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Bryn Mawr Bank Corp (BMTC) Q3 2020 Earnings Call Transcript

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Bryn Mawr Bank Corp (NASDAQ: BMTC)
Q3 2020 Earnings Call
Oct 23, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Bryn Mawr Bank Corporation's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

On the call today, we have Frank Leto, President and Chief Executive Officer; Mike Harrington, Chief Financial Officer; and Liam Brickley, Chief Credit Officer.

Before we begin, please be advised that during this conference call, management may make forward-looking statements. Please refer to the disclaimer labeled Forward-Looking Statements and Safe Harbor in the earnings release and presentation for more information regarding what constitutes a forward-looking statement.

All forward-looking statements discussed during this call are based on management's current beliefs and assumptions and speak only as of the date and time they are made. The Corporation does not undertake to update forward-looking statements. For a more complete discussion of the assumptions, risks, and uncertainties related to the business, you're encouraged to review the Corporation's filings with the Securities and Exchange Commission located on their website at www.bmt.com.

I would now like to turn the conference over to Frank. Please go ahead, sir.

Francis J. Leto -- President and Chief Executive Officer

Thanks Rocco, and I'd like to thank all of you for joining our earnings call today. As we navigate through the remainder of 2020, I'm immensely proud of how our organization has responded to this dynamic and evolving environment.

Our Company has accomplished so much in 2020 despite COVID-19, a testament to our team and our business model. I'd like to thank our employees for their extraordinary efforts and our clients for allowing Bryn Mawr Trust to serve them during these unprecedented times. Our hard work was recently recognized by the Newsweek magazine with the award for Best Small Bank in Pennsylvania.

Our recent quarterly results are also a great example of the hard work of our team. For the third quarter 2020, we reported net income of $13.2 million or $0.66 diluted earnings per share. While our net interest income remains under pressure from historically low interest rates, our fee income business continued to produce solid results, a testament to our diversified business.

This is most notably seen in our wealth, insurance and capital markets businesses, all of which grew from the previous quarter. Specifically related to our wealth business, Bryn Mawr Trust Company of Delaware recently surpassed the $10 billion in assets.

As we've discussed on the previous earnings call, we continue to review our expense profile for ways to optimize performance. One topic that has been trending lately in the banking industry is branch optimization. We noted last quarter our plans to execute approximately 33,000 square feet of office space. However, this does not include any of our branches.

During the third quarter, one of our branch leases expired and we made the decision to exit that branch. Future changes to our retail network are likely, given the change in consumer behavior. We'll communicate these changes, including the impact on our financial performance when we've completed our planning.

Part of the current approach has been to identify and create 15 service centers within our branch network. These client centers accept appointments with clients across all departments of our organization. These 15 locations were specifically chosen because of their ease of access for the majority of our clients. In fact, over 90% of our clients are within five miles of each one of these client service centers.

As we look at our distribution model going forward, we're assessing the efficacy of the client service center structure and we'll continue to factor this data into our strategy as it relates to branches and possible future expansion.

During this third quarter, we saw several other areas of improvement. Our capital ratios strengthened at both the bank and holding company; many of our asset quality indicators, including net charge-offs, improved; and our liquidity position remained robust. Furthermore, we continue our progress in transforming on operations and technology.

As mentioned previously, we've partnered with nCino and their unrivaled client on-boarding platform to improve our customer experience and radically streamline our on-boarding processes. In the fourth quarter, we'll roll out our small business loan origination system. Our third nCino module, which already includes deposits and consumer lending and will be the first nCino client to incorporate auto-decisioning into that workflow.

This is just one example of many ways we are improving our business and positioning ourselves to succeed today and in the future. We believe there will be future obstacles and challenges, but we're confident in our positioning as we navigate through the current environment. Finally, I'm proud to announce the Board of Directors approved a $0.27 per share dividend. This marks our 112th consecutive quarterly dividend.

I'd like to ask Mike Harrington to discuss some of our third quarter results. Mike?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Thank you, Frank, and good morning, everyone. During the third quarter 2020, we posted GAAP income of $13.2 million or $0.66 per diluted share. The main drivers for the quarter included strong fee income from our wealth, insurance, capital markets and mortgage banking businesses.

As we explained on the previous call, tax filing extension this year moved the bulk of our tax fees recorded in wealth line item from the second quarter to the third quarter. During the third quarter, we earned $557,000 in tax fees. As a wealth business overall and adjusting for the mitigation payment recorded in the second quarter related to the unwind of the mutual fund, revenue was up over 4% for the nine months ended September 30th compared to the same period last year.

Our capital markets division continues to grow as well by offering new products and service, along with helping clients take advantage of current market conditions. Capital markets revenue grew 11% quarter-over-quarter and 49% for the nine months ended September 30th 2020, as compared to the same period in 2019.

Net interest income decreased 6.3% from the second quarter. Our cost on deposits have shown a noticeable decline. The same is true for interest on loans. Our tax equivalent net interest margin decreased from 3.22% to 3.03% quarter-over-quarter. The main contributors to the decline included a decrease through our loan yields coupled with a 72% increase from the second quarter in our average cash balances.

We're actively looking to deploy some of our cash reserves but we'll remain prudent as it pertains to excess liquidity during this uncertain market environment. We expect the margin to begin to stabilize at these levels as deposit rates continue to move lower and excess cash is deployed.

The provision for the third quarter was $3.6 million. Slower provision as compared to the second quarter was partly due to lower net charge-offs and some minor modifications to our credit modeling. Result of this provision was a modest 5 basis point build in our allowance for credit losses to total loans.

As we approach the end of 2020 and think about 2021 and beyond, uncertainty abounds as to the path of the economic recovery. This uncertainty will likely manifest itself in episodic charge-off activity and will likely lead to changes in both the qualitative and quantitative drivers of our credit [Technical Issues]. Liam Brickley will provide additional color on the credit risk profile later in our presentation.

Compared to the second quarter, non-interest expenses were up approximately $1 million. The quarterly increase included higher expenses related to compensation, FF&E, advertising and other operating expenses.

Digging a little deeper on expenses, the underlying increase in salary and wages was caused by much lower deferrals related to lower loan closings, recall the PPP loan originations in the second quarter, and not higher compensation costs, which trended lower as expected, given the workforce actions we undertook in the second quarter.

These deferred expenses, an offset to current expenses, were lower by $1.1 million and will fluctuate in the future dependent on loan volume. Also notable as it relates to expenses in the line item of other operating expense, in the second quarter, we released approximately $900,000 in reserve for unfunded commitments and subsequently provided for $200,000 in reserve in the third quarter, a swing of $1.1 million.

Regards to liquidity and capital, remain top priority for the organization. Our cash balances remain high. We frequently discuss opportunities to optimize our deposit profile and lower rates where necessary. This can be seen in the 20 basis points decrease in deposit yields quarter over quarter.

As noted earlier, we would expect deposit cost to drift lower in the fourth quarter. Capital at both the bank and holding company improved in all areas quarter-over-quarter and remains well above the levels needed to be deemed well capitalized. We monitor capital closely and performed stress test based among the changing economic scenarios.

We believe we have a firm hand on the possible outcomes and are well-positioned to absorb unexpected losses should they occur. Consistent with our position related to our capital, we maintained our dividend and are committed to doing so in the future. Company has ample liquidity at the holding company to both support the bank as a source of strength and pay future dividends.

As for the stock buybacks, we are taking a cautious approach that we'll not be in the market until we have further information as to the path of the virus and the resultant impact on the economy and credit risk.

As you'll note on Slide 6, asset quality was generally stable during the quarter, in the third quarter and net charge-offs decreased $1.2 million. As noted earlier, the provision was slightly lower in the third quarter and the allowance for credit losses to total portfolio loans increased modestly to 1.53%.

I will now turn it over to our Chief Credit Officer, Liam Brickley, who will provide additional commentary on the Bank's credit quality and loan portfolio. Liam?

Liam Brickley -- Senior Vice President & Chief Credit Officer

Thanks, Mike, and good morning, everyone. As shown on Slide 7, our portfolio did not change materially during the third quarter and it remains diversified across borrower, industry and property types. We remain in close communication with many of our borrowers, specifically those who may be in more vulnerable sectors in this current economic environment.

At the end of the third quarter, 13% of our commercial real estate non-owner occupied portfolio was in deferral as compared to 28% at the end of the second quarter. This amount is expected to gradually decline through the end of the year. However, depending on circumstances, at our discretion, a portion of these loan deferrals may be extended into 2021.

Our leasing portfolio remains a more susceptible segment, given the difficulties in the market, but we have seen the percent of deferred transactions drop from 16% at the end of the second quarter to 6% as of September 30. We remain conservative as we approach this portfolio which is evident in the nearly 6% provision on total leases. Deferral terms for some of the leasing portfolio may extend into 2021, but to what extent is unknown at the current moment.

As we transition to Slide 8, we can see a more detailed analysis of our commercial real estate portfolio. The underlying metrics of these segments have not changed materially from the second quarter. We continue to review our loan portfolio and to make changes to risk ratings as necessary.

Again, we are taking a conservative approach in our methodology. This is seen in several of our commercial real estate sectors, including retail and hospitality, where we made additional downgrades during the third quarter. We believe it is prudent to rate each loan according to the underlying fundamentals of the property along with current market data.

Our trends around lines of credit usage have improved over the last quarter and year-to-date. Since the end of the second quarter, our line of credit usage actually decreased by 0.7% or $5.4 million.

On Slide 9, we outlined a detailed schedule of loan deferrals by customer segment. At the end of the third quarter, approximately 9% of the total portfolio was in a deferral program, as compared to 21% at the end of the second quarter. Over the past few months, we have seen this percentage gradually decline and anticipate this will continue as many of these loans come out of their initial 90-day deferral term or second 90-day deferral term.

However, as previously mentioned, at our discretion, we may extend some of these deferral periods for select clients based on certain underlying factors. In this case, some deferrals could extend into 2021. However, much of this is dependent on what occurs over the remainder of Q4.

During the third quarter, we increased our total criticized loans and leases by $13.9 million based on updated information and additional reviews of the entire portfolio. As a result, our allowance for credit losses as a percentage of criticized loans and leases modestly decreased from 26.2% to 25.2% quarter-over-quarter.

Moving on to Slide 10. In early September, we disclosed new deferral information as part of an investor presentation. This information has been updated as of September 30th and is included in slides 12 through 14 of the third quarter investor presentation.

Slide 10 provides a deferral summary by loan segment. As indicated on the slide, the peak for deferrals was reached at the end of June and has since declined considerably. The months shown after September 30th are based on our current assumptions but may change as circumstances progress for our customers.

Slide 11 is a different visual of the information contained in Slide 10 on total loan deferrals. On this slide, it is broken out between first and second deferral terms. As we move through the fourth quarter, we could see a third deferral segment that carries into 2021, however, to what extent is currently unknown.

Slide 12 shows the deferral information on a more granular commercial real estate concentration view. As I indicated earlier, the retail and hospitality segments are more vulnerable to current market conditions, but we have seen a steady decline in deferrals even under these two segments. While we anticipate continued volatility in the market, I share Frank's sentiment in our preparedness and the experience of the team to handle any uncertainties that may arise.

And with that, I'm going to turn it back over to Frank.

Francis J. Leto -- President and Chief Executive Officer

Thanks, Liam and Mike. Rocco we'll open the line for questions at this point.

Questions and Answers:

Operator

Absolutely sir. [Operator Instructions] Today's first question comes from Michael Perito with KBW. Please go ahead.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hey, good morning, guys.

Francis J. Leto -- President and Chief Executive Officer

How're you doing?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Good morning.

Francis J. Leto -- President and Chief Executive Officer

Good morning.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks for taking my questions. I wanted to first start on the expense side. Obviously, you guys have already done or in the process of doing a few things, it sounds like there's maybe another smaller item, some smaller items brewing as well. I guess two-part question. One, near-term here, Mike, I mean any thoughts you can provide us on where that expense run rate might settle once the actions that you guys have already announced kind of take place, all else equal.

And then second part. Just as you guys think about the cost side, can you help us get in our head a little bit here? I mean, what is the kind of the main driver of some of these decisions? Is there like an overall cost structure that you guys think you need to have to remain at a certain level of profitability in this rate environment or is it really more strategic just in trying to make the platform as efficient as possible as kind of the delivery of products and services evolves here?

Francis J. Leto -- President and Chief Executive Officer

Mike, why don't you take the first part, I'll take the second part.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

That a lot. Yeah, OK.

Francis J. Leto -- President and Chief Executive Officer

I'm writing down the second question. Go ahead, Mike.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Yeah, I don't know how specific you want me to get, Mike. And I'll try to just level set back on Q2. So Q2 and what I said in my prepared remarks as there's a couple of items in there that made this cost look a little bit lower than they actually were. So we're really pleased with how things are trending from an expense standpoint if you make some of those adjustments.

The actions we took and the workforce actions we took in the second quarter, some of the work through dates and the timing of when that hits really happens in the third and fourth quarter, so we would expect to see the continued benefits of those actions play out through the end of the year and then the full effect of those actions really manifest themselves in the first quarter of 2021.

So other than that, I was wondering, we bounce back and forth. I'll let Frank maybe jump in on the strategic question you asked and then maybe we can play off that and dig a little deeper if we need to.

Francis J. Leto -- President and Chief Executive Officer

Yeah, Mike, let me put it in certain terms. I mean, we don't target a specific dollar amount we're looking for expense savings on. I think from our perspective, we look across the enterprise and we're focused on creating efficiencies in a lot of different ways. First and foremost, technology, which you've seen a lot of and you see some of the investments. And by the time we have this call next year, we'll be fully baked in with nCino and we should start to see some of those benefits start to play out.

But we'll look for those efficiencies and process improvement, and it's just a -- it's a continuous ongoing process at the Bank, just like our -- just like it's a lot of the investments we've made, strategic investments we've made for a much long -- the longer-term, not the quarter-to-quarter kind of benefit.

This is an ongoing discipline that we've tried to instil at the Bank of continuously looking for where we can cut and save without impacting obviously client service, without creating excessive risk. I don't know if that helps. I mean, I know you would like a specific target number, but we don't -- we just don't target a [Speech Overlap]

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

No, no, it's -- that is excellent and I'm not necessarily looking for a target now [Phonetic]. Just kind of think of how -- I should kind of think about what you guys are doing going forward, so that is helpful. I guess, just my one follow-up to close the loop on expenses. It just -- as we think about the timing, Mike, you mentioned some items, unlike the staffing side have come in but I think something like the back office exit and maybe the lease ending on that one branch? Some of that stuff hasn't hit yet.

So I mean, is it fair to say that there is still another, all else equal as we look at the $35.7 million in third quarter run rate, there is still -- at least it would seem like a $1 million or so that has to come out as those items hits to the end of the year and into the early part of first quarter or is it more than that [Speech Overlap]

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Yes, not -- all things being equal, it should trend lower, that's correct. Yes because -- and all the occupancies and as what we said about the occupancy actions we took, they don't happen until the first quarter. So we're still -- we're actually still occupying the buildings, we're -- we've mentioned the 33,000 square feet. That decrease in that run rate expense doesn't happen till Q1.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Helpful. Then switching over to the balance sheet, the liquidity had built up a little bit. I mean, it seems like based on your commentary and your prepared remarks that you're expecting some of that to kind of be maintained here. I guess, any feedback from customers or thoughts, I mean, it seems like based on a lot of your peer commentary that that liquidity is expected to be around for a little bit here at least. I mean, is that consistent with what you guys are seeing? And if you do get the chance to kind of deploy it, where are you hopeful to kind of move -- to deploy that cash over the near-term, if it's going to stick around for a little bit?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Well, we did some [Technical Issues] endpoint or the endpoints is much lower. So the way we've been doing that is we just had some funding that matured or we've priced some funding out of the institution, most of that on the wholesale side. So we're trying to drive it out from -- using those actions on the pricing side and then just repaying some maturities that came up.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay.

Francis J. Leto -- President and Chief Executive Officer

But I think we've got -- we don't know this, Mike we don't -- the level of precision here, the analysis of how much PPP money is still sitting in the institution, but it's a fair amount. So, we know there is going to be -- there could potentially be a short-term need for -- where those proceeds could get utilized. So that's one of the reasons we're holding some -- maybe more cash than we normally would. And then we're just looking -- I don't know, we'll probably get the question about loan growth and I think that's going to be -- we should probably talk about the market at some point.

But we're definitely trying to deploy some of that excess liquidity into loans. And then maybe just get some of it invested in the -- through the investment portfolio instead of having it sitting there overnight, which it did for the most part in the third quarter and that's what drove the margin lower and we're definitely trying to move that money out into something that's higher earning.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. But so -- I mean all else equal, I mean, when you say the margin should stabilize here, I mean, that's kind of like a 4Q, 1Q thing and then where it trends from there will depend on the long end of the curve, obviously, but also just what and when you're able to move that liquidity back to a normalized level.

Francis J. Leto -- President and Chief Executive Officer

Yes. Yeah, and I think the dynamic around that is just the marketplace and all three of us could comment on this. It's competitive, it's getting -- it feels like it's getting more competitive. There is -- and so that dynamic around new pricing for new loans, that's going to be a variable that we're going to have to see how that does plays out in terms of new volume. One good piece of news is a new origination, where we're originating new loans versus where the loan portfolio, the overall yield and the portfolio are getting pretty close, so at least in the near-term. I mean that's why we're getting a little more confident that the margin is going to stabilize here because of new volume we're bringing on is close to the yield that were recorded that's already on the balance sheet.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Got it. Really helpful. I'm just going to sneak one more in if I can, just on the fee side. Just Frank, any more specific thoughts you can give on the outlook for wealth and capital markets and insurance? I mean, all three I thought showed really good sequential growth. And clearly gave you guys some ammo at a time when rates were really not helping you and I'm just curious if you could provide maybe a little bit more of a specific update on how the growth opportunities for those look and how we should be thinking about the revenue opportunity in the current environment?

Francis J. Leto -- President and Chief Executive Officer

Sure, and I'm glad you asked the question, because I think this ties directly to our strategic plan, as it relates to diversifying our revenue streams. But you know, we've been talking about now for five or six years. And it was obviously not designed for a pandemic, but it was certainly designed for a slowdown or time like we're in currently.

Obviously, you're looking out in the future, what I can tell you is how we've gotten to where we are today is through a lot of discipline, through an execution on a strategic plan that Jen Fox has really been -- was instrumental in creating and executing on changing a little bit of the culture of those departments into much more sales focused as opposed to solely client service focused. And we see that playing out in the success we've had in growing numbers of accounts, not just AUM, which obviously we can't completely control the fluctuations in the markets on.

We see a very similar kind of activity in insurance with the consolidation of multiple acquisitions we've made over the last couple of years is fairly well, I think, baked in this year. I think Kim Trubiano, who is the President of our Insurance Group has done an excellent job of now integrating and consolidating those businesses. So I think that gives a lot more renewed focus on the sales component of it, even in this very difficult time.

So, we see that playing out and capital markets has been -- it's been obviously our shining light over the last couple of years. It continues to grow. We can see lots of opportunities. We've expanded the business just within the bank. We see some real good synergies, obviously the commercial lending, but in our Private Banking Group, with our SBA group.

I mean they've been able to really offer a level of sophistication that I think is unrivaled in our peer group. And I think that's also what is driving a lot of the results that we see. So, that all being said, it's obviously a continued focus moving into '21, '22, '23 because by all accounts, we're going to be in this low interest rate environment for a long time. I don't know, hopefully that helps.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

It does. And thank you, guys, for taking my questions and providing all the insights. I appreciate it. Stay well.

Francis J. Leto -- President and Chief Executive Officer

Thanks, Mike.

Operator

And your next question today comes from Casey Whitman with Piper Sandler. Please go ahead.

Charlie Hough -- Piper Sandler -- Analyst

Good morning. This is Charlie Hough [Phonetic]. I'm on for Casey today.

Francis J. Leto -- President and Chief Executive Officer

Hi, Charlie.

Charlie Hough -- Piper Sandler -- Analyst

Hey. So I guess I'll ask the loan growth question, Mike. I mean before COVID hit, you guys had spoken about growing C&I at a faster pace than CRE over the longer-term. I was wondering if that's still a goal, maybe in the near term or on the other side of this crisis or if your stance has changed? And then in that vein, I guess, what is a reasonable loan growth outlook, as we think about 2021?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Frank, do you want to take this?

Francis J. Leto -- President and Chief Executive Officer

Yes, I mean, look certainly -- Charlie, certainly is a focus and that really hasn't changed. That's just a continuation or an expansion of the diversification of what this bank does. So we are focused on that. We're focused on acquiring talent in that area and it makes sense. Going forward, it's really hard to say. We're just -- there is such a -- I wish I had a crystal ball, probably wouldn't be talking to you if I did.

It's just -- we have no idea. We're being very selective with credit at this point in time, just given where we are in the market and I think we have to see how this wave plays out and where we are with the virus, really as we go into the first and second quarter. So I think it's going to have a lot of impact on, obviously, the balance sheet and how we look at credit going forward from there. I don't know if Mike or Liam want to add anything to it, but hopefully that helps you [Speech Overlap]

Michael William Harrington -- Executive Vice President & Chief Financial Officer

This is Mike Harrington. Yes this is Mike. I just -- I mentioned it earlier, but risk appetite and pricing are going to be really important variables for us to monitor and risk appetite right now is probably lower than normal. And then pricing again is very dynamic right now and getting very competitive, that's what we're seeing in the market. So yeah, I agree with Frank, just trying to predict that right now is very challenging, and we're not ready to throw a number out there for 2021. Liam, do you have any color you'd like to add?

Liam Brickley -- Senior Vice President & Chief Credit Officer

No. I would agree with both Mike and Frank. It's a pretty choppy market and ultimately, the opportunities are driven by demand and we're seeing, spotty and episodic demand, as a lot of our entrepreneurial clients are waiting out the pandemic before making big decisions on capital plans or replacing their current banks.

So it's a very -- not entirely frozen market but it's very choppy and very episodic in terms of our opportunities. And again, we need to be selective, given the uncertain economic outlook over the next several quarters.

Charlie Hough -- Piper Sandler -- Analyst

Understood. That's all very helpful. Thank you. And then, Liam, I had one for you. So, starting with the uptick in classified loan balances this quarter of about $20 million that you mentioned on the call. Can you give us a sense for, if there is any sort of like geographic concentration within that bucket and then if those loans had been on deferral, I guess, what the status is there would be helpful?

Liam Brickley -- Senior Vice President & Chief Credit Officer

Sure. Well, a significant portion of our criticized and classified loans are in the hospitality and restaurant sector. Essentially the whole book was downgraded in Q2. So the geographic concentration, it's all within our footprint. There is no outliers in terms of specifics there.

And in terms of the Q3 stuff, it was one medium sized borrower in an industry that is very impacted by work from home and the rest of it's just a one-off episodic kind of transactions. We haven't seen any wholesale deterioration outside of the stress seen in our hospitality and restaurant portfolios.

Charlie Hough -- Piper Sandler -- Analyst

Understood. Thank you for taking my questions.

Operator

And our next question today comes from Christopher Marinac with FIG Partners. Please go ahead.

Christopher Marinac -- FIG Partners LLC -- Analyst

Hey, thanks. Good morning. I also had a question for Liam which just goes back to the off-balance sheet reserve for unfunded commitments. Did that change at all from June to September?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Yes.

Liam Brickley -- Senior Vice President & Chief Credit Officer

Yeah. Mike, go ahead.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Yeah, it was up $200,000.

Christopher Marinac -- FIG Partners LLC -- Analyst

Great, OK. And that's [Indecipherable] on the NPL.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Yeah. That's three and change, yeah.

Christopher Marinac -- FIG Partners LLC -- Analyst

Okay, perfect. And then I guess just a continuation of what you're seeing...

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Chris? Chris?

Christopher Marinac -- FIG Partners LLC -- Analyst

Yes.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

This is Mike. So, just to be clear, it's not in the allowance itself. It's another -- it's a separate liability. So it runs through that other line. We don't consolidate it.

Christopher Marinac -- FIG Partners LLC -- Analyst

Correct. That's what I thought. Great. Okay, thank you for that. And then, Liam, do any of the deferrals come back into criticized or are they already in the criticized classifications at this point? Just curious kind of how that plays out in future quarters.

Liam Brickley -- Senior Vice President & Chief Credit Officer

We took the tack of downgrading the majority of the second deferral population. Going back to Q1, when this was a dynamic event and customers were looking for relief, we did not initially downgrade stuff but we've instituted a series of ongoing portfolio reviews, which has resulted in the big step up in crit class in Q2.

So the bulk of those Q2 deferrals are in crit class or at least a substantial portion, and we don't see a backlog of stuff that's going to drift into crit class because there will be stuff coming out. And there are some puts and takes. Ultimately, the outcome up there is going to be driven by the economy. And if it's steady as she goes with no repeat kind of shutdown based on public health issues, we don't see a lot of movement, but obviously events on the ground are going to change everything and we're watching every day.

Christopher Marinac -- FIG Partners LLC -- Analyst

Got it. Thanks for that background. I appreciate it. And then just a quick one. Frank, you mentioned on the nCino adopting some of the new bells and whistles that they do. Can that benefit you in the near term or would the benefits of that piece of nCino kind of be -- take a couple of quarters to get realized?

Francis J. Leto -- President and Chief Executive Officer

I think it's going to be out a couple of quarters and even a little bit longer. I think what it does, it slows down the pace of hiring more than seeing an immediate benefit today -- actually I should take that back, immediate benefits to our client and customers, a much better experience.

It creates a lot of efficiencies internally but until you work through it and as things materialize or as we grow, you're going to see the less hiring at the pace at which we were hiring before because this creates that capacity within the system.

It also should really free up a lot of time for our lenders and that's an immediate impact because of the way the system operates. It's less manual, less pushing of paper around and more straight through the system itself. I don't know, Liam, you want to add anything to it? You're really impacted by it more so than any [Speech Overlap]

Liam Brickley -- Senior Vice President & Chief Credit Officer

Yeah. Sure. The benefits are, as Frank said, they are largely in the future because there is a learning curve for the people who operate the system, both customers and bankers before you can fully realize the efficiencies. So it will be a continual ramp up over the next multiple quarters before we're fully optimized. But it is, especially in our consumer and small business segments, a much faster, much more streamlined approach to getting stuff done. But the benefits are in the future.

Francis J. Leto -- President and Chief Executive Officer

Yeah. But I mean, you know I think this ties directly into to our overall strategy that we really talked about at the end of Q2, which is less focus on the traditional retail kind of model and more focus on technology. And we really saw the impact of what we did last year which is that deposit module, in being in a really seamless PPP process, I mean opening the accounts in PPP.

It was virtually all through the nCino portal. So hopefully those will start to leg in sooner than the commercial one, which is going to have the biggest impact but we'll be through three modules by the end of this fourth quarter and we should start to see some of the benefits, hopefully sooner rather than later.

Christopher Marinac -- FIG Partners LLC -- Analyst

Great. Thanks again for all the background this morning.

Francis J. Leto -- President and Chief Executive Officer

Sure.

Operator

And our next question today comes from Matthew Breese with Stephens Inc. Please go ahead.

Matthew Breese -- Stephens Inc. -- Analyst

Good morning, everybody.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Good morning.

Francis J. Leto -- President and Chief Executive Officer

Good morning.

Matthew Breese -- Stephens Inc. -- Analyst

Just on the margin, I know that the messaging was stable. I would like to just parse it apart a little bit. Could you talk about the maturity schedule on the retail time deposit book? It seems like that's where the most repricing opportunity is. How fast does that reprice and what are the new rates?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Well, the new rates are -- I think our top rate, don't quote me on this, but I think it's about 20 basis points, 20 basis points to 30 basis points maybe. So you can look at the line item and see what the delta is there. And as it happens, I'd say the bulk of that maturity happens in the next nine months. So that's part of the drifting, that drifting lower comment. Besides what we're doing, just in our non-maturity side, there's a little bit of room left to move there, but I think we've almost -- at this point, we've done pretty much everything we can do there.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. And then on the loan yield side. I know you mentioned a fairly stable gap there. What is the incremental new loan yield versus existing and what is that gap?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

It's less than 10 basis points at this point. So we're at around 4% or just below 4% in the loan yield. I think that's recorded 3.97% in the press release and right around that area for new volume. But again, hedging all that with the dynamic marketplace we're operating in, so we've been trying to be very disciplined around floors and spreads and spreads have widened, which is good. But it's going to be this trade off of if competition keeps grinding lower in terms of spreads then, we're going to have to make a decision around whether we play in that market or we don't. And that's -- we just have to see how things play out.

Matthew Breese -- Stephens Inc. -- Analyst

Understood. And maybe just going back to the loan growth question. I just want to get a better sense for overall activity. I mean if you feel like you're not getting the deals, is it because of its overly competitive or is it just a general lack of activity? And if that continues for, call another couple of quarters, I know the overall strategy is to lean into commercial more, but just in terms of maintaining the overall size of the book, could we see you go back to consumer segments just to maintain the size? Is that an option?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

So I've said -- go ahead Frank.

Francis J. Leto -- President and Chief Executive Officer

Go ahead. No, go ahead Mike.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

I was just going to -- your comment around just commercial side and what's happening there and we're going to continue to evaluate that from a risk appetite standpoint.

And as Liam said earlier, some of this is demand as well. So that the issue with, well how much demand is there, and that's this period of uncertainty, the longer this lasts the more we'll be stuck within this in this period of -- OK, the demand is not there because the business people don't want to borrow money. They're waiting to see how this plays out. So we got the demand aspect.

And then, on the terms and structure side, we're seeing not just pricing pressure and this hunger for yield, but then just selectively episodic kind of loosening of credit standards, which you wouldn't expect to happen in this environment. So it's the same dynamic we always see and I think that just puts a lot of uncertainty around there on the commercial side of the house, and then I'll let Frank answer the pivot question, whether we would pivot to different areas.

Francis J. Leto -- President and Chief Executive Officer

Well, yeah, let me just comment a little bit about what Mike said. I mean I think exactly what he described is happening and I see that expectation, particularly in institutions that don't have diversified revenue. They -- they're stretching. I mean -- and that's the one thing that we've always, always relied upon is our credit culture at this Bank.

And so that's something we're never going to give back, we're never going to give up on. And so, as Mike was describing, you would not expect to see at a time, the time we're living in right now, people with some of the term, some of the relaxing covenants, even guarantees, things that we are just not comfortable with. But when you're stretching, you're just going to stretch and it's probably not the right time to do it from our perspective.

So as Mike talks about our risk appetite, that is not our risk appetite to take risk in that portfolio at this point in time. Would we go into other segments? We've never really been a consumer lender. That's not been our strength or a forte and I don't know that we would, is this the time necessarily to jump into it?

But, what it does do is it gives us a unique opportunity to really focus hard on our non-interest income segments. And we did that. If you could just go back and take a look at our history in '08, '09, '10 and '11, that's when we really -- we really jump-started our Wealth Group at that point in time. And we've been on a run since then, and I think that gives us a lot of opportunity now to focus marketing efforts, things like that in those specific areas.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. So the capital shift or the capital management shift wouldn't be toward other portions of the lending. The loan portfolio, consumer wise, would be more into fee income areas like BMT Delaware, things like that.

Francis J. Leto -- President and Chief Executive Officer

Fee income, I mean there could be some of those things we do on the commercial side. But at this point in time, I hate saying the same thing over and over again because I feel like we're trying to avoid your question, and we're not. It's just we just don't know where we're headed. And I think we're taking that very, very cautious eye on everything right now until we get a little better clarity and who knows when we're going to have that.

It'd be great to say we're going to have it before the end of the year. It'd be great to say we're going to have it the day before the election. I mean, who knows at this point in time. But when we get that clarity, I think that'll -- then we can start to talk about where we're going to be moving at that point in time.

Matthew Breese -- Stephens Inc. -- Analyst

Understood. And then capital is up quite a bit...

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Matt, can I just one -- I mean, so as an example of what Frank's describing. When CS, all of a sudden, the residential portfolio growing at an accelerated rate as an example from a pivot perspective, if that helps, in terms of an example.

Matthew Breese -- Stephens Inc. -- Analyst

Right. Just curious if capital is up quite a bit since the last quarter. The dividend is intact. And do you feel more comfortable on that front or do you feel comfortable enough to maybe do something even like a buyback? Curious on your thoughts there?

Francis J. Leto -- President and Chief Executive Officer

Again, I think -- we have a very disciplined, and thanks to Mike and his team, we've a very disciplined capital planning process we go through that entails looking at everything at our disposal. And it's clearly on the table, but again, it's just about, let's get through the next couple of months and then I'd say everything is back up for discussion. We just had our Board meeting yesterday. We talk about these things all the time. It's just we don't feel at this pocket -- the posture we're standing in today.

The industry, the economy, the country that it's the right time to start to jump into the buyback mode or to any of those -- any of the things that are available to us and you get, again, a little bit better clarity. So yeah, I mean, we've got the capital, it's good. And I think it's really good if we need it. And if we don't need it, there are a lot of things we can do with that in addition to buyback.

Matthew Breese -- Stephens Inc. -- Analyst

And then my last one. Just to go back to the expense discussion. Is it fair to say that this quarter's expense rate, which includes the FTE reduction and includes the wind down of BMC Advisors. This is a better starting point for the -- to work off of when we reduce that square footage for next year?

Francis J. Leto -- President and Chief Executive Officer

Yeah, and I appreciate too, some of that -- aren't seeing the full effect of the workforce actions either. That won't -- you'll see the full effect of that again on one-one. So we started to see it immediately because some of those actions took place immediately, but there was also a lot of work through data that went all the way through to the end of the year, so...

Matthew Breese -- Stephens Inc. -- Analyst

Okay. I appreciate taking all my questions. I know there was a few of them. Thank you.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Thanks.

Francis J. Leto -- President and Chief Executive Officer

Thanks, Matt.

Operator

And our next question today comes from Erik Zwick with Boenning & Scattergood. Please go ahead.

Erik Zwick -- Boenning & Scattergood, Inc. -- Analyst

Good morning, guys.

Francis J. Leto -- President and Chief Executive Officer

Good morning.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Good morning.

Liam Brickley -- Senior Vice President & Chief Credit Officer

Good morning.

Erik Zwick -- Boenning & Scattergood, Inc. -- Analyst

One follow-up on the loan growth discussion. I appreciate all the commentary you've given so far about risk appetite being more cautious today and pricing dynamic. Curious if you can provide any kind of quantitative numbers behind loan pipeline at September 30th versus maybe June 30th and also kind of end of 2019, just curious to maybe frame the change in the borrower demand with some numbers, if you have anything handy there.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

I think we prefer not to give anything forward-looking. I'll say this as more anecdotal, and Frank and Liam can weigh in. But pipelines are obviously much lower than they were a year ago, whether that's 50% or 60% or 40%. I don't have a precise answer. I mean, we do have a loan pipeline that we're working. But yeah, definitely demand is much lower than it's been, Erik. And just, that's all back to the conversation we've been having this morning.

Francis J. Leto -- President and Chief Executive Officer

Yeah. And I think it's probably fair to say, again, without getting into specific numbers, 9/30 looks better than 6/30 for certain. And the other thing to understand, the demand has been there. It's not that it hasn't been there. It's just these may not be the credits or the things we want to jump into right at this moment. So we're just trying to be very selective and thoughtful about how we're deploying this liquidity at this point in time.

Erik Zwick -- Boenning & Scattergood, Inc. -- Analyst

Got it. That's helpful. And just one last one for me. I'm just trying to understand kind of -- maybe your expectations for how the CECL model impacts provisioning going forward. So the big change and the big build in reserves this year came in 1Q as the economic forecasts changed. And then the second quarter and third quarter provisions have been more modest even as you've kind of now made some risk downgrades in the portfolio.

And I think, Mike, in your prepared comments you mentioned, at some point this will lead to some episodic charge-offs. As those charge-offs and losses occur, if the economic forecast stays the same, would -- kind of your understanding of kind of the CECLC model, you would not have to kind of replace reserves at that point, but the reserves start to come back down at that point or -- just trying to understand the reserves and provisioning as the cycle plays out?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Yeah, I mean I'll answer that. This is Mike and then I'll let Liam speak to that. But, yes. So I think the answer is, could be yes. So if things stay the same and we move through time; that means we're getting closer to a time when things are normal. So to the extent there is no charge-offs between now and that time, then you would naturally expect for the allowance to come down because you would have predicted that you would have had losses, right?

So -- but to the extent those losses happen and when they happen and how large they are relative to the allowances there, that's the interplay between which loan charges off because this is a pool concept. So which loan charges off and then how is that loan accounted for in as a function of the pool? And that's where this gets tricky and that's where we could have -- we could have a charge-off and maybe you have to replace some of that just because of the time period it takes place, just because of the way the modeling works.

And so if you [Phonetic] get this lumpiness, I use that technical term, lumpiness, you could get that from a provisioning perspective -- you could get it from a provisioning perspective based on these one-off charge-offs. And it's going to be -- the whole industry is going to have to deal with this situation because of the way this works. It's a pooled concept and it's a pooled methodology. So, Liam, do you have anything to add?

Liam Brickley -- Senior Vice President & Chief Credit Officer

No, I think that's generally correct. It is done on a pool basis and there is a series of underlying assumptions and it really comes down to how quickly do we revert to the mean, right? How quickly do we revert to a baseline economy that's on an uptick, and what's the damage between now and then.

And frankly, none of the models can factor in some of the extraordinary mitigants out there that -- nobody could model for PPP, nobody could model for the inter-agency guidance that allowed for a substantial loan deferrals. Nobody can model for whatever the next round of stimulus looks like and how that flows through to various customer segments.

So we are watching. We think the correct path here is to be constructively engaged with clients who are going to make it, right? Then to the extent charge-offs happen, charge-offs happen, but the impact on ACL has all these other macroeconomic drivers that you could have some lumpy movements.

And we have a game plan -- every permutation of what could happen. But as Mike said, all things being equal to the extent that the trend of charge-offs is reasonably modest, you could reasonably expect, with an improving economy, that the ACL would decline over time.

Erik Zwick -- Boenning & Scattergood, Inc. -- Analyst

I appreciate that thorough response. Thanks for taking my question today.

Operator

And our next question today comes from Stan Westhoff with Walthausen & Co. Please go ahead.

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

Good morning, Frank and Mike.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Hey, good morning, Stan.

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

I just wanted to touch on a couple of things. We've been seeing across the industry solid sequential loan -- deposit growth, kind of across the board, even in the face of some lower time and broker deposits. Can you talk about what trends you're seeing in there that showed a pretty significant decline here sequentially?

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Frank, you want me to take that?

Francis J. Leto -- President and Chief Executive Officer

Sorry Mike, Yeah, go ahead.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Yeah, this is Mike. I mean, some of what you saw happening with us is the bulk of what -- the reduction in deposits that you saw quarter-over-quarter was really a lot of actions we were taking to just push some excess liquidity out. So generally speaking, the retail deposit profiles remain pretty much intact and normal for us.

So we have a very established pattern, seasonality pattern. And typically late second quarter or third quarter, we actually see some run-off and then we start to see it builds going into the end of the year and we're seeing that pattern play out as it typically does in the early part of Q4 here. So we haven't really seen a huge change in that pattern or flows for that matter. So the large increase in deposits we've had was really related to PPP and bad activity.

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

I understand that -- go ahead.

Francis J. Leto -- President and Chief Executive Officer

Yeah. No, no. I was going to say, I think Mike hit the nail on the head. I mean, I don't think we're seeing anything out of the ordinary there. Go ahead. Sorry, Stan, I didn't mean to interrupt.

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

No, that's all right. I've seen -- I've heard a couple of comments from other CEOs across the country here that even with in the face of the PPP which obviously drove a good chunk of it in the second quarter, some of them were a little surprised that the deposits are not going out like some of us might thought that they're going to do, such as myself, just as people used cash for various purposes. It just seems like you guys are -- you of bucked the trend a little bit there.

Francis J. Leto -- President and Chief Executive Officer

And keep in mind, too, our bases. We have a large business base, a large commercial base of customers. So I think we just got a -- maybe a little different pattern than what if we are a more retail oriented.

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

Okay. And then can I get a little bit more granularity on the deferrals in the hospitality space? Is that the bulk of them or in fact you have leftover on there?

Liam Brickley -- Senior Vice President & Chief Credit Officer

Well, I'll try. Sorry, is the question, is the bulk of the deferral is hospitality or is the bulk of the hospitality book on deferral?

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

It's either or I guess. I guess if we just look at the deferrals which came down to about 9% and you're going to have a good chunk of it supposedly run off here over the -- through November. How much of that is hospitality?

Liam Brickley -- Senior Vice President & Chief Credit Officer

The hospitality book in general is a little under $100 million and probably -- certainly more than half of that is on deferral. So that sector of it that was hit as hard as anyone through this. And right now, all of those deferrals roll off in Q4. We would anticipate some subset of that to potentially be seeking some incremental deferral action into 2021.

Although I would caution folks that deferral doesn't mean necessarily a 100% payment deferral, some of the deferral activity that has been undertaken and that is being contemplated is really just moving folks from an amortizing basis to an interest-only basis for a period of time. So the answer is, a big hunk of our hospitality book was on deferral. Some have rolled off and resumed payments and the rest will be rolling off deferral in Q4, subject to any individual properties that may be looking for relief over the winter and into the spring.

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

Of course, of course, that's a factor that's going to take quite a bit of time to get through. All right, that's about all I have for now. If I have any other questions, I'll give you a shout.

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Thanks, Stan.

Francis J. Leto -- President and Chief Executive Officer

Terrific.

Liam Brickley -- Senior Vice President & Chief Credit Officer

Thank you.

Operator

And, ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Francis J. Leto -- President and Chief Executive Officer

Thanks, Rocco. And just a quick thank you to all of you for your interest in the Bank. To our shareholders, to our employees, and our clients; again a big thanks. We'll talk to you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Francis J. Leto -- President and Chief Executive Officer

Michael William Harrington -- Executive Vice President & Chief Financial Officer

Liam Brickley -- Senior Vice President & Chief Credit Officer

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Charlie Hough -- Piper Sandler -- Analyst

Christopher Marinac -- FIG Partners LLC -- Analyst

Matthew Breese -- Stephens Inc. -- Analyst

Erik Zwick -- Boenning & Scattergood, Inc. -- Analyst

Stanley Westhoff -- Walthausen & Co. LLC -- Analyst

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