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Fulton Financial Corp (NASDAQ:FULT)
Q3 2020 Earnings Call
Oct 21, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Fulton Financial Third Quarter 2020 Results Conference Call. [Operator Instructions]

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

Matthew Jozwiak -- Investor Relations

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 PM 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 [Phonetic] 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.

E. Philip Wenger -- Chairman and Chief Executive Officer

Thanks, Matt. Good morning, everyone and thank you for joining us. Today we will follow our usual call format beginning with some prepared remarks. First I'll provide a high level overview of the quarter. 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 the 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 interests 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 five limited service locations. Over the last five 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, excuse me, changing our operating model at a number of other financial centers. At these centers, we will move from traditional open lobby access to appointment banking and either drive-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 Companywide 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.

Curtis J. Myers -- President and Chief Operating Officer

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 non-interest bearing demand deposits grew 2.2%. We also saw seasonal inflows on municipal deposits, slightly more than prior years. Overall, deposits grew $846 million on an ending balance basis with growth occurring across checking, savings and money market categories. We also continue to reprice our deposits, and deposit costs declined 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 three specific areas. First, the mortgage company had a record third quarter coming on the heels of a record second quarter. This was fueled by both originations and historically strong gain on sale spreads. Total residential mortgage originations for the third quarter of 2020 were $960 million, an increase of 82% from the same period last year. Our mortgage pipeline sits at $902 million at quarter end.

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

Moving to credit, certain metrics showed improvement over the quarter. Our non-performing loans as a percentage of assets declined with 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 to make up a $186 million or 51% of the hotel balance, as you can see on the addition -- 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've 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 is still too early to predict the ultimate credit outcome in these segments, we are pleased with the overall deferral trends. Lastly, in our consumer portfolio we're just starting to reach the expiration of many deferrals as residential mortgage forbearances were initially granted for 180 days. 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.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

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. Non-performing 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 non-performing loans was 188% at September 30, a slight increase from 183% last quarter.

Moving to slide 6, non-interest 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 to our mortgage servicing rights asset during the quarter, which decreased mortgage banking income. This impairment charge was $5.1 million lower than the mortgage servicing rights impairment charge we recorded in the second quarter.

With respect to mortgage loans that we originate for sale, our new commitments were $608 million for the quarter, up from $573 million last quarter and our gain on sale spread of 3.20% for new mortgage commitments was higher than 2.89% last quarter as strong 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 up linked quarter as the gradual reopening of the economy appears to be influencing consumer and business spending.

Moving to slide 7, our non-interest expenses were $139 million in the third quarter, down $3.4 million linked quarter. As you may recall, in the second quarter, we recognized a $3 million charge for prepayment penalties on FHLB advances. As Phil noted, in the third quarter, we recorded a $1.5 million of charges for a legal settlement with the SEC and we are now implementing many of the findings from these strategic operating expense review 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 initiatives will result in 2021 core operating expenses, lower than our projected 2020 core expenses. The expense initiative is expected to result in charges totaling between $17 million and $19 million pre-tax. The timing for this estimated charge is shown in the chart on page 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 pre-tax 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 non-interest 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 pre-tax in the fourth quarter with the remaining charges between $0 million and $1 million pre-tax 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, we'll now turn the call over to the operator for questions. Michelle?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Chris McGratty with KBW. Your line is open. Please go ahead.

Chris McGratty -- KBW -- Analyst

Good morning, everybody.

E. Philip Wenger -- Chairman and Chief Executive Officer

Good morning, Chris.

Chris McGratty -- KBW -- Analyst

Mark, maybe I could 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 charge, the prepay in Q2 and the litigation in Q3. I was trying to -- what's my starting point to judge the decline?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, yeah. For the starting point to judge take our expenses through nine months of $425 million, and then we're seeing at $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.

Chris McGratty -- KBW -- Analyst

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

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yes.

Chris McGratty -- KBW -- Analyst

Got it. In terms of the deposit growth and the margin implication, so deposit growth, like a lot of banks isn't 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.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Sure. Yeah. 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 grow in that number lower. As I've reported for the last several quarters, we continue to see going out over the next four quarters. Just over $1.6 billion of CDs that will reprice. When I look at the average cost of those CDs versus our current replacement yields for comparable terms we're about 115 basis points to 120 basis points lower in each quarter for those CDs that will mature. So we think there is still room to grind out a little bit lower, obviously a wildcard and all of this is going to be when we initially put PPP loans in place. Those are funded with zero cost DDAs on our books. We've seen $2 billion of growth in zero cost DDAs year-over-year. So, how much of that sticks over the next couple of quarters here would remain the one wildcard to total liability cost.

Chris McGratty -- KBW -- Analyst

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

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

That is correct.

Chris McGratty -- KBW -- Analyst

Okay. And then on the taxes, a lot has been given, 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?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Well, I think until we get to appointment, 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 given that guidance next quarter.

Chris McGratty -- KBW -- Analyst

Okay, but nothing, nothing structurally change in the way you've done your tax management over the past couple of years. So if I could -- I guess, is the prior, is the proxy reasonable?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

No. Yeah. We don't anticipate any wholesale changes to any of our tax strategies as a result of taxes staying where they are or going back up.

Chris McGratty -- KBW -- Analyst

Great. Thanks, Mark.

Operator

Thank you. And our next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is open. Please go ahead.

Frank Schiraldi -- Piper Sandler -- Analyst

Good morning.

E. Philip Wenger -- Chairman and Chief Executive Officer

Good morning, Frank.

Frank Schiraldi -- Piper Sandler -- Analyst

Just wanted to follow up on the efficiency program. Unless I missed that, 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 to the bottom line. And I guess, if you have and it's not 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 any more color you can give on percentages would be helpful.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, sure, Frank. This is Mark. Good morning. We would -- we would anticipate, of that $25 million, that's somewhere between half to two-thirds 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 clear picture, when -- we have a bunch of technology projects already in flight, some others that will start next year. So we'll have a clear picture on that to provide next quarter. But at this early stage, I would say, we would expect at least half to two-thirds of that expense savings should drop to the bottom line.

Frank Schiraldi -- Piper Sandler -- Analyst

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.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, 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 -- continue this quarter. But I would say that as we would see a gradual reopening of the economy and a rewarding of our employee base, you would see going into next year or certain costs like T&E and even utilities cost and paper cost, printer cost, things like that, would all tend to go up a little bit. So I think those would tend to offset.

Frank Schiraldi -- Piper Sandler -- Analyst

Got you. Okay. And then just last question on the provisioning and how 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 industrywide, is that more of a 4Q event or more of a 2021 event in your estimation.

E. Philip Wenger -- Chairman and Chief Executive Officer

So, Frank, this is Phil, and you know, I think provisioning going forward is going to depend so much on when we really come out of this. And 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. I -- 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?

Frank Schiraldi -- Piper Sandler -- Analyst

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

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Charge-off.

E. Philip Wenger -- Chairman and Chief Executive Officer

Yeah. I think they are 2021 event.

Frank Schiraldi -- Piper Sandler -- Analyst

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

E. Philip Wenger -- Chairman and Chief Executive Officer

I think that's fair.

Frank Schiraldi -- Piper Sandler -- Analyst

Okay. All right, great, thanks.

Operator

Thank you. And our next question comes from the line of Daniel Tamayo with Raymond James. Your line is open. Please go ahead.

Daniel Tamayo -- Raymond James -- Analyst

Good morning, everybody.

E. Philip Wenger -- Chairman and Chief Executive Officer

Hey, Danny.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Hey, Danny.

Daniel Tamayo -- Raymond James -- Analyst

Just wanted to kind of touch on the, maybe the other side of this -- 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?

E. Philip Wenger -- Chairman and Chief Executive Officer

Yeah, well, I think you hit it on that head. We need to be more confident that we can understand of somebody's loan book and we need to feel confident that we've turned the 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.

Daniel Tamayo -- Raymond James -- Analyst

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

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, if you strip out PPP, I think the most important thing to focus on is 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 scores in market loans with little -- our customers that we previously chosen to sell into the secondary market.

Over the next couple of quarters, we might take a little bit of that production and put that on balance sheet, what that might do is just sort of maintain the level of loan growth than you've seen in that resi, because the next few quarters tend to be slower quarters in the mortgage business. But by portfolio and a little bit more of that production, that will give us a little bit of a head start to 2021. So if you strip, PPP is going to create a lot of noise over the next three quarters with the loan forgiveness taking place. But excluding that, yeah, I think we're -- I think we're pretty close to the trough now on margins, and then it's going to be a slow build back from there.

Daniel Tamayo -- Raymond James -- Analyst

Very helpful. Thanks, Mark.

Operator

Thank you. And our next question comes from the line of Erik Zwick with Boenning & Scattergood. Your line is open. Please go ahead.

Erik Zwick -- Boenning & Scattergood -- Analyst

Good morning, everyone.

E. Philip Wenger -- Chairman and Chief Executive Officer

Hey, good morning, Erik.

Erik Zwick -- Boenning & Scattergood -- Analyst

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

Curtis J. Myers -- President and Chief Operating Officer

Hey, Erik. It's Curt, I'm giving you a little more color on that. We have a little more than 10% of our PPP loans that are through the internal, our 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, that we're ready to go, when SBA, it starts to provide forgiveness, but we're at little over 10% right now.

Erik Zwick -- Boenning & Scattergood -- Analyst

Thanks for that -- the color there, Curt. And then looking at slide 15 in the slide deck, I appreciate, the break out of kind of the heightened risk industries and we mentioned when we didn't have the discussion three 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, foodservices, kind of arts and entertainment. Are they optimistic that if I guess, if we get some sort of resolution with the vaccine or something that by, back end of next year, they can be up and running and viable businesses again or some of these business owners thinking about closing up shop and moving on at this point. Curious how, there are -- any kind of color commentary you could add there?

Curtis J. Myers -- President and Chief Operating Officer

Yeah, we specifically have worked through the hotel portfolio, we've given you additional information on that. You can see in the special mentioned 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.

Erik Zwick -- Boenning & Scattergood -- Analyst

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

Curtis J. Myers -- President and Chief Operating Officer

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

Erik Zwick -- Boenning & Scattergood -- Analyst

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

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, that's it, Erik. It's just really a higher taxable revenue.

Erik Zwick -- Boenning & Scattergood -- Analyst

Thanks for taking my questions today guys.

E. Philip Wenger -- Chairman and Chief Executive Officer

Thanks, Erik.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Russell Gunther with D.A. Davidson. Your line is open. Please go ahead.

Russell Gunther -- D.A. Davidson -- Analyst

Hey, good morning, guys. 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?

Curtis J. Myers -- President and Chief Operating Officer

Russell, it's Curt. Thanks for that question. We have invested significantly over the last five 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.

Russell Gunther -- D.A. Davidson -- Analyst

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. Thank you, guys.

Curtis J. Myers -- President and Chief Operating Officer

Yeah. 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.

Russell Gunther -- D.A. Davidson -- Analyst

Okay. Thanks, guys. That's it for me.

Curtis J. Myers -- President and Chief Operating Officer

Thanks.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of Matthew Breese with Stephens Inc. Your line is open. Please go ahead.

Matthew Breese -- Stephens Inc. -- Analyst

Good morning, everybody.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Good morning.

Matthew Breese -- Stephens Inc. -- Analyst

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

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

So PPP you have two 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 coupon. So take $2 billion at a 2.5% yield. And that's how to think about it.

Matthew Breese -- Stephens Inc. -- Analyst

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?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, yeah. 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 going to be a sea change, but we think there's room to have some incremental growth in that asset class.

Matthew Breese -- Stephens Inc. -- Analyst

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?

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah, that was the lock amount. Yeah, it was $608 million.

Matthew Breese -- Stephens Inc. -- Analyst

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

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Yeah. 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.

Matthew Breese -- Stephens Inc. -- Analyst

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 two 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?

Curtis J. Myers -- President and Chief Operating Officer

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.

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

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 sales 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.

Matthew Breese -- Stephens Inc. -- Analyst

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?

Curtis J. Myers -- President and Chief Operating Officer

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.

Matthew Breese -- Stephens Inc. -- Analyst

Got it. Okay. Great. That's all I had. Thanks for taking my questions.

Operator

Thank you. And 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.

E. Philip Wenger -- Chairman and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Matthew Jozwiak -- Investor Relations

E. Philip Wenger -- Chairman and Chief Executive Officer

Curtis J. Myers -- President and Chief Operating Officer

Mark McCollom -- Senior Executive Vice President and Chief Financial Officer

Chris McGratty -- KBW -- Analyst

Frank Schiraldi -- Piper Sandler -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

Erik Zwick -- Boenning & Scattergood -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

Matthew Breese -- Stephens Inc. -- Analyst

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