Q3 2019 Earnings Call
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Star Zero I would now like to Honda concept over its your first speaker today Crystal. Please go ahead Sir.
Thank you Brent good morning, Thank you for joining us today.
He discusses our financial results for the third quarter of 2019.
Please review the cautionary statements on materials, which can be found in our earnings release and presentation.
Materials contain reconciliations to non-GAAP measures along with information pertaining to the use of non-GAAP measures as well as forward looking statements about the third performance. We undertake no obligation to would not expect to update any such forward looking statements. After the date of this call.
This morning, I'm joined by our President and CEO , Greg Carmichael, CFO tied to presume Chief operating Officer, Lars Anderson, Chief Risk Officer, Freak Forest and Treasurer, Jamie Wonder.
Oh my prepared remarks by Greg can talk soon we will open the call for questions.
During the cold another grad for his comments thanks, Chris.
I think all you for joining us. This morning earlier today, we reported third quarter 2019, net income available to common shareholders.
$530 million were 71 cents per share.
Reported EPS included negative for Sun impact from the and shown on page two of our release.
From a merger related expenses associated with MB financial.
Excluding these items adjusted third quarter earnings were 35 cents per share.
Actual results very strongly reflects our ongoing discipline throughout the bank. This was a strength we're diversified revenue streams.
I would generate strong fee revenue, including a record in capital markets, what tightly managing our expenses revenue and expense results exceeded or July expectations.
When the quarter. We also returned 96% of our earnings to shareholders, a former common dividends share repurchases.
Adjusted pre provision net revenue increased 40% from your go to quarter.
The strong commercial flux or ability to generate strong core revenue growth.
And your managed or expenses.
And our financial commitments from the MB financial.
Acquisition.
We also generate strong core deposit growth compared to prior quarter will proactively lowering interest bearing deposit cost.
Well were key returned profitability metrics improved that's getting the third quarter as we achieved or year end financial targets, but generating in order to see excluding <unk> of 16.5 person.
Normally a 1.35 person who's fishy ratio below 57% on adjusted basis.
We're always ROTC. He has increased 280 basis points or away has increased seven basis points North fishy ratio has decreased 60 basis points.
From a year ago quarter.
And the figure loans were flat sequentially or commercial loan production continued to be sold during the quarter was muted by elevated pay off.
Consistent with our prior guidance would generate average consumer loan growth of 2% sequentially. We remain focused on maximizing our returns to the full cycle, rather than generating lower quality loan growth.
Critical we once again remain relatively benign during the quarter nonperforming assets in the NPL ratio both decline for the prior quarter and many of our credit metrics remain at or near historically low levels.
Fortunately, we've tried to discuss our future results.
Outlook or you are four key strategic parties to crude or long term.
Morning.
First we continue to leverage technology, such as our duty analytics capabilities to accelerate or digital transformation.
Our investments are focused in areas that reduce the friction aired in traditional banking channels. While also investing it there is a drive operational efficiencies. We have made considerable investments with the past several years Tomorrow night, simplifying the rationalized Rupert structure.
In addition, we're investing in advanced cyber security technologies detect respond to threads quickly.
In two or annual technology spend exceed $650 million.
Well, we will continue to invest in technology next year beyond we expect our investments will lead to improved efficiencies throughout the bank.
Second we continue to best to drive future organic growth and so every one of the bank.
The ultimate goal, but investments is to improve both the employee and customer experience in order to support sustainable profitable growth.
We believe is critical to provide our employees with the right tools to maximize productivity, particularly those directly interact with our clients.
To that in the recently announced an increase the minimum wage for employees to $18 an hour effective at the end of this month.
Oh, primarily impact those located in branches and her operation Center.
Before expected this increase will lead to lower employee turnover better customer experience and as a result improved revenue growth.
We've also added talent and capabilities toward Texas, and California geography.
We remain pleased who are building success would generate strong relationship growth well meeting at credit standard consistent with our footprint middle market banking business.
In addition, we already seen positive financial outcomes more renewable energy M&A advisory team.
Which complements our investment banking capabilities to deliver strategic find solutions throughout our national commercial franchise.
Third we continue spinner presents a slick key geographies, including Chicago.
I had mentioned previously our strategy is to generate a higher market share in large in high growth markets. Our employees remain energized about the combined potential Chicago.
Overall employee attrition continues to track or reduce deal expectations. Most importantly, we have not experienced any material client attrition remains very pleased with the middle market loan production or Chicago region, which.
Was by far the strongest region during the quarter.
Although we are not piece, we're going to ensure sustainable success.
I'm pleased with the progress we have made so far.
We are coughing or do we delivered the financial synergies from the end before due to acquisition as previously communicated.
We continue to expect to realize the $255 million and annual expense synergies by the end of the first quarter of 2020 and I've already completed many of the key expense actions.
We also continue to expect revenue Suzy generate plus 60 to 75, new doors and annual pre tax income like 2022.
Our commercial teams have done a great job laying a foundation to leverage our capabilities and strength across our entire franchise.
Already see success generate incremental revenue opportunities.
For instance, we are successfully leverage you aren't here's leasing capabilities to provide value backline solutions to all our middle market in corporate banking clients.
We continue to believe that fit their Chicago is a position strength the loss of Germany strong deposit household revenue growth moving forward.
With the N.B. acquisitions, if we improving our position in Chicago him say, we're continuing to invest in our southeast markets with better deposit growth trends are expected population growth and greater market fatalities.
Lastly, we are focused on maintaining our disciplined approach throughout the company. We continue to expect generally stable credit quality, we're cognizant of the evolving economic and interest rate environment.
Our balance sheet perspective, we have successfully generate strong deposit growth, while maintaining pricing discipline.
We expect to continue our strong deposit growth momentum going forward or average loan to core deposit ratio of 91% is the lowest in over 15 years, reflecting our ability to generate strong core deposit growth and unwillingness to stretch for loan growth.
We expect that this ratio remained in a low ninetys for the foreseeable future.
Our balance sheet management philosophy of focusing on a pre performers.
Economic cycle positions us well for the future.
Given our capital management priorities are focused on returning capital through dividends and repurchases.
In addition to organic growth strategies, I mentioned bank acquisitions or not a priority.
We have continued to demonstrate our discipline in managing our expenses diligently on besting areas of strategic importance.
So expenses declined $3 million sequentially, excluding merger related items.
Generated year over year positive operating leverage on adjusted basis, where this quarter, who will share more better expense expectations for the fourth quarter.
[noise] are clearly defined strategic parties in our proactive balance sheet management, nor continued discipline throughout the bank.
This is us well into next year and beyond.
We remain cognizant of the dynamic economic interest rate environment, you continue to focus on through dislike well performance.
To create long term shareholder value.
I'm pleased report that we were getting able to deliver strong financial results like and what do you think over employees for their hard work dedication and for always keeping the customer to set of everything we do.
We'll go through tough to discuss our third quarter results are kernel. Thank you Greg good morning, and thank you for joining US today, let's move to the financial highlights on slide four of the earnings presentation.
During the quarter, we achieved strong revenue growth was flat expenses and continued benign credit results.
With a 3% quarter over quarter increase in adjusted total revenue and a slight decline in expenses, our annualized core PPNR as a percent of earning assets of 2.3% in the third quarter of 2019 reached the highest level since 2013.
Reported results for this quarter were negatively impacted by two notable items a $22 million after tax impact from MB merger related charges and an 8 million dollar after tax negative mark related to the visa total returns swap.
Adjusting for those items pre provision net revenue increased 7% from the prior quarter and our efficiency ratio improved 180 basis points to 56.7% as strong firm wide fee growth more than offset lower net interest net interest income during the quarter.
As Greg mentioned in his opening remarks, our adjusted return metrics were also very strong into third quarter.
We achieved an adjusted our way of 1.35%.
And adjusted return on tangible common equity of 16.5% excluding AOCI.
Despite the market dynamics and stable capital levels during the quarter.
Our adjusted ROTC is now over 280 points basis points higher compared to a year ago and our adjusted ROI is up seven basis points for the same period as most of our peers have experienced declines in those metrics.
At our original C.T., one targets, which was closer to 9% ROTC, excluding AOCI I would've been approximately 17.5% in your third quarter.
Our performance. This quarter also helped us achieve our previously stated year end return targets, one quarter sooner than we anticipated.
Clearly environmental factors, especially interest rates will have an impact on these returns going forward.
Our third quarter credit performance continued to reflect the generally benign macroeconomic environment with both the NPL and NPL ratios declined quarter over quarter.
Moving to slide five.
Total average loans declined less than 1% sequentially.
Our focus continues to be on generating high quality loan growth to maximize our returns through the full cycle.
In our commercial business strong origination volumes in cnine, where more than offset by elevated payoffs and paydowns.
Total commercial line utilization decreased over 1% sequentially, reflecting the broad market uncertainties.
I would also like to point out that the third quarter average loan growth metrics were impacted by higher payoffs and paydowns at the end of June .
We also continue to see declining balances in large ticket indirect leasing where we halted new originations in early 2018.
Average commercial real estate loans were flat from last quarter.
Our CRT balances as a percentage of total risk based capital remained very low at less than 80%, which keeps our exposure relative to capital near the bottom of our peer group.
We expect that near term loan growth will continue to reflect the softer environment for corporate capital investments.
With our expanded capabilities.
Our new originations continue to remain strong however, payoffs and Paydowns have resulted in muted net loan growth so far this year.
Assuming a similar environment in the fourth quarter, we expect average commercial loans to be relatively stable compared to the third quarter.
As always our focus is on client selection and prudent underwriting as we plan to grow our balance sheet and the best long term interest of our shareholders.
Average total consumer loans grew 2% from last quarter.
Overall consumer loan demand remains at healthy levels within our risk appetite.
This quarter growth was driven by strong auto loan production of $1.8 billion during the quarter.
Auto production spreads were the highest and nearly a decade again with the same strong risk profile that we have targeted for the past number of years.
Home equity production was 5% higher this quarter compared to last quarter, but due to paydowns and payoffs are balances declined.
Our credit card growth was inline with the industry.
The residential mortgage portfolio was flat and in line with our balance sheet management preferences and the current rate environment.
In the fourth quarter, we expect total average consumer loan balances to increase 1% to 2% sequentially.
Moving onto slide six.
Reported net interest income was stable compared to the prior quarter.
Adjusting for purchase accounting accretion and III decreased $14 million sequentially or 1%.
The purchase accounting adjustments benefited our third quarter, and III by $28 million and our net interest margin by seven basis points.
The adjusted third quarter NIM of 3.25% decreased seven pages points from the second quarter.
Third quarter margin compression was slightly elevated relative to our July expectations due to a larger decline in LIBOR and the shift into yield curve as well as elevated cash balances, resulting from strong deposit growth.
Our overall interest bearing liability costs continued to be very well maintained down six basis points during the quarter.
Interest bearing core deposit costs decreased two basis points sequentially as we expected.
We expect interest bearing core deposit costs into fourth quarter to decline approximately another 15 to 18 basis points from the third quarter, assuming at October fit fed rate cut.
During the quarter the yield on the loan portfolio declined nine basis points and as we expected our investment portfolio yield maintained relatively stable level with the decline of only four basis points total premium amortization was less than $3 million.
On a core basis, we expect fourth quarter NIM to declined four to five basis points from the corps third quarter NIM of 3.25%.
Our guidance incorporates a 25 basis point fed rate card in October and results in a core NIM for the full year 2019 of approximately 3.26% a four basis points increase compared to 2018.
We currently expect our fourth quarter net interest income, excluding PAA to be down approximately 1% sequentially, reflecting the NIM impact and the relatively stable loan growth outlook.
As we look ahead to next year, the hedge positions will start contributing meaningfully and at an increasing level to the overall eni based on our current rate outlook.
We expect our toward our core NIM in the first quarter of 2020, so expand a couple of basis points from the fourth quarter of 2019, given the benefit of $4 billion. Our previously executed forward starting hedges that we will begin in December and January .
At this time, we expect full year 2020 core NIM to be in the range of approximately 3.2% to 3.25% depending on the size and timing of federal reserve actions.
We would expect to be at the upper end of the range, assuming no fed rate cuts in 2020 and expect to be at the lower end of the range assuming two additional 25 basis point rate cuts in March and September of 2020.
We assume that deposit betas will be into forties in.
In summary, we expect our NIM to widen a few basis points for the full year 2020 relative to the expected Q4 level. If there are no rate cuts and remain fairly stable. If there are two more rate cuts.
Moving on to slide seven.
We had a stronger quarter in fee income than we guided to in July .
Adjusted noninterest income increased 11% sequentially led by strong performances in both corporate banking and mortgage banking.
As you recall in July we guided to a strong second half fee performance and we realized a larger portion of our anticipated growth and the third quarter.
During the last two years, we deliberately channeled our investments in a number of diverse fee generating businesses to maintain our ability to grow total revenues in different environments and our year to date noninterest income results demonstrate the increasing benefit of having a platform with a wider scope of product and service capabilities.
Corporate banking fees were up 23% from the prior quarter significantly exceeding our prior guidance driven by strong growth in debt capital markets M&A advisory and lease related revenue, all reflecting our diversified and enhanced capabilities to better serve our clients.
Our capital markets teams generated record revenues this quarter, partially impacted by clients accessing the debt markets for financing.
Additionally, the renewable energy M&A team that we hired two months ago already closed two transactions during the quarter.
For the fourth quarter, we currently expect corporate banking revenues of approximately $150 million or up 15% from the year ago quarter, but down from this record third quarter.
Mortgage banking revenue of $95 million increased 51% sequentially.
Originated in volume of $3.4 billion was up 17% from the prior quarter.
Our gain on sale margin of 232 basis points was up 66 basis points sequentially and 69 basis points from the same quarter last year, driven by expanding primary secondary spreads, which we anticipate will remain elevated in the fourth quarter given industry wide capacity constraints.
Our mortgage platform is stronger today than three years ago based on our investment in our loan origination system.
The cyclical nature of this business is providing good revenue support in this environment.
Wealth and asset management revenue increased 2% from the prior quarter due to higher personal asset management revenue.
Deposit service charges were flat compared to the prior quarter as higher consumer deposit fees were offset by lower commercial deposit fees.
Our strong performance this quarter elevated our second half total fee outlook, raising our full year 2019 fee income growth to 17% to 18% from our July guidance of 15% to 16% once again, highlighting the diversification benefits and strength and fee income generation.
Because of the record high numbers in the third quarter, we expect our fourth quarter total noninterest income to decrease approximately 4% from the adjusted third quarter of 2019.
This outlook is reflective of seasonality in mortgage banking.
We also expect higher wealth management revenues during the quarter.
Moving on to slide eight.
Third quarter. It reported expenses included merger related items of $28 million as well as intangible amortization expense of $14 million.
Adjusted for these items and prior period items shown in our materials non interest expense decreased $3 million from the prior quarter.
We remain on track to deliver on the previously provided outlook for MB related expense savings.
We continue to expect to achieve $255 million and savings by the end of the first quarter of 2020 and to capture approximately 80% of the savings on a run rate basis by year end.
Additionally, we continue to expect our total after tax merger charges inclusive of the merger related charges recognized in current and past periods as well as projected future charges to be approximately $250 million after tax.
We expect current and we expect fourth quarter expenses to continue drift slightly lower from the adjusted third quarter level, including the impact on the $3 raised in our minimum wage from $15 to $18 effective at the end of this month.
As we look ahead to 2020, we are mindful of the challenging outlook for revenue growth related to slower loan growth and lower interest rates and plan to manage the trends in our core expenses appropriately.
While we maintain our focus on investing in our businesses for long term growth. We will not this regard to near term realities associated with a market environment and the impact on operating leverage.
We will share our 2020 expectations with you in January .
Turning to credit results on slide nine.
Third quarter credit results continue to reflect the generally benign economic environments.
Our key credit metrics remain at or near historical lows. So.
The third quarter NPL ratio of 47 basis points declined four basis points sequentially, while the NPL ratio decreased sequentially to 44 basis points from 48 basis points.
Compared to last quarter commercial net charge offs increased five basis points and consumer net charge offs were up nine basis points, reflecting seasonal factors.
The ATRA parallel ratio increased slightly sequentially to 1.04% of portfolio loans and leases.
We currently expect fourth quarter charge offs to generally track the third quarter's performance again I would like to remind you that the current economic backdrop continues to support a relatively stable credit outlook with potential quarterly fluctuations given the current low absolute levels of charge offs.
We expect to the up weeks with respect to the upcoming Cecil adoption are expected ranges appear to be in line with other banks that have already disclosed their information.
And our legacy portfolio, we expect the impact of Cecil to result in a 30% to 40% increase in reserves.
Due to differences between the accounting treatment of MBS loans under the acquisition accounting methodology and the treatment undersea. So the increase in Cecil reserves for our combined loan portfolio will be in the range of 40% to 55%.
This incremental impact is predominantly due to the fact that under the seasonal methodology. There is no mechanism that converts the non PCI discount that we established at the time of acquisition to loan reserves.
Turning to slide 10.
Capital levels remained very strong during the third quarter, our common equity tier one ratio was 9.6% and our tangible common equity ratio, excluding AOCI I was 8.21% our medium term CPT one target remains at 9.5%.
Our tangible book value per share was $20 $21.06 this quarter up 17% year over year and up 5% from the second quarter.
During the quarter, we completed $350 million in buybacks.
Which reduced our share count by approximately 13.4 million shares are about 2% of our common shares outstanding compared to the second quarter.
We expect to execute the remaining approximately $900 million of repurchases over the remaining three quarters in the seek our cycle. In addition to raising our dividend by three cents, which is subject to board approval.
Slide 11 provides a summary of our current outlook, we plan to provide more information regarding our 2020 outlook in January consistent with our normal timing.
In summary, I would like to reiterate a few items.
Our third quarter results were strong and continue to demonstrate the progress that we've made over the past few years towards achieving our goal of outperformance through the cycle.
Our execution on the MB acquisition is on track to meet our targets on both expense and revenue synergies.
As always we remain intently focused on successfully executing against our strategic priorities.
And confident in our ability to outperform through various economic cycle.
With that let me turn it over to Chris the open the call up for QNX. Thanks, I said before we start una as a courtesy to others. We ask that you limit yourself to one question and a follow up and then return to the Q. If you have additional questions.
We will do our best answer as many questions as possible in the time, we have a lot of this morning.
During the question and answer period. Please provide your name and that of your firmly operator.
Prince Please open the call for questions.
Sure as a reminder to ask a question you will need to press star one on your telephone to withdraw your question the past the pound key.
Our first question comes from Matt O'connor from Deutsche Bank Your line open.
Good morning, good morning.
Thanks for all the clarity on the guidance for the fourth quarter and I. Appreciate you don't want I give a explicit on 2020 related to cost, but you did say.
You are mindful of the tougher revenue environment and I was hoping you could just talk about the puts and takes as we think about 2020 and I'll put a couple out there today that the easy ones are the way like you've obviously got the full year benefit of the I'd be costs a.
We will drag from minimum wage, but remind just kind of where you are in some of the investment cycle, whether it's related to technology or some of your expansion efforts, how those might compare next year versus this year.
Yes. Thanks, My first question.
Just the SMB.
Comparison also needs to take into account the fact that.
We will have four quarters would then be expense base versus.
Three quarters in 2019, so I just want to point that out.
Obviously, the MB picture is intact, and we will deliver those cost savings in terms of.
The drivers.
The expense base that we are now.
Looking at as we are building our 2020 plan.
The tech investments clearly are underway I think we've done.
Quite a bit to improve our infrastructure and focused on customer facing tools. This year.
That will continue into next year, our expansion plans, whether it's related to retail expansion in the southeast which is mostly financed by closing branches in the north as well as prudent.
Geographic expansion in commercial we are still keen on moving on because those are long term growth drivers and we've had good success.
In the efforts over the past two years, having said that.
I think those decisions the incremental investment decisions.
We'll be made with the with the environment in the background.
And we also look to improve the productivity of the existing expense base. When you think about it we have about a 4.4 billion dollar total expense base on an annual basis about $2.3 billion of that is in head count related expenses that salaries benefits and other headcount expenses.
So we need to make sure that we get to productivity out of that expense base.
Appropriately and that should continue to provide.
Some ability to fund those incremental expansions from savings on the expense base about half and half a billion dollars over that $4.4 billion total expense base is in equipment in occupancy and we continue to focus on efficiencies, there and about $400 million.
That is in pure IP costs away from head count related costs. So these areas still will give us the opportunity to look for efficiencies as we continue to prudently and selectively invest in the company.
But the revenue growth is strong and we believe that despite the fact that we will have challenges associated with the rate environment the fee base and the diversified product and service offerings will continue to support that revenue growth into 2020, so thats the color that I can give you today, but.
Again.
We've been very focused on positive operating leverage over the past two three years.
And that's still in our minds as we are building the 2020 plant.
Okay. That's helpful very detailed thank you.
Next question from John Pancari from Evercore. Your line is now open.
Morning.
Just on the on the acquisition.
On M.B. I know theres been some press about departures Banca departures going to competing banks and I just wanted to see if you could talk a little bit about what you have seen on the bank or front because I know the some of the reports were including other departures that were unrelated and have those departure has been consistent with your expectation.
Or have they.
Ceded thanks, John as I mentioned this is Greg had mentioned my prepared remarks.
The execution against the expense synergies is going as planned large part of expenses. You. Obviously was personnel. So you absolutely expect.
Some of that personnel to move the other banks, we fully expected debt I would say right now 90% of all the high performers that we targeted retaining from bank of perspective, we're still with the bank today. So we've not lost as it is it's very much in line with our expectations of what we modeled in is probably a little more to come.
As we continue to work towards or expense synergy numbers. When you would expect that both in the back office and some of our Salesforce that we bring the two companies together you look at our gearing ratio is what we need in that market, while those bankers base, who didnt have opportunities with the third and end up another bank. So you're going to have banks want to tell tell a little bit, but thats to be expected and within our modeling.
This transaction.
Okay. Great. Thanks, that's helpful. And then just separately I appreciate all the guidance you gave on the loan side and everything so really I just wanted to ask about demand what you're seeing in your markets right. Now if you are seeing any erosion and confidence on the commercial borrower side I mean, we have seen some macro data that would say.
For the view that there could be some moderation, whether it's I assume or capex or or whatnot. So if you can give us a little bit more color and what you're seeing they'd be helpful.
Yes. So this is lars.
Frankly been in the market a lot recently and.
I am not seeing any.
Improvement I don't believe in terms of the perspective of our clients relative to the economic environment.
I'd say that we continue to see a very heightened level of concerns that uncertainty with terrorists global slowing.
A lot of growing uncertainty now in Washington around public policy add these are all weighing heavily on to our clients mines and certainly we're taking that into consideration as we.
Look at the market environment, which would be operating in the fourth quarter and 2020. So.
With that with that said.
We're very pleased with the investments that we've made.
We had very very strong in fact, the strongest quarter of commercial loan growth and the in the third quarter.
We did have offsetting that.
Utilization rates back off about 140 basis points, that's about a billion dollar.
Swing in terms of our Outstandings.
Good portion of that however, we're positioned very well, we as you know weve invested in our capital markets platform in particular.
And FRM or bond underwriting and distributing and frankly, we're well positioned to capture a lot of that that is a portion of the record level of capital markets fees that we recognized in the third quarter. So it's not always just about the balance sheet the outstanding loans.
It's about helping your clients depending upon the current economic buyer bent and with our broad and capabilities. We are well positioned ourselves to do that so frankly, I feel very confident about.
The future for our company given the investments that we've made and.
Look forward to continue to execute against our our opportunities.
Thanks, Laura I appreciate it.
Next question is from Ken then from Jefferies. Your line is now open.
Thanks, Good morning, particularly I was just wondering thanks for giving the color on the on where the NIM could settle out.
How can how does it how's it going to work with the purchase accounting from here.
Just given your current schedule and then how Cecil might change the expected contribution for that as you think about next year. Thanks.
Hey, Jeff Thats, Jamie that was actually a very complicated question. The first part it's very easy purchase accounting.
We were 15 million in the second quarter it increased to $28 million in the third quarter, just given the higher CPR is we're forecasting again, assuming zero prepayments that number be about 15 million.
Fourth quarter, and first quarter, Theres, roughly $150 million PAA left to go.
So that part as fairly straight forward the more complicated part in terms of how to seasonal impact all of this.
The PPA, they really shouldnt be impacted however, the impact on income recognition from PC I loans is still being evaluated the big for accounting firms are still having discussions with the Fas be in terms of whether that should be record continue to be recognized on an effective yield basis or recognize more on a.
Cash flow for those that would need to go to non accruals. So.
Quite complicated with no official answer yet so we'll provide more guidance once we hear back.
Okay got it and then just follow up just on the deposit side I believe you guys talked about 15 to 18 basis points interest bearing cost decline in the fourth.
That's a healthy beta on the way down can you talk about what's happening on the deposit front in terms of price product pricing and.
Your confidence in getting that type of response and across the deposit base. Thanks.
Yes, we think.
We are confident in our ability to deliver a 40% beta on the three moves July September and October .
That full beta will actually be realized through the end of the first quarter and what we've done from a rate perspective is midway through the third quarter, we reduced our.
Go to market rates on the retail side from a 1.5% offer we pulled it down to 1% because as we've said before we really are interested in competing with online banks are attracting hot money.
And so not all of our peers move their promo rates during the quarter and Thats why we were able to deliver the reduction that you see in the third quarter of two basis points, but are confident that will continue into the fourth quarter and then on us from the CD side, we've talked about this last quarter.
Got about 1 billion nine of Cds, the mature at a 2% rate.
In the fourth quarter and our go to market rate right now is roughly 1.2% and when there's another 2 billion in the first quarter. So from a retail perspective, we feel very good about the steps we've taken that if those numbers will materialize and then on the commercial side large portion of that deposit book is index. So.
As those rate thats occur, we'll realize that so again, we thank our strong market share in the majority of our markets allows us the opportunity to.
Move a little bit earlier than perhaps some of our peers and deliver those deposit reductions.
Great. Thank you Jamie.
Gerrick Cassidy from RBC. Your line is now open dish.
Good morning.
Good Gerard.
Tiphone can you share with us one of the things I think investors in the analysts are trying to get their arms around this next year's Cecil So called Dade too.
Number the day, one number which you gave us the amount of capital.
On the amount of the reserve that it will go up when you guys change the Cecil and you pointed out on the legacy portfolio, 30% to 40% increase is that any rough idea of what we can think of provisioning going forward in day to their provisions under Cecil could be as high as 30% to 40% higher than what they would.
I have been if Cecil was not implemented or is that just way off base well its gerard it's a difficult question to answer because.
Clearly there is going to be.
Dependence upon what the economic scenarios are and how each portfolio is growing because as many banks have said and we're seeing the same thing clearly the pressure on the commercial side.
Is much less compared to the mortgage side and the consumer side and.
And also there are different as you consider the full life of that product. There are different phases that are governed by the economic scenario outlook for the first few years and then there is a regression back to normal and then back to normal historic rates. So it is difficult.
Yes, Sir.
We are.
Still working on finalizing the models.
And albeit I'll be able to give obviously.
A lot more clarity.
As we move into the first quarter.
But I think.
There is a decent chance that.
Provisions will go up based upon where that growth is coming from relative to today.
Okay. Thank you.
Greg you pointed out in your opening comments that acquisition this or not our priority right now.
And you look at the Big merger, we saw this year between BB anti and Sun Trust and you look at the stock performance are those companies.
The days prior to the announcement to today and then they've outperformed the bank Index would you guys consider merger of equals or what would make you think about something like that in the future.
Ill draw Weve.
Responsibly perspective, we have we have an obligation onto our shareholders in our board to assess any opportunity the mix could business sense for our shareholders. So an opportunity of that nature emerged.
We will discuss that we will look at it would make the right decision for long term benefit of our shareholders. At this point right now we have a lot underplayed completing MB financial organic growth strategy. We have we're very pleased with the performance of the franchise. We don't think we used to do anything but continue to.
Invest in our business and grow our business and delivering the results that were talking about today.
But once again, if something did emerge of that nature, we would consider it as we would be required to.
At this point right now we're not interested.
In an acquisitions were focused on.
Driving to the outcomes will can pull through organic perspective, where business.
Great. Thank you for the color.
Next Peter Winter from Wedbush Securities. Your line is now open.
Good morning, Hey, Peter.
Give an update on credit.
Obviously nice decline in nonperforming assets, but I was just looking at the.
Increase in net charge offs quarter to quarter, which should be fairly stable in the fourth quarter and then this reserve builds and then finally, just what's happening with criticized loans, Yes, let me make just.
Sure comment I'll turn it over to Frank for more color I mean, we've always said that at these very low levels of charge offs theres going to be small variations, but I would still we're still in the teams in terms of commercial charge offs and very much in line on the consumer side. The other thing that I want to points houses the consumer charge offs, if you're looking at.
Year over year comparisons, we had a charge off portfolio sale last year, so that lowered the.
The absolute rate last year in terms of the provision builds really I mean for any given portfolio. When you think about it.
Sort of compare the economic environment at the end of June to the economic environment at the end of September the background is different than so the two basis point increase in reserves reserve coverage is really.
More reflective of that.
Yes, I'll turn it over to Frank for any color on the actual sort of portfolio trends here, Yes, Hey, Peter.
Question, just some perspective, when you think about reserve builds.
One thing to keep in mind and this quarter as you look at it we had a 35 million dollar build.
Up to 30 528 was on funded on the funded portfolio seven is on.
Increases and reserve for unfunded commercial commitments.
When you go back and you think about 2018 for example, we had reserve releases of $122 million.
We said at that time, and we've said over subsequent quarters. We were at an inflection point tightens has mentioned that several times. This morning, we have been at an inflection point our numbers have been historically low across the board.
We're really sort of still at an inflection point, our nonperforming assets are below 50 basis points that number if you compare it to the median.
Reported pure numbers is better than the pier, we expect that to stay stable. That's an important number our charge offs are well within our risk appetite, we expect that to remain there we haven't changed our guidance at all.
When you think about criticized assets were watching criticized assets closely the third quarter included the results of the shared national credit sales for banks. We included that in our numbers, we did have a blip up.
Criticized assets, one particular large large corporate.
Well it was involved in that we don't see any loss in that credit it's being restructured.
Where we saw an increase in criticized assets, it's really been in sort of core middle market.
And so when you look at core middle market those loans tend to be secured loans backed by guarantors and so we don't see any particular trends are patterns related to geography or or risk type that is overly concerning to us.
Are you think of our large corporate book.
And you think about commercial real estate those are our books that typically have a lot of volatility in a market. Our criticized assets are below 3%. Both us portfolios are very well underwritten very stable portfolios. Our leverage book does performing well, we've reduced it by 50% and the last three years. So all the work that we've.
Does that change the mix of this portfolio.
Still reflected in our results today and so yes, we we did have a built in the third quarter. We did that close we want to take very conservative view of where we are.
The market has changed a bit in the third quarter do live in a world is large stocking belt, where our borrowers more on the edge now than they have been before.
Tariffs are taking an impact we can customers are not really having an impact on strong customer so as I step back and think about a 2018.
We had a significant release in 2019 for the most part it's been stable. We took a look in the third quarter, we bumped it up a bit we think it was the prudent thing to do we manage this book conservatively and I think it's been reflected clearly in our results over the past two to three years or outlook has not changed so I'm still very comfortable with where we are at.
We're comfortable with the positions we've taken to change the outlook of this company going forward relative to repositioning.
The portfolio with a much different matter than we did in the past.
Great very helpful.
Very helpful.
Okay.
Expenses I know you.
You're not ready to give 2020.
Guidance.
I'm, just wondering with a full quarter.
I guess fully realizing the expenses by the first quarter.
Next year.
Could you say expenses in the first quarter, you would expect to be down from four Q.
It's very early to be able to give you that.
Perspective.
Peter the difference between the run rate.
Just with respect to.
The Mb portfolio.
From the fourth quarter it to the first quarters about $20 million. So.
Our run rate basis, because on a run rate about 65 million note to 55 divided by four gives you.
About a 60 back to 70 million dollar type of number and then we're going from 80% realization to 100% realization. So and then our first quarter is always the high quarter because we have.
See numbers and the FICA numbers all that stuff so.
Just wait a little longer to give you that color, but as I said, we are we're very focused on making sure that we delivered the right expense numbers for next year given the backgrounds.
On the revenues.
Great. Thanks, Stephanie yes.
Next question is from Brian Foran.
I missed your line is now open.
Hi, good morning, everyone. Good morning right.
So I am one follow up on C., So I'm almost.
Reluctant to ask because my understanding is tenuous at best.
But my understanding was there was like double count benefit where seasonal had lifetime reserves and then the old PCI accounting had.
So on these acquired loans and then so you're effectively reserve twice and then that reverses through the panellist loans mature.
What was your comment that it's unclear how that double count benefit of workers the comment that that double count benefit might not actually be there.
Well, we will have to wait for more clarity throughout the quarter.
And I'm hesitant to give you more guidance at this time, but what I pointed out to was that from a pure seasonal impact perspective.
The current methodology does not provide.
A a mechanism.
To convert to non PCI discount into the seasonal reserve number thats to that really is more of the impact on a day one basis, but.
Let's let's wait until the first quarters. So that we can give you a bit more clarity on that.
Fair enough one small file I still get a fair amount of questions on Green Sky from investors I mean, it's such a small piece of your book I, sometimes wonder if their fifth third investors or crane Sky investors, who are asking it.
Could you maybe give us an update where does the loan book stand now and any thoughts on on the growth trajectory going forward. So the loan book stands at about $1.4 billion.
Clearly incremental growth this year came in lower than we expected because the prepayments in the portfolio are overwhelming.
Preset level of originations.
If you remember going two years ago, when we first announced the.
Partnership we thought by now we would be at $2 billion, which was the back end goal.
And so the in terms of the portfolio metrics credit is behaving as we expected to end the margins are behaving as we expected.
And.
The company clearly announced a.
A a period of time during which they will be evaluating different strategies and we are waiting for that.
And depending upon.
What direction they choose to go.
We will make our own.
Visions based on how we see those loans benefiting our balance sheet. So I.
I think theres still probably some questions that need to be answered because before we can give you a clear direction on green scandals.
Thank you for that.
Next question from Erika Najarian from Bank of America. Your line is now open.
Hi, good morning, good morning.
So.
Despite a solid quarter to stop gap down at sea open and I'm wondering if.
Some of that is is the hope to the market had that you'd provide a little bit more directional if not specific clarity in expenses. So I guess I'm going to try one more time.
If I take out the impact of March 22nd close and I just look at consensus numbers.
Or expectations for revenue starting in the second quarter 20. It seems like consensus is expecting flat year over year revenue grows from the second quarter of 2020 onward.
And I'm wondering given your message for positive operating leverage if after the seasonal increase in the first quarter. The message really here is that if that is really the revenue outlook that will transpire explained 20 that the expense base would technically would have to go down.
From that 1.117 billing in the fourth quarter.
Yes so.
I think.
Trajectory.
Well the revenue outlook, we gave you some perspective on our margin expectations in 2020.
At five basis point difference, depending upon when and how much the fed decides to cut.
If they decide to cut.
But we still expect a decent level of fee income growth. We've seen good income growth this year in fees and investments should continue to provide support for.
Better fee income growth going forward.
And our the last couple of years.
And.
I am very hesitant to give you more clarity than that in terms of the revenue side and we will manage the expenses Accordingly, and I think you. We are very focused on making sure that the expense base does not move away from us as we look at that revenue trend.
And our teams are very focused.
And we have about six to eight weeks in front of us year to finalize our plan and we're optimistic that.
We will be able to provide good guidance.
So you guys in January in terms of what the markets was expecting the what we guided in July is playing out for the second half of the year. It very much in line with our guidance. The NIM came down a little bit more than we expected based on the rate movements, but in terms of the revenues.
We had a great third quarter obviously.
And that is capturing pretty much what we expected from the second half and with the mortgage.
Seasonality upon us moving from third quarter to fourth quarter. It is difficult to build upon this very strong third quarter in fee income in project, even higher fee income in the fourth quarter. So we're mindful of that in a couple of.
Transactions on the capital market side, and advisory side came in and third quarter, but in general our outlook was strong for the second half of the year and we are now actually showing a very strong second half performance.
Okay.
So the follow up question is thank you for giving a clarity in terms of your net interest margin expectations for.
Next year and Jamie I'm wondering.
Clarified that range of 3.2 to 3.25 that includes two rate cuts from here and if that's the case then the contribution from the 4 billion in hedges should be a.
40 million annualized with LIBOR at 115.
So in that side. So the guide we have as the card in October plus two more in 2020, Mark I got it large in September .
In order to help let's just look at all of the hedges that we haven't place from a cash flow perspective, so our cash flow hedges in the first three quarters of 29 team made about $2 million.
Over the next five quarters, if those rate cuts play out those $11 billion of hedges are going to make a $155 million.
So that's 15 million in the fourth quarter and then.
The rest spread out across 2020, so that's really.
The backdrop for our confidence in the NIM.
Overall not compressing.
Going forward the way you saw it in the third quarter. We just unfortunately did one year forward starting swaps. So we probably should have done seven month forward starting swaps to protect the third quarter, but when you look at first quarter of 2019 versus first quarter of 20. Our guide is that NIM would be down five or six bips with.
Those July September and October cuts and I got to believe that's going to be best in class performance over that period of time.
I am results actually when you look at the cumulative change in NIM. This year. We are ahead of our peers.
It's been a very actually very good performance.
For the first three quarters of this year when you look at it on a cumulative basis also when you look at it as people are guiding now for the fourth quarter.
And the way we are guiding for the fourth quarter. The 2019 NIM performance is.
This is very strong.
Understood I think that.
The market may be thinking that workforce that industries generally top ticking on fees I don't think the the skepticism is over actually your net interest income I think it's a combination of just the industry top ticking on fees and then sort of what the expense management fall well being sent there, but I very much appreciate all that all the detail on that.
Hi, Thank you Andrew yes.
Next question is from Saul Martinez Your line is now open.
Hey, guys.
I will ask another question on C., So which is a pretty popular topic on this call.
You. Your reserve ratio is about I think was 104 basis points.
This quarter with the Cecil reserves.
40% to 55% that'll take you more or less I think to about 150 basis point, a triple our ratio.
Do you expect your growth going forward the balance.
Your growth and balanced loan balances to on average under the C., So methodology come from products that have higher.
Or lower than 150 basis points lifetime losses.
Good good question. So when you think about the portfolios that are driving a higher percentage of Cecil reserves residential mortgage we have.
At this time and probably in the near to medium term have no plans to grow.
The residential mortgage book home equity loans have been and decline now for a number of years. That's another portfolio that is carrying a high percentage and then.
Other consumer loans inclusive of a green Sky loans also carries a higher percentage. So those are all know three portfolios.
We'll probably display a relatively lower growth rate compared to other loans on our books.
And commercial clearly being our largest portfolio getting back to a more normalized level of commercial loan growth would indicate that.
Perhaps that day, one percentage would be overstating the incremental impact.
On on reserves, Yeah got it so I mean under the C., so methodology or commercial you, especially you're seeing I would think would be.
Yes.
I don't know materially, but it should be much lower than what it half percent in your cash if at normal.
Great Triple ratio should should gravitate down is that that has everything else being equal, including the economic scenarios that are being applied that is a reasonable assumption yes, okay got it. Thank you.
On and I guess, if I wanted to go back to Eni and specifically on.
Deposit betas in deposit pricing. It seems like you have good visibility in terms of B.
Based on the rate cuts for July September October .
But if I look into next year.
If we do get a march into September cod.
I mean, how confident are you with those 40% betas on future cuts because in a mass because if your guidance comes to fruition calculate that youre your deposit cost interest bearing deposit costs are going to be probably in the 80 basis point range, probably lower obviously lower.
All in.
It just doesn't seem like there's a lot of room for deposit costs to come down from these levels given the low jump off point and deposit costs are already low relative to short term rates from a historical standpoint. So I guess a question is if rates do continue short rates do continue to come and maybe even more than what you're expecting.
How does the deposit beta outlook change.
Yes. This is Jamie so.
You're right and that our fourth quarter forecast for interest bearing core deposits is in the.
This call it mid eighties.
Basis points of cost and then that number.
Coming off of the other rate actions, we would take plus a march cut we'd be into the seventies at that point in time, we still think theres opportunity to operate at a 40 based on the next couple of cuts, but certainly once you are beyond.
Those cuts and if you had more in 2021, you would start to bump up against some of your deposit floors and some of your products. So we model all of that in our interest rate risks sensitivity tables, and Thats, where you see that when the fed starts cutting 100, or a 150 basis points.
That.
The outcomes part as productive as on the on the first couple of but I think for the foreseeable future. The next three or four cuts a 40 basis, a good number for us and at the end those cuts come it is betas coming.
Pretty pretty balanced between retail and commercial or they.
No it's very.
Barbelled, where retail right now.
We think from July September October will be in the 25 to 30 range and commercial will be in our wealth and asset management group would be in the 60% rate and that's similar to what we saw in the way up on the 225 basis points of fed hike.
Right. Okay got it thank you very much.
Next question is from Mike Mayo from Wells Fargo Securities. Your line is now open.
Hi can you hear me.
You don't.
Hi, so on three things, which we can observe your expenses are controlled the MB financial closings.
Place in Tech is a priority. So we can see that so can you just give us more understanding whats happening under the hood as it relates to technology like you close three of the four MB financial data centers. So now how many datacenters did you have at the peak how many do you have now.
Where do you think that can go and then maybe how many apps did you have at the peak getting what happened pre and post merger with MB financial and anything else on technologies, such as the clouded what percent of the apps.
I want to move to a public cloud.
And Mike I'll try and answer that question the order in which you asked it.
First off from a from a technology perspective, obviously, we've invested and technology as other banks have done that but we really like the returns we've got from those investments. If you go back in 2007, just some color Central operations you look at 2007 to 29 team.
We grew the expense based 1% over that 12 year period of time.
$30 billion bigger bigger necessarily a more transactions, we focus a lot of or technology investments in operational efficiencies back office capabilities artificial intelligence capabilities to those of our clients were getting paid well for those who those type of investments.
Continue to do that as well as our customer facing opportunities.
We continue leveraging technology to to improve the way we serve our customers are reach our customers and the effect. This from a cost perspective, how we talk to those customers.
This is that we're investing in cyber security.
As you would imagine AMR fraud, we took our fraud losses were down year over year I would tell you a very few of our peers I think are down year over year, because the investments we made in technology, we get paid will for that.
So we'll continue to do that at the right pace, how we think about it scores data centers go we run with two data centers will run the future with two data centers will be assumes that there were about 200 miles board has requirement from a from a conduit perspective.
And right now with MB financial there's two additional data centers that will close down and consolidated into our operations most of their applications will consolidate on the or applications and most of our applications were limited new supply those applications that we're supporting their there.
Asset based lending platforms in or leasing platforms.
Everything else for the most part that was consolidated into fifth third and majority. That's complete so we're doing a cleanup of the of the date as soon as you would expect but that's all part of the plan for the numbers. We explained you will absolutely execute will and getting it done with respect to the cloud.
Listen we don't just move applications from our legacy to the cloud in current state if we have the opportunity to re engineered and application.
It's suited for that for the public or private cloud will bid move it to the pro public private cloud, we do use a public cloud would use private clouds.
But the other day, it's really based on the application, we're very mindful to risk. So we're very mindful with applications.
Do we allowed to be in that cloud environment. So we're really diligent about how we think about our infrastructure lover investments also around re monetization of our technology infrastructure, our legacy platforms and make a more agile. So we can move quickly. This digital age. So we'll continue to do that in the cloud part of how we do that but were less concerned about how many apps we haven't seen.
In areas, but if you just move current application of into the cloud, it's probably to cost you more money to operate.
Okay.
Yeah, I guess just.
That that last comment was interesting.
And as far as data centers, where where you at peak and just to be clear you had two data centers.
You have to more with MB financial CF, four or if you got 44 data centers, Mike and we'll go back down to two.
He will have for total datacenters when you're done.
How does that compare.
Mike will have to data centers were done we had two going into the merger and be had two will consolidate their too on the are too. So we'll have to at the end of the day.
Okay, great set to data centers right and how does that compare and look you have the tech background. You know this stuff I mean, how does today the Senate for bank your size compared to here or how many total datacenters that the industry had and why so many banks not give this information when we ask so I appreciate you, giving this story.
Let me first off to has always been in any business, whether it was a prior days in manufacturing sector to data centers as the more optimal way of running it you have to him space of propylene threw off different grids and so forth.
From a telecom perspective, but to the optimal way for us to run our business.
And that's what we have we've operated that's we're most efficient we had the best leverage or talent in our resources are reuse of our capabilities.
More than that will not make sense were for the third or most companies I believe.
But that's that's how we see things that will consolidate once again to to be under our current two legacy fifth third data centers.
Alright, thank you.
Next question is from Marty Mosby from Vining Sparks. Your line is now open.
Thanks I have.
Hey, good morning, I have three quick questions and then I want to kind of dive into a little deeper sub subject, but if you get into our first of all three.
Capital into or buybacks bottom up about $350 million this quarter, you're kind of foreshadowing $300 million per quarter. I thought there was kind of an overhang of past games that you could have a catch up this quarter. So I was curious why wasn't a little bit higher end the share repurchase and this protect.
Our quarter, yes. Good good good question Marty to 300 million dollar per quarter is probably a good directional.
Guidance.
What we did was as you remember.
At the beginning of this year, we were thinking that we would probably be going towards a 9% type capsule number, but we chose to actually.
At the upper end of our targets at more like nine in the half percent. So.
We had the world pay gains that still remain.
We executed in the first quarter, we decided not to execute to.
Buybacks related to that that's about $200 million or so in gains that we've kept on balance sheet. That's the difference that you're seeing.
Okay, and thats up keeping that going forward and want to keep that higher capital ratio. So thats. There are enough for now in the near term that's probably a good targets.
Okay, and then you showed a schedule preferred dividends kinda oscillating between 30 317 is that going to be the pattern going up and down each quarter, given the semi annual payments on series H.
Yes, it more or less but that's what's going to happen and then it would change has any of the preferred reach.
They are fixed period and move to floating but those are a few years off so for the foreseeable future. That's the good pattern.
Okay and then.
I will just wanted to bring up a point on purchase accounting you had the uptick this quarter from 15 to 28, and then you had the reserve build a 50. So when you look at those two things the reserve build more than offset this uptick and purchase accounting accretion.
And those are kind of tied because that you're taking those loans out of their pre paying and then coming back again as a normal alone you are having to kind of rebuild reserve home loans that were and purchase accounting accretion so theres, a and actual not a world benefit this quarter from this transaction. Our this kind of process are actually.
Negative weighing on the quarter that kind of release as you go into next quarter.
The Marty I don't think those two are necessarily connected to each other clearly higher prepayments have resulted in a higher.
Since accounting accretion number for the quarter, but to build is not necessarily on MB loans. So.
It is a broader environmental factor that takes into account many other variables in our a triple element that allergy, so I would not connected dose too.
Together.
Well I mean, if they're not connected theres, some offsetting going between the reserve build that's negative in the positive and the purchase accounting accretion.
I'd, probably I would still say that they're not connected to each other.
Right got it now going into his Cecil again, what I wanted to answer Gerard question.
I think we're missing a little bit a math. So let me lay kind of give you what my thought is and get your response.
The thought that you increase your allowance by 30 or 40% in that your day to provisioning costs are going to be 30% to 40% higher.
The work out that way for this reason.
If you looked at your allowance over the last five quarters, you've had provisioning a $475 million.
You had net charge offs, a $409 million, which represented 85% of your loan loss provisioning. So that doesn't change they too you're still gonna have to cover your losses, what's you're going to have increase as the 15% of what you paid over the last year and loan growth goes.
By 30%. So you could go from 15% to 20% of your allowance that's related to loan growth, which would be at that higher ratio because you're going to have the higher reserve level that you're going have to maintain so it's only the incremental part on loan growth that goes up about 30, 40% because I'm not sure.
Total amount of loan loss provision that you have every quarter, because that's really mainly related to the losses not.
The allowance ratio does that make sense, yes, it does and I think.
The second question I think was Peter or somebody else asked the question in terms of what that incremental number is based on the growth dynamics that we would see in our portfolios.
So.
What you're saying, it's correct on top of it which portfolio grows also has an impact.
On that.
Provision that is purely related on incremental loan growth.
Yes. So if you had the exact same mix of loans.
Keeping 115 ratio so instead of providing at 105, you're going to be providing a 150. So just on the incremental loan growth doesn't go up 30% your whole loan loss provision doesn't go up 30%.
Losses are the majority reason for our loan loss provision so net charge off ratio still will be the main driver for your loan loss provisioning that is correct I interpreted it drags question. The same by unit in terms of just applying it to incremental loan growth. So.
But yeah generalist kind of get lost in that in the sense. They kind of thank with all that means our loan loss provisioning has to go up by that amount. It really doesn't have to and the only thing I was going to leave as our guidance and just for.
Everybody in the industry to kind of think about is because of date to don't think of day, one as a real good chance to round up our allowances because we'd ever get us back. This isn't an allowance like we had in the past when you kind of can build it given your economic believe on what's going to happen and then eventually.
Kind of recapture that this as a through the life through the cycle kind of provisioning. So rounding up on on the seasonal im just going to create more volatility and higher provisioning.
Really never gets realized until you actually liquidator bank, so actually being conservative in a sense of rounding up.
In our mentality, we've been trained to do that for so long is not a good answer given the way the accounting is going to be different they too.
Hasn't been forward. So I'll just encourage everybody to not just think of this as I've heard so many people say this is our chance to round up allowance to prepare for the recession. This thing going give you any benefit as you go into that recession. So it's not our reserve you're getting benefit from so anyway.
Thanks for that background I think it's that's that's very helpful. Marty. Thank you are thank you all right.
Next question this from that Jeff from JP Morgan. Your line is now open maybe that the hi, sorry, I'm glad I got a little more prosaic.
Corporate banking.
Line item, you mentioned lease remarketing.
Can you tell us what the gains on that for this quarter.
Yes that lease item.
Did that includes more than just remarketing, because remember we now have to initiate two new leasing businesses under our hard Lasalle leasing and Celtic leasing so it's a broader number the demaray there were just.
Some leverage leases that paid off during the quarter and I think that number was at a nine days or single digit upper single digit number something like that.
Okay.
Okay great.
And that number given that you're doing more and leases was likely to be more volatile going forward. As a result tiphone. There are some there are there is some.
Volatility associated with the underlying business, especially on the technology side, which.
Is dependent upon the timing of the technology contracts that are coming due but in general I think the trends will be.
Positive I think we expect that line item as we are also now investing more in that business to continue to grow we may see some seasonality going forward.
And but in general I think the trends will be up yes, and I would just add as weve continued to build out our equipment finance kind of preeminence frankly in the regional banking market within be joining us on our strength and syndicate and syndicating lease transactions has grown significantly progressive great talent there.
And we would expect that that will continue to grow in the future.
Okay great.
Second question just want to clarify the numbers that I think frankly have put up criticized assets Frank was up 3%.
Criticized assets are loans or was it does that get that not correct I was up 3%.
And how did what does that change linked quarter.
Let me, let me talk in terms of classified assets, which is probably better than criticized assets classified assets or close that are rated substandard.
Notices assets include loved to have potential problems, but they're not well the fund weakness at this point in time are classified assets were up 5% of the quarter and again as said before they fluctuate from quarter to quarter up and down still well within our risk appetite within our tolerance.
Okay and is that increase as you said, mostly from the shared national credit.
Exam results no. It actually was more in the quarter on on the on the class side. It was actually just more to our core middle market.
It's a granular portfolio with us as said before it's a portfolio that since the well secured.
So it well the level of Portlands goes.
It doesn't change our outlook relative did not perform in order to loss and a materially I think the snic portfolio levels I don't have the actual numbers in front of me, but they're almost like 50% in terms of these credit metrics, where there is classified criticized they are well below the broader portfolio credit metrics.
Yes, I mean, that's right.
What I did mention before to maybe what you reflected on.
Our.
A large corporate book.
Which is the shared national credit portfolio for the most part the level of criticized assets and that entire book is.
Under 3%, maybe what you are referencing Thats, a fair number and the same goes for our commercial real estate portfolio was under 3%, which is where the banks have had the preponderance of their problems over the past decade or so so those are books, we managed very carefully we feel very comfortable with the overall asset quality.
So I think that was in response to your question.
Okay. Thank you. Thank you.
Next question is from Christopher Marinac from Janney Montgomery Scott. Your line is now open.
Hey, Thanks, just just wanted to ask about the.
Hello pull in Chicago and that the turnover that has happened would that be is most of that behind you and are you confident.
Kind of whats happened on backfill with their staff.
First of all up as we said the said earlier the turnover we that we see supporters exactly we model did 90% of all the farmers that we tend to keep we offered position to are still with the bank.
This is normal with respect to an acquisition in a market larger bank, you're going to theres. The individuals that we didn't offer positions to that are going to show. The other banks a lot of that's what you're seeing right now we're getting close to the ended that till right and we feel very comfortable about.
The talent do we have sort of that market account that we retain as I mentioned my prepared remarks, we've had very little.
Client attrition associated with this transition in Chicago was one of our strongest production markets.
Core middle market across all regions. This quarter. So we feel really good about the talent that we have once again to get $235 million of expense synergies out a lot of that as people related expenses. So you would expect those individually shopper the banks and I know the things that the tell debt is having success recruiting is.
And entity, but that's just part of this process of consolidating two financial institutions youre going to somebody that attrition, which is to be expected in playbook.
Craig Craig that's very helpful. Thanks, very much.
There are no further questions I'm, turning the call over to Chris Doll.
Thank you Brent and thank you all for your interest into third if you have any follow up questions. Please contact the IR Department and we will be happy to assist deal.
This concludes today's conference call. Thank you figure participation you may now disconnect.