Community Bank System Inc
NYSE:CBU
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Community Bank System Inc
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Welcome to the Community Bank System Third Quarter 2020 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission.
Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris Executive Vice President and Chief Financial Officer. They will be joined by Joseph Serbun, Executive Vice President and Chief Banking Officer, for the question-and-answer session. Gentlemen, you may begin.
Thank you, Jason. Good morning, everyone. Thank you as well for joining our Q3 conference call, and we hope you and your families are well. This quarter was certainly different than the last, less day-to-day and sometimes minute-to-minute focus on COVID, PPP, loan deferrals and the Steuben acquisition, and we seem to have settled into a reasonably effective operating cadence. Our operating earnings for the quarter were a bit better than we might have expected given the yield curve and muted credit demand, but our nonbanking businesses had a strong quarter. In fact, year-to-date, they're up 4% on the top line and over 6% on the bottom line, so a very solid performance for those businesses. The quarter was also very good for mortgage banking, credit, deposit growth, consumer deposit fees, and the Steuben acquisition was also very additive to our performance. The only real negative in the quarter, notwithstanding the litigation accrual that Joe will discuss further, was credit demand, excluding mortgage lending. The total loan book was up about 1% with slight declines in every business.
The mortgage business was quite strong, and we sold over $100 million of lower rate conforming production into the secondary market, where premiums are, at the present moment, very generous. So overall, we're satisfied with the quarter and with current operating trends given the environment. As we head into the last quarter of the year and into 2021, we will continue to be mindful and focused on the potential headwinds, including credit, the economic environment and interest rates. Despite the forward headwinds, we think we're in pretty good shape to capitalize on opportunities that we expect lie ahead. Joe?
Thank you, Mark, and good morning, everyone. As Mark noted, the earnings results for the third quarter of 2020 were very solid, especially in light of the economic challenges and industry headwinds we faced throughout the year. The company recorded $0.79 in fully diluted GAAP earnings per share for the third quarter. Excluding $0.04 per share for litigation reserve expense net of tax effect and $0.02 per share for acquisition-related expenses net of tax effect, fully diluted operating earnings per share were $0.85 for the quarter. These results were $0.01 per share higher than the third quarter of 2019 fully diluted operating earnings per share of $0.84 and $0.09 higher than the linked second quarter 2020 fully diluted operating earnings per share of $0.76. The company's adjusted pretax pre-provision net revenue per share of $1.10 was consistent with the third quarter of 2019 and $0.02 per share higher than the linked second quarter results.
I will next touch on the company's balance sheet before providing additional details on the company's earnings performance for the quarter. The company closed the third quarter of 2020 with total assets of $13.85 billion. This was up $401.1 million or 3% from the end of the linked second quarter and up $2.25 billion or 19.4% from a year earlier. Similarly, average interest-earning assets for the third quarter of 2020 of $11.96 billion were up $852.5 million or 7.7% from the linked second quarter of 2020 and up $2.15 billion or 21.9% from 1 year prior. The very large increase in total assets and average interest-earning assets over the prior 12 months was driven by the second quarter of 2020 acquisition of Steuben Trust Corporation and large inflows of government stimulus-related funding and PPP originations.
Ending loans at September 30, 2020, were $7.46 billion, up $605.5 million or 8.8% from 1 year prior due to the Steuben acquisition and the origination of $507.4 million of PPP loans. Ending loans were down $69.4 million or 0.9% from the end of the linked second quarter due to a decline in business activities in the company's markets due to the COVID-19 pandemic. The company's average total deposits were up $823 million or 8.1% on a linked-quarter basis and up $2 billion or 22.6% over the third quarter of 2019. A significant portion of these funds were invested in overnight federal funds sold, which increased average cash equivalents in the quarter to $1.3 billion, $635.1 million or 95.4% higher than the third quarter of 2019 and $478 million or 58.1% higher than the linked second quarter balances.
The company's capital reserves and liquidity profile remained strong in the third quarter. The company's net tangible equity to net tangible assets ratio was 9.92% at September 30, 2020. This was down from 10.08% at the end of the second quarter, but up from 9.68% 1 year prior. The company's Tier 1 leverage ratio was 10.21% at the end of the third quarter, which remained over 2x the well-capitalized regulatory standard of 5%. The company has an abundance of liquidity resources and is extremely well positioned to fund future loan growth. The company's funding base is largely comprised of low-cost core deposits. At September 30, 2020, checking and savings account balances represented 71.3% of the company's total deposit base.
The combination of the company's cash and cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available for sale investment securities portfolio provided the company with over $4.8 billion of immediately available sources of liquidity.
The company recorded total revenues of $152.6 million in the third quarter of 2020, an increase of $4.3 million or 2.9% from the prior year's third quarter. The increase in total revenues between the periods was driven by increases in net interest income, banking-related noninterest revenues and noninterest revenues derived from our financial services businesses. Net interest income was up $1.7 million or 1.9% between comparable annual quarters, driven by a $2.15 billion or 21.9% increase in average assets between the periods, offset in part by a 61 basis point decrease in net interest margin. The company's fully tax-equivalent net interest margin was 3.12% in the third quarter of 2020 as compared to 3.73% in the third quarter of 2019. A precipitous drop in market interest rates and the significant increases and change in the composition of earning assets between the periods, including a $635.1 million increase in average cash equivalents, negatively impacted the company's net interest margin.
Noninterest banking revenues were up $1.2 million or 6.9% from $17.9 million in the third quarter of 2019 to $19.1 million in the third quarter of 2020. This was driven by a $4 million increase in mortgage banking revenue, offset in part by a $2.8 million decrease in deposit service and other banking fees. Employee benefit services revenues were up $0.8 million or 3.4% from $24.3 million in the third quarter of 2019 to $25.2 million in the third quarter of 2020, driven by increases in plan administration and recordkeeping revenues and employee benefit trust revenues. Wealth management insurance services revenues were also up $0.5 million or 3.6% between comparable annual quarters.
Similarly, total revenues were up $7.7 million or 5.3% on a linked-quarter basis due to a $1 million or 1.1% increase in net interest income, a $4.8 million or 33.4% increase in banking noninterest revenues and a $2 million or 5.1% increase in revenues from our financial services businesses. The substantial increase in banking noninterest revenues was driven by a $2.5 million increase in mortgage banking income due to an increase in secondary market mortgage sales activities, a $2.3 million increase in deposit service and other banking fees as the deposit transaction activity levels rebounded in the third quarter.
The company recorded $1.9 million in the provision for credit losses during the third quarter of 2020. This amount was significantly less than the amounts recorded in the prior 2 quarters of 2020 and only $100,000 greater than the amount recorded in the third quarter of 2019. The decrease in the provision for credit losses during the third quarter as compared to the prior 2 quarters was due to improving economic conditions, modest levels of delinquent nonperforming loans, a decrease in loans outstanding, low levels of net charge-offs and a large decrease in the number and amount of the company's loan balances subject to borrower forbearance.
The company recorded loan net charge-offs of $1.3 million or 7 basis points annualized during the third quarter of 2020. Comparatively, low net charge-offs in the third quarter of 2019 were $1.6 million or 10 basis points annualized. On a year-to-date basis, the company reported net charge-offs of $3.7 million or 7 basis points annualized. This compares to $5.4 million or 11 basis points annualized for the 9-month period ended September 30, 2019. Exclusive of $0.8 million of acquisition-related expenses and $3 million of litigation reserve charges, the company recorded $93.2 million of operating expenses in the third quarter of 2020. This compares to $90.9 million in operating expenses reported in the third quarter of 2019, exclusive of $6.1 million of acquisition-related expenses and $87.5 million in operating expenses in the linked second quarter of 2020, exclusive of $3.4 million of acquisition-related expenses.
Although the company continued to experience reduced levels of business activities during the third quarter of 2020 due to the ongoing COVID-19 pandemic, the resumption of certain marketing and business development activities and the incremental costs associated with operating a larger organization as a result of the acquisition of Steuben in the second quarter of 2020, resulted in a $2.3 million or 2.6% net year-over-year increase in operating expenses between the comparable third quarters. This increase in operating expenses between the quarters was attributable to a $1.2 million or 2.2% increase in salaries and employee benefits, a $1.4 million or 13.3% increase in data processing and communications expenses, a $0.3 million or 3.4% increase in occupancy and equipment expense, offset in part by a $0.2 million or 2.3% decrease in other expenses and a $0.4 million or 9.6% decrease in the amortization of intangible assets.
The $5.7 million or 6.5% increase in operating expenses between the third quarter of 2020 and the linked second quarter was driven by a $2.6 million or 4.7% increase in salaries and employee benefits, a $1.3 million or 11.7% increase in data processing and communications expense, a $0.4 million or 3.9% increase in occupancy and equipment expense and a $1.4 million or 16.4% increase in other expenses. The effective tax rate for the third quarter of 2020 was 20.3%, consistent with the linked second quarter.
During the third quarter, the company accrued $3 million or $0.04 per fully diluted share net of tax effect in litigation reserves related to a class action suit brought against the company for its deposit account over direct disclosures. The company anticipates it will execute a settlement agreement with the plaintiff on the matter in the fourth quarter. The agreement will be subject to the final approval of the court, and the company does not anticipate that additional reserves will be approved for this matter in future periods.
From a credit risk and lending perspective, the company continues to closely monitor the activities of its COVID-19-impacted borrowers and develop loss mitigation strategies on a case-by-case basis, including, but not limited to, the extension of forbearance arrangements. At September 30, 2020, 216 borrowers, representing $193 million or 2.6% of loans outstanding, were active under COVID-related forbearance. As of last week, the outstanding loan balances under active forbearance dropped below $125 million. Although these trends are favorable, the company anticipates that the number of delinquent nonperforming loans will increase over the coming quarters. At September 30, 2020, nonperforming loans increased to 43 basis points or 0.43% of total loans outstanding. This compares to 0.42% of total loans outstanding at the end of the third quarter of 2019 and 0.36% at the end of the linked second quarter of 2020.
Total delinquent loans, which includes nonperforming loans and loans 30 or more days delinquent, total loans outstanding was 0.79% at the end of the third quarter of 2020. This compares to 0.85% at the end of the third quarter of 2019 and 0.72% at the end of the linked quarter second quarter of 2020. The company's allowance for credit losses increased from $64.4 million or 0.86% of total loans outstanding at June 30 to $65 million or 0.87% of total loans outstanding at September 30, 2020. The allowance for credit losses at September 30 represented over 10x the company's trailing 12 months of net charge-offs.
Operationally, we will continue to adapt to the changing market conditions and remain very focused on asset quality and credit loss mitigation. We anticipate assisting the substantial majority of the company's PPP borrowers with forgiveness request in the fourth quarter of 2020 and throughout 2021. The eligibility of the borrowers' forgiveness request and the SBA's ability to provide loan forgiveness in a timely manner is uncertain at this time. For these reasons, it is uncertain as to the timing which the company's remaining $11.3 million in net deferred PPP fees will be recognized through the income statement.
Loan demand may also be impaired by weak economic conditions. We are also uncertain as to whether or not the high levels of deposit liabilities will be maintained, spent down or increased by further additional stimulus. Since the ultimate effect of the COVID-19 pandemic will have on the company's credit losses remains uncertain, the decrease in the provision for credit losses during the third quarter should not be interpreted as a trend or utilized to forecast provision in future quarters. Although the credit metrics that management historically utilizes to determine expected loan losses remain subdued in the third quarter, the company anticipates increases in delinquency and nonperforming loan balances in future quarters that it is unlikely that all COVID-affected borrowers will resume full payment of contractual amounts upon the expiration of their forbearance agreements.
Although we have begun to deploy portions of our cash equivalent balances into investment securities to increase interest income on a going-forward basis and provide a hedge against the sustained low interest rate environment and anticipate recognizing the substantial majority of deferred PPP fees over the next several quarters, we also expect net interest margin pressures to persist and remain well below our historical levels. Fortunately, the company's diversified noninterest revenue streams, which represent approximately 38% of the company's total year-to-date revenues remain strong and are anticipated to mitigate some of the margin compression. In addition, the company's management team is actively developing and implementing various earnings improvement initiatives, including potential revenue enhancements and cost reduction measures intended to favorably impact future earnings. The company's dividend capacity remains strong. Accordingly, the company expects to continue to pay a quarterly dividend consistent with past practice.
Undoubtedly, the COVID-19 crisis has changed the near-term outlook for society in general as well as expectations around economic conditions. With this said, we will continue to support our stakeholders in a thoughtful, disciplined and compassioned manner. I believe the company is well prepared to endure its impacts.
Thank you. I will now turn it over to Jason to open the line for questions.
[Operator Instructions]. The first question comes from Alex Twerdahl from Piper Sandler.
First off, just wanted to sort of continue some of the last comments that you were talking about, Joe, with respect to the NIM and NII, and obviously, a pretty challenging environment from an interest rate standpoint. And I was wondering if you can maybe talk a little bit through some of the levers that you guys have over the next couple of quarters to keep NII moving in the right direction. I know there's going to be some noise with PPP, but if we sort of back out the accelerated accrual of the fee income as it comes in, what do you have out there to actually keep that number going higher?
Well, Alex, I think you touched on it pretty accurately. I mean it is a challenge, clearly. The interest rate environment is not kind to banks right now with a very flat yield curve. So if that persists for an extended period of time, it won't be a challenge just for us, it will be a challenge for the entire industry, and I think it's already being recognized in the last couple of quarters. With that said, the balance sheet and the earning asset balances have grown significantly. We expect that some of that money will stick around, so we will begin to deploy some of that into longer-term securities to effectively throw an anchor out there from a net interest income perspective for a longer-term period just to sort of protect us from continued downward pressure on the margin. So I think moving some of those funds from a 10 basis point yield up to something likely north of 1% will at least be helpful.
Also, loan demand has not been very strong given the challenges we've had with the economic conditions, but our loan yields have kind of hung in there in the quarter on a blended basis. We averaged a little over 4% for new loan generation. So obviously, we still have a pretty good credit spread in that piece. But overall, it will be challenged. If the rate environment stays where it is, we don't get slope in the yield curve and we don't have a significant increase in loan demand. You mentioned the PPP factors, they will create some volatility in reported net interest margin and net interest income, I think, through most of 2021. As I mentioned, we still have a little over $11 million of deferred fees to recognize next year.
Okay. And then I think you talked about -- or you mentioned that investing in some securities brings some of that cash to work. I wasn't sure if you've done some of that already in the fourth quarter and kind of how much we could expect of that 10 basis points to north of 1%, is something that we could throw in our model for the fourth quarter, if there's any way to get a handle on the magnitude of that.
Yes. We have started the process of investing some of that cash. That combination of -- we have some maturities in the fourth quarter, and we also are investing some of that excess cash. So kind of on a net basis, we expect to round up $500 million or $600 million in the quarter in terms of the cash deployment, so basically taking about that amount in cash equivalents and having it deployed into something that's a little bit higher. There's still going to be likely some cash on the balance sheet. The permanence of that is a bit uncertain. We also don't know if there's another round of stimulus coming, too. So we need to monitor those items as we move into 2021, but the expectation is that we'll at least have $300 million or $400 million more net -- or maybe -- I'm sorry, I said $500 million to $600 million more net in securities balances at the end of the fourth quarter.
Okay. Great. And then what about on the liability side in terms of borrowings? You still have a small amount of borrowings on the balance sheet. Are any of those coming due or repayable in the near term?
We do have some trust preferred securities, about $75 million. They're in the window to redeem, so we'll be evaluating that in 2021. That is one item we're looking at. And the other borrowings, I think, that probably you're referring to are repurchase agreements, which are repurchase agreements with customers, largely our public funds customers in our Vermont markets. And we kind of look at those, even though they're technically borrowings, we look at those as generally customer relationships and more deposit-like. So no anticipated reductions in those relationships and those borrowings.
Okay. And then just finally for me, just looking at fee income, I guess we have had 1 full quarter, it was too bad now, but just kind of thinking about the right level for deposit service and other banking fees, still seems a little bit depressed in the third quarter versus a year ago. And obviously, with the acquisition, it should be a little bit higher. Should we get full rebound in the fourth quarter in that line item? And then kind of how are you thinking about mortgage banking on a go-forward basis? Is this 3.9% maybe not sustainable until 2021, but is the pipeline still pretty full? And do you expect to sell an equivalent amount in the fourth quarter?
Yes. So I'll take the first question first, which is just in our general fee line items, particularly in the banking fee line items, I would not expect the full rebound in the fourth quarter. A lot of our consumers are still a little reticent to spend. We have seen some pickup in transaction activities. We've seen less overdraft occurrences than we have in prior quarters.
So I wouldn't anticipate that, that will rebound fully in the fourth quarter. I would expect, maybe by the middle of next year, we'll see some of those noninterest deposit service fees rebounding a bit, but I wouldn't expect it immediately. With respect to the mortgage banking revenues, we saw very attractive premiums and pricing in the mortgage banking market over the last couple of quarters and chose to sell off some of our originations into the secondary market. We do need earning asset yields -- or excuse me, earning assets at good yields over the coming quarters, so we would expect to wind down a bit some of the mortgage banking activities and look potentially to the portfolio, some of those originations in future quarters.
The next question comes from Russell Gunther from D.A. Davidson.
I wanted to start with questions around the expenses. First, a little more acute in terms of the drivers of the increase in the data processing line. What was the rationale for that this quarter? And how do you expect that to trend? And then bigger picture follow-up in terms of comments of taking a look at the expense base and any opportunities to take some expenses out of the run rate and help support positive operating leverage?
Yes. Russell, I would say with respect to the data processing and communications line, I don't think there's anything in particular that would lead us to believe that, that's going to be an elevated run rate for us. I think it's just a timing issue relative to the same quarter last year. I mean I can give you a little bit more specific answer, but a lot of it is in the communications area. Just we have more data lines to maintain with additional branches and centers. And so some of that is there, some higher payment processing costs and things, but I don't think there's any concern -- trend that I would be concerned with in the data process and communications line other than sort of normal growth activity that sort of stimulates the inflationary rates.
With respect to the overall core operating expenses, I think I mentioned last quarter that, including Steuben on a more normalized level, the expectations were somewhere between $95 million, $96 million as a run rate for the balance of 2020. With some of the initiatives we have going on just to minimize growth in expenses next year, I think that's a fair run rate for the 2021 year, all in including Steuben. So I think that $95 million, $96 million of operating expense run rate is not unreasonable.
Okay. No, that's very helpful, Joe. And then just switching gears a bit. You guys touched on the challenges with the organic growth balances and the macro uncertainty. But as you think about the trajectory of loan growth into the fourth quarter in '21, are pockets of strength that could help support drive positive growth into next year? Or how are you thinking about loan balances going forward?
Russell, Joe Serbun. I'll take a shot at that. So just to give you a little perspective, the current pipelines in the residential mortgage line of business is running about $265 million, which is a pretty good number for us. And on the commercial pipeline, that's running about $250 million, $300 million. That's a little light, quite candidly. And on the indirect side, in the indirect business, quite frankly, you can get as much as you want, if you're willing to buy deep and buy low. We don't have any intentions of buying deep or buying low. So we probably won't see much growth in that portfolio.
The commercial portfolio has got some pockets of opportunity, primarily in the multifamily sectors and primarily in some of our bigger markets, more larger markets like the Syracuses or the Buffalos or the Rochesters or the capital district in Albany. I don't expect it to be overly robust at all. I think that we're going to be hunkering in here with a pipeline that's going to hang in around the $250 million, $300 million range. We were historically closer to $455 million, and that's obviously dropped off specifically as a result of COVID.
The next question comes from Erik Zwick from Boenning and Scattergood.
First, just wanted to, I guess, talk about the employee benefits business. It has and continues to be a great source of revenue for the bank, especially today with the net interest income headwinds. I'm curious if you could provide an update on the growth strategy for that business. And also curious about the typical term of a customer contract and whether the sales cycle for that business aligns with the traditional kind of end of year benefit cycle or is it more of an ongoing full year effort.
It's Mark. I think strategically, it's the same strategy we've always employed, which is continue to be disciplined about growing that business, both organically and through high-value M&A opportunities, so we'll continue to pursue that as a growth strategy. In terms of the markets we're in, we are in -- that business, the revenue run rate is $100 million, pretty close to it. But there's some bigger pieces to it, so we've got a collective trust piece, we have a 401(k) platform piece, there's a viva piece, we have an actuarial consulting piece. So there's a lot of pieces to it, and they all integrate really well together.
And so particularly on the organic side, over the last few years, really refined the cross-selling capacity of all of those businesses to support each other. So the organic piece is not just kind of pursuing market opportunities, but it's also pursuing internal cross-sell opportunities to existing customers. And I don't know what the answer to this question is, so I know I'm supposed to give answers not ask questions, but I think a good question to ask would be how much of our organic growth is outside the current customer base and how much of it is inside, and I don't know that and I'll find out because I think it's a fair question.
So a lot of our effort is really kind of internal cross-selling of all those different pieces to the customer base, which is usually a lot of times a CFO or HR directors or there's pieces that go to kind of investment managers. So I think the growth strategy is going to be internal cross-selling, market organic growth as well as high-value M&A.
On the business model side, we like the mix of businesses we're in. I think the 401(k) business is probably more mature than some of the others. So we have spread our wings a bit in the last few years and invested in some kind of other lines of business and that are start-up that are actually growing more rapidly than that core business. So we'll continue to look for those opportunities in the market to pursue the sectors and the spots that are actually growing. So I think that's kind of a quick summary of what the growth strategy and business model is in that business. They're having a really, I mean, a terrific year-to-date. They're up, I think 6%, 7%, 8% in earnings year-to-date, so they're really having an extremely good year.
We're also seeing a bit more activity in terms of M&A in that space, for whatever reason. It's been more active the last couple of quarters than it has been in some period of time, so that's good news as well for us in that business.
That's great. I appreciate the detailed answer there, Mark. And then just looking at Slide 15 in the supplemental deck, the one on the health care and social assistance portfolio. Looking at that, I guess, about 10% of the portfolio still had some forbearance at the end of the quarter. It seems a little bit higher than some of the other portfolios. You did mention just overall for the total loan portfolio, it sounds like forbearance continued to come down over the past few weeks. Has that continued here in this portfolio? And then just looking at the breakdown of the kind of individual pieces of that portfolio, are there any that are kind of more stressed today? Or are there something that are recovering better? Just curious of the trends that you're seeing there.
Yes. So Erik, this is Joe. I'll take you through October 22. In the health care and social services, we had 7 deferrals, for a total of $15 million. And as you look at the -- you talked about Page 15, as you look at the breakout of Page 15, the only one that's concerning would be nursing facilities, nursing home facilities just because of COVID and the restrictions placed upon them. Everybody else are performing just fine for us. And I'm not suggesting that the care facilities aren't performing fine, it's just a higher concern just, again, because of the population of the people and the restrictions placed upon them as a result of COVID.
The next question comes from Chris O'Connell from KBW.
This is Chris filling in for Collyn. I just wanted to start out with the strong -- you guys have obviously very strong capital and liquidity position. As you guys think about that, and I guess where the stock price is, are you considering the buyback at all? Or if you aren't considering the buyback at this time, why not? And I guess, what would get you involved?
Chris, this is Joe Sutaris. That's a good question. Our challenge with buying in shares is obviously that given our valuation, our price is that it is dilutive to tangible book value. But the other part of that, too, is we've been an active acquirer over a very long period of time, and we like to have some of that capital resource available for M&A purposes. I think we'd rather use it for accretive M&A transactions than we would for stock repurchases, at least at this time.
Got it. And I guess going along that line, I mean, you said you've seen a pickup in M&A conversations and opportunities on the fee side of the business. And then how are those conversations and kind of opportunities been popping up in terms of frequency on the bank side of the business?
It's clearly been slower on the bank side of the business. I think boards and management teams are continuing to grapple with kind of the new environment, the COVID-related impacts to the business and the economic environment and the credit concerns and the interest rate yield curve. So I think everybody is kind of busy with all of that. In addition, for the most part, brought the industry, particularly the smaller banks in kind of the market cap to small cap or less kind of banks that we would look to partner with, their multiples are way down.
So I think the idea of thinking about a strategic partnership in that environment is just less likely. If your stock is selling at $20 now and the beginning of the year, it was at $40, it's hard to sell for $25. So that's what I think the simple dynamics of it. I do think the environment is going to get more challenging for all of us for a lot of different reasons. Maybe less related to credit, certainly for us, and more related to the interest rate environment, potentially.
So I think the yield curve challenges is going to make it more difficult for banks across the spectrum, particularly if there's low credit demand. I mean a lot of banks, they have essentially 1 lever to pull, which is other than knockbacks, which everybody has that lever, but it's basically credit growth. And that's the lever you have to pull. And for us, we don't rely on that as much because we have other levers to pull.
And so I think over the course of the next 18 months, the discussions around strategic partnerships will probably grow over time. But I would say at the current time, a lot of teams are just kind of looking at what they have and how they manage it and how they get through the rest of this year and into next year with the new challenges of the new environment, which could change it again, if you have a change in the administration and the change in kind of the regulatory regime. So I think there's some precipitating factors that might create more opportunity in the bank space in 2021.
Got it. Makes sense. And if a deal were to come to you, say, in the next 3 or 4 months, do you think that you would have the tools and the resources and the proper information to be able to evaluate that deal and execute on it, given the current state of the credit environment? Or would you be more comfortable kind of waiting another quarter or two before taking a real hard look at a deal?
No, I'd be fine taking a look at something that was the right opportunity. I think, when times are more difficult, that's when you have greater long-term opportunity. When the trees are growing to sky, there's more risk, in my view. I would certainly look at anything that kind of met our general criteria, that it has to be a higher quality franchise, but it has to be a good fit for us. It has to be able to create sustainable economic value for our shareholders. And certainly, I think, if they have the kind of information about their portfolio that we have, we would have enough information to get our arms around it. So I think a lot of it would depend on what level of granularity they have around data collection, data analysis, data summary reporting, as it relates to their portfolio. But we would certainly take a look at something if the opportunity arose.
Great. And then just one last one on the credit and deferrals. I mean it seems like you guys have made really good progress on deferral bucket. I think you said it might have dropped down to $125 million or so. Obviously, what's left in the deferral bucket is credits from fairly highly impacted sectors. Have you guys made any loss assumptions that you can share on some of those higher impact deferrals? Or how do you see that -- or do you see those translating into actual losses as you move through the credits?
Yes. And I'll let Joe serve and comment a little further. This is Joe Sutaris. As we head into some of the inter -- potentially round three with some of those borrowers, we're going to have to evaluate them for nonperforming status, nonaccrual status, and we'll be taking those on a case-by-case basis. We're hopeful that some of the borrowers will see some light at the end of the tunnel and hopefully are resuming some of their pre-COVID levels in terms of cash flow. Although the reality is, is that in our markets, we're headed into the winter season, which is not always a great season for a lot of our hospitality borrowers. So that will be a challenge as we move through the next round of deferrals.
Chris, let me just add, if I might, and you're right, we've made some progress. So back in the second quarter, we were at round number $700 million in deferrals, 9.4% of the total portfolio. Third quarter, $192 million, 2.6%. As we sit here, as of Friday last week, we were down to 1.6% or $121 million. So we've made some great strides. Clearly, some of these accounts that are on deferral, the expectation is they're not all going to make it. Some will end up falling delinquent, and we'll apply our standard loss mitigation processes. As Joe mentioned, we are working through, and we'll continue to work through each one of these on an individual basis to determine exactly what we should call them and what our approach will be to minimize any potential loss that we might experience.
The next question comes from Matthew Breese from Stephens Inc.
A couple of follow-up questions. Just on the last credit discussion. Curious, especially in the lodging book, have you've seen any transactions nearby that give you either confidence or make you a little bit concerned about the underlying collateral value of what's behind these loans?
Sure. So a couple of data points, I guess, with respect to the lodging portfolio. Our current weighted average loan-to-value sits at less than 55%, excuse me, less than 55%. Just in talking with some industry specialists, specifically some appraisers, I would tell you that we probably lost 20%, maybe a little bit more value as a result of the current COVID situation. We canvassed our portfolio. Our occupancy, just to give you a few other data points, our occupancy, 2020 year-to-date occupancy, 42% and clearly benefited from a strong June, July, August and September. When I say strong, the month of September had an occupancy rate running at 52%.
So there was activity that picked up during the season that you would expect it to pick up within. As long as society stays open, I think that these hospitality operators have a strong opportunity to make their way through. The majority of our portfolio before COVID, the majority of our portfolio was with known, existing, strong management capabilities, liquidity, lower leveraged relationships that we expect will see us through. They're not all going to make it, but I think that the lion's share have got a real shot at seeing it through to the end.
Right. Yes. I just wanted to get a sense for do you think those LTVs of less than 55% provide the bank enough protection, if there is a sale, to not undertake any charge-offs. It sounds like so far, plus or minus, you feel okay about that.
Yes. Yes. Correct.
Next question, just real quick.
And we're going to get -- go ahead.
No, I'm sorry, you go ahead.
I was just going to say, and we like -- for the most part, we like the location, location, location. We like the locations of many of our properties. There's a reason they were built where they were built, and that should benefit the operator in the long haul.
Understood. And then what was the all-in PPP income for the quarter?
$3 million. That includes the interest and the recognition of the deferred.
Okay. And then just my last one. Mark, I know you talked about M&A, you don't expect anything near term. But just curious, as we remain in this environment for longer and perhaps your currency advantage remains intact, would you consider taking advantage of that to the point where maybe you consider a larger deal? I know part of the recipe for success here is to make sure that CBU DNA survives. Would you consider a larger transaction, even an MOE to take advantage of the current situation if it presented itself?
Unlikely. I think the risk/reward profile of an MOE or a larger transaction, I don't think is conducive to our view of value creation over time. You can certainly model lots of things, including MOEs, and they certainly can be additive to EPS, but are they sufficiently additive to get us over time to that double-digit annualized return to shareholders? And I think the answer to that is probably no. The smaller transactions are generally much more profitable and high-value and lower risk. So I would rather do four small transactions than 1 big one because the risk/reward is just very different.
And yes, it's a lot more work doing it that way, but I think we have a pretty good team and a pretty good system and a lot of experience and expertise in terms of integration and conversions and the like. So I think we'd be unlikely to do something that was really large. There's probably a couple of opportunities where an institution, maybe $4 billion, would be something that is really, to me, meets our kind of risk/reward expectations around transactions, but it's a pretty small number of those. So I think for the most part, we'll continue to look for kind of things in the half billions or couple billions range. And we think there's still a lot of opportunity in that range as well within our footprint as well as kind of contiguous to our footprint in different directions.
There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tryniski for any closing remarks.
No closing remarks other than thank you all for joining. We will talk to you in January, and I hope you are well over the wintertime. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.