Q2 2020 PNC Financial Services Group Inc Earnings Call
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I will now turn the call or to the director of Investor Relations Mr., Brian go.
Sir Please go ahead.
Oh, Thank you Carlos and good morning, everyone welcome to todays conference call for the <unk> Chief Financial Services Group.
Participating on this call or PNC is chairman, President and CEO, Bill Demchak, and Rob Roley Executive Vice President and CFO. Today's presentation contains forward looking information a cautionary statements about this information as well as reconciliations of GAAP non-GAAP measures are included in todays earnings release materials as well those are actually see falling.
The other investor materials.
These materials are all available on our corporate web site PNC dotcom under Investor Relations.
These statements speak only as of July 15th 2020, and PNC undertakes no obligation to update them.
Now I'd like to turn the call over to Bill.
Thanks, Brian a and good morning, everybody as you've seen this morning, our results for the second quarter had a number of moving towards moving parts, including obviously the gain on the sale of our stake in Blackrock overall I thought it was a pretty solid quarter in the context the environment. The work that we're operating in.
You are saying that revenue was down from the first quarter, which if you remember included some some kind of one off gains and expenses were well managed.
We were able to produce positive operating leverage both in the in Q2 and for the first half of the year. However, as we mentioned in our first quarter call. Our view of the economy is substantially worsened since we closed the books three months ago and in turn has resulted in a substantial loan loss reserve build.
Our recent she CCAR results should later aesthetic concerned that this is a pea and see specific balance sheet problem.
See CCAR results underscore the strength of our balance sheet, which coupled with the benefits of the monetization of our Blackrock investment physician PNC with substantial capital and liquidity to continue to support our constituents and capitalize on opportunities that can arise during disrupted markets. In fact, our capital ratios are at record levels and we saw cigna.
If it again significant increase in our book value.
Looking ahead I fully recognize that we are perhaps a bit more pessimistic than the market on the odds of a full recovery anytime soon.
While recent economic data has been encouraging we're still in the very early innings of how this is going to play out massive fiscal and monetary stimulus has allowed us to infect kick the can down the road in terms of feeling the real effects of this recession.
Much is going to depend on continuing support from the government as the economy continues to to adjust with life with Covance.
Unfortunately.
What is becoming very clear at least to me is that there's a new normal that would help profound and lasting effects on parts of our economy and the workforce that supports it.
Despite these challenging times in what's your navigating simultaneous crises, both a pandemic and civil unrest caused by deep racial and equities PNC has remained steadfast in our commitment to our customers communities employees and shareholders.
Despite the challenges of Cove, and we continue to make good progress in terms of executing on our key strategic focus areas, including national little market expansion and our national digital efforts.
Now before I turn it over to Rob I want to recognize and thank our employees are going above and beyond to help our customers address the many challenges that they are facing.
I also want to thank my leadership team incurring, including Carol Brown, and Richard buying them. The newest members of our executive committee for their invaluable support during this time.
Finally, I want to thank our board of directors their leadership as we continued to navigate what has been a year both extraordinary challenges and opportunities now I'll turn it over to route for a closer look at our second quarter results and then we'll be happy to take your questions.
Thanks, Bill and good morning, everyone.
As Bill just mentioned a notable during the second quarter, we divested our equity investment in Blackrock, which generated $14.2 billion in net proceeds with an after tax gain of $4.3 billion.
PMT portion of Blackrock results, so second quarter activity in prior periods are now reported on it or as discontinued operations.
Our balance sheet is on slide four and is presented on an average basis.
On the asset side total loans grew 24, and a half billion dollars to $268 billion linked quarter.
Investment securities of $88 billion increased $4 billion or 5%.
Our cash balances at the Federal reserve averaged $34 billion and were $50 billion at the end of the quarter.
Significant increase which are result of liquidity from the sale of our investment in Blackrock and strong deposit growth.
On the liability side deposit balances averaged $335 billion for the quarter and were up $45 billion or 16% linked quarter.
Total borrowed funds decreased $4 billion compared to the first quarter importantly on a spot basis borrowed funds declined approximately $26 billion as we used excess liquidity to reduce borrowings primarily with the federal home loan bank.
And our tangible book value was $93.54 per common share as at June Thirtyth, an increase of 10% linked quarter and 16% year over year.
As you can see on slide five our capital reserve and liquidity positions are all strong.
As of June Thirtyth 2020, our Basel III common equity tier one ratio was estimated to be 11.3%.
Our board recently approved a quarterly dividend of $1.15 per share, which is consistent with the previous quarter.
As you know the fed has authorized dividends for the third quarter subject to amounts not exceeding the average of net income for the proceeding four quarters on this basis, our third quarter dividend is 27% of our average net income for the prior four quarters.
In regard to share repurchases and in accordance with the Federal Reserve guidance, we'll continue to suspend share repurchases through the third quarter with the exception of permissible employee benefit related purchases.
Our loan loss reserve levels have increased substantially in light of the current economic conditions and are now at 2.55%.
We remain core funded with a low cost deposit base and importantly, our liquidity coverage ratio significantly exceed the regulatory minimum requirements.
Slide six shows our average loans and deposits in more detail.
Average loan balances of $268 billion in the second quarter were up $25 billion or 10% compared to the first quarter. This growth reflected an increase in commercial loan balances of approximately $25 billion driven by higher utilization related to line draws short term liquidity facilities to support our clients and new loan balances under.
Paycheck protection program.
Consumer lot loans declined approximately $700 million, reflecting lower activity in card auto and student loans.
It's worth noting that spot loans declined $6.4 billion predominantly related to lower commercial loan utilization.
Our seen Ivy segment experienced a 5.5% decline in utilization rates from peak levels as approximately 75% of the lines that were drawn were subsequently paid down.
At quarter end utilization rates were approximately 1% above pre cobot rates.
Compare to the same period, a year ago average loans grew 14%.
$33 billion.
At this slide shows the yield on our loan balances declined 71 basis points to 3.37% in the second quarter.
Second the full quarter impact to the fed 150 basis point reduction in interest rates during the first quarter, which drove LIBOR rates lower as well.
The rate paid on our deposits also declined 47 basis points linked quarter to 23 basis points.
Average deposit balances, a $335 billion increased $45 billion or 16% linked quarter.
Commercial deposits grew reflecting the enhance liquidity positions of our customers due to covert 19 concerns.
Tumor deposits also grew primarily due to government stimulus payments and lower consumer spending.
Year over year deposits increased $62 billion or 23%.
As you can see on slide seven second quarter total revenue was $4.1 billion down $260 million linked quarter or 6%.
Net interest income of two and a half billion dollars was up $16 million or 1% compared to the first quarter as higher earning asset balances and lower funding costs offset lower yields.
Our net interest margin decreased to 2.52% down 32 basis points linked quarter, reflecting the full quarter impact of 150 basis point reduction and the federal federal funds rate during March 2020, and the related decline in other market rates.
Noninterest income of $1.6 billion declined $276 million or 15% linked quarter.
Fee revenue decreased $204 million or 14%.
Tumor services and service charges on deposits declined by $136 million in total due to lower consumer activity and fee waivers in the second quarter.
Residential mortgage production volumes and loan sales revenues for both higher but were more than offset by a lower our MSR valuation.
And asset management in corporate services remained relatively stable.
Other noninterest income declined $72 million, reflecting lower securities gains, partially offset by strong client activity in corporate securities and capital market.
Noninterest expense declined $28 million or 1% compared to the first quarter due to lower business activity as well as continued progress on cost savings initiatives related to our continuous improvement program.
As Bill mentioned, we generated positive operating leverage for the second quarter, both year over year and year to date.
Provision for credit losses was two and a half billion dollars, reflecting a worsening our economic outlook relative to March which I'll provide more detail on in a moment.
And our effective tax rate was 17.5%.
Sure.
Slide eight as an update to the template we introduced in the first quarter regarding specific industries, we have identified as most likely to be impacted by the effects of the pandemic.
Our outstanding loan balances as of June Thirtyth to these industries or $19.6 billion and represent approximately 8% of our total loan portfolio.
We haven't yet experience any material charge offs in these industry. However, if current economic trends continue we'll see charge offs increase overtime.
Sure.
Corporate loan balances and these industry totaled $11.5 billion, an increase of approximately 900 million dollar since March 30, Onest, resulting from funding of $2 billion up PPP loans.
Excluding the PPP loans balances are down approximately 10%.
Nonperforming loans in these industries were flat linked quarter at just under 1% of loan outstanding but criticized assets did grow during the quarter with the greatest stress CNN leisure recreation and trap.
We have 8.1 billion in loans to high impact industries in our commercial real estate portfolio, a decrease of approximately $600 million since the end of March.
Nonperforming loans and the real estate categories increased from approximately $5 million at March 30, Onest suggests over $140 million driven almost entirely by a single mall REIT Salt single mall Reits related credit.
Similar to last quarter, we continue to see substantial stressed in the retail in lodging segments.
Turning to slide nine this as an update on our oil and gas portfolio.
Yes. The ended the second quarter was $4.1 billion or less than 2% of total outstanding loan.
Outstanding loan balances have declined approximately $500 million since March 31st 2020.
As expected we continue to see an increase in the nonperforming loans, which now represent approximately 4% of current outstandings in this portfolio.
We believe are properly reserved for this portfolio and we'll continue to monitor market condition.
Turning to slide 10, we're continuing to provide relief and flexibility to our customers through loan modifications. During these uncertain time.
With our consumer customers or granting loan modifications to extensions deferrals and forbearance.
New request for modifications have declined 97% from their peak in early April but year to date, we branded assistance to nearly 280000 customer accounts.
Representing $12.7 billion of loans.
Six point billion 6.6 billion of which is invest around and 6.1 billion, which is bank.
6.1 billion bank on modification they continue to represent a small percentage of both overall account and total loan exposures for each asset class and a significant percentage of clients have made at least one payment in the last 60 days.
Although the payments suggest the potential decrease and modifications as extension periods begin to expire we believe it's too early to make that conclusion.
On the commercial side, we're offering emergency relief for small and medium sized businesses, including through the PPP loans.
We're also selectively granting load modifications to commercial clients based on each individual borrowers situation.
Our credit quality metrics are presented on slide 11.
Charge offs for loans and leases were $236 million, a 24 million dollar increase from the first quarter.
Annualized net charge offs in total loans remained stable at 35 basis points.
Total delinquencies of $1.3 billion at June Thirtyth declined $173 million or 12%, reflecting a decline in delinquencies related to the cares act as well as other forbearance and extension fee.
Non performing loans increased $232 million or 14% compared to March 30, Onest 2020.
The increase was primarily driven by commercial real estate borrowers in the high impact covert 19 industries as well as borrowers in the energy industry, which I previously mentioned.
As you can say the allowance for credit losses to loans has increased to 2.55% in the second quarter compared to 1.66% last quarter, primarily resulting from our updated economic forecasts, which incorporate a significant totaled 19 impact on the economy.
Importantly, we believe the economic assumptions used in the scenarios to generate our Cecil reserve estimates this quarter sufficiently reflect the life of loan losses in our current portfolio.
Therefore, we don't anticipate any substantial reserve builds during the remainder of 2020 based on these assumptions, which I will cover next.
The recent fee CCAR results highlight the quality of PNC loan portfolio under the severely adverse scenario, our cumulative losses as a percentage of our total portfolio were lower than most of our peers.
However, based on our economic outlook under the Cecil methodology, we did have a substantial increase in our allowance this quarter.
Slide 12 highlights the drivers of the increase to our allowance for credit losses.
Our attribution shows the increase in reserves of $557 million foot portfolio changes and approximately $1.6 billion for economic factors.
Our weighted average economic scenario is derived from four separate scenarios and uses a number of economic variables with the largest drivers being GDP in the unemployment rate.
And this scenario annualized CDP GDP contract, 6.2% in the third quarter of 2020, finishing the year down 4.9% from the fourth quarter 2019 levels and recovering to pre recession peak levels by the first quarter of 2022.
Additionally, the scenario assumes the quarterly unemployment rate falls to 9.5% in the fourth quarter of this year from a peak at 13.6% in the second quarter with a labor labor market continuing to recover in 2021 in 2022.
For internal analytical purposes, we also considered hypothetically.
What our capital ratios would be if we had a year end 2020 allowance for credit losses equal to the nine quarter fed see car severely adverse scenario losses at $12.1 billion.
Essentially frontloading, an incremental $5.5 billion and reserves over the next few quarters.
I would emphasize the scenario is not our expectation, but simply approximate the possible outcome under hypothetical severe condition.
The analysis resulted in the tier one ratio of approximately 10% at December 30, Onest 2020, a level well above 7%, which is our regulatory minimum of 4.5% plus our stress capital buffer of two and half percent.
In summary from a capital liquidity and loan loss reserve perspective, we believe our balance sheet is well positioned for this challenging environment.
Finally, the biggest variables impacting the economy continue to be the duration of this crises and the efficacy of a massive U.S. government support in stimulus programs.
At this time at this time, we have no way of knowing these outcomes and visibility remains low.
Within that context, our guidance for the third quarter in our thoughts for the full year as are as follows.
The third quarter of 2020 compare to the second quarter 2020.
We expect average loans to decline in the low single digit range.
Expect net interest income to be down approximately 1%.
We expect total noninterest income to be down between three and 5%, which includes our expectation that core fee revenue will be stable, while other noninterest income will be lower in the quarter.
We expect total noninterest expense to be flat to down and in regard to net charge offs, we expect third quarter levels to be between 250 and $350 million.
For the full year.
Again, I want to emphasize the context limitation of low visibility, we now expect both revenue and non interest expense to each be down between two and 5%.
And our effective tax rate is now expected to be in the low teens.
And with that Phil and I are ready to take your questions.
Carlos could we please have the first question.
Thank you at this time of you would like to ask a question. Please press star one followed by the four on your telephone keypad. Please hold while we compile acuity roster.
Your first question comes from the line have John Pancari with Evercore ISI. Please go ahead.
Morning.
Hi, good morning, John.
Just wanted to see if you can.
Talk little bit about see the margin I know the.
And your outlook spread revenue to be down about 1% third quarter. How do you know what does that mean in terms of your margin expectations.
Going into the third quarter, and then I guess through the back half of the year.
Yes, Hey, John it's Rob good morning.
We don't provide.
NIM guidance so to speak because.
Then outcome, but I would say generally speaking I expect margins to remain sort of stable.
Well clearly see some.
Some lower yields as a as a function of rates being lower but we also have some more room on the liability side I think largely they'll offset but we have I mean, we also have all the PPP fees, yes, yes, yes, we're likely to see that spike in the fourth quarter.
Yes, yes, so we might see a little bit of a lift in the fourth quarter, but essentially now these are they see that NIM levels, where I think we'll be at some time.
Right. Okay. All right. That's helpful. And then separately Bill just want to see if you can give us an update on your thoughts around the potential deployment of the Blackrock capital.
If your thought process has changed at all since you completed the sale the stake and if you could just give us.
Just how you're thinking about ultimately putting network. Thanks.
No no real changes, we're going to be patient here.
I think.
Like I said in my script, it's pretty early innings here to see how does this all plays out the the.
Fiscal payments that the government has put out plus with the feds does.
Effectively masks what are some pretty severe underlying.
Problems in the economy and depending on how fast that comes a comes back end or if the government keeps providing stimulus it'll tell us.
How much of that capital we need in the first place and secondly, what the opportunities will be to deploy it.
So we're going to be patient the strategy of trying to pursue.
Bank like acquisitions to help us expand our national franchise.
Remains to say.
Okay, great. Thank you.
Sure.
Next question comes from the line of Scott Siefers with Piper Sandler. Please go ahead.
Morning, guys. Thanks for taking my question.
Right.
Hey, Rob was hoping you could talk a little bit about the nuance within the fee income guide for the.
Third quarter sounds like the core fees that you guide to pretty stable, but maybe just sort of the.
And then some how how I guess.
Maybe a retrospective I guess on how some of those.
Activity based fees came in relative to what you guys would have thought how they trended through the quarter.
Yes, I think.
I'll answer it sort of backwards there I think in retrospect I think it largely came in as we expected.
I mean, a softer on the consumer side, which we did expect as a function of the lower activity as well as fee wafers.
Corporate services was actually pretty strong.
Down a little bit but.
Some that activity that might have been a little better than what we expected that asset management and mortgage.
Both came in with expectations asset management relatively flat mortgage up a bit in terms of production.
We had that are flat that large our MSR gain in the first quarter. So we were down quarter over quarter, but production levels were outside I'd say in retrospect.
And they came in assets as we expected going forward in terms of stable for the third quarter and again.
Scott it's fluid so visibility is low but.
I'd expect consumer services actually to pick up a little bit.
Corporate services, maybe to fall off a little bit and asset management and residential mortgage.
Actually stable.
And again Thats, what the caveat of.
Of the environment and how much consumer activity actually happens.
Yep.
Okay perfect. Thank you and then.
Since what's your bill on the.
The reserve this may end up being.
Totally premature given how fluid this situation as but if you guys are right in your assumptions and there's no need for additional reserve build.
How how does provisioning that project like at what point or how much clarity does one need in a seasonal world before you start drawing down the reserve.
Hi, how does that kind of stuff work in this newer reserving.
Well.
Bill may want to chime in too where.
You are getting ahead of ourselves there a little bit in terms. So how we positioned it now, but it's going to be a function of the models, obviously, which will continue to run.
Through the balance of the year and next year and at some point when those just by definition.
When those scenarios improve.
Provided that you didnt need the reserves for charge offs you'd start to release.
That's that's seasonal definition.
Yeah.
Okay mechanically.
All else holds true on assumptions.
Rolled down and burned off the reserve with your charge offs and you've had life of the loan reserves for whatever new loans come up.
[music].
It affects you'd be adding provision for new loans and everything else would solve to zero, if everything else held equal which at most certainly won't yeah. That's right I think a distinction yet in terms of the components of the calculation, which our portfolio changes, which incorporate the levels of loans and then the economic assumptions.
Yes.
Okay perfect reckons, the one final one and just so I'm certain I'm on the right page the Blackrock and just for purposes of the.
Dividend or excuse me the earnings deficiency test that is now part of the the car rules theres nothing that like disqualifies that gain right like it yes.
Yes.
Yeah, Okay wonderful.
Alright, Thank you very much.
Yes sure.
As a reminder, please press one forward to queue up for questions.
Next question comes from the line of Erika Najarian Bank of America. Please go ahead.
Hi, good morning.
My first question is for you Bill So one of your peers, Jamie Donovan said something yesterday that really struck mall.
That said don't count on buybacks for the fourth quarter.
And given that we.
Don't have any of the information in terms of capital plans beyond the third quarter and given that you have a significant amount of capital even look at.
Severely adverse scenario becomes your base case, you know I am wondering what your view is in terms of balancing buyback activity near term when it's more allowable can do so versus just keeping the powder dry for that opportunity.
The.
First of all if we get into an environment, where somehow buybacks are allowed in the fourth quarter I.
I'm not sure where he was going with that in terms of maybe he's hearing something from the fed I am not but.
Ignoring that just assume that.
There were no restrictions at the moment for the fed I continue to believe.
You know that we're going to see.
Opportunities, both organic and inorganic in this environment to deploy the capital.
In a very shareholder friendly way.
At the margin would we use some of our capital to support our share price of course, we would but that would be value dependent and it would be also dependent on the environment that we're operating in.
And whether or not we saw.
Confirmation of our belief that there'll be opportunities or not so it's.
We'll see I mean, you've heard me used the phrase over and over again that will be.
Rational stewards of your capital.
That has and that hasn't changed.
Got it and as a follow up the one thing that also struck me in the quarter as me amount of cash on on your balance sheet.
Aside from the Blackrock proceeds obviously the deposit growth has been.
Significant.
And Rob I'm wondering if you think about your revenue your revenue guide for the rest of the year, what do you assume in terms of the deployment or cash.
Yeah hair. So we will put some of that to work tactically, we won't but all of it to work, obviously and given particularly in terms of security yields.
It's pretty hard to make up a lot of revenue.
Deploying that so.
We're going to run with some pretty high cash balances to the balance of the year, but as far as securities that deployment loan loan balances. That's that's all factored into our guidance.
Got it thank you.
Sure.
Our next question comes from the line of Kent, then with Jefferies. Please go ahead.
Thanks, Good morning, guys.
A big picture question for you Bill just you know ex the Blackrock sale the business returns to more of a traditional regional banking look.
And your wheelhouse and I'm just wondering you know as you think about whether it's our away or are we potential long term efficiency ratio. What how do you know just think if any differently just about the structure of the company the business mix and where you want to head from your long term.
I don't know that.
You know, we necessarily think differently about it strategically we've had a focus and we'll continue our focus through time on organic growth of or.
Consumer lending balances as we simply try to penetrate existing clients to them.
The extent, we acquire clients the same thing.
Our business model is basically built on our ability to go to new markets and.
Profitably build share not just through lending, but through heavy cross sell and to fund the.
Through our national digital expansion.
So so.
It's less of a focus on do I need to somehow change the mix of what we're doing as opposed to can we accelerate the actual growth of what we're doing.
Inside of that as we look at different opportunities might things change at the margin.
Sure, but but it's not by design, it's basically to take what we have and grow it.
Even faster than we have historically.
Yes, and as a follow up to that and then the prior questions.
There is the needs versus won so when people think about the potential inorganic strategies. When you think about the franchise. It in your point earlier about moving towards consumer has been a strategy for a bit.
Are there things that you just either like to have or think you need to have to still have like the full complement or is it more just are going to be about what's opportunistically out there and what's financial as much as a strategic.
There is nothing.
In the list that we think we need to have that we don't have we want to take our existing products and services and go to market strategy.
And do that in more markets.
This issue is something financial versus strategic.
The issue of and we'd obviously look at both the issue of doing a purely financial transaction.
Is one of you know does it cause us to take our eye off the ball in terms of our long term growth potential.
Doesn't mean, we wouldn't do it and what we would do with financial proceeds is accelerate organic growth.
But but ideally we'd find something that's both very financially attractive and matches, our strategic agenda of expanding our geography.
Yeah, Alright, I understood. Thanks Bill.
[music].
Next question comes from the line of matter Connor Deutsche Bank. Please go ahead.
Good morning.
Second somewhat on the theme here of what you'll do with the excess capital I guess.
The prime the question.
And by the way I agree that we're still early and lock they'll play out, but how do you know if the opportunity that you're looking for won't be there.
And then kind of like what's plan B right like the hope is probably something interesting strategically.
Financially beneficial and you all know when it's there.
I think.
The investors and analysts truck you guys did the right thing there, but if that doesn't arrive.
Do you kind of capitulate and say, let's go to plan B and maybe rates are higher and you can buy some security 30 buyback stock like what's the thought process there.
Thought process.
Is it.
So side, a little bit wrong, but to.
Make that decision or worry about that if in fact, we get into that environment.
The moment, we're in the middle of in an environment, where we I think Mike Corvocet. This yesterday that theres more we don't know than we do.
You know it is really unclear what the long term damage is going to be the economy at how long, it's going to take to grow back and our focus right now is to make sure we have.
Jamie is where it's a fortress balance sheet that we're serving our customers that were opportunistic inside of what is a fairly strange environment at the moment and we'll sit and watch and of all of that changes. You know then of course will change in replay on and regroup and refocus and so forth, but today none of that has changed.
So we continue the course and I know you guys want to sort of.
Somehow drive us into a corner that says.
The following three things happen then are you going to do a b or C and my brain Ken Ken.
Do that math, so we're not going to go down that path.
Fair enough and I was at that but we're fairly confident that an opportunity will rise.
Yes.
And then maybe in the meantime, and.
From an organic perspective.
It still seems like there's a couple of areas that you could spend a little bit to try and grow I mean, I know mortgage.
A frustrating area.
Over the year, but there's been some dislocation in the industry from care.
Still seems like an area that could be bigger capital markets you have walked off and your thoughts about Frank first half this year, but obviously had a really big kind of.
Bank.
They are getting the benefit and trading in investment banking from this unusual environment. So the thoughts on kind of organically or from the bolt on deals with this on the path focusing on those through area.
I mean look.
I wouldn't rule anything out neither of those necessarily.
Fit.
Longer term strategic.
Issues were facing but your mortgage is an interesting question because we've clearly seen some stress in the not I'm going to say the non capitalized mortgage.
Players and to the extent that becomes a structural change in the industry, which would in turn cause mortgage itself to be more profitable for banks.
Then we could look to grow that.
At the moment the structural challenges with the mortgage business as you know the costs to comply with various regulations, coupled with the capacity in the market just make it difficult to make money no of course, we're in a nother refi boom and all that looks good at the moment, but long term as not necessarily true that.
Changes and or the the government agency model changes such as you have to deploy capital to be on the mortgage business and that could be attractive.
The capital markets business.
We purposefully have been careful in picking our spots.
That as a business.
In my experience.
Turns more to employees than it necessarily does to shareholders through the cycle.
Offers lower returns on capital through the cycle, but maybe.
You know with some of the changes in Volcker.
And and the opportunities, we're clearly seeing just in the ability to too.
In effect broker trades in the margins in that.
Maybe maybe we would expand them, but we can do that organically, we would need to be at all.
Purchase something to do that.
Okay Thats helpful. Thank you.
Next question comes from the line after our Cassidy RBC. Please go ahead.
Good morning deal demeaning Ron.
Morning chart.
Bill can you share with us this been.
Bruce conflicting economic reports this morning, we see the impairment New factory index turned positive for the first time since February industrial production came in better than expected within none of them because the initial unemployment claims numbers and they're extremely high when you talk to your business customers nothing.
Once the leisure room that restaurant type of customers, but when you talk to your core customers what are the telling you about what they're seeing in their businesses today.
Well.
Basically everybody is.
Lastly, struggling nobody can figure out why the stock market is where it is.
And everybody at the margin unless Youre your directly volume impacted for whatever reason.
By Cove it in a positive way you know everybody's basically off.
Industrial production comes back, but it's still 11% down year on year. So.
Positive readings are positive readings from what was it really negative number.
You know the the struggle I am personally having with a lot of the data.
As I watch continuing claims they publish a number of.
17.
Million, plus or minus people, but theres 32 billion people getting unemployment benefits today right because of the carriers ex special provision that allows sole proprietors and gig workers to get unemployment.
So 32 million people getting unemployment out of 150 million us workers, yet, we're saying the unemployment rates only whatever they are quoting today, 13% I can't connect the dots I see the dollars that are coming in so our deposit balances and you see it from unemployment claims.
Which are causing our retail customers.
Who are receiving unemployment on average to have higher balances and they had when they were employed which has in turn driving consumer spending and part of this economy.
Yes, so it will Jamie one on this route is exactly right, we see consumers flush with cash we see no delinquencies, we see consumer spending increasing.
It's all at the moment based on.
Government, writing a check.
And I just don't know how this plays out but the generic corporate client we've talked to whose otherwise opened in doing business is.
You know almost without exception down from what they would have expected going into the year end down from where they were last year for sure.
Very good and Rob.
You mean touched on this in your presentation I mean, this slide 10, where you gave us.
In the numbers.
We're barron's or what you dialing in helping your customers providing relief can you share.
Any color on the request were forbearance I assume the coming down during the peaks probably in early April and how do you see that going forward.
Yes, I did I did cover that Gerard so.
Compared to the peak were down which is mid April were down 97% in terms of new request. So.
Patients again, all things remaining April that new request would be pretty minimal but.
Now as Bill mentioned things are fluid.
And the other thing, we're just now coming off of.
That period of the initial requests and so as frankly too early to really tell.
How many of those customers are going to ask for extension versus going back to their normal payment.
Payment plans.
And I covered that as well.
The payment that was.
Payments that were made in the last 60 days are on a percentage basis are pretty high so that would suggest possibly.
Lower modifications going forward, but it's too early.
You got me and then requests for people that are in some sort of refer barron's when they come back to you.
Isn't an automatic approval or do you have a process in place where you actually look into customer and say this one doesn't look like they're going to make it we're going to put it into non accrual.
Process work on the free but we have for a second.
We have a pretty detailed treatment plan that looks.
Amongst other things just to cash flow available to them from the balances we see.
And so forth.
Well work.
To come up with something that makes sense for the client denotes different the second time around than it was in the initial requests were effectively you just say fine and move on to the next phone call. So we're doing them case by case.
Great. Thank you.
Next question comes from the line kind of Mcdonald economists research. Please go ahead.
Hey, good morning, Rob wanted to ask you about the full year 2020 guidance and understanding what you said, there's a lot of uncertainty in the environment. Just just first on the basis is this on a continuing ops basis. So we should think of it as kind of revenues and expenses backs Blackrock in 19 and ex Blackrock.
Chuck in 20 is that how we're thinking of it yeah. That's right John that's exactly right Blackrock to discontinued operations and removed from that guidance.
Okay, So just kind of GMP.
Yes, Dan that's right, Okay, and then I'm not sure if you mentioned.
This but is it fair to us to expect like within reason, obviously, because it's a range down two to five.
You'll manage within reason to shoot for positive operating leverage like if revenues are down three you'll try to get expenses down three again within reason is that something is shooting for should we think about that sure sure absolutely within reason [laughter].
Yeah, Hey, where you know where.
We're pleased actually a given everything that's happened in the first half of the or that we have actually generated positive operating leverage.
But they are the back half.
Continue side in the state sort of unknown.
Variables.
So we dial that in the message that I want to send is that we're very conscious and deliberate and disciplined around our expense management and we'll work hard.
This suggests somewhere flat operating leverage maybe we can do a little better than that to your point, but that remains to be seen.
Okay. Okay, and then on the deposit service charges you mentioned this a bit just wanted to drill down we get any sense of how much of that decline in deposit service charge was due to fee forgiveness versus just kind of lower incidence and activity levels.
Bill mentioned consumers being flushed with cash and then you US banks. This morning, they expect there's to bounce back a bit in the third quarter still be down year over year do you expect a similar kind of trend and maybe asphalt.
Now, we do and I'd say, just rough rule of thumb about 50, 50, 50, and the waivers and 50.
As reduced activity.
And I did affect us come back not necessarily it back to all those sub peak front at levels, but up off of.
Second quarter levels.
In the third quarter.
Yes.
Okay, and that's part of my guidance yet.
For the flat kind of core fee revenue and that.
Core fee revenues stable up on consumer to that point.
Probably down a bit on corporate services, just reflecting lower activity and asset management in residential mortgage stable.
Okay. Thanks.
Okay.
Next question comes from the line of print personnel with Portales partners. Please go ahead.
Great parents. So thank you.
Great to have a war chest during a pandemic.
I have two specific questions on.
The national digital.
And the National Midmarket effort these actually moving the needle in terms of.
The revenue wall that you and other regional banks are hitting.
And then the second question would be on what you're seeing in Midland.
And the MBS.
MBS.
Experience, if you could update us on that thanks.
Just on that.
Moving the needle on revenues and let Rob throw some figures that you had a second but the cninety space, where we have been path has for a number of years, it's starting to become a meaningful part of the total revenue inside overseeing.
The franchise and it's growing at a much faster pace than our legacy markets, including fees were maintaining the cross sell ratios that we had in our legacy markets the retail effort.
In terms of profitability at this point is probably a drain almost certainly a drain but.
It is affording us the ability long term to be able to fund the growth in our C and IBX expansion with core deposits.
As we as we build build out our retail franchise collectively as part of its profitable.
I don't have.
The only thing that I would add to that is not yet there the expansion markets and say an IDR doing quite well one question we added.
What's the progress on the the opening of Seattle, and Portland, which we had teed up for this year have in fact that in fact higher there.
It's a little bit slower than what we had planned for 2020, but but were growing and each of those markets.
Contributed significantly in terms of aligned draws that we saw in the at alone growth that we've seen.
On Midland loan servicing.
I.
Thanks for the largest or close to it of one of the largest.
Servicers in the CMBS market, both on the master servicing side and importantly on the special servicing side.
Thus far.
We have seen.
As much as half a billion.
Weak I think that number is plus or minus rolling into special servicing out of a balance, but we actually a little over 200 billion in special servicing about 150 billion of that as pure CMBS and our guys would tell you that the and the crisis. We saw a 12 billion move to special servicing.
They're expecting as much as 20 billion through this and we're a little less than half of that we're happy to that.
That is it as an aside that's obviously those are our assets we are paid money.
To service those we get paid a fee stream.
When they move into special servicing we get paid a very nice.
Interest rate when we advance on principle and interest and ultimately we also get paid on resolution of those assets.
Another fee stream so it's.
It's large is accelerating and as profitable.
As to clarify what was it designated special servicer on 200 billion.
I think you said, we had 200 million sorry were designated specialty.
We do it for others.
Thats right.
So your property joining unusual profitability from this up.
Did you did you this 10 years ago as well.
Yes now.
Okay. Thank you.
Yep.
Next question comes from the line of Saul Martinez would you be asked please go ahead.
Hey, good morning, Thanks for taking my question so.
Hoping you could help me get a better sense of.
What are the order of magnitude is in terms of how much PPP.
Fees can actually help your your net interest income and how much is sort of baked into your your outlook. Because you have about 13 7 billion of loans and hope you as much as some other regional banks, but certainly not chump change and if I. If we do assume that sizable portion of that is.
For given.
Just run 70% to 80% and I don't know if that's the right number and a 3% fee on that we're talking about a few hundred million dollars accrued over or or recognized over a few quarters. So why did get a sense as to whether you think my intuition and I guess my estimates or.
Right first of all and then second of all Robert I don't know have you given or where do you have estimated.
Sorry provided.
Numbers or or or.
How much is incorporated into your your revenue guidance for the full year and your guidance for the third quarter. Adam If you can to give any.
This is to two to the numbers there.
Yes.
So one it is built into my my full year revenue guidance in terms of PPP.
Most of that in terms of what I'm thinking about right now would be in the fourth quarter. So.
So not so much in the third quarter and then I think I think the issue is.
You know to what extent, maybe some of that goes into 2021 so it.
It's a it's a real number but in the context of our total eni for the year, It's hot shoot.
Yes, I mean, it's not hugely material.
And with.
Oh, it's so.
It's not it's certainly moves the needle in any given quarter even in a yes.
Sure so right.
Or maybe thinking about it correctly in terms of of.
What percentage could be for given I know, there's huge uncertainty around that but are we talking about.
Our next year.
In revenue that will will be collected over the next three or recognized.
Some quarters.
Yes, I think I think that that's right and like I said that thats built into my guidance.
Got it okay. Thank you.
Sure.
Next question comes from the line.
Brian Klock with Keefe Bruyette <unk> Woods. Please go ahead.
Hey, good morning, guys.
Hey, good morning.
Hey.
Question on credit and I wanted to I guess at first and actually more of a bourbon bands and single mouth, but.
I was waiting for that to come up a little center.
I understand now.
Have made it probably cost somewhere at thing but right.
But I really I guess tables, while shows I get that at one single mall and Paul read that funding.
Yes.
Right.
Yeah, let's kind of Eric.
But can you talk about the criticized trends in the commercial I guess quarter over quarter, I guess, the thinking about it.
Forbearance and I was kind of thing going on this I sit in the past news I guess I was wondering where the overall criticized commercial along transport quarter over quarter.
Yes, so it's it's up.
I would say sort of mid teens.
We will report that in terms of.
Our reports criticize criticize are up.
But one way that spend way to look at that as are the exact breakdown, but when Rob went through the reasons for the increase in our and our provision both economic and then specific credit that $500 million plus or minus.
Was effectively the result of downgrades of credit.
So you can think about that population thats been affected here.
As being covered by the downgrades that gave rise to that 500, plus or minus billion.
Got it at that helps that helps.
Yes, hi, it's it's a single mall Reits related credit [laughter] somehow Ray do you think that fat yeah.
[laughter] and maybe just one real quick follow up and.
The guidance.
You talked about core expenses and revenues and the positive operating leverage target.
With a longer term.
Hi, Bill on you guys have been able to function pretty well, what your digital investment, but a lot of branches that you haven't reopened yeah, great because it depends I.
Yes is there any sort of thoughts longer term about maybe not reopening some of those and that.
Closing some of those branches, even though you still have the digital art.
Branch.
Stanton strategy nationally, but any thoughts on.
Selling some of your end market branches.
Yes, theres additional funds.
Yes.
Okay I think.
And by the way that well that wouldn't show up and run rate near term because it.
This point it probably call it $10 to close in as a dose for the savings but.
What's clear is consumer behavior has changed.
You know and my belief is and a lot of ways is changed permanently.
With this adoption to digital so we'll.
Just the way we serve our clients and it is likely that that will mean less physical space.
Yes, Thanks makes sense, thanks for time yet.
Sure. Thank you.
Yes.
And there are no further questions from the question.
Okay. Okay.
Thank you everybody. Thank you in the third quarter.
This concludes todays conference call you may now disconnect.
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