Fulton Financial Corp (FULT) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fulton Financial Third Quarter 2020 Results Conference Call. (Operator Instructions). Please be advised that today's conference may be recorded. (Operator Instructions)

I would like to hand the conference over to one of your speakers today, Mr. Matt Jozwiak. Sir, please go ahead.

Good morning, and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the third quarter of 2020. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil are Curt Myers, President and Chief Operating Officer; and Mark McCollom, Chief Financial Officer.

Our comments today will refer to the financial information and related slide presentation included with our earnings announcements, which we released at approximately 4:30 p.m. yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News. The slides can also be found on the Presentations page under the Investor Relations website.

On this call, representatives of Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors and actual results could differ materially. Please refer to the safe harbor statement on forward-looking statements in our earnings release and on Slide 2 of today's presentation for additional information regarding these risks, uncertainties and other factors.

Fulton undertakes no obligation, other than as required by law, to update and/or revise any forward-looking statements. In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday in Slides 11 and 12 of those non-GAAP financial measures to the most comparable GAAP measures.

Now I would like to turn the call over to your host, Phil Wenger.

Thanks, Matt. Good morning, everyone, and thank you for joining us. Today, we will follow our usual call format, beginning with some prepared remarks. And first, I'll provide a high-level overview of the quarter. And next, Curt will share some thoughts on our business performance. And then Mark will discuss the details of our financial performance. And after that, we'll be happy to take your questions.

We were pleased with our results for the third quarter. They were stronger than we had anticipated in both our consumer and commercial lines of business. We achieved these results despite the impact COVID-19 continues to have on our nation and on many of the communities we serve, and despite the challenges of a low-interest rate environment in which we were operating.

Specifically, during the third quarter, loan growth, fee income, net interest income and credit quality exceeded our expectations. Our mortgage business saw a record quarter, and wealth management provided another bright spot. We also saw positive loan deferral trends and improvements in some of our credit metrics. And Curt and Mark will share more details on these areas in a few minutes.

In terms of other milestones, a few weeks ago, we reached a final settlement with the SEC to fully resolve an investigation that has been ongoing for a number of years. This settlement puts the investigation behind us, and it is in the best long-term interest of our team, our customers and our shareholders.

In early October, we announced plans to consolidate 21 financial centers in January of 2021. These centers are located in Pennsylvania, New Jersey, Maryland, and include 5 limited service locations. Over the last 5 years, we have reduced our number of financial centers by about 20%. In addition to these consolidations in December, we will be charging our operating model -- changing our operating model at a number of other financial centers. At these centers, we will move from traditional open lobby access to appointment banking and either drive-up or walk-up service.

You may remember that we had implemented this format at nearly all of our branches last spring at the onset of the COVID-19 pandemic with very positive results as our customers appreciated having the opportunity to schedule an appointment for a time that is convenient for them. We also added technology solutions. And as a result, more customers are now conducting their banking business digitally.

Effective December 7, we will have traditional open lobby access at 155 centers and another 47 centers will embrace the appointment drive-up/walk-up model I just described. While these changes are part of our continuing branch optimization effort, they are also part of a much larger initiative.

In the third quarter, Fulton conducted a company-wide strategic operating expense review. This was prompted largely due to the prolonged and continuing effects of COVID-19 and the fact that we are expecting to be in this low-interest rate environment for the next couple of years. In addition, we are very aware that the pandemic has accelerated the timetable for some of the activities we had already begun. These include developing technology and digital tools for employees and customers. Therefore, we needed to find a way to invest resources in these key areas at a faster pace than we had originally planned.

As a result of this review, we are making a variety of changes that we expect to result in a $25 million annual savings in operating costs. The changes include the financial center consolidations and format changes I just mentioned. In addition, we have some realignments and optimizations in a variety of business lines and functions and some position eliminations. Mark will share more detail in a few minutes. These decisions, while difficult, are necessary to help ensure that the company remains strong over the longer term.

Now I'd like to turn things over to Curt Myers, who will shed more light on our business performance.

Thank you, Phil, and good morning, everyone. As Phil noted, our third quarter performance surpassed our expectations, and I'd like to share some of the detail on the results we achieved in several key areas. Our overall loan growth trends for the quarter improved from the second quarter, reflecting progress in the reopening of our regional economy, a strong residential mortgage market and continued business development activities. Excluding PPP loans, commercial loan balances increased $118 million for the quarter on an ending-balance basis, even with a modest decrease in line utilization.

Looking forward, our commercial loan pipeline at September 30, 2020, is down 9% from a year ago; however, the team has adjusted to the current environment, and we would expect the pace of originations in the fourth quarter to be consistent with the third quarter and sufficient to generate the loan growth in our outlook. In consumer lending, our loan balances grew $175 million linked quarter on an ending balance basis. Residential mortgage results continue to be very strong, producing linked quarter ending loan balance growth of approximately 7% or $200 million despite significant refinance activity.

Given our asset-sensitive balance sheet and the high-quality nature of these residential borrowers, we have room to continue growing this segment on our balance sheet for the next several quarters, and we expect to do so. Deposit growth exceeded our expectations for the quarter as noninterest-bearing demand deposits grew 2.2%. We also saw seasonal inflows of municipal deposits slightly more than prior years. Overall, deposits grew $846 million on an ending-balance basis, with growth occurring across checking, savings and money market categories. We also continued to reprice our deposits, and deposit costs declined 7 basis points during the quarter, down from 36 basis points to 29 basis points.

Moving on to fee income. The strong fee-based revenues we saw in the quarter were driven by performance in 3 specific areas. First, the mortgage company had a record third quarter coming on the heels of a record second quarter. This was fueled by both originations and historically strong gain on sales spreads. Total residential mortgage originations for the third quarter of 2020 were $960 million, an increase of 82% from the same period last year. Our mortgage pipeline sits at $902 million at quarter end.

Next, our wealth management business also performed better than we had anticipated as the stock market edged higher for most of the quarter, and we continued to benefit from a high level of recurring fee business. Our assets under management administration grew to $11.8 billion at quarter end. And finally, transaction-related revenues also performed well with commercial merchant and card revenues up 17% linked quarter. Consumer credit card revenues also improved slightly from the second quarter levels, posting our strongest revenue in the past 4 quarters.

Moving to credit. Certain metrics showed improvement over the quarter. Our nonperforming loans as a percentage of assets declined, both linked quarter and year-over-year. Net charge-offs were a net recovery of $2.4 million, down from a $4 million charge-off last quarter. This was fueled by some large recoveries.

In mid-September, we filed an 8-K which provided commercial loan deferral trends through August 31. We have updated these trends through September 30 and have included residential trends on Slide 14 of this presentation. Second round commercial P&I deferrals now totaled $346 million or approximately 2.5% of commercial loans outstanding. This is down 84% from the highest point. Our second round commercial deferrals, hotel loans make up $186 million or 51% of the hotel balance. As you can see on the -- on -- additional details on Slide 16 of this presentation.

As a reminder, we have reevaluated and reviewed each individual credit in the hotel portfolio. We have also provided several additional slides on other segments of our commercial portfolio, which we believe are more at risk due to COVID-19. While it's still too early to predict the ultimate credit outcome in these segments, we are pleased with the overall deferral trends.

Lastly, in our consumer portfolio, we're just starting to reach the expiration of many deferrals as residential mortgage forbearances were initially granted for 180 days. The total amount of residential loans under first-round forbearance totaled $230 million or 7.5% of the residential mortgage portfolio. Of that amount, $179 million has expired and only $82 million having opted for a second round forbearance term. We expect to know a lot more about this portfolio over the next quarter, as $51 million of our first round residential mortgage forbearances have yet to expire.

Despite these very positive near-term credit trends, our outlook remains cautious for the next few quarters. It is still too early to fully assess the impact of COVID-19 on our regional economy. And while our loan deferral trends are favorable, certain segments of our portfolio would be affected by a second wave of COVID-19 that lengthens the full reopening of the markets we serve.

Now I'd like to turn the call over to Mark to discuss our financial results in a bit more detail.

Thank you, Curt, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the second quarter of 2020.

Starting on Slide 3. Earnings per diluted share this quarter were $0.38 on net income of $61.6 million. Contributing to this quarter's performance was a lower provision for credit losses. In addition, our fee income was also very strong, and our operating expenses were at the low end of our guidance, exceeding our expectations. Our net interest income was also at the top end of our quarterly guidance.

Moving to Slide 4. Our net interest income was $154.1 million, a slight increase of $1.4 million linked quarter. Stronger loan growth linked quarter and higher overall interest-earning assets combined to produce this result. Our net interest margin for the third quarter was 2.70% versus 2.81% in the second quarter. The 11 basis points of linked quarter compression in our net interest margin was in line with our internal expectations and was driven by continued excess liquidity as well as new asset yields.

Deposits, some of which resulted from PPP loans, continue to remain in our bank, and our third quarter also saw average municipal deposits grow by approximately $340 million, slightly more than prior years. As a result, our average loan-to-deposit ratio declined during the quarter from 95.1% to 92.6%.

Turning to credit. Our third quarter provision for credit losses was $7 million versus $20 million for the second quarter and $2 million a year ago. This decrease in our provision linked quarter was driven by our assessment of the economic outlook at September 30 versus the prior quarter as well as the net loan recoveries we experienced during the quarter. Our CECL methodology utilizes Moody's for the macroeconomic assumptions that drive our models, and we also consider and employ qualitative overlays to our models based on a comprehensive review of additional financial and economic data.

Nonperforming loans, as a percentage of total loans, excluding loans originated under PPP, were unchanged at 83 basis points linked quarter compared to 81 basis points a year ago and including PPP loans remained stable at 75 basis points on a linked-quarter basis. The allowance for credit losses related to loans at September 30 was 1.56% as a percent of total loan balances, excluding PPP loans, an increase of 3 basis points from the prior quarter. The allowance for credit loss coverage ratio as a percentage of nonperforming loans was 188% at September 30, a slight increase from 183% last quarter.

Moving to Slide 6. Noninterest income, excluding securities gains, was $63 million, up $10 million from $53 million last quarter and $8 million from $55 million a year ago. This result was in line with our recent refreshed guidance and was driven by record performance in mortgage banking as well as solid results in wealth management revenues as well as commercial card and merchant revenues. Mortgage banking revenues were at an all-time high with $17 million for the quarter, up $7 million from last quarter's record pace.

As a result of lower interest rates, driving higher prepayments and refinances, we recorded a $1.5 million impairment charge through our mortgage servicing rights asset during the quarter, which decreased mortgage banking income. This impairment charge was $5.1 million lower than the mortgage servicing rights impairment charge we recorded in the second quarter.

With respect to mortgage loans that we originate for sale, our new commitments were $608 million for the quarter, up from $573 million last quarter, and our gain on sales spread of 3.20% for new mortgage commitments was higher than 2.89% last quarter as strong demand for mortgage assets has continued.

Wealth management revenues were $15 million for the quarter, an increase of $1.5 million from the prior quarter and an increase of $1.1 million from the prior year. Consumer and commercial card-based and merchant revenues were also uplinked order as the gradual reopening of the economy appears to be influencing consumer and business spending.

Moving to Slide 7. Our noninterest expenses were $139 million in the third quarter, down $3.4 million linked quarter. As you may recall, in the second quarter, we recognized a $3 million charge for prepayment penalties on FHLB Advances. As Phil noted, in the third quarter, we recorded a $1.5 million of charges for a legal settlement with the SEC. And we are now implementing many of the findings from the strategic operating expense review that Phil referenced. These initiatives are expected to result in the following outcomes: the closure of 21 financial centers in January, the renegotiation of certain vendor contracts and reductions in several other expense categories.

In total, we expect this initiative will reduce our operating expenses by $25 million on an annual basis. We anticipate reinvesting a portion of these savings in 2021 in order to accelerate the digital transformation of our company. We believe that we should be able to realize approximately $4 million of these savings in the first quarter of 2021, with the remainder of the savings expected to be realized beginning in the middle of the year.

We plan to continue making normal ongoing investments in our franchise in 2021, and several of these initiatives have been in-flight throughout 2020. However, in total, we believe this expense initiative will result in 2021 core operating expenses, lower than our projected 2020 core expenses. The expense initiative is expected to result in charges totaling between $17 million and $19 million pretax. The timing for this estimated charge is shown in the chart on Page 8 of our materials.

Employee severance, fixed asset write-offs and lease termination charges account for the majority of these costs. Our effective tax rate was 13% for the quarter compared to 14% in the second quarter of 2020. This is slightly higher than our outlook due to higher pretax earnings.

Slide 9 gives you more detail on our capital ratios. We continue to maintain sufficient capital and liquidity to maintain our shareholder dividend, which is our intention. We have suspended share repurchases since March, and we do not anticipate evaluating further repurchases until the economic outlook is clear, most likely into 2021.

Lastly, we would like to provide our thoughts about forward guidance for the fourth quarter. In terms of loans, for the fourth quarter, we expect our overall loan balances, including PPP loans to be plus or minus 1% to 2%. We are currently assuming approximately 10% of our PPP loans are forgiven in the fourth quarter. Excluding PPP, we would expect loan growth to be in the low single digits. We would expect deposits to decline 3% to 5% in the fourth quarter with seasonal municipal deposit outflows as well as modest PPP deposit runoff driving this result.

We expect our net interest income to be in the range of $153 million to $158 million for the fourth quarter, which includes $3 million to $4 million attributable to PPP loan forgiveness. We expect our noninterest income to be in the range of $57 million to $62 million. Mortgage banking should continue to be a bright spot as our pipeline is very strong at the end of the third quarter and gain on sale margins remain historically high.

Overall, we expect core operating expenses to be consistent with the third quarter in the range of $139 million to $142 million. Charges related to our expense savings initiatives are expected to be between $16 million and $17 million pretax in the fourth quarter, with the remaining charges between 0 and $1 million pretax being recognized in the first quarter of 2021. Lastly, we expect our effective tax rate to be between 14.5% and 15.5% for the fourth quarter.

With that, I'll now turn the call over to the operator for questions. Michelle?

(Operator Instructions) Our first question comes from the line of Chris McGratty with KBW.

Mark, maybe, I can start with you. I just want to make sure I got the expense guide correct for the pro forma. I think you said 2021 expenses will be lower than 2020. I guess, I'm wondering if what the starting base for 2020 is? Is it the reported year-to-date plus the guide? Or are you adjusting for, I think there was a charged prepay in Q2 and the litigation in Q3, I'm just trying to -- what's my starting point to judge the decline?

Yes, yes. For the starting point to judge, take our expenses through 9 months of $425 million. And then we're saying add $139 million to $142 million on top of that. So if you add, say, $140 million, that would get you to $565 million as your starting point.

Okay. And then your expectations, you'll be inside of that for '21, okay?

Yes.

Got it. In terms of the deposit growth and the margin implications, so deposit growth, like a lot of banks, has been very strong. I'm interested in where spot rates are today and whether there might be anything further to do with the liability structure, either pushing out higher-cost CDs or borrowings to support the margin in this environment?

Sure. Yes. Yes, so, Chris, so we lowered our deposit costs from 36 basis points in the second quarter to 29 basis points for the third quarter. For the month of September, we were at 27 basis points. So we do think we'll continue to grind that number lower. As I've reported for the last several quarters, we continue to see going out over the next 4 quarters just over $1.6 billion of CDs that will reprice.

When I look at the average cost of those CDs versus our current replacement yields for comparable terms, we're about 115 to 120 basis points lower in each quarter for those CDs that will mature. So we think there is still room to grind that a little bit lower. Obviously, a wildcard in all of this is going to be when we initially put PPP loans in place, those are funded with 0-cost DDAs on our books. We've seen $2 billion of growth in 0-cost DDAs year-over-year. So how much of that sticks over the next couple of quarters here would remain a one wildcard to total liability costs.

That's great. Maybe just one technical and then I'll hop back. The net interest income guide, that's not a fully taxable equivalent, that's a GAAP basis, right, $153 million to $158 million?

That is correct.

Okay. And then on the taxes, a lot has been given -- a lot of airtime has been given about potential tax increases if we see a change in administration. Can you walk me through how you're thinking about proportional increases in your tax rate as compared to what happened a few years back when rates went down?

Well, I think until we get to a point, we'll obviously be giving guidance next quarter on our tax rate for next year. And at that point, we'll -- what we'll know, certainly, the outcome of the presidential election, and we'll have a clearer picture. I mean each side is putting together programs of what taxes would look like. But until we actually have an election result, we'll be giving that guidance next quarter.

Okay. But nothing structurally changed in the way you've done your tax management over the past couple of years. So if I could, I guess, use the prior as a proxy, it's reasonable?

No. No. Yes. Yes. Yes, we don't anticipate any wholesale changes to any of our tax strategies as a result of taxes stand where they are or going back up.

And our next question comes from the line of Frank Schiraldi with Piper Sandler.

Just wanted to follow up on the efficiency program. Unless I missed it, I believe you obviously talked about reinvesting into digital. I don't think you gave what percentage of that $25 million you expect to fall through the bottom line? And I guess, if you haven't, is that just still sort of to be decided? And what kind of governors can you put around maybe -- obviously, you put a ceiling on what expenses would be next year. But anymore color you can give on percentages would be helpful.

Yes. Sure, Frank. This is Mark. We would anticipate of that $25 million, that's somewhere between 1/2 to 2/3 of that would drop to the bottom line. And we'll have more guidance on that as we complete our fourth quarter and have a clearer picture on. We have a bunch of technology projects already in flight. Some others that will start next year. So we'll have a clearer picture on that to provide next quarter. But at this early stage, I would say we would expect at least 1/2 to 2/3 of that expense savings should drop to the bottom line.

Great. I appreciate it. And then just a quick follow-up there in terms of the expense base. Obviously, what we saw this quarter minus the litigation charge and then what you guys guided to next quarter. Is there any sort of sizable COVID recovery-related expense that you would put in those quarters that might come out once we get through this tough environment?

No. I think there's going to be some things that offset each other, Frank. I mean, last quarter, we had some bonuses that we paid to our frontline personnel that didn't continue this quarter. But I would say that as we would see a gradual reopening of the economy, a reboarding of our employee base, you would see going into next year, certain costs like T&E and even utilities cost and paper cost, printer costs, things like that, would all tend to go up a little bit. So I think those would tend to offset.

Got you. Okay. And then just last question on the provisioning. I know it's always tough to look forward here and give any sort of color on that front. But as you think of things with deferrals coming down to a smaller pool as you have there now, and you had with the recoveries, you had a much lower provision, obviously, relative to last quarter and you still saw some reserve -- modest reserve builds. Is it reasonable to assume that builds are over at this point? And what is your thoughts on when -- if we start to see elevated charge-offs, which I assume we will, industry-wide, is that more of a 4Q event or more of a 2021 event in your estimation?

Well, Frank, this is Phil. And I think provisioning going forward is going to depend so much on when we really come out of this. And so if we get a vaccine in the first half of next year, I think you could go to the point where we aren't building anymore. It's just so up in the air. We feel comfortable right now with where we are. What was the last part of that question?

When you expect elevated -- I assume we're going to see some elevated charge-off in the industry.

Yes. I think they're a 2021 event.

Okay. So it sounds like from your comments, Phil, it's certainly too early to release reserves. And it sounds like we could see maybe continued modest builds to be conservative here until where some of the uncertainty comes out of the macro environment. Is that more fair?

I think that's fair.

And our next question comes from the line of Daniel Tamayo with Raymond James.

Just wanted to kind of touch on the -- maybe the other side of this crisis, as you get back to looking for a potential acquisition. What may give you comfort in terms of the environment to get more active in those discussions or to get more comfortable with the loan books of potential inquiries?

Yes. Well, I think you've hit it on the head. We need to be more confident that we can understand somebody's loan book. And we need to feel confident that we've turned a corner in the pandemic and that things aren't going to get worse. So I'm not sure we'll be able to understand the loan book until we know that.

Okay. That makes sense. And then, Mark, maybe for you on the margin. I look at your guidance kind of assumes a little bit more core pressure here, it appears, going forward. Kind of putting aside the impact of PPP. Assuming we were not to get any kind of steepening of the yield curve, do you envision that we're near a bottom for the margin in the next few quarters? Or how are you thinking about the trajectory of the core NIM from here?

Yes. If you strip out PPP, I think the most important thing to focus on has just been the excess liquidity. Pre-pandemic, Danny, we were averaging about $200 million to $300 million of excess cash. You can see here in our numbers in the third quarter, our cash and due from other banks was between $1.2 billion, $1.3 billion this past quarter. So that -- if we would just have that and take out about $600 million of that excess liquidity, that actually would have added back about 7 basis points to margin this quarter. So as we continue to see excess liquidity wind down, and as Curt referenced in his comments, we are going to take a little bit of that excess cash and put it to work in our loan portfolio.

We have really strong FICO score in market loans with our customers that we've previously chosen to sell into the secondary market. Over the next couple of quarters, we might take a little bit of that production and put that on balance sheet. What that might do is just sort of maintain the level of loan growth than you've seen in that resi because the next 2 quarters tend to be slower quarters in the mortgage business. But by portfolio and a little bit more with production, that will give us a little bit of a head start to 2021. So if you -- PPP is going to create a lot of noise over the next 3 quarters with the loan forgiveness taking place. But excluding that, yes, I think we're pretty close to the trough now on margins, and then it's going to be a slow build back from there.

And our next question comes from the line of Erik Zwick with Boenning and Scattergood.

Maybe just first a follow-up on something you just mentioned there, Mark, in terms of PPP loans potentially getting forgiveness. It sounds like you think maybe a bulk of those happened over the next 3 quarters or so. What are you seeing so far? I guess, do you have any updated stats in terms of the number of your borrowers that have submitted for forgiveness so far? How fast those are coming back? And then, I guess, you think it's kind of wrapped up by end of 2Q '21 for the most part?

Erik, it's Curt. I'll give you a little more color on that. We have a little more than 10% of our PPP loans that are through the internal process for forgiveness have been submitted to the SBA. To the best of our knowledge, we don't have any forgiveness grants. We don't think that's happened really anywhere across the country at this point. So we are building as customers request that forgiveness through our process so that we're ready to go when SBA starts to provide forgiveness. But we're at a little over 10% right now.

And then looking at Slide 15 in the slide deck. I appreciate the breakout of kind of the heightened risk industries. And we mentioned, and we did have the discussion 3 months ago, kind of any second deferral request are going through kind of a full underwriting process? As you do that, and I imagine, kind of talk to the customers as well, how are those discussions going? Are these customers specifically in kind of hotels, food services, kind of arts and entertainment? Are they optimistic that, I guess, if we get some sort of resolution with a vaccine or something that by the back end of next year, they can be up and running and viable businesses again? Or are some of these business owners thinking about closing up shop and moving on at this point? I'm curious how the -- any kind of color or commentary you could add there?

Yes. We specifically have worked through the hotel portfolio. We've given you additional information on that. You can see in the special mention category, the hotel portfolio really is the bulk of the increase overall. So we're monitoring that portfolio. We've reviewed each individual credit. And we're monitoring that closely. Just general color from all of our customers, they are adapting to the current environment. They are trying to generate as much cash flow as they can to navigate through this. We will have certain borrowers that do not make it through that. But overall, the customers are really trying to find a way to navigate through, hopefully, this shorter-term environment.

And have you been asking for additional collateral pledges or anything along those lines as you've kind of gone through this process?

Yes. As I said, we work through our second round deferrals. They -- we've had a process for credit underwriting overall in order to obtain a second-round deferral we either had to be comfortable with the credit or the customer had to provide credit enhancement, either collateral guarantees, cash flow support to be granted that second round deferral. So yes, we are working through all of that really with all customers.

And then last one for me, just on the tax rate expectation for 4Q. That rate is a little bit higher than what we'd seen through the first 3 quarters of this year. Is that due to just maybe potentially a higher mix of taxable revenue based on what you're expecting? Or something else pushing that higher?

Yes, it -- yes, that's it, Erik. It's just really a higher taxable revenue.

And our next question comes from the line of Russell Gunther with D.A. Davidson.

I wanted to follow up on the digital transformation and get a sense for what are some of the initiatives and projects that you expect to roll out, what the deliverables would be there? And then just sort of bigger picture, how you'd characterize this investment? Is this an attempt to get ahead of the tech curve and digital-offering curve versus peers? Is it a bit of a catch-up? Just how do you think about where you're spending this money and why?

Russell, it's Curt. Thanks for that question. We have invested significantly over the last 5 years in technology, so we view this as a continuation and acceleration of the pace of that investment as we move forward. So things that we had on the road map that maybe we wouldn't get to for 12 or 18 months, we're trying to accelerate that as quickly as we can. One specific area is electronic signatures and documentation and things like that. We're on a journey to get all of that electronic. We're going to do that as fast as we can. Most of the technologies, we would just be continuing to invest and develop versus any new specific technology as we feel pretty good about where we stand relative to the peer group in customer technology capability and internal technology enablement.

That's great. I appreciate your thoughts on that. And then the last question was just a follow-up to the comments on expectations around core commercial growth in the fourth quarter being sustainable. Just any comment on the drivers of that, whether it's a particular geography or product? And then to the extent you have a view on how 2021 organic commercial is shaping up? That would be appreciated.

Yes. Just overall on commercial loan growth, we continue to grow in most markets. Our team has remained focused on business development in all of our markets. We hope to not have the headwind of line utilization reductions. So if that's stable or maybe provide some benefit in the fourth quarter, that will certainly help. So we really expect the fourth quarter to be more like the third quarter, where typically, we get a ramp-up in the fourth quarter. We're expecting at least stable. And if we can get that to ramp up a little faster than the third quarter, that would be great.

(Operator Instructions) And our next question comes from the line of Matthew Breese with Stephens Inc.

Just curious, what was the total income from the PPP program this quarter?

So PPP, you have 2 components. It's a 1% interest rate. And then our accretion of the fee is $2.5 million per month because it adds 1.5% to the compound. So take $2 billion at a 2.5% yield. And that's how to think about it.

Got it. Okay. And then just thinking about the growth outlook, you discussed mortgage continuing to be a driver there as it has been. How much of the loan portfolio are you willing to dedicate to residential mortgage given your commercial background?

Yes. Yes. When you look at our asset sensitivity, we have plenty of room. We're one of the more asset-sensitive banks in our peer. So we think that it's appropriate for us to be able to add incrementally to what we've done historically to take off $50 million to $100 million a quarter in fixed-rate residential production and put those on the books over the next couple of quarters. So I mean it's not a sea change, but we think there's room to have some incremental growth in that asset class.

Okay. And then just tying this back into the mortgage gain on sale production. I think you said total originations this quarter were $902 million. Is it right that you sold, what was it, $600 million or so, is that correct?

That was -- yes, that was the lock amount. Yes, it was $608 million.

Okay. And is that kind of breakdown, production of $900 million is the current pipeline and roughly 2/3 of that being sold? Is that what should we expect for 4Q as well?

Yes. I think in 4Q, you can end up seeing a little bit more of that shift to be on balance sheet and a little bit less sold.

Okay. And then just -- I know you've made a lot of investments on the mortgage banking front. And clearly, that's reflected in the last 2 quarters of gain on sale revenues. As we think about not just next quarter, but 2021, 2022, how much more market share in the mortgage market have you taken? Just trying to think of scale versus just a huge influx of mortgage refi production. And should we expect mortgage banking revenues to come in at, call it, $8 million to $12 million on a quarterly basis going forward?

Just a follow-up on the growth. We have and continue to outpace the mortgage banking association's market info. So we do think that we are picking up market share across the board. Our team is relatively stable. We have just over 100 mortgage originators, and we would continue to add to that as we can attract good, strong talent and grow the business. But we really expect it to be incremental from where we're at on a business standpoint for generation of new business.

And then to speak about the revenues, Matt. I mean we are -- for the third quarter, our gain on sales spread was 320 basis points, which is exactly double what it was a year ago. Third quarter last year, we were at 161 basis points. So I mean how long do we stay at these elevated levels as there continues to be just a claim waiting for yield out there that's driving up sale spreads is anybody's guess. With this lower for longer, you would think that those gain on sale spreads will stay higher. But at some point, you do reach a saturation point. Now we had a little over half of our production in the third quarter was purchase money; 48% originations, 52% purchase money. So we still think there's some room. But at some point, you have to assume there's going to be normalization of gain on sale spreads. But does that happen in 2021, or that drift into 2022, that would be anybody's guess.

Okay. And then just last one for me. The interest rate swap fee income line has been incredibly resilient over the last few quarters. Could you just give us a sense for what the pipeline there looks like? And if you can -- you think you can sustain this kind of $4.5 million to $5 million run rate?

That activity correlates to commercial originations, most predominantly. And we do expect to be able to hold that consistent as we originate commercial loans consistent with the prior couple of quarters.

I'm showing no further questions at this time. And I would like to hand the conference back over to Phil Wenger for any closing remarks.

Well, thank you all for joining us today. We hope you'll be able to be with us when we discuss fourth quarter results in January.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.