Q2 2020 U.S. Bancorp Earnings Call
Yeah.
[noise] welcome to the U.S. Bank.
Second quarter 2020 earnings conference call.
And when are we view over results by ends just dairy chairman, President and Chief Executive Officer, and Terry Dolan, Vice Chair and Chief Financial Officer, There will be a formal question answer session.
If you will like to ask a question. Please press star one on your telephone touched.
The pound gauge withdraw.
This call will be recorded and available for replay beginning today at approximately 12 P.M. eastern through Wednesday July 22nd at 12 midnight Eastern.
Now I'd like to turn the conference over to Jim Thompson Director Investor of Investor Relations and economic analysis for U.S. Bancorp.
Thank you mattress and good morning, everyone with me today or Andy Syriana, Our chairman, President and CEO and Terry Dolan, Our Chief Financial Officer also joining us on the call today, or our chief risk Officer, Jody, Richard and our Chief Credit Officer, Mark ankle.
During their prepared remarks, Andean Terry will be referencing a slide presentation.
A copy of the slide presentation.
Well as our earnings release and supplemental analysts schedules are available on our website you watch bank dotcom.
I would like to remind you that any forward looking statements made during today's call are subject to risks and uncertainty factors that could materially change or current forward looking assumptions are described on page two of today's presentation in our press release in in our form 10-K, and subsequent reports on file with the FCC well now turn the.
All over to Andy.
Thanks, John and good morning, everyone. Thank you for joining our call.
Following our prepared remarks, Jerry Jody Mark and I will take any questions yeah.
On slide three in a second quarter, we reported earnings per share a 41 cents consistent with the industry. Our performance is being impacted by the current economic environment.
Loan growth reflected the impact of defensive draws by corporations in March in early April strong mortgage long growth.
The impact of the paycheck construction program, which should support it small business is impacted by the cold It 19 situation.
Increase liquidity and financial system, and a flight to quality drop strong deposit growth supported.
[noise] are healthy fee income growth. This quarter is a testament to our diversified business model jumpy lines, including or payments businesses were negatively impacted by slower economic activity. However, we saw very strong growth in our mortgage and commercial products businesses and walk consumer spend activity remains pressured compared with a year ago.
Volume trends in each of our payments businesses have improved some economies economies have started to reopen.
<unk> expenses were held relatively flat compared with the first quarter.
We continue to manage our cost structure prudently and in line with a show revenue block environment.
Credit quality metrics in the second quarter reflected increased economic stress offset by the beneficial impact of government stimulus and forbearance and deferral programs.
During the quarter, we increased our allowance for loan losses, your response to economic conditions.
We believe our reserve level at June Thirtyth as appropriate based on the information we have available changes in the allowance will be depending on actual credit performance and changes in economic conditions.
And the lower right quadrant to this slide you can see that book value per share grew 2.8% compared with a year ago, and we remain well capitalized.
Slide four provides key performance metrics, we delivered a 7.1% return on tangible common equity in the second quarter impacted by lower earnings went to the current economic environment.
Slide five shows are continually improving digital optic trench shelter in place orders early in the quarter, a temporary branch closures due to the cold igniting had increased an increase in debt you can digital adoption.
Did you don't know accounts for more than three quarters of all service transactions in about 46% of all bombshells.
We expect digital adoption by customers to stick, even after the economy fully riocan.
Now, let me turn over to Jerry you provide more color on the corner.
Thanks, Andy.
Turning to slide six I'll start with the balance sheet review, followed by a discussion of second quarter for each trends.
Average loans grew 6.9% on a linked quarter basis and increased 10.0% year over year.
Growth includes $7.3 billion wounds made under the S.P.A. Paycheck protection program during the second quarter.
The average loan size to these small businesses was approximately $73000. Excluding the impact of P.P.P. average loans grew 5.4% on a linked quarter basis, an 8.5% year over year.
Excluding PPP linked.
Quarter growth was primarily driven by growth in commercial loans and in mortgage loans.
Late first quarter business customers grew drew down their lines to support business activity and a future liquidity requirements. We started to see pay downs of commercial loans in may and the paydown activity accelerated in June as many customers access the capital markets.
As of last week about two thirds of the defensive draws we saw in the late first quarter, an early second quarter have been repaid.
Strong residential mortgage growth reflected the low interest rate environment.
Credit card balances declined in the quarter due to lower spend activity.
Turning to slide seven average deposits increased 11.2% on a linked quarter basis and grew 16.8% year over year.
Average non interest bearing deposits increased 30.1% year over year, driven by corporate in commercial banking consumer and business banking and wealth management investment services.
Turning to slide eight while the net charge off ratio was relatively stable on a linked quarter basis nonperforming assets increased 24% sequentially, reflecting increased economic stress.
Nonperforming assets to loans plus other real estate owned ratio total 0.38% at June Thirtyth compared with 0.30% at March 31st.
We have taken a proactive approach and evaluating credit quality across the entire commercial loan portfolio and considered risk rating changes in the evaluation of our allowance for credit losses.
Our loan loss provision was $1.7 billion in the second quarter inclusive of 300 $437 million net charge offs and a reserve build of $1.3 billion. The increase in the reserve was related to changes in risk ratings and deterioration in economic conditions driven by.
The impact of Cobot 19 on the U.S. global economies, and our expectation that credit losses, and nonperforming assets will increase from current levels.
The increase in the allowance for credit losses considered our best estimate of the impact of slower economic growth and elevated unemployment, partially offset by the benefits of government government stimulus programs as of June Thirtyth.
Well estimates are based on many quantitative factors and qualitative judgments our base case outlook, a films and unemployment rate of 13% to 14% for the second quarter declining to 9.0% in the fourth quarter of 2020 and to 7.8% by the fourth quarter of 2021.
Slide nine highlights our key underwriting metrics and exposures to certain at risk segments. Given the current environment. We have a strong relationship based credit culture at U.S. bank supported by cash flow based lending that considers sensitivity to stress proactive management and portfolio diversification, which allow.
As opposed to support growth throughout the economic cycle and produces consistent results.
Slide 10 provides an earnings summary.
In the second quarter of 2020, we recorded 41 cents per share.
These results were adversely affected by the current economic environment and their related impact to consumer and business spend and the expected increases in credit losses.
Turning to slide 11, net interest income on a fully taxable equivalent basis, a $3.2 billion was essentially flat compared with the first quarter inline with our expectations as it as the impact of lower interest rates was partially offset by deposit and funding mix and loan growth.
Also as expected the net interest margin declined by 29 basis points compared with the first quarter, the lower margin reflected lower rates on a flatter yield curve as well as higher cash balance of being maintained for liquidity to accommodate customer demand while loan mix put pressure on the net interest margin the earning asset impact.
It was mostly offset by beneficial shifts in deposit in funding mix.
Slide 12 highlights trends in non interest income.
Strengthen mortgage banking and commercial product revenue more than offset declines in the payment revenues.
Mortgage banking revenue benefited from higher mortgage production and stronger gain on sale margins, partially offset by the net impact of change in fair value of mortgage servicing rights and related hedging activity.
Commercial product revenue.
Reflected higher corporate bond issuance fees and trading revenue.
Slide 13 provides information about our payment services businesses, including exposures to impacted industries.
Payments revenues were pressure was pressured by the impact of cobot related shutdowns and reduced economic activity in the quarter. However, consumer sales trends improved throughout the quarter and that trajectory has continued in early July.
Credit and debit card revenue declined 22.2% year over year and merchant processing services revenue declined 34.2% year over year, both categories performing somewhat better than when we had expected.
Corporate payment.
Products revenue declined 39.5% year over year inline with our expectations as business spending continues to reflect cautious sentiment.
Slide 14.
Turning to slide 14, non interest expense was essentially flat on a linked quarter basis in line with our expectations second quarter expense reflected an increase in revenue related costs from mortgage and capital markets production and expense related to covert 19 situation.
During the quarter, we incurred incremental covert 19 related costs of approximately $66 million.
These expenses consisted of about $30 million related to increasing liabilities for potential future delivery claims related to the airline industry and other merchants and about $50 million related to premium pay for frontline workers and cost tied to providing a safe working environment for our employees. We expect these inc.
For mental cobot expenses to begin to dissipate in the second half of the year.
Slide 15 highlights our capital position.
At June Thirtyth, our common equity tier one capital ratio calculated in accordance with transitional regulatory capital requirements related to the current expected credit loss methodology implementation was 9.0% at June Thirtyth.
Our common equity tier one capital ratio, reflecting the full implementation of the current expected credit loss accounting methodology was 8.7%.
I'll now provide some forward looking guidance.
For the third quarter of 2020, we expect fully taxable equivalent net interest income to be relatively flat compared to the second quarter. We expect mortgage revenue to continue to be strong on a year over year basis in the third quarter, but it is likely to decline compared with the second quarter, reflecting slower refinancing activity for the industry.
Payments revenue is likely to be adversely affected through the remainder of the here on a year over year basis due to reduced consumer and business spending activity. However, we expect continued gradual improvement in sales volumes, we expect non interest expenses to be relatively stable compared to the second quarter.
Future <unk> future levels of reserve build will depend on a number of factors, including changes in the outlook for credit quality, reflecting both economic conditions and portfolio performance and any beneficial offset from government stimulus. We will continue to assess the allowance the adequacy of the allowance for credit losses as credit conditions.
Change.
For the full year 2020, we expect our taxable equivalent tax rate to be approximately 15% I'll hand, it back to Andy for closing remarks. Thanks, Gerry all in my remarks on slide 16, which highlights the here. The recent actions we've taken as a company to help support our customers communities in place.
We are operating in uncertain times, not only for the economy, what price society in general However, I'm confident that together, we can make lasting and impactful changes that will leave us all better on the other side each trying times.
We are well positioned for near term challenges and we continue to manage this company with a long term lands and focus on maximizing shareholder value.
Our capital and liquidity positions are strong and our unique business model remains a differentiator for us.
I only three things that we will continue to support our ability to deliver industry, leading returns through the cycle.
First as our second quarter results indicate our diversified mixer business mix reduces revenue and earnings volatility and this quarter. It allowed us deliver good revenue growth even against the challenging interest rate backdrop, and an industry wide slowdown in consumer spending activity.
Second our time tested credit underwriting discipline puts us in a strong position to navigate through an economic downturn, while setting us up to return to prudent and consistent growth and the more favorable economic environment.
And third our culture remains the foundation, which informs not only what we do at U.S. bank, but how we do it.
I couldn't be more proud of our employees have come together support or customers communities.
And they face significant economic and social disruption.
I want to take this opportunity to thank them for all their hard work and resiliency well now open up the call for QNX.
At this time I would like to remind everyone in order to ask your question. Please press Star then the number one on your telephone keypad.
No question first upheld.
Please standby lobby compiled the Q1 a roster.
Your first question comes from the line of Scott Siefers with Piper Sandler.
Whereas God morning, guys, Hey, Thank you for taking my question Las Vegas, Terry a question for you just you gave the.
And I expectations since third quarter Wonder if you could talk a little bit about the sort of the puts and takes meaning a balance sheet growth and where you'd see the margin.
Injecting from here.
Yeah from a loan perspective again, we would expect that we'll see year over year growth, but on a linked quarter basis, clearly, it's going to be down we're going to continue to see a pay downs associated with those defensive draws that we had at the end of the first quarter and early second quarter. So that'll put downward pressure on a linked quarter basis PPP a will act.
Actually probably help from a growth standpoint, as we think about second quarter, but you know it it does start to dissipate in third and fourth quarter simply because the loan forgiveness program. So.
The consumer side.
You know auto lending has generally been a little bit a it was weak in April and may and but it's gotten stronger in June. So we believe that's going to be a bright spot. We think about the third quarter, but overall consumer lending is likely to be down simply because consumer spending has been down. So that's kind of the puts and takes you think about loan growth.
You know margin, we believe is going to be relatively stable will be helped a little bit by PPP, but but impacted a little bit there'll be a little bit pressure on the yield curves that equation, but.
Relatively stable to the second quarter.
Okay perfect. Thank you and then just given the absolute level of interest rates.
Do fee waivers or start to become an issue.
For a in the money market area and we did if I recall correctly from the last time rates, where this I think they'll show up in <unk> Trust fees, if they're sort of something you guys are thinking about where would they show up in what what's kind of the impact you guys would see yeah. You know I think the impact would be probably somewhere.
What we saw last time, you don't give given but it'll maybe a little bit more simply because of growth but it.
It will show up in trust and investment management fees, because that's where our money market fund revenue gets recognized.
Alright, perfect. Thank you guys very much <unk> Scott.
Your next question comes from the line of Matt O'connor with Deutsche Bank.
Good morning.
For clarify on the nothing kind of outlook of stable quarter to quarter, because I incurred some of the benefit from PPP repaying were for bearing.
And if so what are your assumptions on that in terms of the next couple of quarters.
Yeah, you know so it includes all the puts and takes like I said it will reflect you know I.
A decline on a linked quarter basis in terms of commercial loans because of the draws but there will be some benefit associated with PPP. So there. It includes essentially all the puts and takes associated with a net interest income.
Okay, and then I am wondering on the other PPP.
It seems like Youre approach was.
More granular or to go after have smaller really the small small businesses. If I just look at your total amounts funded versus applications and just wondering if you could talk to that approach and maybe give some insight in terms of the cough a that you've incurred to originate those loans.
Matt. This is Andy we took up to the applications as they came in serving our customers and initially and then ultimately a outside of the bank. As you saw we had over 101000 applications and the average balance was in the 70000. So a lot of our customers are all small business and see how we helped a lot of inflation.
The team did a great job, we started with a little bit of a manual process and went to a much more automated process certainly in the second round.
So it was just based on the the request that came in and the priority was really time based.
Okay, and then just the cost to originate was it just kind of moving resources for one part of the bank to another yeah.
Yes, It was Matt we Ah, we actually had a individuals from throughout the entire company help us through this process, particularly in the manual process. It started and the technology as well, but yes, the entire bank with support.
Okay. Thank you.
You bet.
Your next question comes on the line of Saul Martinez would you be yes.
Hey, good morning, Hey, good morning.
I wanted to drill down little bit on your comments Cherry on on the payments business and sort of a gradual improvement there.
I guess first of all could you could you just give us a little bit of a sense for the.
How much the consumer recovered and the seemed like in June the.
The year on year declines in acquiring volumes any current volumes should really really.
Lets into it but can you just give a sense of what see the exit rates were in terms of volumes and in those categories in June versus versus margin and I guess as an adjunct to that why wouldn't that suggest that we sequentially.
You should see pretty sharp improvement in terms of the sequential growth in.
Issuing and acquiring revenue versus release versus second quarter, obviously, you're on your stock versus the second quarter, which suggests that you could see a nice improvement sequentially, that's one and get your senses to as to whether I'm thinking about that right. Yeah. So a I think you're right on I think we we end up looking at our payments.
Business on a sequential basis, you know we will see growth.
Particularly in the credit card in the merchant I'm you know the corporate payments. We would also expect gross that maybe not as the same level simply because.
Sales volumes there.
Our commercial spend or commercial customers are still fairly cautious but.
Kinda Kinda give you some perspective, you know at the end of our in April you know we saw.
On the merchant side of the equation consumer spend was down almost between 50, 55% kind of in that ballpark and today, it's really back to spend levels are closer to about 20%. You know so that has come back really very nicely.
Things that are going to continue to impact for a while as the mix associated with the airline industry and some of the entertainment, but it has come back very nicely to your point on sequential growth is right on.
With respect to credit card credit card, we had said was down kind of in that 30% range in April.
And that has come back nicely as well in terms of credit card you know it is still down it's down around 10% to 12%.
We would expect you know that trajectory to continue so into third quarter.
Debit card revenue or sales excuse me actually had been pretty strong and you know the sales on the debit card side has been kind of up 10%, 12% kind of in that range and while we went expected to be maybe quite at that higher level in the third quarter is still I think going to be relatively strong.
And then on the Cps I'd equation Cps.
Again, the commercial spend has been pretty cautious it was down kind of in the magnitude of 30% to 35%.
April sort of timeframe and you know, it's still are down around somewhere between.
25, and 30%, we do expect it to get a little better than that in the third quarter for a couple reasons or simply because government spend tends to be a strongest in the third quarter. So hopefully that gives you some insights are perspective.
No Thats Super helpful. If I could squeeze another one in fees the deposit service charges, obviously down a lot you commented.
About fee waivers.
Related to customer co bid.
I mean, how do we think about that going forward in if you can quantify that or how do we.
Or just give us a sense of how that is $833 million, how that compared to two to maybe a more normalized level.
Yeah, you don't a similar sort of similar sort of impacts a you know as consumer spending just activity.
Has declined and then you have the stimulus checks and all sorts of enticing just incidence levels related to China, South and fee waivers in terms of helping our customers has impacted the second quarter on a sequential basis. We would expect you know that will come back nicely in the third quarter, but on a year over year basis, it's still going to be down simply because consumer activity is.
Sounds similar to merchant or credit card.
So soon it'll take some time get actually yesterday.
More normalized or what.
Yes, that's right.
Awesome. Thank you very much.
Thank you.
Our next question goes one on line of Erika Najarian with the Bank of America.
Hi, there no Bernie.
My first question is on on the reserve and this is a question that all your appears to have been getting during this earnings season. So you know I always like to thank and in the Cecil World that are reserve to loan ratio of 2.54% represents you know a cumulative loss rate for.
For the recession that represent lets say, let's say two years and I guess a question here is that right.
Is that your view yeah, I guess is another way of asking are you Don in terms of reserve building and related to that your peers have also talked about their base case, but that the base case tend to be one of let's say five or so different scenarios endos scenarios are waited until I'm.
Wondering if you could give us some insight in terms of as you had built your reserve.
How much weight that these keys.
It does take into account versus perhaps other scenarios.
Yeah. So let me let me take the first question and you know what do we think about the reserving now you're absolutely right. You know you you make your estimates at the end of any particular quarter based upon the information that you have available at that particular point in time and not certainly at June Thirtyth. A you know we believed that the reserve is appropriate for the cumulative.
Losses that are there so.
No we wouldn't expect a future increases in the reserve, but again that is gonna be highly dependent upon what changes either in terms of economic factors or are.
You know our credit quality changes differently than what we had expected so.
You know the important thing is that you know we're going to continue to assess the reserve every quarter based upon the information that we have available to us but that you are right.
Theoretically that is policy so works and that's how we're trying to imply it coming to your second question you know the information that I end up giving do with respect to unemployment now keep in keep in mind unemployment is an important factor, but theres like 200 different multiples that are a part of the modeling process. So it's pretty complex.
Because you got a lot of different types of portfolios et cetera, but unemployment you know the the information I gave you was really the weighted average across many different multiple scenarios that we ended up looking at so you are right. When we look at this we look at information from many sources in terms of things like on unemployment, GDP et cetera et cetera.
We developed a a base case, if you will but then we look at multiple scenarios around that base case and weighted but the information that I gave you was a weighted weighted based upon those multiple so it should give you some comparability.
When you think about that.
Andy.
All right you said it well.
Got it and my second my follow up question is to Andy So Andy I think what was particularly impressive about this quarter is your ERP PNR resiliency and obviously the forward look I would imply that this will continue.
I'm sorry, just told US that you know we could be done in terms of reserve building.
As you think about the future and as you think about a more difficult operating environment for banks, how are you thinking about inorganic growth strategies from here.
Well Erika first as you mentioned I think our diversified revenue mix helps a lot. This isn't this quarter probably represented it very well you know we had some pressure on payments because of these stand activity that Terry talked about but mortgage and commercial products had a it hit it out at the park this quarter in terms of positive so.
And then the other part of a diversification is how much of our revenue comes from.
The balance sheet or net interest income this as well as fee revenue was sort of a mixed bag. A 50 50, there so that really helps in environments like this in different businesses do well in different economic cycles. As we think about the future I think we are planning for a future that has continued low rates.
It'll take a while for spend to get back to normal. So we're going to manage our expenses in that would that thought in mind, which is what we're doing today.
We're going to continue to invest in the businesses that have opportunity as well as a digital initiatives I talked about and those digital initiatives will offer not only the opportunity for our customers to connect with us in virtual means I think it'll also offer expense opportunities in the long run. So those are the when should we thinking about.
And just any thoughts on inorganic strategies acquisition, Yeah, you know more bluntly yeah.
Thanks for being what so [laughter], we've been Lucky we will look at a opportunities has come up the only thing I'd say as.
The initial environment Erica there's a lot of uncertainty and it's certainly not a clear vision in terms of the future even for US show to look at someone else with that plans will be well be challenging, but no I do think opportunities will come up because of the stresses that are out there and we'll take a look.
Okay. Thank you you bet.
Our next question comes from the line of Mike Mayo with Wells Fargo Securities.
Hey, Mike Hi.
Just.
I want to challenge your like you're one of the most conservative banks, but I want to challenge some of your conservatism. So on that your base case again, 9% unemployment by the end of this year I know, it's a lot of scenarios and had a weighted average and all that but at least one of your peers was more conservative than than that and I know, that's the fed base case and.
Nothing crazy about it it's just.
You know I thought maybe why not be more conservative to be enough flexibility or or when you take the weighted average in the different scenarios I'm I'm pushing back a little bit more like this seems like Pete reserve builds and you said that but if you economic assumptions are wrong, then at that won't be the case or will not be more conservative there and along those lines.
And your pick your payments comment that it should improve sequentially kind of makes sense, but look we just had a big increase in Cobra cases, which leads to more das which leads to some closing down in.
How are you feeling about you know that progression.
Yeah, So maybe a to address the first question you know when you end up establishing the reserve you have to establish what you believe is appropriate based upon the information that you have available to us.
And you know what we use things like Moody's analytics and other sources in order to kind of come up with that projection of what unemployment doesn't example looks like so a you know you have to make sure that that your reserve is appropriate based upon the information that you have you can't build and tons of conservative as.
So to speak into it.
You know, but again part of it is we'll we'll pass kind of wait and see on the payment side of the equation in terms of coal that cases.
Based upon our estimates right now I think that you know this this go around versus last go around a you know I think that states are continuing to try to stay open to the best that they can I think you have different sort of health treatments and all sorts of different things that exist based upon better information or different information than what existed.
So far but quite honestly, it's we're going to find out there's a lot of uncertainty in its too early to know yeah and I'd add on Mike you know I think you're right things are changing every day and the fact change daily weekly sometimes hourly so we're just going to continue to.
Assess and managed company given the changes are out there what carries Johnny what do you see in right now and as he said, we're getting we get data every day and we're going to continue to assess what we think is going to happen. We're running a lot of models were sharing with our board a lot of scenarios, including a much harsher scenario and understanding what would occur in that so what you're right.
I mean, theres a lot of unknown, yet and we are being conservative in the way, we're approaching our financial modeling.
And then one follow up question look your third.
Slide of substance that slide number five but the digital engagement trends I mean, you're certainly putting that front and center. How can you bring us up to date like you know I'd like.
To the moment of what's happening with your digital engagement and what does that mean in terms of branches and.
National expansion and anything else because if you're putting this as your third slide in your earnings deck. It's clearly a I know, it's always been important but it seems like it's now being put in on steroids in terms of the way you're highlighting this which must mean or some bigger or you know part of the strategy.
So Mike It has always been important but I do think the recent events and the customer behavior changes as even accelerated that further and you can see that in the numbers.
Nearly 80% of transactions now occurring in a digital fashion Oh, the branch activity as far as transactions was down a lot in the sales side I talked about the loan sales, but actually total sales in the branches have doubled since you're excuse me on a digital platform have doubled versus a year ago and so we do expect those digits.
All investments both do it yourself and do it together in other words coal co browsing or virtual activity is going to continue to be important not just for the consumer but across many business lines. So that investment that we're making this important on two fronts. It's important to make sure we're giving the customer the best experiencing connecting with them in the wage they choose to and it's also.
Oh offering efficiencies and long run as we talked about we do which we were we announced a over a year ago that we expect to have 10% to 15% fewer branches and I would expect that number to increase in terms of the number of fewer branches that we have because of these changing customer behavior branches will still be important but the number of them in the sizes.
Then, we'll be <unk> and LOE and less.
Any number on those branches the updated number.
We don't have another jani, yeah, we continue to assess and as we think about though the changes that are occurring in the closures that are out there will continue to.
Assess what we what we expect but I do expect it to be higher than it 10% to 15%.
Okay. Thank you.
[music].
Your next question goes on the line up David Wong with Raymond James.
And David.
Morning, everyone are going back to the teacher protection program, and we talk a little bit involved the expectations for forgiveness. There, but do you do you have a timeline on where you think your seven plus billion in PPP loans may start to two before given.
Yeah, well, we do expect that there's going to be some forgiveness. It's gonna take place as early as the third quarter. You know so there's going to be some run off of the balances just because of that I think the vast majority of it happened late third fourth and early first quarter in terms of timing.
That's our expectation right now.
Got it Okay, and then on the deposit side, obviously very good deposit growth there how do you see the trajectory of gas playing out take into consideration, the PPP and and all liquidity.
That's built in now and how does that impact the size of the balance sheet through the rest of the year.
Yeah, well our expectation is that the deposit growth is going to continue to be strong at least through the end of the year if not into early next year.
And you know, what's really highly correlated to the amount on liquidity that the fed is continuing to pump into the system.
You know the the the you know the impacts from a balance sheet perspective, as you know I think certainly have a funding benefit associated with that.
The challenge is always trying to identify you know if he if you get the loan growth grade. If you don't you know you're gonna have to look for opportunities on the investment side the equation. So.
But we do expect strong growth in deposits into the foreseeable future because the fed programs.
Got it thank you.
Thanks, David <unk>.
<unk>.
Your next question comes one on line of can you stand with Jefferies.
Hi, guys, Hey, good morning, and just one question on the expense side, obviously, you know much stronger than expected revenues, especially our mortgage but no noting that you're talking about some of the covert costs coming off and that even some of the Mike costs I would think incentive related cost type stuff like mortgage will be softer sequentially, you're still talking about flat.
<unk> expenses sequentially and can you I was wondering if maybe you can kind of put that in context.
Some of the broader reaching comments you just made about the future of the expense base in terms of why you don't you expect to see spot expenses sequentially specs.
Yeah, you know the areas that we're gonna see a growth or not I mean.
On a sequential basis I do think you're going to see revenue related sort of expenses coming down a bit if you will see cobra delays expense coming down.
There's still going to be a fairly significant amount of PPP and costs associated with all sorts of things.
You know that will end up happening the third quarter.
The other thing that I think that ends up coming into play is just timing with respect to for example, other loan expenses when they end up getting recognized.
Relative to the mortgage production that occurred so you know we recognize revenue in the quarter, which the application is taken unlocks, but a lot of the expenses and up happening in the <unk> and according to its following that simply because of the timing of cold in loans and that sort of things. So that's a big driver that ends up impacting the sequential growth from.
Second to third quarter do you have to keep in mind.
Okay, and a follow up on the money market fee waivers are you had mentioned earlier that you would expect them to be larger than last time can you put that into numeric context first how much where you waiving either on an annual basis or at peak through the last cycle and how is the.
Asset management complex differ in terms of mix today versus then thanks.
Yeah in terms of the in terms of the mix is a product that we end up offering I think there's probably a more government or gavi based sort of money market as opposed to prime based you know the prime based declined fairly significantly but the overall.
You know when you end up looking at.
Assets under management.
It's certainly were at a higher level today than 10 years ago. That's that's the reason I think that the rate of the fee waivers will be pretty similar but just the assets under management.
In the wealth management space is a is higher and I'm trying to put nice fingers on a kind of what that looks like right now.
But we certainly can kind of get back the account.
Okay. Thanks, a lot I'll follow up.
Terry I think fee waivers will when they are implemented will be somewhere in that $30 million quarter range plus or minus.
Your next question comes on line of <unk>, Joni with JP Morgan.
Morning does that.
Hi, Thanks, Thank you.
Well the questions.
Couple of ones Firstly.
<unk>.
Cogs.
Can you give us the reserves to Cogs and also what are you seeing in terms of.
Hog customers web photos are coming off have you started to see deferrals come off and what's the reaction been.
Dozens of customers paying the full amount or asking to stem the deferrals.
Thanks, Rick I'm going ask Mark rock, our Chief Credit officer respond to that got Martin The reserve ratio on the credit card was 10.14% at the end June.
That's question number one the second in terms of those customers that have come off some of the programs that we've got and players we've seen very strong payment performance today about 70% of those customers have started to make normal payments. After those periods of time, we've seen a few of those about 20% reenroll.
Hi, and then the rest has moved into delinquencies. So so far so good on customer performance.
That's great.
Okay. If I may ask sneak in one other income I know it had a lot of noise this quarter.
What would you suggest that doesn't have the rate for us studios.
Yeah. So if you kind of think about the eye when island of looking at the current run rate just given the environment that we're in the back a you know I would end up looking at a second quarter's a pretty good estimate of what future quarter is going to look like at least for awhile.
I'm going at this 130 million that the huh.
Yes, yes, yes, okay yep, okay, great. Thank you.
Your next question comes from the line of Gerard Cassidy with RBC.
Good morning Gerard.
Oh, sorry, Hi, Jerry.
Andy.
Some real crosscurrents in economic.
Summation for example, the Empire State manufacturing Index, you know today positive first time since February.
Industrial production coming a little better today as well, but on the other him.
The initial unemployment claims numbers remain very elevated what are your customers. When you talk to your customers and they understand the restaurants and the leisure guys is still feeling a lot of pain, but can you give us some color on one of your commercial customers telling you what are they seeing.
Yeah. So first you know you're.
You're absolutely right. There are some mixed signals and I think the mixed signals is the the sort of the competing factors of the stress in the economy from the shutdown offset by the stimulus that's occurring across many categories.
You know unemployment benefits the stimulus checks PPP all those things and those are competing forces, which makes modeling and projecting very difficult in this environment I would say small businesses are struggling the most.
For a lot of different reasons park, principally because they have less cushion in the larger companies the larger companies as Terry mentioned you know it initially they were very defensive drawing down in excess of $22 billion, but about two thirds of that is paid back so while certain industries continue to be stressed you're seeing under the industries that are actually doing a little bit better in this environment. So.
Small.
Challenged middle and large mixed some doing well so I'm not so much Jerry what would you add or mark.
Well I think that's also and I think it's right.
And then as a follow up in the reserving in the provisioning you guys did this quarter I know you mentioned Theres a lot of moving parts as you just touched on it a indeed, but how much would you see the provisioning was.
Allocated to specific credits that you are now starting to see obviously distress versus just building up the general reserves.
Yeah, I mean, I'll have more kind of add to this but certainly when we end up looking at.
Net charge offs with things like that you know theres hasn't been a lot of movement, especially on the consumer side of equation you are starting to see nonperforming assets on commercial.
Going to grow as we talk about but it's still what I would say relatively early I think the government stimulus programs and things like that have kind of at least for for some period of time muted some of those underlying credit.
Characteristics that you typically see you know some much more of it or most of it is really driven based upon kind of our outlook. When we think about the economic conditions going forward and then at the end of looking at kind of split between products. You know, it's probably a more heavily weighted 66.
Plus percent as the reserve builds really more focused on wholesale and commercial real estate as opposed to consumer at this point that mark what we get the only other thing I might add as you mentioned this in the early comments, we've gone through the portfolio very granular and downgraded the credits appropriately. So we feel like all of that's been factored into it the analysis.
But the bulk of both because of changes really the economic assumptions that there's no.
I make sure I think they can coming back to your question on fee waivers the impact.
Second to third quarter, so on a sequential basis, a fee waivers will be about $30 million net ballpark.
And your final question comes from them lineup, David Smith with autonomous.
Good morning, Thank you taking the call I'm money, just just to clarify on the expense guidance Threeq you stable to Duke relatively does that include the kobin expenses in in Twoq that its total expenses, it's all inclusive and again, we'll see benefit.
Kobe coming down, but some of those production type cost that I talked about earlier going up.
Thank you and also any or any particular color you could give on the err on the jump in nonperforming loans in commercial real estate.
Yeah, I would just say they are really focused in on a couple of different industries that we've highlighted one is on the commercial side is really heavily energy and the retail sector and then on the commercial real estate is gonna be some of the retail related exposure as well, it's coming off a very low point as you know, but those are the industries that had been.
Most impacted today.
Okay. Thank you so much.
At this time I would like to turn the call back over to management for any closing remarks.
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