capitalized residential mortgage servicing rights.

There were no adjustments to the valuation allowance in the third quarter.

The efficiency ratio, which excludes intangible amortization.

For deal related costs from the numerator and securities gains or losses from the denominator was 57, 7% in the recent quarter compared with 58, 4% in 2021 second quarter.

Excellent turn to credit.

Okay.

And Marie <unk>.

Credit trends continue to stabilize but as has been the case for the past little while some industries are improving more rapidly than others, reflecting challenges such as the supply chain pressure on materials cost and the cost and availability of labor.

The allowance for credit losses declined by 60 million.

Colors to stand at one 5 billion at the end of the third quarter.

This reflects a $20 million recapture of previous provisions for credit losses, combined with $40 million of net charge offs in the quarter.

At September 30, the allowance for credit losses.

<unk> of loans outstanding was unchanged from June 30 at 162%.

Annualized net charge offs as a percentage of total loans were 17 basis points for the third quarter.

15 basis points in the second quarter.

The allowance for credit losses.

As of the end of the quarter reflects our assessment of credit losses.

In the portfolio.

Under the seasonal loss measurement methodology, which.

Which includes our macroeconomic forecast.

Yes.

As we've previously indicated our macroeconomic forecast uses a number of economic variables with the largest.

First being the unemployment rate and GDP.

Our forecast assumes the national unemployment rate continues to be elevated compared to pre pandemic levels.

<unk> five 5% over 2021, followed by a gradual improvement.

Reaching three 5% by mid.

Just drive 23.

The forecast also assumes that GDP grows at a six 8% annual rate.

Over 2021, and two 7% annual rate during 2022.

Non accrual loans were essentially flat at $2 2 billion.

2012, compared with June 30, but increased as a percentage of loans to two 4% compared with 231% of loans at the end of June.

We also expect to disclose that our level of criticized loans is little changed from the second quarter. When we file our third quarter 10-Q, and a few weeks.

Loans past due on which we continue to accrue interest for $1 billion at the end of the recent quarter.

Turning to capital.

<unk> common equity tier one ratio was an estimated 11.

1% at quarter end compared with 10, 7% at the end of the second quarter.

This reflects continued strong organic capital generation combined with lower risk weighted assets.

As previously noted while the peoples merger is pending we don't plan to engage in any stock.

<unk> repurchase activity.

Now, let's turn to the outlook.

As we enter the final quarter of the year, we see little need to change our outlook for the remainder of 2021.

We expect year over year loan growth.

To be flat to up slightly on a reported.

Stock races, and flat to down slightly excluding the impact from PPP loans, which reflects the decline in dealer floor plan loans.

We continue to expect net interest income to be down a low single digit percentage from full year 2020.

We noted on the July conference.

<unk> call that we expected net interest income in the third and fourth quarters to on average be in line with the $946 million in the second quarter.

We still expect that to be true but.

But the faster than expected forgiveness of PPP loans did pull some of that income forward into the third.

<unk> quarter from the fourth quarter.

We slightly exceeded our outlook for low single digit growth in noninterest income.

As we begin to retain the majority of residential mortgage loans, we originate on the balance sheet.

<unk> gains on sale will be primarily driven by Ginnie Mae retooling game.

Momentum in the trust and payments related businesses remained strong.

Expenses have grown faster than we forecast in January but with most of that growth.

Directly connected to better than expected revenue and better than expected net income.

The credit environment.

<unk> continues to improve along with the overall economy.

But some segments are recovering more slowly than others.

We believe criticized assets are at or near their peak, but there still remains some risk of downgrades within criticized loans from accruing to non accruing.

Our preparations for completion of the.

People's United continue while we wait for regulatory approval.

Our projections as to the financial impact remained largely in line with what we offered at the time of announcement this past February.

Following our usual practice, we will offer our thoughts for 2022 on the January.

The merger with the conference call.

Of course as you are all aware our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth.

<unk> and interest rates political events and other macroeconomic factors, which may differ materially from what actually unfolds.

During the future.

Now, let's open up the call to questions before which Emma will briefly review the instructions.

If you would like to ask a question. Please press star one on your telephone keypad.

If you wish to remove yourself from the queue press the pound key.

Please pick up the handset optimal sound quality.

Our first question from Jared Cassidy with RBC.

Okay.

Thank you hi, Darren good morning Gerard.

Couple of questions for you.

Regarding your swap book can you share with us.

<unk> stands today and how that.

Blends into net interest income over the next six or 12 months and simultaneously you've been very conservative in the positioning of your cash.

Particularly obviously at the Central Bank the Federal reserve is up dramatically.

We're year over year, you have been talking about it all year when do you start to lengthen out the duration in that one.

One item on the balance sheet.

Sure thing.

Well.

<unk> started writing with your questions down so now I won't Miss them.

So on the swap.

<unk>.

What book has been fairly steady in terms of notional amount right around $19 billion.

And it's been that way since the fourth quarter of last year.

The receive fixed yield we're getting on that book has been declining.

New hedges roll on an older hedges at higher rates roll.

GAAP book and this quarter it added.

Round number $65 million to net income.

<unk> impacted the margin by slightly less than 20 basis points.

We will see the notional amount come down.

Next quarter.

And we will start to come down over the.

Of course of the following four quarters into into the end of 2022 the.

The receive fixed coupon will come down a little bit as well, but but the bigger impact will be just the decline in the size of the the outstanding notional.

And the impact of swaps.

In.

And just to remind everyone.

For full year 2021 is really close to what it was in 2020 and in 2022.

<unk> will be about half.

And Nick will be highest in the first quarter of 2022 and lowest in the second quarter or the fourth quarter sorry of 2020.

But to go along with that and to answer or address your second question about cash.

We've talked a lot about the cash position over the course of the year.

If you look at the uptick in the latest quarter.

It has been.

Laurie.

Two actually trust demand deposit growth in the quarter that drove a lot of the increase however.

We are seeing some of the PPP balances as they decline and up in cash and so what you saw this quarter I think if you look at the securities balances at the end of the quarter as.

Largely up.

<unk> $300 million, so we replaced runoff plus $300 million.

We've been in <unk>.

Generally, replacing the mortgage backed securities that are running off.

And we're kind of targeting a duration there of our thinking about 'twenty year.

They were on average sometimes provide <unk>, sometimes we're manufacturing twenty's by a mix of 15 year and 30 years.

And we were in a little bit although not in a big way and some of the five year spaces as rates have moved around.

That was more backend loaded this quarter as rates have started to move up.

And then the other thing, which I mentioned in the prepared remarks, where we're starting to retain some retail mortgage production.

And so as we think about duration.

We think about what's what.

And our eyes, the best choice or maybe the least bad choice of how to invest the dollars right now we.

We do like the mortgage space and if we have a choice between the MBS.

Or retaining our own production.

We'd like to yield better on our own production and so.

We retained about $400 million of production.

That's started through this quarter, but had the biggest impact in September.

And we will continue that.

That practice through the fourth quarter and into the early part of next year.

Obviously, we'll be paying close attention to where rates are and how we feel about holding.

Holding duration either in the mortgage line or in the Securities line, but that's something that we'll be watching to put put that cash.

To work.

<unk>.

I guess as we look forward at that plan and how it all unfolds taking into account <unk>.

P M.

And and the hedges that are rolling off we see net interest income.

Dropping first quarter and not declining from there.

There are in fact, increasing depending on what you see as the forecast the race as the year goes on and so.

When I look at that the storm, we've weathered and the patients we exhibited on.

That cash back to work.

I see has turned in the quarter.

The next couple of quarters.

Very good and just to clarify one of your comments on the notional amount 19 billion, you mentioned $65 million.

<unk> to net income, but you meant to say net interest income is that correct. Yes net interest income that's correct yep. Thanks Kurt.

Yes, I just wanted to check on that.

The follow up question.

You were very good at giving us the details on the commercial and industrial loan portfolio. What happened this quarter with PPP and also with the floor plan loans can you share with us what youre seeing outside those areas Youre other customers and then second.

Darrin Whats the dollar total dollar amount of the floor plan portfolio.

Yes.

Total alright.

We've done a year or so.

So other industries.

What's going on and then the floor plan.

So floor plan.

Balances are.

Lastly, I'll.

Billion and a half.

And if you look at where those have been and what's interesting Gerard is when you look at Floorplan balances.

Really it's much about line utilization and the commitments you have with those floor plan dealers and line Utilizations are running around 25%.

Which.

Call it a as part of the year when those are typically lowest.

So it never that low and when do you when you think about where the where they are on average.

Normal times, there are about 70%.

And so when I look at where those floorplan balances are compared to what I would consider normal.

It's probably $2 billion to $3 billion.

This lower than than what might normally be the case.

<unk>.

When you look outside.

The PPP loans.

You're seeing some some movement up.

And C&I business.

In the areas that you might expect in some construction and manufacturing.

<unk>.

Interestingly, a little bit in resources in AG.

And lessen some of the other areas.

When I look at new originations and what the trends are in new C&I originations.

Ticked up every quarter this year.

It would be nice for all of.

<unk> they were screaming up but that's just not the case, but they are consistently going up in this quarters.

C&I originations were the highest in the last seven quarters.

You all are well aware of the fourth quarter tends to have a little bit of seasonality.

As folks in the industry, both in C&I and commercial real estate look to get deals done before tax years and.

And so holding holding's fourth quarter to decided it was a another constructive quarter of improvement and it's a slow and steady.

Moving up in a direction that.

What we like.

And the margins are holding.

Fairly solid as well so.

It's encouraging trends.

Obviously, welcome a little bit faster, but.

The trend is our friend here.

Thank you so much.

One point of clarification.

As it is on the outlook for the hedge benefit next year that assumes a short term rates, whether the fed trups target or LIBOR, so far do not start to ramp up rapidly.

Okay.

We'll go next to Matthew O'connor with Deutsche Bank.

Thanks.

Good morning, I was hoping you could update us on the latest estimate on pro forma capital investment.

And that will be all closes in.

The <unk> bank.

Okay.

Sure Matt.

Just to make sure I have.

Got the question right.

The question, specifically will the deal still be capital accretive or is the question once the deal is done.

Where how will we move down the CET one ratio.

The initial estimate at closing so you had 11, one right now.

We closed the deal.

Your latest thoughts if you close the deal right now where does the 11th Gotcha got it okay perfect.

It's gonna be right around there is probably within 10 or 20 basis points of 11, one in there.

Reason why I'm, not giving you an exact number as well.

If you do the final marks.

Where interest rates are we will have a big impact on the interest rate marks which was one of the pieces of.

Helping us be capital accretive and the other thing obviously is the credit marks and with the credit improving.

That lowers the.

Amount of loans that are classified as purchased credit deteriorated and increases the non PCV loans, which increases the day two famous double count and so that will.

Perhaps bring down the impact on capital or reduce capital at at close but as you recall that will just increase the.

<unk> <unk> to EPS as we go forward so.

We should be right around that 11 spot.

Just north of that would be my my my belief based on what I see today.

Okay, and then what are the thoughts on kind of what.

Near or medium term target.

For the two one ratio.

You know, obviously, what I'm getting at is how aggressively would be on buyback they got there.

Yep.

Well.

I think it's fair to say that.

Harboring capital has never been a characteristic of empty and as we mentioned at $11. One were near an all time.

And so we'll be looking to bring that down.

Ideally, we'll bring it down because we will have asset growth and we will see the CET one ratio come down as we continue to build the balance sheet and support our customers.

Both with existing <unk> and the new peoples customers.

But based on.

Hi, since that will probably be slow and so we will look to bring that ratio down.

When you are generating 30 to 40 basis points of <unk>.

Capital every quarter, obviously, you've got to be fairly bold in your and your buybacks to bring that down.

And to run at a pace, where it comes down.

The faster than net 20 to 30 basis points, a quarter would be pretty tough and so that'll be I think a reasonable glide path to use as you think about what the.

The rate of decrease might be.

And.

As a place to look if you go back to how.

CET one came down.

Post Hudson city, and that path that that rate of decrease.

It's probably a reasonable guide of how it might unfold.

Post completion of the peoples merger.

Okay. There's a lot of numbers you threw out there just to summarize.

You generate 30.

Dave points of capital per can.

Quarter and then.

Suggested maybe bringing down the CET one by 20 to 30.

Just to summarize that.

That's right yes.

Yeah, Okay. Thank you very much.

We'll take our next question.

From John Kerry with Evercore.

Good morning.

John.

The loan front I appreciate all the color you gave around the loan growth dynamics and what you're seeing there.

I wanted to see if you could talk a little bit about your plans for the commercial real estate portfolio.

Longer term I know you are right.

Right now you're a bit out your outsized there at 30% of loans and your peers are closer to 15% and I believe you had expressed interest in shrinking that portfolio could you maybe talk about what the long term target is for the size of that book as a percentage of loans in the how we should think about the cadence.

Cadence of those of that decline.

Yes, I'm happy to talk about that.

I think the.

The future plans for EM and Ts CRE have been highly dramatized in the last little while notably by a favorite per quarter in New York City.

If you look at.

The.

The impact of CRE in.

In the stress test in the December 2020 stress test.

It suggested that there might be more capital friendly ways to participate in the CRE industry.

And so.

When we look at the relationships, we have with clients and how we approach the market.

Our job is to be advisors and financial intermediaries for those customers and historically, we've fulfilled that role by holding the loans on our balance sheet.

We will still do that in.

Sure, but we'll think more broadly and include other sources of capital and act as an intermediary on behalf of those clients.

As we shift to that kind of a thought process. It will be a very gradual and controlled shift and so as you think about CRE balance.

If you are and how they might change over time, there's some natural <unk>.

Decrease what's going to happen no matter, what and that comes in the form of the construction portfolio right and.

So theres a number of projects that are that are ongoing and if you look at CRE balances over the over the year they've been relatively flat.

And Thats some of those.

Ounces projects going through their natural cycle with those lines drawing.

That are that are building those balances, but as those projects come to their natural conclusion and turned into permanent mortgages youll start to see those balances come off our balance sheet and you'll see a natural decline in CRE not unlike what we saw.

Structure of the 2017 2018 timeframe with a similar.

Similar period.

And then as we look at new originations.

We will still think about obviously supporting our clients from a construction perspective, but.

But as we look at permanent mortgages and other forms of.

In.

Real estate lending will look not just on our balance sheet, but outside and if you think about in real estate, we use our <unk> Realty capital Corp for agency.

Loans with Fannie and Freddie.

And we'll continue to do that and we also use and place some loans with insurance company.

<unk>.

And so we will look to broaden those into non agency types of relationships as well.

But it's going to take some time and so I guess the long story short here is new in the path. We're on is to be able to actually provide a broader level of service and access for our clients.

Company capital efficient and we will see some of those net interest income dollars become fee income dollars as we make that transition.

Transition and the decrease that you will see in.

Imbalances will be gradual as.

As we kind of work our way.

From where we sit today.

Through the next few years.

We don't necessarily have a hard target of what we're trying to get to.

But we're just trying to get to be a little bit better balanced than than we might've been.

Coming into the crisis.

Got it Okay. That's helpful and then separately on the expense side could you maybe just talk about them.

Observing a way.

To be equation impacts that youre seeing in the business and how that impact could it could that impact at all your expectations around the peoples peoples deal either the cost save expectations are for the merger related costs.

Yeah, I guess I think the pressures we see.

Wage among wages, both at the bank and our customers are not much different than it is being seen around the country.

The number of folks exiting the workforce is really putting a strain on.

On those that are looking for folks.

Who are still in the job market.

<unk>.

We're seeing folks.

Are people being coveted by others, which isn't necessarily new but that seems to be exacerbated right now.

It's particularly acute in the space.

Which again was always a place where there's been a lot of competition given what's happening.

And in the world with the prevalence of technology and business.

But we're seeing it spread to other parts of the bank as well.

<unk>.

When when you look at.

Our expense growth that's related to comp.

Really the regular salaries, what I would describe as a regular salaries.

And impacted by it but the full effect won't be seen until next year, because it's been going up.

Throughout the year and so you won't have a full year run rate until you get to 2022.

And in the meantime, what's been driving our increase has been.

Increase in <unk>.

Revenue.

New related or profit related compensation, so for our corporate pool, we target a percentage of net income.

For that pool and this net income has gone up.

So has that accrual and then for some of our fee businesses as those revenues increase so to the commissions earned by by the employees.

I think it's interesting.

Interesting.

Bunch of time with the team going through.

Our expenses in.

And if you actually looked at our expense growth in 2020 over 2019, our expenses actually went down and against our peer group. We were one of three banks that actually decreased expenses in 2020, and what we're seeing this.

Year is a little bit more of a return to normal.

With a little bit of pressure that we talked about from the outside world, which is making the print this year higher than everyone else because just because of that.

If you look over the course of the last couple of years.

Our expense growth is pretty much right in line with the peers.

So it's not a couple.

Our basis points below.

As it relates to pump.

I am sorry, Thats, our internal acronym for People's United Bank.

We are.

We believe that the.

The expectations for accretion.

Still in line with what we what we thought.

Obviously, they are subject to the same.

<unk> that everyone else's.

But by and large the cost takeouts.

Our way right, where we thought they would be on the revenue synergies are what we thought they would be in from a capital perspective, as we mentioned a few.

Ago.

We don't see any any change there and so the rate of return on the deals still are still very attractive versus alternative uses of capital and so on.

No real change there but.

Yes.

<unk> operating environment that's for sure.

Got it alright, thanks, Dan.

Minutes will go next to Frank Schiraldi with Piper Sandler.

Good morning.

Darren on the.

Follow up on the dealer Floorplan.

Utilization comments.

As you plan for budget 2022.

Think about.

Balances in that year and growth in that year.

What are your thoughts in terms of.

Those could we see it expect that we'll see sort of a bounce back.

To those older utilization rates.

Client supply chain issues subside or just wondering what are your expectations.

For 2022, then.

Okay, well at the risk of being an over an empty optimists. We we believe that those balances will start to come up but knowing our conservative nature, we don't see a bounce back.

And those utilization rates back to normal.

Right away, but we do see an increase.

Year over year.

From what we can see in the industry.

What we hear from the dealers, what we believe how the manufacturers will be looking and thinking about things.

We think it's probably.

Into 2023 early 'twenty four before you're back to the utilization rates that that you were at.

<unk>.

Pre pandemic and so given that.

And without any better intelligence I would think about kind of straight lining that over the course of the next couple of years.

We get better information, obviously, we'll share that with you, but just watching how youre seeing manufacturing come back online.

We haven't seen.

Signs of a material.

<unk>, yes.

In terms of production and therefore, we don't think we will see the inventory bounce as quickly, but we should see some some steady improvement over the course of the next four to six quarters.

Okay, and then just a follow up on.

Seen whose book.

Securities in the quarter.

Could you just share what the pickup in yield is there and.

I know, there's a lot of unknowns.

In terms of interest rates.

Moving parts.

Is that kind of a reasonable expectation of moving into securities.

Purchases on a quarterly basis.

5% increase in those volumes or is this more about just pre funding.

Helpful.

So I guess on the Securities book and on and on the yield pickup.

The yields that we're putting on now.

Spirit are lower than the roll off yield and so that's the downside. The upside is we're putting things on call. It $1 50, 160, and we're taking it out of 15 basis points and so the pick up there is pretty good.

When you look at the rate and the pace of us.

Investing in securities.

I think what you saw this quarter.

<unk> is a good indication that we ate a minimum don't want to decrease the securities portfolio. So we will work to keep it flat.

But but realistically, we probably think about.

Two $300 million increase a quarter in addition to replacing.

Awesome.

<unk> is a good target lease that's kind of as we look at it and think about it.

Where our heads are today.

And again I'll remind you that the other part of that thought process is retaining retail production right and so we're getting mortgage exposure both in the securities portfolio.

The Roes in the mortgage line on the balance sheet, and so youll see us deploying that cash.

And kind of as our Treasurer would described can be legging into the trades as we go through the coming quarters.

Doing a bit of dollar cost averaging into that and rather than trying to.

Solve it all at once.

As well alright, great. Thank you.

Yes.

We'll go next to <unk> with Jefferies.

Yes.

Thanks, Hey, good morning.

Just have one follow up on NII understanding the PPP pull forward.

<unk> you.

<unk> said that NII would be down.

In the fourth quarter I'm, just wondering what type of PPP or you're expecting is that the most of the remainder or what type of level do we step back down to given that pull forward from third.

Well.

It's a bit of.

A bit of a guess.

Because the timing of when our customers might.

Seek forgiveness is a little bit unknown, but.

Broad strokes, we're we're thinking it's kind of half the rate of accelerated.

Capture of those origination fees in the fourth quarter versus what it was in the third just for perspective, the third quarter was the highest.

In terms of the dollar volume.

Those origination fees that we pulled forward.

When I look at where we stand from the whole program.

For the better part of.

75% of the way through.

We're approaching.

80% of the way through and so it might be another $75 million of those origination fees to come.

We think we see the bulk of that.

Well I should say, probably two thirds of that in.

The fourth and first quarters.

And then it falls off from there and trickle down.

And so.

I think in the range of $30 million in the fourth quarter compared to the 60 ish we were in those fees.

This past quarter.

And then and then continuing to drop from there.

Yeah, Okay got it. Thank you and then so if we just take that out of the third and four.

And then what's happening with underlying NII, then is that is that more stable or whats happening underneath the surface. When you kind of talk to that because given that you've kind of talked about your down low single digit full year guide, yes, no you've got it exactly right Ken I mean the down.

It is also a function of the.

Swaps and the hedging portfolio, we had talked about you know when we look underneath at the at the core.

Core you know I got to be careful when I use the word core because that means different things to different people, but when when we look just underneath at.

The balance sheet, and we look at the loans and the deposits and the cost the yields on the loans.

Been relatively stable for the last.

I would say four quarters, and we had a slide that outlined that.

In the documents that we.

We posted.

Earlier this quarter.

And so you know LIBOR has been fairly stable in most of the loans are priced off LIBOR and so you've seen those yields fairly fairly stable for the last little while in the.

<unk> costs have been fairly stable for a while and so when you look at that book.

Things have been relatively constant and so those yields the spreads.

The margin has been it's been very steady in the portfolio.

Since the PPP has been reasonably steady as well and so there's a there's.

A consistent stream of net interest income.

More typical of a T low volatility.

And as these other factors that are that have caused some of that.

But those are starting to.

Run their course, right and so as I mentioned PPP, we had a very strong quarter theres a little bit left to go.

The hedged.

Hedging is running down in and it's starting to run its course and the.

More normal what I would put in air quotes.

<unk> balance sheet and lack of volatility we will start to show itself and that's why we think we start to hit a trough in net interest income and the.

First quarter.

And start to build back from there, especially as we take some of the actions that we just talked about rebuilding the securities portfolio and holding some of the mortgage loans.

On our balance sheet that we start to inflect and go back in the other direction.

Got it Okay and one quick follow up do you know just the amount of Ginnie Maes that.

You sold and how much that helped the mortgage banking line as far as the in and out of keeping 400, resi, but selling some of the <unk>.

I would.

I'll be close Ken, but I won't I won't be exact I think we're within like 350.

$50 to $400 million of.

Genies that went out this quarter and the gain I think it was about $9 million.

So just kind of round numbers.

Where we are.

There is still.

With decent.

Balance of journeys on the books.

And so.

The rules there were you had to have they changed all the time, which is why they are still on our books.

<unk>, where you had to be six months of consistent payments before you could re poulet.

Sometimes that got moved around a little bit and got extended to seven or eight.

But we're at the.

A point, where those should start to retool and come off the balance sheet.

Youll see some of that in the fourth quarter and into the first quarter.

So again those are those will put a little bit of pressure on the overall balances.

But that will show up in fee income.

And this is reflected in our.

Our comments about growth.

Over the over the rest of the year.

Perfect. Okay. Thank you Darren.

We'll go next to Bill Karachi with Wolfe Research.

Yes.

Thank you hi, Darren following the methane.

Just wanted to follow up on your comments on pursuing.

Less balance sheet intensive strategy to reduce your exposure in CRE can you elaborate a bit on how that looks and what kind of revenue impact you would expect that to have.

Lose the credit exposure, which would be beneficial given the harsh treatment that regulators have been imposing CRE as an asset class, but curious how to think about the top line effect.

Yes sure.

Sure Bill.

I guess the short answer is I don't have a great answer for you and the reason is we're still early in the process. When you look at what we do today.

You see a good analog is what we do in our Realty capital business.

Okay.

And it produces.

A steady stream of fee income for us every year.

And a nice margin, obviously very capital friendly.

But the pace at which we switch and build the fee income from the net interest income.

It's still nascent.

In terms of our development and so if you look at what we're getting in that line of business today, it's probably in the $30 million to $40 million range.

<unk>.

Outside of our Realty Capital Corp business.

And if.

If you look at where some of our competitors are and how big of a.

Impact it has on there.

<unk> fee income.

We're bullish that it can be a good.

Source of income capital friendly income.

That will offset what might be a decline in net interest income and so.

I guess I would start to look at the fees that you might see at some of our peer banks.

As a way to start thinking about what it could become.

At this point.

I don't have big plans, we don't have big plans for that in terms of hitting the income statement in 2022, and we'll talk more about 2022, when we get there we're still we're still doing our work.

For now I would think about it is if there's a decrease in Sierra.

Sorry, net interest income it will be offset by fees.

As we as we do gain on sale in that line of business.

And then we will come back to you with a little bit more detail.

On what that shift might look like as we finalize our plan.

Got it that's really helpful. There and then thinking about.

CCAR is a follow up to that is your binding constraint.

Any thoughts on how long before I guess these actions get reflected in your stress capital buffer it sounds like it's going to be.

It takes some time and so from that standpoint.

Would it take some time to show up.

The lower FCB.

Such that we could see it migrate back down your required level of capital somewhere back towards the 9% range.

Yes.

Bill Youre thinking about it exactly the right way.

No.

Obviously, the next time, we're category for bank and so as a category four bank we go.

Go through the stress test every other year.

And this year this upcoming.

<unk> 2022 will be a CCAR year for MMC and we won't have made these changes.

To be reflected in that stress test, which means youre at least two years away from that.

And then what will happen.

As the impact will work its way through the stress test in a couple of places. So the first place Youll see it obviously as in the risk weighted assets and the losses that are assumed under stress.

But the other place that you see it as you see it in the <unk> right and so the <unk> as a percentage of risk weighted assets should go up which will be more.

More better.

Producing of income and capital to absorb losses under stress and over time that will work its way into the stress test as well.

So you know not.

Not much you will see in the 2022 version will start to see it in the 2024 version, but I would really think you'd.

You'd see it in 2026 is when it would start to start to come in.

But the.

As I said Theres a number of reasons why we're thinking about this not just because of the capital efficiency, but we think it actually broadens the the level of service. We can we can provide to.

Our customers and just as a reminder, our current FCB is two 5%.

<unk>.

The implied one from December.

Would have would have brought it up higher but that's not our actual FCB and we'll see where the scenario ends up this year, but if it is.

Meaning in 2022, but if it's like it was in the stress test just passed.

Would not expect to see an SCB at the rate that it was cash located in the December 2020.

Scenario that was run which was a pretty pretty severe scenario.

So the quick follow up to that is.

Is there anything that could change your mind as to perhaps unwinding the decision to kind of.

Asset light thought process around CRE or is that a direction that you want to head in.

I guess, it's not a foregone conclusion that regulators or is it a foregone conclusion that regulators are going to be harsher treating CRE more harshly.

<unk>.

Yes.

I wouldn't say, it's a foregone conclusion build the way is the way I think about it is if you look over time there has been a stress test for a number of banks every year and for many banks every other year and each time there is a stress test there is a different scenario.

As gold goes through that process and different.

Asset classes are stressed.

And each one of those.

Those those scenarios leads you to an outcome and gives you more insight into how portfolios perform under different economic scenarios, sometimes they stress CRE, sometimes they stress mortgage sometimes these dress credit card.

Sometimes they.

Distress indirect auto and so you got to go through a series of these in each of those are data points that help inform your thinking and what we got in December 2020 was a data point.

And it's informing our thinking.

And it's not telling us that we want to never do another CRE loan as long as we live but it has said to.

To us that there are certain.

Asset classes and certain types of loans and how long they might exist on your balance sheet.

But carry a different loss assumption and therefore, a different level of capital that you need to support them and so we'll look at the mix of assets that we have on our balance sheet.

And be thinking like we always do about how to optimize returns.

And what's the best use of our shareholders' capital we will.

Still have CRE on our balance sheet, but we think that more.

Moving down this path.

<unk> has a number of upsides that we described in terms of capital efficiency and balancing out.

Our income streams between net interest income and fees.

And most importantly, it gives us.

Another outlet to help support our clients and so for those reasons, we'll move down this path I don't think theres any turning back from from that thought process.

The question.

It really is just as we talked about I think in answering your first question, what's the pace at which we get there and.

The market will to some extent dictate that pace based on clients and talent.

But like anything we do will be thoughtful and measured in how we execute.

It's super helpful. Darren Thank you for taking my question.

Yeah.

We'll take our last question from Christopher <unk> with Wells Fargo.

Hi, Good afternoon. Just my question is related to the role of technology and the integration of peoples, United and if you can contrast that with.

With the Hudson City deal.

The integration there and this is all assuming that the integration takes place in the first quarter of next year.

Okay.

I don't think my answer will change on the impact of technology, if it doesn't happen.

It happened in the first quarter.

I'll start with that one.

I guess, if you look at technology, Chris and different conversions and different mergers bring with them different levels of complexity and so to kind of compare and contrast before people. Our most recent two mergers Hudson City was probably one of the least complex.

System integrations, we did when we were basically converting mortgages in time deposits.

So when you think about the complexity of products those are about the easiest ones there or if there was no trust business. There really was no commercial business to speak of no cash management and Treasury management.

The usage of the web.

In mobile we're pretty light.

So that was a very straightforward.

Less complex conversion.

If you went all the way to the other end of the spectrum I would look at Wilmington Trust I know there was a merger where we had traditional bank products, both consumer and commercial while we also inherited a number of new.

Wealth and trust business.

And so that we werent really in a big way.

So that one was much more complex in terms of the planning and set up for that.

I would characterize the peoples as down the middle in that.

It certainly looks much more like.

Like Wilmington Trust.

There's a little less emphasis on trust, but we gained some outside businesses in.

Mortgage warehouse lending as well as in.

Some equipment finance.

We wouldn't have and so we'll be looking to maintain those systems and set them up and be able to run them, but.

But the flip side is the core banking system.

With that People's runs on is that bias and so.

One deconversion from FIS onto our platform.

That's something we've done before we've done a number of times before.

And so we know the game plan of how to execute that and so.

When I look at the.

Thanks.

Things that we need to get done to prepare for that integration.

We're progressing along we know.

What the path forward is and we're preparing to do what we need to do to minimize the disruption to customers to make it easy for employees to be able to service those customers in the past.

The path is known and so.

I would characterize this one down down the middle of the of the two ends of the spectrum.

Not without its.

Its challenges, but in the Grand scheme of things not the most complex.

Conversion system conversion that we've had to execute.

Thanks, So I guess I should be clear.

So assuming that you do get approval in the fourth quarter you can begin the conversion process in the first quarter of next year correct.

Assuming we get approval.

I guess I would just caveat the fourth quarter as if we get approval on December 1st or past is probably.

Probably going to make.

First quarter challenge.

And so depending on the timing of the approval there might be some push back on when we actually complete the system conversion.

And so we'll see where that happens but.

Obviously, our objective to complete that system integration and conversion.

As quickly as practical.

Once we have our approval and we complete the legal close.

Because.

I know, you're well aware, Chris we've never been.

Folks to maintain multiple deposit systems and multiple loan systems any longer than we have to because it's just.

Creates risk and it is.

On a cost effective and so for those reasons, we would look to.

Find a an ability and a path to complete the system conversion as quick as practical once once we know for certain when our approval is in our legal close.

Thank you.

And this does end our allotted time for question and answers I'll turn the call back over to Don Macleod for closing remarks.

Again, thank you all for participating today and as always if clarification of any of the items on the call or news release is necessary. Please contact our Investor Relations Department at area Code 700 684 to.

103, eight thank you and goodbye.

Yeah.

This concludes today's conference call. Thank you for your participation you may now disconnect.

[music].

Fun.

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[music].

[music].

Good day, and thank you for standing by and welcome to the MMP Bank third quarter 2021 earnings Conference call.

Currently all phone participants have been placed in a listen only mode. Following management's prepared remarks, we will open the.

<unk> for your questions. If you have a question at that time. Please press star one on your telephone keypad.

If you wish to remove yourself from the queue press the pound key we do ask that you. Please pickup your handset to allow optimal sound quality. Please be advised that today's conference is being recorded.

Lastly, if you should need operator.

Greater assistance at any time, Please press star Zero I would now like to hand, the call over to Don Macleod. Please go ahead.

Thank you Amit and good morning, I'd like to thank everyone for participating in <unk> third quarter 2021 earnings conference call.

By telephone and through the webcast. If you have not read the earnings.

Release, we issued this morning, you may access it along with the financial tables and schedules from our website www Dot MTBE dot com.

Clicking on the Investor Relations link and then on the events and presentations link also.

Also before we start I'd like to mention that today's presentation may contain forward looking information.

Cautionary statements.

<unk> about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investor materials. Those materials are all available on our Investor Relations webpage, and we encourage participants to refer to them for a complete discussion of forward looking statements and risk.

These statements speak only as of the date made and empty undertakes no obligation to update them.

Now I'll turn the call over to our Chief Financial Officer, Darren King.

Thanks, Don and good morning, everyone.

As we noted in this morning's press release, the favorable results, we reported for the quarter highlight the strength and.

Factors of <unk> business model in the current challenging environment.

Revenue in our fee generating businesses, with particularly strong, including mortgage banking trust and brokerage and payments.

Credit trends are stable to improving illustrated by net charge offs above half hour long term average a modest reserve release.

Release, and little change in the level of nonaccrual loans.

In alignment with the strong revenue trends and the improved profitability over the last year.

Compensation is rising as well.

We'll offer some details on that in a moment.

Lastly, our capital levels continue to rise.

The CET one ratio is near a record.

Hi, as we await the closing of the peoples United merger.

Now, let's review our results for the quarter.

Diluted GAAP earnings per common share were $3 69 for the third quarter of 2021.

Improved from $3 41 in the second quarter of 2021 and two.

75.

In the third quarter of 2020.

Net income for the quarter was 200.

$95 million compared with $458 million in the linked quarter and $372 million in the year ago quarter.

On a GAAP basis, <unk> third quarter results produced.

$2 annualized rate of return on average assets of 128%.

And an annualized return on average common equity of $12 one 6%.

This compares with rates of one, 2% and 11, 5% respectively in the previous quarter.

Included in GAAP results.

Produced in any quarter were after tax expenses from the amortization of intangible assets amounting to $2 million or <unk> <unk> per common share.

Changed from the prior quarter.

Also included in the quarter's results were merger related charges of $9 million related to <unk> proposed acquisition of peoples United.

And the reason.

This amounted to $7 million after tax or <unk> <unk> per common share.

Results for this year's second quarter included $4 million of such charges amounting to $3 million after tax effect or <unk> <unk> per.

Common share.

Consistent with our long term practice.

Practice <unk> provides supplemental reporting of its results on a net operating or tangible basis.

From which we have only ever excluded the after tax effect of amortization of intangible assets as well as any gains or expenses associated with mergers and acquisitions.

<unk> net operating.

Financials for the third quarter, which excludes intangible amortization and the merger related expenses.

It was $504 million.

Compare that with $463 million in the linked quarter and $375 million in last year's third quarter.

Diluted net operating earnings per common.

Income were $3 76 for the recent quarter.

<unk> from $3 45 in 2021 second quarter and up.

Up from $2 77.

In the third quarter of 2020.

Net operating income yielded annualized rates of return on average tangible assets.

And average tangible common shareholders' equity of 134% and 17, 5% to 4% for the recent quarter.

The comparable returns were 127%.

$16, 6% to 8% in the second quarter of 2021.

In accordance with the SEC guidelines.

Sure. This mornings press release contains a tabular reconciliation of GAAP and non-GAAP results, including tangible assets and equity.

Let's take a look at some of the details that drove our results.

Taxable equivalent net interest income was $971 million in the third quarter of 2021 compared.

$946 million in the linked quarter.

Higher income from PTT loans accounted for the majority of $25 million quarter over quarter increase in net interest income as the second round of PPP loans began to receive forgiveness from the small business administration.

The net interest.

With margin for the past quarter was $2 two excuse me, 274% down just three basis points from 277% in the linked quarter.

We estimate that the higher balance of cash on deposit at the Federal reserve contributed about 13 basis points of pressure to the margin.

Interest largely offsetting that was the higher income from PPP loans, both scheduled amortization and accelerated recognition of fees from forgiven loans, which added an estimated 10 basis points to the margin.

All other factors, including lower income from hedges slightly lower cost of deposits and an additional accrual day.

Netted to zero impact.

Compared with the second quarter of 2021.

Average interest, earning assets increased by 3%.

<unk> at 22% increase in money market placements, primarily cash on deposit with the fed.

And a 3% decline in.

<unk> Securities.

Average loans outstanding declined about 3% compared with the previous quarter.

Looking at the loans by category Corey.

On an average basis compared with the linked quarter.

Overall commercial and industrial loans decline.

<unk> invested $3 3 billion or 12%.

The primary driver was a $2 4 billion decline in PPP loans.

Dealer floor plan loans declined by $803 million.

Reflecting the ongoing impact from vehicle production and inventory issues.

Decline across the industry.

All other C&I loans were essentially little changed from the prior quarter.

Commercial real estate loans were also little changed from the second quarter.

Residential real estate loans declined by just under 4%.

There are a few moving parts.

<unk> relying that figure that are worth highlighting.

Balanced decreases due to normal prepayments and principal amortization, including the Hudson City portfolio drove some of the decrease.

As well as <unk> of loans previously purchased from Ginnie Mae servicing pools.

Offsetting those were offset.

By retention of new home production, which will be a bigger factor in the fourth quarter.

Consumer loans were up 3%.

Consistent with recent quarters and continuing to be led by growth in indirect auto and recreational finance loans.

On an end of period basis total loans.

On a 4%.

Reflecting the same factors I just mentioned.

The 11% decline in C&I loans include a decline of PPP loans outstanding to $2 2 billion.

At September 30.

Average core customer deposits, which exclude.

We're diabetes over $250000 increased 2% or $2 8 billion compared with the second quarter.

That figure includes $3 8 billion.

Of non interest bearing deposits, partially offset by lower interest checking deposits.

Turning to noninterest.

<unk>.

Non interest income totaled $569 million in the third quarter compared with $514 million in the linked quarter.

The recent quarter included an insignificant valuation gain.

On equity Securities largely on our remaining holdings of GSE preferred stock.

First income while the prior quarter included $11 million of valuation losses.

Okay.

Mortgage banking revenues were $160 million in the recent quarter compared with $133 million in the linked quarter.

Revenues for our residential mortgage.

Including both origination and servicing activities were $110 million in the third quarter compared with $98 million in the prior quarter.

Residential mortgage loans originated for sale were.

Down about 7% to $1 1 billion.

When compared with the second quarter.

However.

However, the lower volume was more than offset by higher gain on sale margins.

Commercial mortgage banking revenues were $50 million in the third quarter compared with $35 million in the linked quarter.

Results reflect a strong originations quarter combined with prepayment fees on loans previously securitized.

Trust income was $157 million in the recent quarter compared with $163 million in the previous quarter.

Recall that the second quarter's results included $4 million of seasonal fees arising from tax preparation work, we undertake for clients, which did not recur in the third quarter.

Also in conjunction with the transfer of <unk> retail brokerage and advisory business to the platform of LPL financial and mid June of this year about $10 million in revenues associated with managed investment accounts previously classified as trust income are now included in brokerage services income.

Service charges on deposit accounts were $105 million.

Compared with $99 million in the second quarter the.

The primary driver of the increase was customer payments related activity.

Turning to expenses.

Operating expenses for the third quarter, which excludes the amortization.

Of intangible assets and merger related expenses previously mentioned were $888 million.

Comparable figure was $859 million in the linked quarter.

Salaries and benefits were $510 million for the quarter compared with $479 million in.

<unk> order.

As was the case in previous quarters. This year, the higher salaries and benefits reflect revenue generation in certain business lines and incentive compensation associated with that revenue.

Notably commercial mortgage banking and trust.

Also at the enterprise level, we are accruing the corporate incentives.

The prior higher rate in 2021, reflecting our expectation that <unk> full year earnings and profits will be higher than they were in 2020.

Other cost of operations in the recent quarter included $5 million.

From the accelerated amortization of capitalized mortgage servicing right.

At a high as a result of the prepayments of previously securitized commercial mortgage loans that we referenced earlier.

Lastly year over year growth in trust income and assets under management in our retirement business has carried with it an increase in the share of those fees paid to sub advisors, which.

Included in other cost of operations.

Also recall.

But the other cost of operations for the second quarter included an $8 million addition to the valuation allowance for our capitalized residential mortgage servicing rights.

There were no adjustments to the valuation allowance in the third quarter.

The efficiency ratio, which excludes intangible amortization and merger related costs from the numerator and securities gains or losses from the denominator was 57, 7% in the recent quarter compared with 58, 4% in 2021 second quarter.

Excellent.

Excellent turn to credit.

Okay.

Credit trends continue to stabilize but as has been the case for the past little while some industries are improving more rapidly than others, reflecting challenges such as the supply chain pressure on materials cost and.

And the cost and availability of labor.

The allowance for credit losses declined by $60 million to stand at $1 5 billion at the end of the third quarter.

This reflects a $20 million recapture of previous provisions for credit losses.

And with $40 million of net charge offs.

In the quarter.

At September 30, the allowance for credit losses, as a percentage of loans outstanding was unchanged from June 30 at 162%.

Annualized net charge offs as a percentage of total loans were 17 basis points for the third quarter.

15 basis points in the second quarter.

The allowance for credit losses at the end of the quarter reflects our assessment of credit losses.

In the portfolio.

Under the seasonal loss measurement methodology, which.

Which includes our macroeconomic forecast.

Yeah.

As we've previously.

Previously indicated our macroeconomic forecast uses a number of economic variables with the largest drivers being the unemployment rate and GDP.

Our forecast assumes the national unemployment rate continues to be elevated compared to pre pandemic levels.

<unk> five 5% over 2021.

Followed by a gradual improvement.

Reaching three 5% by mid 2023.

The forecast also assumes that GDP grows at a six 8% annual rate.

Over 2021, and two 7% annual rates during 2022.

Nonaccrual loans were essentially flat at $2 2 billion comp.

Compared with June 30, but increased as a percentage of loans to two 4% compared with 231% of loans at the end of June.

We also expect to disclose that our level of criticized loans as little.

For the second quarter, when we file our third quarter 10-Q, and a few weeks.

Loans past due on which we continue to accrue interest were $1 billion at the end of the recent quarter.

Change turning to capital.

<unk> common equity tier one ratio was an estimated 11, 1% at quarter end compared with 10, 7% at the end of the second quarter.

This reflects continued strong organic capital generation combined with lower risk weighted assets.

As previously noted while the peoples merger is pending we don't plan to engage in any stock repurchase activity.

Now, let's turn to the outlook.

As we enter the final quarter of the year, we see little need to change our outlook for the remainder of 2021.

We expect year over year loan growth.

To be flat to up slightly on a reported basis and flat to down slightly excluding the impact from PPP loans, which reflects the decline in dealer floor plan loans.

We continue to expect net interest income to be down a low single.

What percentage from full year 2020.

We noted on the July conference call that we expected net interest income in the third and fourth quarters to on average be in line with the $946 million in the second quarter.

We still expect that to be true.

But the faster and expect.

<unk> given us a PPP loans did pull some of that income forward into the third quarter from the fourth quarter.

We slightly exceeded our outlook for low single digit growth in noninterest income.

As we begin to retain the majority of residential mortgage loans, we originate on the balance sheet.

<unk> for residential gains on sale will be primarily driven by Ginnie Mae refueling gains momentum.

Momentum in the trust and payments related businesses remained strong.

Expenses have grown faster than we forecast in January but with most of that growth.

Directly connected to better than expected revenue.

And better than expected net income.

The credit environment continues to improve along with the overall economy.

But some segments are recovering more slowly than others.

We believe criticized assets are at or near their peak, but there still remains some risk of downgrades within criticized loans from <unk>.

<unk> to non accrual.

Our preparations for completion of the merger with People's United continue while we wait for regulatory approval.

Our projections as to the financial impact remains largely in line with what we offered at the time of announcement this past February.

<unk> following our usual practice, we will offer our thoughts for 2022 on the January conference call.

Of course as you are all aware our projections are subject to a number of uncertainties and various assumptions regarding national and regional economic growth change.

Changes in interest rates political events and other.

Macroeconomic factors, which may differ materially from what actually unfolds in the future.

Now, let's open up the call to questions before which Emma will briefly review the instructions.

If you would like to ask a question. Please press star one on your telephone keypad.

Other.

If you wish to move yourself from the queue at this time please.

I ask that you please pick up the handset optimal sound quality.

And we will take our first question from Jared Cassidy with RBC.

Okay.

Hi, Darren.

Good morning Gerard.

A question for you regarding your swap book can you share with us where it stands today and how that remains.

Into net interest income over the next six or 12 months and simultaneously.

Been very conservative in the positioning of your cash.

Particularly obviously at the Central Bank. The Federal reserve is up dramatically year over year, you have been talking about it all year when do you start to lengthen out the duration in that.

One item on the balance sheet.

Sure thing.

Well.

Okay.

Cash started writing your questions down so now I won't miss them.

So on the swap book.

The swap book has been fairly steady in terms of notional amount right around $19 billion and it's been that way since the fourth quarter of last year.

The receive fixed yield we're getting on that book has been.

Thanks.

New hedges roll on an older hedges at higher rates roll off.

And this quarter is added.

Round number $65 million to net income.

<unk> impacted the margin by slightly less than 20 basis points.

We will see the notional amount.

Decline.

Next quarter.

And we will start to come down over the course of the following four quarters into into the end of 2022.

The receive fixed coupon will come down a little bit as well, but but the bigger impact will be just the decline in the size of the the outstanding.

Counting notional and the impact of swaps.

On the hedging just to remind everyone.

For full year 2021 is really close to what it was in 2020.

And in 2022.

Impact will be about half.

And it will be highest in the first.

Standing $1 22, and lowest in the second quarter or the fourth quarter sorry of 2022.

But to go along with that and to answer or address your second question about cash.

We've talked a lot about the cash position over the course of the year.

Quarter, if you look at the uptick in the latest quarter.

Ben.

Largely actually trust demand deposit growth in the quarter that drove a lot of the increase however.

We are seeing some of the PPP balances as they decline and up in cash.

And so what you saw this quarter I think if you look at the securities balances at the end of the quarter as they were actually up.

By about $300 million, so we replaced runoff plus $300 million.

We've been in <unk>.

Generally, replacing the mortgage backed securities that are running off.

And we're kind of targeting a duration there of our thinking about 'twenty year.

MBS on average sometimes provide 20, sometimes we're manufacturing <unk> by a mix of 15 year and 30 years.

And we were in a little bit although not in a big way and some of the five year spaces as rates.

Brown.

That was more back end loaded this quarter as rates have started to move up.

And then the other thing, which I mentioned in the prepared remarks, where we're starting to retain some retail mortgage production.

And so as we think about duration and.

And we think about what's what is it.

The move to the best choice or maybe the least bad choice of how to invest the dollars right now.

We do like the mortgage space and if we have a choice between the MBS or retaining our own production.

He'd like to yield better on our own production and so we.

We retained about $400 million of production.

That started through this quarter, but had the biggest impact in September.

And we will continue that practice through the fourth quarter and into the early part of next year.

Obviously, we'll be paying close attention to where rates are and how we feel about holding.

Holding duration either.

In the mortgage line or in the Securities line, but that's something that we'll be watching to put to put that cash to work and.

I guess as we look forward at that plan and how it all unfolds taking into account PPP.

And the hedges that are rolling off we see net.

Either income kind of shopping first quarter.

And.

Declining from there are in fact, increasing depending on what you see as the forecast of rates as the year goes on and so.

When I look at that the storm, we've weathered and the patients we've exhibited on.

Net interest and putting that cash back to work I see I see has turned in the quarter.

In the next couple of quarters.

Very good and just to clarify one of your comments on the notional amount 19 billion, you mentioned $65 million improvement to net income, but you meant to say net interest.

Is that correct, yes, net interest income that's correct Yep Yep.

Yes.

Yes, just wanted to check on that and then the follow up question you were very good at giving us the details on the commercial and industrial loan portfolio. What happened this quarter with P. P. P and also with the floor plan loans can you share with us what youre seeing.

Income outside those areas.

The customers and then second.

Darrin Whats the dollar total dollar amount of the floor plan portfolio.

Yes.

The total alright.

Get our ratios down in New Jersey, So other industries.

What's going on and then the floor plan.

<unk>.

So floor plan.

Balances are rough.

Roughly call it 1 billion and a half.

And if you look at where those have been and what's interesting Gerard is when you look at Floorplan balances.

Really it's much.

Time utilization in the commitments you have with those floorplan dealers.

And line Utilizations are running around 25%.

Which this is the part of the year when those are typically lowest vote.

Never that low and when do you when you think about where the where they are on average in normal times.

About 11%.

And so when I look at where those floorplan balances are compared to what I would consider normal.

It's probably $2 billion to $3 billion lower than than what might normally be the case.

When you look outside.

Of the PPP loans.

Youre.

They are about seeing some some movement up.

And C&I business.

In the areas that you might expect in some construction and manufacturing.

Interestingly, a little bit in resources in AG.

And lessen some of the other areas.

When I look at new originations.

You're seeing what's the trends our new C&I originations.

Ticked up every quarter this year.

It would be nice for all of us if they were screaming up but that's just not the case, but they are consistently going up in this quarters.

C&I originations were the highest in.

<unk> the last seven quarters.

You all are well aware of the fourth quarter tends to have a little bit of seasonality.

As folks in the industry, both in C&I and commercial real estate look to get deals done before tax years and.

And so holding holding's fourth quarter to.

And it was a another constructive quarter of improvement and it's a slow and steady.

Moving up in a direction that we like and the margins are holding.

Fairly solid as well so.

This encouraging trends.

Obviously welcome.

The side, a little bit faster, but.

The trend is our friend here.

Thank you so much.

One point of clarification I would add is on the outlook for the hedge benefit next year that assume the short term rates, whether the fed funds target or LIBOR, so far do not start to ramp up rapidly.

Okay.

We'll go next to Matthew O'connor with Deutsche Bank.

Yes.

Good morning, I was hoping you could update us on the latest estimate on pro forma capital <unk> and vessel deal closes then.

The marks are bank.

Okay.

Sure Matt.

Just to make sure I've got the question right is the <unk>.

<unk>, specifically will the deal still be capital accretive or is the question once the deal is done.

Where how will we move down the.

The <unk> ratio.

The initial estimate at closing so you had 11, one right now.

He had to close the deal.

Your latest thoughts if you close the deal right now where does the 11 one okay got it okay perfect.

It's going to be right around.

See it's probably within 10 or 20 basis points of 11 one.

And the reason why I'm not giving you an exact number is.

When we do the final marks.

Where interest rates are we will have a big impact on the interest rate marks which was one of the pieces of.

Helping us be capital.

Round area and the other thing obviously is the credit marks and with the credit improving.

That lowers the amount of loans that are classified as purchased credit deteriorated and increases the non PCV loans, which increases the <unk> famous double count and so that will.

Capital.

Bring down the impact on capital or reduce capital at at close but as you recall that will just increase the accretion to EPS as we go forward. So.

We should be right around that.

<unk> spot.

Just north of that would be my my my belief based on what I see today.

Okay, and then what are the thoughts on kind of what are near or medium term target.

For the two one ratio.

Obviously, where I'm getting at is how aggressively would be on buybacks. They got there.

Yep.

Well.

I think it's fair to say that.

Okay.

<unk> capital has never been a characteristic of MMC and as we mentioned at $11. One were near an all time high.

And so we will be looking to bring that down.

Ideally, we'll bring it down because we will have asset growth and we will see the CET one ratio come down as we continue to build the balance.

And support our customers.

Both with existing <unk> and the new peoples customers.

But based on the trends that will probably be slow and so we will look to bring that ratio down.

When you are generating 30 to 40 basis points of <unk>.

Capital every quarter.

<unk> got to be fairly bold in your and your buybacks to bring that down.

And to run at a pace, where it comes down much faster than net 20 to 30 basis points, a quarter would be pretty tough and so that'll be I think a reasonable glide path to use as you think about what the.

Obviously the rate of decrease might be.

And.

As a as a place to look if you go back to how <unk> came down.

Post Hudson city, and that path that rate of decrease.

Probably a reasonable guide of how it might unfold.

Post.

Completion of the peoples merger.

Okay. There's a lot of numbers you threw out there just to summarize.

Can you generate 30 to 40 basis points of capital per quarter and then.

Suggested maybe bringing down the CET one by 20 to 30.

Just to summarize that.

That's right yes.

Okay. Thank you very much.

We'll take our next question from John Kerry with Evercore.

Good morning.

Good morning, John.

On the loan front I appreciate all the color you gave around the.

The loan growth dynamics, and what Youre seeing there.

I wanted to see if you could talk a little bit about your plans for the commercial real estate portfolio longer term I know you are right.

Right now you're a bit out your outsized there at 30% of loans and your peers are closer to 15% and I believe you had expressed interest in shrinking that.

Portfolio could you maybe talk about what the long term target is for the size of that book as a percentage of loans in the how we should think about the cadence of those of that decline.

Yeah happy to talk about that.

I think the.

The future plans for them and she is.

CRE has had been highly dramatized in the last little while notably by a favorite per quarter in New York City.

If you look at.

<unk>.

The impact of CRE.

In the stress test.

The December 2020 stress test.

It suggested that there might be more capital friendly ways to participate in the CRE industry.

So when we look at the relationships, we have with clients and how we approach the market.

Our job is to be advisors and financial intermediaries for those customers.

And historically, we've fulfilled that role by holding the loans on our balance sheet.

We will still do that in the future, but we'll think more broadly and include other sources of capital and act as an intermediary.

On behalf of those clients.

As we shift to that kind of a thought.

Process, it will be a very gradual and controlled shift and so as you think about CRE balances and how they might change over time, there's some natural.

Decrease.

To happen no matter, what and that comes in the form of the construction portfolio.

So theres a number of projects that are that are on.

And if you look at CRE balances over the over the year they've been relatively flat.

And Thats some of those construction projects going through their natural cycle with those lines drawing.

That are that are building those balances, but as those projects come to their natural conclusion and turn into permanent mortgages.

Youll start to see those balances come off our balance sheet and you'll see a natural decline in CRE not unlike what we saw in the 2017 2018 timeframe was.

Similar similar period.

And then as we look at new originations.

We will still think about obviously.

Obviously supporting our clients from a construction perspective.

But as we look at permanent mortgages and other forms of.

Real estate lending.

Well look not just on our balance sheet, but outside and if you think about in real estate. We use are empty Realty capital Corp for agency.

Loans with Fannie and Freddie.

And we'll continue to do that and we also use and place some loans with insurance companies.

And so we will look to broaden those into non agency types of relationships as well.

But it's going to take some time and so I guess the the long story short here is.

The path. We're on is to be able to actually provide a broader level of service and access for our clients.

To be capital efficient and we will see some of those net interest income dollars become fee income dollars as we make that that.

Transition and the decrease that you will see in imbalance.

<unk> will be gradual.

As we kind of work our way from where we sit today.

The next few years, we don't necessarily have a hard target of what we're trying to get to.

But we're just trying to get to be a little bit better balanced than than we might've been.

Coming into the end of the crisis.

Got it Okay. That's helpful and then separately on the expense side could you maybe just talk about any observation of wage inflation impacts that you're seeing in the business and how that impacts could could that impact your expectations around the peoples peoples deal either the cost save expectations.

Or or the merger related costs.

Yes, I guess.

The pressures, we see on wages, both at the bank and our customers are not much different than it was being seen around the country.

The number of folks exiting the workforce is really putting.

Strain.

On hosted or looking for folks.

Who are still in the job market and we're seeing folks.

Are people being coveted by others, which isn't necessarily new but it seems to be exacerbated right now.

It's particularly.

The acute in the it space.

Which again was always a place where there's been a lot of competition given what's happening in the world with the prevalence of technology and business.

But we're seeing it spread to other parts of the bank as well.

<unk>.

When when you look at our expenses.

<unk> growth that's related to comp.

Really the regular salaries, what I would describe as a regular salaries have been impacted by it but the full effect won't be seen until next year, because it's been going up.

Throughout the year and so you won't have a full year run rate until you get to 2022.

And in the.

Meantime, what's been driving our increase has been.

Increase in.

Revenue related or profit related compensation, so for our corporate pool, we target a percentage of net income.

For that pool and this net income has gone up.

So has that accrual and then for some of our fee.

As those fee revenues increase sort of the commissions earned by our by the employees.

I think its interesting you know I spent a bunch of time with the team going through our expenses and if you actually looked at our expense growth in 2020 over 2019, our expenses actually went down.

And against our peer group, we were one of three banks that actually decreased expenses in 2020, and what we're seeing this year.

Is a little bit more of a return to normal.

With a little bit of pressure that we talked about from the outside world, which is making the print this year higher than everyone else because just because of the math.

But if you look over the course of the last couple of years.

Our expense growth is pretty much right in line with what appears Theres not a couple.

Percentage basis points below.

As it relates to pump.

Sorry, that's our internal acronym for People's United Bank.

We.

We believe that the.

The expectations for accretion are still in line with what we what we thought.

Obviously, they are subject to the same.

Pressures that everyone else's, but.

By and large the cost takeouts.

Our.

Right, where we thought they would be the revenue synergies are what we thought they would be in from a capital perspective, as we mentioned a few minutes ago.

We don't see any change there and so the rate of return on the deals still are still very attractive versus alternative uses of capital and so on.

No real change there but.

Great.

It's a challenging operating environment that's for sure.

Got it alright, thanks, Dan.

We'll go next to Frank Gerardi with Piper Sandler.

Good morning.

Darrin on the.

So a follow up on the dealer floor plan utilization.

Utilization comments.

As you plan for it budget out 2022.

Think about.

Balances in that year and growth in that year I mean, what are your thoughts in terms of those.

Those could we see or is it expected that.

Sort of a bounce back to.

To those older utilization rates.

Clients supply chain issues subside or just wondering what are your expectations.

For 2022, then.

Okay, well at the risk of being an over an empty optimists.

We believe that those balances will start to come up but knowing our conservative nature, we don't see a bounce back.

Those utilization rates back to normal.

Right away, but we do see an increase year over year.

From what we can see in the industry.

What we hear from the dealers, what we believe how the manufacturer.

<unk> will be looking and thinking about things.

We think it's probably.

Into 2023 early 'twenty four before you're back to the utilization rates that you were at.

Pre pandemic and so given that.

And without any better intelligence I would think about kind of straight lining that.

That over the course of the next couple of years.

As we get better information, obviously, we'll share that with you, but just watching how youre seeing manufacturing come back online.

We havent seen signs of.

A material uptick yet.

In terms of production and therefore, we don't think we will see the inventories.

Bounce.

But we should see some some steady improvement.

Over the course of the next four to six quarters.

Okay, and then just a follow up on the Securities book.

And the securities in the quarter.

Could you just share what the pickup in yield is there and.

I know, there's a lot of unknowns.

In terms of interest rates.

And I'm moving parts.

Is that kind of a reasonable expectation.

Moving into securities purchases on a quarterly basis, 5% increase in those balances or is this more about just pre funding.

Yeah.

So I guess on the Securities book and on the yield pickup.

The yields that we're putting on now.

Our lower than the roll off yield and so that's the downside the upside is we're putting things on call it $151 60.

And we're taking it out of 15 basis points and so the pick up there.

Is pretty good.

When you look at the rate and the pace of us.

Investing in Securities I think what you saw this quarter.

Is a good indication that we are at a minimum.

Don't want to decrease the securities.

Portfolio. So we will work to keep it flat.

But but realistically, we probably think about.

Two $300 million increase a quarter in addition to replacing the runoff.

As a good target lease that's kind of as we look at it and think about it that's where our heads are today.

And again.

I'll remind you that the other part of that.

That process is retaining retail production right and so we're getting mortgage exposure.

Both in the securities portfolio as well as in the mortgage line on the balance sheet, and so youll see us deploying that cash.

And kind of as our treasurer.

<unk> described can be legging into the trades as we go through the coming quarters.

I'm doing a bit of dollar cost averaging into that and rather than trying to.

Solve it all at once.

Okay, Alright, great. Thank you.

Yes.

We'll go next to Ken Nielson.

Jefferies.

Thanks, Hey, good morning.

Darrin I have one follow up on NII understanding the PPP pull forward so.

You said that NII would be down in the fourth quarter I'm, just wondering what type of PPP or you're expecting is that the most of the remainder or what type of level do we step back down to given.

That pull forward from third.

Well.

It's a bit of.

A bit of a guess.

Just because the timing of when our customers might seek forgiveness is a little bit unknown, but broad.

Broad strokes, we're we're thinking it's kind of half.

The rate of it.

Accelerated.

Capture of those origination fees in the fourth quarter versus what it was in the third just for perspective, the third quarter was the highest.

In terms of the dollar volume of.

Those origination fees that we pulled forward.

Yeah.

When I look at where we stand from the whole program.

We are for the better part of.

75% of the way through.

For approaching 80% of the way through and so it might be another $75 million of those origination fees to come.

We think.

We see the bulk of that.

Well I should say, probably two thirds of that in the.

The fourth and first quarters.

And then it falls off from there trickle down.

And so.

I think in the range of $30 million in the fourth quarter compared to the 60.

<unk>, we were in those fees.

This past quarter.

And then continuing to drop from there.

Yeah, Okay got it. Thank you and then so if we just take that out of the third and fourth and then what's happening with underlying NII. Then is that is that more stable or whats happening underneath the <unk>.

Surface when you kind of talk to that because given that you've kind of talked about your down low single digit full year guide, yes, no future.

You've got it exactly right, Ken I mean the down.

<unk> is also a function of the swaps and the hedge portfolio that we had talked about when we look underneath that the core.

Core I got to be careful when I use the word core because that means.

Two different things to different people, but when we look just underneath that.

The balance sheet, and we look at the loans and the deposits and the cost the yields on the loans they've been relatively stable for the last I would say four quarters.

A slide that outlined that.

In the documents that we.

We posted.

Earlier this quarter.

And so you know LIBOR has been fairly stable in most of the loans are priced off LIBOR and so you've seen those yields fairly fairly stable for the last little while in the deposit costs have been fairly stable for a while and so when you look at that book.

Things have been relatively.

Constant and so those yields the spreads.

The margin has been been very steady in the portfolio.

The PPP has been reasonably steady as well and so there's a there's a consistent stream of net interest income.

More typical of a T low volatility.

And as these other factors.

<unk> that are that have caused some of that.

But those are starting to.

Run their course, right and so as I mentioned PPP, we had a very strong quarter theres a little bit left to go.

The hedging is running down and it's starting to run its course and the.

Warren.

Normal what I would put in air quotes MMC balance sheet and lack of volatility we will start to show itself and that's why we think we start to hit a trough in net interest income and the <unk>.

First quarter and start to build back from there, especially as we take some of the actions that we just talked about rebuilding the securities portfolio.

And holding some of the mortgage loans.

On our balance sheet that we start to inflect and go back in the other direction.

Got it Okay and one quick follow up do you know just the amount of Ginnie Maes that you sold and how much that helps the mortgage banking line as far as the in and out of keeping 400 resi, but sell.

Some of the <unk>.

Yes.

I would.

I'll be close Ken, but I won't I won't be exact I think we're within like $350 million to $400 million of Genies that went out this quarter and the gain I think it was about $9 million.

<unk>.

So just kind of round numbers.

Where we are.

There is still.

<unk>.

With decent.

Balance of journeys on the books and so.

The rules there were you had to have they changed all the time, which is why theres still are on our books.

The rules, where you had to be six months of consistent payments before you could re pool it.

Sometimes that got moved around a little bit and got extended to seven or eight.

But we're at the point, where those should start to retool and come off the balance sheet.

Youll see some of that in the fourth quarter and into the first quarter.

And so again those are those will put a little bit of pressure on the overall balances.

But that will show up in fee income.

And as reflected in our comments about growth over the over the rest of the year.

Perfect. Okay. Thank you Darren.

We'll go next to Bill Karachi with Wolfe Research.

Yes.

Thank you hi, Darren following the medicine.

I wanted to follow up on your comments on pursuing the less balance sheet intensive strategy to reduce your exposure in CRE can you elaborate a bit on how that looks and what kind of revenue impact you would expect that to have.

<unk>, we lose the credit exposure, which would be beneficial given the harsh treatment that regulators had been imposing on CRE as an asset class, but curious how to think about the top line effect.

Yeah sure Bill.

I guess the short answer is I don't have a great answer for you.

The reason is we're still early in the process. When you look at what we do today.

And you see a good analog is what we do in our Realty capital business.

And it produces.

A steady stream of fee income for us every year.

And a nice margin obviously.

It's very capital friendly.

But the pace at which we switch and build the fee income from the net interest income.

It's still nascent in terms of our development and so if you look at what we're getting in that line of business today, it's probably in the $30 million to $40 million range.

Outside of our Realty Capital Corp business.

And if.

If you look at where some of our competitors are and how big of a <unk>.

Impact it has on their fee income.

We're bullish that it can be a good <unk>.

<unk> income.

Capital friendly income.

That will.

We'll offset what might be a decline in net interest income.

So.

Yes, I would start to look at the fees that you might see at some of our peer banks as a way to start thinking about what it could become.

But at this point.

I don't have big plans, we don't have big plans for that in terms of hitting.

The income statement in 2022, and we will talk more about 2022, when we get there.

We're still doing our work.

For now I would think about it is if there's a decrease in CRE net interest income it will be offset by fees.

As we as we do gain on sale in that line of business.

And then we'll come back to you with.

A little bit more detail.

On what that shift might look like as we finalize our plan.

Got it.

Really helpful. There and then thinking about CCAR as a follow up to that is your binding constraint.

Any thoughts on how long before I guess these actions get reflected in your stress capital buffer.

It's going to be.

It takes some time and so from that standpoint.

Would it take some time to show up.

The lower fcb's, such that we could see it migrate back down.

Our required level of capital somewhere back towards the 9% range.

Yes.

It sounds like Bill you are thinking about it exactly the right way.

Obviously, the next time, we're category for bank and so as a category four bank. We go through the stress test every other year and this year that's upcoming.

22 will be a CCAR year for MMC.

We.

These changes.

To be reflected in that stress test, which means you are at least two years away from that.

And then what will happen is the impact will work its way through the stress test in a couple of places. So the first place Youll see it obviously as in the risk weighted assets and the losses that are assumed under stress.

We won't have the other place that you see it as you see it in the <unk> right and so the <unk> as a percentage of risk weighted assets should go up which.

Which will be more better.

Producing income and capital to absorb losses under stress and overtime that will work its way into the stress test as well.

Yes, and so you know.

Not much you will see in the 2022 version will start to see it in the 2024 version, but I would really think you'd see it in 2026 is when it would start to start to come in.

But the.

As I said Theres a number.

That's why we're thinking about this not just because of the capital efficiency, but we think it actually broadens.

The level of service, we can we can provide to our customers and just as a reminder, our current FCB is two 5%.

The implied one from December.

The reason of would have brought it up higher but thats not our actual FCB.

And we'll see where the scenario ends up this year, but if it's like meaning in 2022, but if it's like it was in the stress test just passed we would not expect to see an SCB at the rate that it was.

Was it related in the December 2020.

Scenario that was run which was a pretty pretty severe scenario.

So then the quick follow up to that is is there anything that could change your mind as to perhaps unwinding the decision to kind of.

The asset light thought process around CRE or is that a direction that.

Cash had in it.

I guess, it's not a foregone conclusion that regulators or is it a foregone conclusion that regulators are going to be harsher treating CRE more harshly.

I guess I.

Wouldn't say, it's a foregone conclusion bill the way is the way I think about it is if you look over time.

Been a stress test for a.

You want a banks every year and for many banks every other year.

And each time there is a stress test there is a different scenario that is going to go through that process and different asset classes are stressed.

And each one of those.

Those those scenarios leads you to an outcome and gives you more insight.

A number of into how portfolios perform under different economic scenarios, sometimes they stress CRE, sometimes they stress mortgage sometimes they stress credit card.

Times of distress indirect auto and so you got to go through a series of these in each of those are data points that help inform your thinking.

And what we got in.

<unk> 2020 was a data point and it's informing our thinking and it's not telling us that we want to never do another CRE loan as long as we live but it has said to us that there are certain.

Asset classes and certain types of loans and how long they might exist on your balance sheet.

That carry a different.

December assumption and therefore, a different level of capital that you need to support them.

So we'll look at the mix of assets that we have on our balance sheet.

And be thinking like we always do about how to optimize returns.

And what's the best use of our shareholders' capital.

We will still have CRE.

On our balance sheet, but we think that.

Moving down this path.

<unk> has a number of upsides that we described in terms of capital efficiency and balancing out our our income streams between net interest income and fees.

And most importantly, it gives us.

Another outlet to.

Every quarter, our clients and so for those reasons, we'll move down this path I don't think theres any turning back from.

From that thought process.

I think the question really is just as we talked about I think in answering your first question, what's the pace at which we get there.

The market well.

It helps us dictate that pace based on clients and talent.

But like anything we do will be thoughtful and measured in how we execute.

That's super helpful. Darren Thank you for taking my question.

No problem.

We'll take our last question.

To sum from Christopher Spahr with Wells Fargo.

Hi, Good afternoon. Just my question is related to the role of technology and the integration of peoples, United and if you can contrast that with the Hudson City deal.

The integration there and this is all assuming that the integration takes place in the first quarter of next.

Okay.

I don't think my answer will change on the impact of technology, if it doesn't.

It happened in the first quarter, but.

I'll start with that one.

I guess, if you look at technology, Chris and different conversions and different mergers bring with them different levels of complexity and so too.

Compare and contrast before people our most recent two mergers Hudson City was probably one of the least complex system integrations. We did when we were basically converting mortgages in time deposits and so when you think about the complexity of products. Those are about the easiest ones there or if there was no trust business.

Kind of really was no commercial business to speak of no cash management and Treasury management.

The usage of the web.

In mobile, we're pretty light and so that was a very straightforward.

Less complex conversion.

If you went all the way to the other end of the spectrum I would look at Wilmington Trust.

There.

The merger, where we had traditional bank products, both consumer and commercial but we also inherited a number of new.

Wealth and trust businesses that we werent really in a big way and so that one was much more complex in terms of the planning and set up for that.

I would characterize the peoples.

There was a in the middle.

And that.

It certainly looks much more like.

Like Wilmington Trust with a little less emphasis on trust, but we gained some outside businesses.

Mortgage warehouse lending as well as in.

Some equipment finance.

We wouldn't have and so we'll be looking to maintain those systems and set them up and be able to run them, but the flip side is the core banking system that People's runs on is that bias and so thats, one deconversion from FIS onto our platform.

That's something we've done before we've.

The number of times before.

And so we know the game plan of how to execute that.

So when I look at the the.

The the different things that we need to get done to prepare for that integration.

We are progressing along we know.

What the path forward is and we're preparing.

To do what we need to do to minimize the disruption to customers to make it easy for employees to be able to service those customers in the past.

The path is known and so.

I would characterize this one down down the middle of the two ends of the spectrum.

Not without its <unk>.

That is channel.

Done it and in the Grand scheme of things not the most complex.

Conversion system conversion that we've had to execute.

Thanks, So I guess I should be clear so assuming that you do get approval of the fourth quarter. You can begin the conversion process in the first quarter of next year correct.

Assuming we get approval.

<unk>.

I guess I would just caveat the fourth quarter as if we get approval on December 1st or past is probably going to make.

The first quarter challenge.

And so depending on the timing of the approval there might be some pushback on when we actually complete the system.

<unk>.

And so we'll see where that happens, but it's off.

Obviously, our objective to complete that system integration and conversion as quickly as practical.

Once we have our approval and we complete the legal close.

Because.

I know you're well aware.

Conversions, we've never been.

Folks to maintain multiple deposit systems and multiple loan systems any longer than we have to because it's just that creates risk.

And it's not cost effective and so for those reasons, we would look to.

Find a an ability and a path to complete the system conversion as quick.

Aircraft practical once once we know for certain when our approval is in our legal close.

Thank you.

Okay.

And this does end our allotted time for question and answers I'll turn the call back over to John Mclaughlin for closing remarks.

Again, thank you all for participating.

Quick is today and as always if clarification of any of the items on the call or news release is necessary. Please contact our Investor Relations Department at area Code 700, 684 to 5138, Thank you and goodbye.

Yeah.

This concludes today's conference call. Thank you for your participation you may.

Japan disconnect.