Q3 2020 Truist Financial Corp Earnings Call
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Greetings, ladies and gentlemen.
That's right now and she's Corporation.
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The formal presentation.
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Oh Investor Relations.
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Thank you BJ and good morning, everyone. We appreciate you joining us today.
On today's call are chairman and CEO, Kelly, King and our CFO, Daryl Bible or view, our third quarter results and provide some thoughts for the fourth quarter of 2020.
We also have the Rogers, our president and Chief operating Officer, Chris Henson, our head of banking insurance and Clarke Starnes, our chief risk officer to participate in the Q and a session.
As with prior quarters American.
Conducting our call today from different locations to help protect our exact isn't teammates.
We will reference a slide presentation during today's call a copy of the presentation as well as our earnings release and supplemental financial information are available on the truest Investor Relations website.
Please also note trust does not provide public earnings predictions or forecasts.
However, there may be statements made during this call that express massive actually its beliefs or expectations.
These statements are subject to inherent risks and uncertainties.
<unk> actual results may differ materially from those contemplated by these forward looking statements.
Please refer to the cautionary note regarding forward looking information in our presentation in our S E filing.
There's also note our presentation includes certain non-GAAP financial measures. Please refer.
Please refer to page three in the appendix of our presentation for the appropriate reconciliations to GAAP EPS.
Now I'll turn it over to Kelly.
Thanks, Ryan Good morning, everybody I really appreciate your all joining our call Bob Hope, you and your family or doing well.
No I would say relative to the challenges. We're all facing we're really happy to report what I call a great quarter.
A strong balance sheet, particularly on asset quality liquidity and capital relatively strong earnings right value proposition for clients, particularly on our digital offerings.
Right team, which I'm extraordinarily proud off.
No strong documentaries and all the stakeholders. We are as you know from our previous conversation really focused on our culture.
Especially our purpose to EPS Spartan build better lives reentered it I'm sure are on slide five.
Other things, we're doing to live out our purpose.
So we are now Raceway something we are very excited about affordability of our nation to sabotage an organization called corner square Amerita capital. This.
This is a new organization that we focus on funding through racially him at Merck I play on the verge of small business or wherever that individuals.
I will not return. So this will be done first video files created a developments and ask questions on some very exciting opportunities outside of exactly what I needed.
Real proud of our first true CSR report I Hope you got a chance to read it really recently our troops momentum Richard continuation the Hawick Suntrust program that focuses on Fabrix unnatural.
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We partnered with ever thought to introduce this it's something we're very excited about a game called workforce.
Which helps our kids and take her to learn how to.
Learn how to read.
You heard me say in the past Unfortunately, not Crawford today, two thirds of the kids in the public school system in the third grade send out rate. This is a way of getting that right.
Hey, dough and asked for but it's a really good start very excited about it where am I right Oh, we already have over 4000 students and over 200 school justified.
We are doing a really good job in terms of conservation of energy, a water and making good progress another areas like that investing in those areas to make our climate and environment better.
We did a as you know we're announcing the part of the merger 60 billion dollar community benefits plan over the next three years.
We're very excited about that you're going to be able to slot a number of areas.
Really committed to particularly point out that we will be investing in loans to add to what investments $32 billion over the next three years and probably purchase mortgage loans.
You know to tell them on minority borrowers. So this is a big part of helping the deal we're talking about the social injustice right showing that credit problems that we have in our country and a number of other programs that you can that you can see there.
I would also point out that we are committed oh.
Oh, sorry executive level to improving our diversity, we said enough CSR report that we have committed over the next three years to improve our senior leadership diversity.
From 12% in 2019% to 15% you can.
You can see there that we have a very good and effective diverse board, whereas 45% being women and minorities. So we feel really good about that I would also point out we were honored to receive a perfect score 100 on the human rights campaign foundations 2020, corporate equality index. So we do.
In a really good job that he brought to living our purpose.
Look at slide six.
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I'll just point out a few highlights we did have taxable equivalent revenue of 5.6 Varian.
Net come through available to common shareholders. What are we going to adjusted net income available to common was one block trade barrier that resulted in diluting earnings per share on the just about 97 cents.
Return on average tangible common equity of Dr was 16.5% very strong on a really good efficiency right show adjusted of 57.3.
We're really pleased about our nonperforming assets at 0.26 now we recognize that.
There's more to come with regard to credit quality deterioration, depending on what happens with regard to the economy, but still given where we are today.
And record now than there are some positive impact with regard to accommodations. There. That's a really good numbers, we feel really good about that and I'm like why the net charge offs were <unk>, 0.42%.
At the low end of what we just talked about her place that our common equity tier one is now at 10%. So we feel really good about our capital position if you will.
If you look at some selected items on slide seven.
Slide seven I'd just point out we did have security gains of 104 million, which was a positive six cents per share we have merger.
Structuring to reach our charters on 236 million, which ones are things that we did have incremental operating expenses related to the merger remember these are expenses that don't qualify for Merck in terms of calling out but they do have future benefits for the amount of part of our longer term run rate that was a 152 milligram anda.
They stress and we did make a 50 <unk> nobody Lala unusual contribution to our trickle copper Con Foundation.
Three facets you put all that together it was a negative impact to EPS of about 18 cents. So we feel good about the adjusted number of recalls.
Quality of these selected items ONTAP eight just a couple of comments with regard to the loans as you all know our loans are a real challenge for us and for the industry now over what's going on in the economy. What we did say a big run up in loans in the second quarter and likewise, we saw big run down.
Alan in loans in the third.
A large number of the corporate.
Line draw down quarter page so recall.
Total loan reduction of 11 barium amount on half buried him that was going to say in our area. So Thats press blade, what what happened we did.
We did have some bright spots, we had growth in light frame, our national concern about digital platform.
Sure Phil.
Our gross recreational lending problem out or we did have some decreases in some other areas like or the mortgage.
And so forth. So it's kind of a mixed bag with regard to consumer but overall the big story alone. If you exclude the run up in.
Losses into soccer and the run down in the third it relatively flat.
I'd say to you that we do expect future headwinds with regard to the PPP long, we have about five and a half billion dollars. There that will begin to pay off as we head into the fourth and the first and probably the socket.
Loan growth it really challenging now obviously that banks are a reflection of the economy.
So we should not be surprised about that the real question is whats going to happen to the economy I would just point out and as just one person's opinion.
It's important to look pretty.
Previous corrections that we've had and as always our material precipitating event. So 1991, we had the commercial real estate bubble 2001, when the technology bubble 2000 acre at the residential real estate bubble.
This one didnt have a bubble. This was the first strong tenure economy, 3.5% unemployment right. We just shut it down appropriately sized for medical reasons are we shut it down I make that point decide that if this pandemic doesn't go out too much longer.
As a chance to weaken together snap back in the economy that most people would not expect because there was a structural in trouble to start with FX stays on a long time, then all bets are off.
Firstly delayed as we got into the first quarter, we'll begin to see.
Real developments with regard to vaccines were sort of already have substantial developments positive problems with regard to overcome mitigation.
Segments.
Ramification. So we are somewhat optimistic although cautious as we think about the economy going forward I will tell you I guess.
Feedback from our client facing people and while not that they're not facing them in person as much today as we're talking to people will probably we ever did now although growth related.
David waiver, who runs our commercial green advantage over the other day. He has nine calls in one day. So we've been very very efficient.
Fashion, but to his upper what clients are being very resilient. Thanks.
Okay, particularly our middle and upper market.
One of the products that are out recently was clients decide it's time to move on.
To be honest, that's kind of what Weve said, we sat back for a while and didn't make virtual calls answered we waited for the pandemic that several months ago. We just kind of say, we've got to get on with running our business because our clients need us.
So our clients are being there kind of my business is okay. Now the small very small micro in is struggling and depending on how long. This last we will see a substantial shakeout in the small business micro market.
The aggregate economic level that will re shuffled reallocate yourself at a personal level for a small business for us for a sad story. So we got to hope that that moves along as rapidly as possible how SEC filings on our pipelines are improving our calling activity is robust and we feel very good about where we.
Going relative to what happens to the economy on.
On slide nine.
Slide nine just a brief comment about deposits, which are doing great.
We continue to have a nice inflow talking about because of a flight to quality. We had 1.4 very small increase in deposits on a linked quarter basis. We had a 10 billion dollar increase following other previous quarter increases in non interest bearing deposits. So we feel really good about that are non interest bearing deposits today or.
33.3% of total deposits versus 27.8% in the first quarter. So you can see how rapidly our video or non interest bearing deposits have having great. We've been focusing a lot of attention with regard to getting our cost down.
In regard to our deposit structure and we've made really good progress progress there our total deposit cost decreased from.
12 basis points to 10 basis points average interest bearing deposits decreased 17 basis points down to 15 basis. So really good progress in managing our cost of deposits I would point out if you follow the math and all of our deposit activities are we did divest 2.2 very mild in deposits this quarter and so thats a material.
Factors. So overall I would say our deposits are doing great with that let me turn it to Daryl for some more detail.
Thank you Kelly and good morning, everyone today I want to cover highlights from the third quarter and provide our fourth quarter outlook turning to slide 10.
Reported net interest margin decreased three basis points, primarily due to lower purchase accounting accretion core net interest margin increased five basis points. The first increase since the first quarter 2019.
Core margin benefited from strong media growth lower funding cost lower covered related deferred interest Laura.
Lower yields on loans and securities remain a headwind.
During the quarter, we used excess reserves to purchase $5 billion of high quality securities improving our yield on those assets by approximately 100 basis points.
Our asset sensitivity increased in the third quarter and we plan to stay slightly asset sensitive we will continue to protect our margin by placing rate floors on commercial loans and manage deposit costs.
Due to our excess funding position, we're being strategic about deposit cost by focusing on growing non interest bearing deposits.
Given the low rate environment, replacing pay fixed swaps to partially hedge our investment Securities and association.
Good changes in OCI.
We expect the reported net interest margin.
Slightly decrease for the remainder of the year turning to slide 11.
Adjusted non interest income was relatively flat versus a robust second quarter fee income categories impacted by that endemic continue to improve our.
Our activity on deposit is normalizing coupled with lower fee waivers.
Turning payment related fees increased as payments volumes improved.
Wealth management income increased as a result of higher market valuations.
Despite the seasonally weak quarter and sharing income grew 6.4% on a linked quarter basis did a firmer pricing uptick in new business.
Residential mortgage income decreased primarily due to a $72 million change in the net MSR valuation driven by higher prepayments investment banking had a record quarter by trading was off from a great second quarter, resulting in lower revenue either.
Other income increased due to the increase in the value of non qualified plan assets and other investments turn.
Turning to slide 12.
Non interest expense decreased $123 million.
As losses on debt extinguishment, and higher intangible amortization during the second quarter were partially offset by higher merger related costs and a charitable contribution.
Adjusted noninterest expense increased 20 million, primarily due to an increased personnel expense marketing costs and professional services the end.
The increase in personnel expense reflects higher non qualified plan costs were offset by other income higher.
Higher medical costs due to normalization.
Pension cost adjustment and a reduced labor cost capitalization due to lower loan volume.
Tourists remains highly disciplined on core expenses average FTD decreased 769 during the quarter and we expect further reductions this year.
We plan to close the hired four branches in December and January and are looking at ways to bring forward more branch closures in 2021.
Turning to slide 13.
Asset quality ratios remain relatively stable the NPL ratio increased one basis point to 26 basis points and the NPL ratio increased two basis points to 37 basis points, primarily due to see in Iowa.
Annualized net charge offs relative to average loans and leases increased three basis points to 42 basis points we.
We took a 97 million PCB adjustment to net charge offs, excluding that net charge offs would have been 29 basis points.
Provision.
421 million exceeded net charge offs of $326 million, increasing allowance by $95 million, the allowance was 1.91% of loans and leases up from 1.81%.
Coverage ratios remain strong at 4.52 times net charge offs and two at 5.22 times nonperforming loans, the combination of our allowance and amortize fair value Mark remains very robust at 2.76% of total loans.
Turning to slide 14.
Our exposure to sensitive industries continues to decline to a level of 9.1% of loans held for investment.
Outstanding balances to sensitive industries decreased $2.2 billion to $27.9 billion, we can.
We continue to closely monitor and manage our sensitive industry portfolios turning to slide 15.
The volume of loans with the accommodations have decreased significantly since June thirtyth.
Approximately $692 million of commercial wells had an active activation at the end of September 30 down from 21.2 billion and consumer $6.2 billion at active accommodation down from $11.3 billion the declines reflect exploration at the.
Initial payment relief, which was that reroute, we renewed by the borrower.
Since June Thirtyth, approximately 98% of the commercial borrowers and 94.5% of it.
Consumer borrowers.
Exited payment relief either paid off their balance or are in current status turning to slide 16.
The allowance for credit losses increased 96 million to reflect loan re grading and uncertainty related to the expiration of government stimulus programs are.
Our economic assumptions include extended GDP recovering.
High single digit unemployment through mid 2021, followed by continued improvement through the remaining reasonable answer portable forecast period are.
Our HCR estimate also reflects qualitative adjustments for our motto limitations.
Alright stimulus accommodations and the review of this have snack turning.
Turning to slide 17.
Capital ratios improved for the second straight quarter, and our strong relative to regulatory requirements are.
Our reported CE tier one ratio increased to 10% from 90.7 last quarter. We also issued 925 million of preferred stock to strengthen our tier one and total capital ratios.
The recent assigned stress capital buffer of tourists 70 basis points, we remain in effect until September when a revised stress capital buffer will be provided.
Yes, well, we plan to submit our capital plan in early November as required by the Federal Reserve.
Our purpose of capital priorities continue to be organic growth and our dividend we are.
We remain open to bolt on acquisitions with fee income businesses, turning to slide 18, but.
Liquidity remained strong with an LCR ratio of 117% and our liquid asset buffer of 18.6%.
Our access to secured funding sources is robust with over $200 billion of cash securities unsecured borrowing.
Our company is sufficient to cover 22 months of contractual and expected outflows with net inflows.
Turning to slide 19, we.
We continue to see strong growth in digital banking.
Through its opened up 56000, net new accounts versus 15000 last quarter, driven by digital and increased branch traffic.
For the 12 months through August we experienced a 21% increase in digital sales, 8% increase in active mobile users.
23% increase in mobile check deposit.
And a 5% increase in statements suppression.
We are also proud of the recognition we received recently from javelin.
Heritage BMT was recognized as a leader and ease of use and financial fitness and mobile banking and a leader in financial fitness and online banking hair.
Eric at Suntrust was recognized as a leader and ease of use and online banking.
These awards demonstrate the strength of our heritage platforms and the opportunities as true as advances digital capabilities.
Turning to slide 20.
As we have set our primary reason for the merger has to exceed client expectations through a seamless integration of touching technology to create trust to get there. We are harvesting cost saves from combined companies define increase investment and ultimately drive best in class.
Performance.
We are fully committed to achieving $1.6 billion and that cost base and continue to make good progress on personnel expenses corporate real estate branch rationalization.
Third party span and system decommissioning and datacenter closures.
At the same time, we're also investing in digital marketing and technology. We are also.
We are also investing in talent, including area outside of digital and our revenue businesses.
Together these investments and cost savings will allow us to generate best in class returns versus our peers, while providing distinctive secure as successful client experiences through touch in technology.
Now I will provide our fourth quarter guidance, which is based on a linked quarter changes.
Versus the third quarter.
For our guidance.
Provides a path to positive operating leverage we expect taxable equivalent revenue, excluding onetime security gains.
To be down 1% to 3% driven by lower purchase accounting accretion.
We expect reported net interest margin to be down three to five basis points due to lower purchase accounting accretion and core margin to be relatively flat.
Core noninterest expense adjusted for merger costs, and amortization is expected to be down 2% to 4%, reflecting lower personnel expenses.
We also anticipate net charge offs to between 40 and 60 basis points now let me turn it back to Kelly for our merger update closing remarks in Q.
Thanks, Daryl if you're following along on slide 21, I would say to you generally the merger is on track.
Integration and conversion, we feel really good about where we are making rig spread progress.
Most importantly, our culture is really strong and I would.
And I would say to you kind of an interesting way that they covet experiences isolated bond that our team together even faster than we were expected because when you go through a really tough time.
Thrown into both together it encourages all on strength in terms of developing relationships trust and bonding. So we could not feel better about how strong our collaborators are relative developing.
Some very notable activities in terms of the integration and conversion we did complete the grass divestiture as I mentioned, we recently announced something we're excited about what we call a truce ventures. This is where we are making relatively small but important investments in technology platforms that we can build into our value prop.
Position.
We are testing now.
Now for our client conversions in wealth and mortgage which will come up in the spring. So there will be a number of conversions that have occurred or will occur at the only way towards the file for conversion.
We did launch our dual service branch pilot. This is a technical thing, but it's very important as we move down the road and Daryl alluded to in terms of accelerating our branch closings as we head into next year.
Importantly, we do.
Plate, our end to end truest procure secured conversion. This was our big deals as we know this is the first virtual conversion.
That have occurred and it was seamless our favorite a fantastic job and it's a big deal we are really good.
Securities Operation now backing up our corporate and investment banking.
This is our core conversion is on track for first half of 22. So we feel good about where everything just with regard to the regimen conversion if you look.
If you look at slide 22, just a word about our value proposition as we wrap up we are as I said at the beginning driven by our purpose, which is to inspire and feel better lives and community.
Our goal long term is to grow earnings.
With less volatility relative to our peers over the long term us out of a commitment we made to our to our shareholders. We base that on a very exceptional franchise with diverse products services and markets.
As we said we are in the six largest commercial banking to yesterday that given the scale to be able to compete with very strong in our marketplace.
And that gives us the efficiencies that were noted we are the six largest insurance broker.
Really strong growth there I think we're going to report.
3% organic growth labor problems top in the market. We're the number one regional bank on investment firm for the number two original bank originated a mortgage originator and servicer, so very very strong franchise.
We are really positioned well to be best in class in terms of efficiency and returns at the same time, we will be investing heavily in the future as Daryl said, we are confident and achieving our 1.6 very moment net cost savings at same time, we will.
Same time, we will be investing.
In our revenue synergy operation I would tell you that our integrated relationship management strategy is going great as you know.
As you know in the beginning we said are huge opportunities to lever expenses Suntrust pad and the stress that maybe until you had and I would say that is ahead of schedule.
Revenue of our people with regard to cross selling if you will these products and services.
Across the organization is robust and frankly, there's just a lot of enthusiasm about it we're making key investments in technology, and our teammates and marketing and advertising all of which will drive our above average organic growth and long.
And long term stable and growing profitability, let's say.
So anytime we have a very strong capital base as you can see very strong liquidity and a very resilient risk profile, we're very prudent disciplined and risk and financial management, we have a very conservative risk culture, we have heard.
I've heard diversified benefits arising from the merger that those kind of naturally implicit in the merger, we stressed that very well as you, saying, we're a strong capital very strong liquidity.
Now we have a very strong and defensive balance sheet, which is insulated by purchase accounting marks combined with the seasonal credit reserves.
So overall I would say we have a great culture, we have a great franchise, we have a great team and we.
And we fully believe firmly believe our best days are ahead.
Thank you Kelly VJ at the time, we please explain how our listeners can participate in the Q and a session.
Thank you.
We would like to ask a question. Please take note.
On the agenda.
Using decouple.
Make slow your mute function is Paul.
And to reach our equipment again spreads.
Right.
Hi, Glenn.
And also just the momentum.
Let me know what you mean.
Question.
As announced a couple of questions Ken.
Great.
Hey, thanks.
Hi, Thanks, good morning.
Good morning, Tom.
Daryl I wanted to ask you a question on on the expense side.
Clear that your timing on the cost saves is on track from a long term perspective, two pieces number one at what point do we see.
Incremental operating expenses start to settle back down because they've been on a steady increase.
Since September of last year, and then two can you give us any update in terms of your expected realization of those cost saves as we kind of reset the bar code World and I understand like just your timing recognition of those cost saves. Thanks.
Yes, Ken what I would tell you is that we.
We are still on the uptick and our merger and employee related expenses. We are just going through a developing phases of that testing starts in the first quarter as I start with set testing and then we go into you 80 testing as we get ready for client day one.
In the early part of 2020 sale.
So I would say, we're still on the uptick there.
To date since we announced the transaction in February 19, we have about one and a half billion dollars.
Combined Merck and employee related expenses and at that time, we said, we would be at $2 billion.
I don't have a number of what it is going yet and we will probably give that to you in January we will probably exceed that number sometime in the first quarter of the 2 billion number I want to give you a number and make sure we hit the number that I gave you.
Earnings call in January from that standpoint, so we're coming through figuring all that out and we'll get back to you on that but I would say, we're still stay elevated for the next several quarters as we and we have thousands and thousands of people right now working on hundreds of systems getting them ready getting them tested and we just got to make sure. This is flawless and weak.
I have to be have a great client experience, we have to make sure everything goes right the cost a little bit of money you have to remember Ken on that we chose to choose the better of the two when we had our choices we didnt take the easy way out and just convert everything all one way or the other so far in the commercial platform we chose to.
The heritage Bbmg.
Servicing system assets, coupled with the heritage at Suntrust.
Encino piece that takes a lot more time, a lot more complexity, but when we get it done we will be so far better we're doing it in the retail banking platform as well, where we have that BBSI heritage deposits system, coupled with the heritage Suntrust automated teller again more complexity, but when we get through all that.
And 22, we will be light years ahead of most of our peers because of what we are doing for that so it's the right thing to do it cost a lot of money to do it we're going to do it right and we're going to execute.
Got it and one long term question I know that would be.
Low twentys RTC either outlook that you had previously was pre Kobe had a lot of changes out there consensus for 20 twos, obviously nowhere near it can you.
Can you help us understand like what you think is doable longer term obviously the provisions are big input into that or at what point do you think we can get some updated expectations on what's doable for this franchise. Thanks guys.
So can we still feel confident over the long term and the original expectation of low Twentys Artesia you may remember we already have heard are strong in the environment that we're in today.
And as Daryl described we're really just getting started in terms of getting the long term investment.
Investments made and a related expense reductions that will follow and then.
And then of course, you've got all the revenue synergies that I alluded to so we feel very very good about that obviously will ebb and flows on based on the economy, but that's still a reasonable number to shoot for.
Next question next question please.
So if you find that your question.
You mean.
Licensing SaaS.
The next question from Michael Rentals from Raymond James.
Yeah.
Hey, good morning, guys hope Youre doing well.
Just wanted to get that down just wanted to get some color on this quarter's PCB review and then if you can give us some credit metrics around the.
I want to be the selects so at risk.
Exposures I, obviously saw the balances drop, but if you can give us.
Any sort of sense on what the migration look like this quarter and some of those at risk exposures. Thanks.
Yes, so Michael I'll take the PCB question, and then I'll pick the Clark and he can maybe answer the accommodation piece.
Piece of it so on that on the PCB remember when we.
Remember when we closed in December we closed under.
And now what I would say old accounting method, where we add to set up PCIA. When Cecil came in into January we went from PC to PCB and that process. We went through we grossed up well.
The carrying values in connection with the establishment of HPCD as are our best estimates as we as the year played out what we realized is we grossed up the allowance and we should have not gross them up to the full value. They should have been today charge off from that.
From that perspective, so it was.
Just that that we made this quarter, we think we've got through the book and we've we've caught everything there. So in essence, we would have just had a different number in the first quarter when we adopted.
You know our Cecil numbers, but it was an adjustment that we made it's a noncash item.
And we had really good charge offs. If you exclude that 29, we had good charge offs, even if you add that added 40 till upbeat guidance.
Bart.
Thanks, Darryl Hey, Michael as far as the sensitive industry you see on the slide there we've got in the deck. We had a nice couple of million dollars reduction this quarter Isnt, a very targeted effort to work with those borrowers and reduced exposure. So I would say the highlights of the quarter there as we were.
We worked very aggressively to get a handle on particularly in the energy portfolio and hospitality side, we actually sold $300 million worth of hotel credits at a pretty good pricing and also.
Address a good bit of the energy book, So to give you some context nonperformers in that portfolio of sensitive industries are still less than 100 basis points and we have less than 2% of those balances there in any kind of accommodation or deferral. So I can.
I consider really strong progress and we will continue to watch that closely and it's all considered in our reserves as well.
Okay appreciate that and maybe just my follow up you guys hit 10% see one.
Obviously buybacks on hold for you and others this quarter.
Should we think about capital deployment any updated thoughts you guys have would be appreciated. Thanks.
So Mike.
We're really happy to be up 10% and as you know we have said that that was our target.
So that's a very comfortable position.
We think about it going forward is really a function now of course, when we were actually able to do.
Hi, Max.
And on dividend embraces.
But why do we think about it is about risks projection and so.
So if you know if we look.
If we look forward and we feel like the economy is stabilizing and growing and we look forward in terms of our pandemic this under control.
And we can feel comfortable in terms of a projected relatively stable less volatile growing revenue stream then we'll feel comfortable in terms I'll turn it back on.
Hi, bags and considering dividend increases I think today, it's just premature we just don't know what we don't know and in order to go out there today and try to make those kind of assumption I think that was issued at the door.
Thanks, as we head into next year, we'll say, Florida with regard to the brands that we will see.
Clarity with regard to the economy I said earlier I think the chances economy is going to be better than most banks. So there is a decent chance, we'll have that decision to make as we head into the.
Colin the first half of next year, but today, its just a tad premature.
BJ understood and take our next question.
Thank you.
Yes.
Yes.
Ill take that makes less from Nevada Cassidy from RBC.
Good morning, Kevin.
Hi, drug morning, Jamie Good morning, Hey, Daniel we will gain.
Okay.
Good thank you.
Yes can you share with US you mentioned that you guys purchased 5 billion and security using your excess reserves.
Ill begin by about a basis point.
Well Q how much.
How much more of the insurance reserves can you put to work and can you also share with US what was your duration of those purchases to be able to get that higher interest margin, even though it was only one basis.
Okay.
Yeah, So gerard.
So our current duration of our portfolio because of prepayments speeds picked up we're just a tad over three years right now 3.1, but we did they do have negative convexity. So it is can move in and out from that perspective.
What I would say is that we are in the midst of moving some more of our liquidity that we havent effect, we have a little over 30 billion at the fed currently we are moving back over some of that this quarter, maybe more of it into early next year.
We are layering in some hedges and I would tell you the hedges that were put non our FX hedges.
What we're buying mortgage backs, which as you know as cash flows that paid out over the life of those assets on their way fast.
Fast we has approved hedge accounting on this adds that only allowed to use bullet swaps. They do have a task force that they are working on trying to look for other ways to allow for it is it's called last layer of hedging and we're hopeful that we'll be able to put on a little stronger hedges, but the hedges were putting on will need.
Some of the OCI volatility.
They get comfortable and.
Allow us to use may be amortizing swaps instead of just broad swaps that would significantly improve the performance of those hedges sellable.
Sellable helpful about that but we are trying to hedge it on the best the accounting right now that the cost of these pay fixed swaps are really low added 12 basis points. So it doesn't really impact that so we're on the met Samil, Eric Yes, I always look at it as an opportunity cost right now we could have low rates for the next three years, that's what's in the forecast five years.
You just don't now and I think it's good to be deployed that the way I would think of it though is that if rates were to go up or we started to lose some of the search deposit our cash flows from this investment portfolio over voting now could be easily $10 billion a quarter. So we could just not reinvest if we have.
Strong loan growth, we could use that cash flow to deploy into loan growth. So it gives us a lot more flexibility a lot more optionality and it also helps protect our margin and help run right.
You pay us to run our company and do what we think is best we think this is a good balanced approach to managing the company.
Very good and we will follow that Kelly any share your view about the vaccine is totally in therapeutics, a little less next year hopefully the accounting related expenses did that then come back to something you said about this small business owners and the economy doesn't come back.
The more meaningful fallout.
And can you frame for us and I know its objective.
You could frame for us.
This is what if the economy doesn't come back by the second quarter. The first quarter. When you really start to get concerned about that bowling.
Well, that's something obviously, we don't know but.
I think today.
So of course have already gone away I mean done digits, they couldn't or whatever is that could qualify for the stimulus.
They chose not to guide you through the power, but that's a small percentage.
Most have been void by the.
Shipments for maybe other loan assistance programs.
As that begins to phase out the businesses will have tougher decision to make but I will tell you that a lot of these small businesses are pretty creative on the deferred related and so I mean, I wouldn't expect to see a majority of small businesses.
Fold or anywhere close to that.
Thanks, most are going to find ways to reinvent their business.
His incredible how smart small business people are off that will basically my whole career and that definitely tough group.
So I wouldn't I wouldn't write them all I'm going to say that its an angle on end of the second quarter and December dissolved has embarked backout buyer again on.
You know we roll along we will see a shakeout, but here's the thing today in summer purchases of back up you know the credit card activity I mean, its up year over year. So went through a trough and backs although year over year. So thats fine thats buying in different ways. So one day small businesses have to do is figure out what does carry out our.
Don out in the back yard or whatever it is of your restaurant.
The creative ones will figured out some won't be able to figure it out and they'll have to file another greater but.
But I think that all will begun forgot up again to be clear there are as we.
We head into the second quarter.
Great. Thank you.
Hi, VJ fleet transition to our next question.
I will now take our next question from John.
Let's call it I guess.
Got it.
Hi.
Just on credit.
So.
Apple two part question there first on the delinquencies looks like both 90, plus some 30 to 89 increase and just wanted to get some color on what you are.
What you're seeing beginning to migrate that theres any concentration there what's driving that and then separately on loan loss reserves. If we do see the delinquency to start to interpret into a steady rise in charge offs is it fair to assume as charge offs rise that you are adequately reserved and accordingly, you could see the rig.
In Europe, the loan ratio declined as that happens thanks.
Hey, John this yeah. This is Clarke I mentioned that John on the delinquency side.
We typically see in consumer anyway. Some elevated early stage as you go through the second half of the year. So third quarter is going up a little bit part of that seasonal you'll see a lot of it is concentrated in the Gulf.
The government guaranteed portfolios around student and mortgage so that that if you take that out, particularly for your 90 plus that was the majority there was flat otherwise so.
Again, nothing alarming at this point, we anticipate part of that each year and to your.
Good question all of that is considered as we go through our modeling and our allowance and our.
Our view of the scenarios that we selected so yes, I think we've assumed that will be further deterioration as we.
As we move forward this very likely and Thats all included in our estimate today.
Okay. Good that's helpful. And then secondly on the net interest margin front.
I know that you indicated that Donald.
Well that the reported margin should see some slight pressure through the remainder of the year I just wanted to get your thoughts on the core margin outlook just.
Just given some of the actions you've taken in time, just thinking about that from here.
Yes, so I would tell you that we had a good drop in deposit costs. This past quarter. We still think we have room to go there. So our interest bearing costs or 15. My guess is over the next quarter or two will be single digit I think that's just the direction that we're headed right now I think thats a.
Possibility I think that will help I think as we can grow some of our consumer portfolios successfully that will help mitigate some of our core margin you have higher yields in those portfolios.
And that would definitely help as we were able to be successful in growing that.
And then the other thing I would just tell you that.
What we are doing everything we can.
Protect our core margin and try to grow as much as we can to offset the runoff of the write off of purchase accounting is a little bit and for us it's hard to predict it depends on how the loans pay down on that my guess right now is that it be down three to five right now, but you really don't know whats going to come through from that you just have to.
Do the best that you can live with whats running off from that but what PPP coming out over the next couple of quarters.
So that will help keep core margin probably in the two seventies and that will help mitigate the reduction of GAAP to what depending how much yet PPP paydowns. Our guess is the bulk of our pay downs will comment in the first quarter, maybe second quarter, we'll get some this quarter recall our company has about 12.
And a half billion of.
PPP laws on the books we are.
We are planning to have an invitation sent to all of our clients in the month of November so that all get imitations how quickly they can respond with the documentation and we submitted the SP. A it's just a huge process. That's why we're thinking it's more.
On Saturday in the first half of 21 that in this quarter, but you don't really now it's an unknown right now for a couple of things keep in mind that I think we've been very successful in terms of floors with regard to new loans.
Yes.
The other thing is that.
If the economy comes back faster, which I think it is going to be.
I was going to be a substantial pent up demand for expansion.
And so we will see increase in loan demand or I call. It normally priced loans, which were.
Which were beta plus with regard to announce our couple of things that could really help on there in addition to what else.
Got it. Thank you that's helpful. I know you said relatively flat on the coordinated and you're guiding phones, just looking for the drivers behind that and then maybe bit of behavior beyond that thank you appreciate it.
Thank you BJ, we're ready for our next question.
So you got less than that.
Rental.
Thanks.
Hi.
Hi, David Hi, Hi, Good morning, Okay couple of questions one.
One is on how you think about the reserve release I know it's early to ask this question, but you know we all model out a couple of years. So I'm just trying to understand why.
What your thought process is with regard to when you would start to release reserves is it to match any net charge offs that you get from here.
Or maybe there's something else you're thinking about you could let us know thanks.
Mark you want to take that are yes, yes.
Yes, maybe I'll start and then Daryl Kelly can I mean, it's certainly mix C., we think is.
Premature to be talking about releases right now given the environment. So thank you will see in our estimate this quarter, we've been I think prudent around.
Considering there's still a lot of economic uncertainty around the world, where whether there'll be more stimulus what the ultimate outcome of these accommodations are and just the pace of the recovery.
Of the recovery, so I think for us.
We would want that they should be sure we have much better clarity there and see the economy.
Very firm ground and client performance the at at and really strong level before I think you see us consider releases.
And I guess my question. Thank you again.
That's just one of the things that kind of interesting but to your point yes.
If everything were precise.
As I understand that the economy was up.
Performed as we expected in terms of us April production rates or as we projected so on that for the five miles as a sidebar project, if Allah would happen and be a hub sent correlation right reserve reductions and drug costs.
As far as part of a 100% correlation and the other thing is and I hope. This is not true, but do we get any pressure from regulators to whole reserves up even though all the math on all the cronto excited should be coming down we've not heard anything about that but thats always a log on.
Yes, so how does it work with cease all as my follow up question I know, they maybe that's a little bit longer than the time I want to spend on it but.
On this topic, but the question really is around how to think about the trajectory of the reserves from here like in the old incurred loss model. You know there was some general reserve that you could have and I'm just wondering as we go through this recession and we.
Have you know maybe some asset classes are experiencing greater.
Greater than expected loss, others less than expected loss can you shift the reserves around and.
You know the question really ends up being you know how how fungible are a different parts that you put up against these specific asset classes that you've identified thanks.
Hey, Carlos our first I'll start that you want to maybe add to it but I mean, we do it both ways, but the thing that we do a bottom up analysis. So our model or go through when we model all the portfolios and we are right or they get the scenarios and we come up with a bottom up analysis, given the limitation to them.
Not all those and the uncertainty in the environment. There is always top down adjustments that occur at our basically in play there. So it's really.
It's a process you go through and as you have to know what you have in the model is today, if the economy gets better and everything else stays. The same you know you could see every lease potentially but that's not reality things are always changing things are always getting regret it up and down in the portfolio.
Client behaviors are changing more charge offs or whatever so it's always a dynamic process I think Clark and his team do a great job and analyzing it we thoroughly review it several times before we come up with our our numbers each quarter. So I. It's just it's hard to predict right now, especially with the uncertainty how high.
The economic variables are today and the model limitations out there there is a lot of qualitative adjustments occurring right now are.
No no I think you said it well there. They are all I think it's very granular by segment and that segment analysis and our view of the economy and the impact on all of that does does allow us to adjust the estimate is needed in so you could have differences quarter to quarter by those different segments and that can impact.
The level the estimate.
Thanks, very much there on cards appreciate it.
Thanks, Brett Thanks, Great. We are ready for the next question.
Yes, I will take our next question from Mike Mayo from blends pauses.
Hi, My question goes to slide 12, where.
The efficiency trends and not on the right direction in the last couple of quarters.
But you just gave guidance for that to improve in the fourth quarter you talked about.
Personnel savings CRT brands third party systems and closing on four branches. So I think I'll summarize what I heard so my question is.
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Why not more why not faster.
This is one of the biggest.
Biggest merger overlaps that you've seen how you're allowed to close branches starting in December yesterday US Bancorp said, they're going to close 300 branches and you just said you're going to close about 100 branches. It just seems like you could do a lot more and I, just being too safe to get the merger integration.
Smooth I mean, you are growing deposits not blow ups in them I'm sure you're protecting the long term franchise, but I thought that efficiency story would be coming in a little sooner than its come in thanks.
So Mike I'll start with that and others can help help may finish the answer so I'll start with we have five buckets of cost savings you.
You started with the branch system. So we are closing 104 branches that I said in my prepared remarks, and the December January timeframe.
I also said that we are looking at opportunities to pull forward. Some other branch closures in 2021, we aren't at this stage yet to announce exactly what we're going to do there, but we didn't give you an indication that there is a possibility and we wouldn't have said that if it wasn't a strong reality that we're going to pull forward a significant piece of some branch.
Closures in 2021, we'll give you that once we are able to do that if you look at our third party span the third party providers to date right now with the oil offenders, our sourcing and procurement teams have basically realized $266 million of savings from that.
We think that run rate translates into about 300 million in 2021, they are not at their goals yet they're still trying to get more savings. We think that will occur over the next year or so we hope those numbers will exceed $400 million before it's all said and done from a run rate perspective, as as contracts come up as we redeploy.
You know, we're still going through the process of.
Negotiating contracts with the end provider of these services that we are having so right now so not everything can be fully negotiated yet.
Next one would be in our non branch facilities, we talked about that in our last earnings call. We have 29 million square feet outstanding if you add branches and nine branches out there that we talked about potentially taking 5 million square feet out and our non branch areas.
Next year, we said the average cost to that on a gross basis was $30 a square foot there will be a little bit investment come back as we you know refit under the socially distance areas and all that for the build.
The buildings that are surviving we at branches that will probably not have another two to 3 million square feet. There. So that will be close to 20 million square feet, probably by the end of 2021 in our company from that perspective. So that's a third that were taken out very aggressively very quickly.
Fourth area is in technology I talked about in the prepared remarks, we're just now getting in the midst of eating through conversions, we've done some small conversions that client facing and we.
Starting to decommission system, starting to get systems. There. We just did a conversion in those area and capital markets large corporate area at all that stuff. So that those savings are going to be captured as we get thrilled conversions in the first quarter and Jos area with wealth and broker dealer that we have there in that in that one first.
Quarterly I want to second quarter. It takes probably three to six months before we get through and get those systems Decommission. Scott has plans that we don't need for data centers right now we're going to end up with a couple of data centers at the end of the day that will probably be at 22 savings. So we will get those savings. It's just a matter of when we are able to get those close and get everything transfer.
And the last one I personnel, if you look at our Ft every quarter they've been following in Fps that we pull forward FTTS as they go through these conversions. We are going to have continued FTD closures I mean, we don't need as much about areas on the support side as we go through these.
Conversions and get things finalized so there's a lot to kind of we are not backing down from the 1.6 billion. We are backing down from a timing, where we are going to come through on target. Like we said we were and this is just a way of doing it and I might just amplify your question Sir.
So appropriate about branches, but two points.
Up to this point, we have been cautious in terms of closing branches, probably more I have wanted to have maximum.
Mobility for our our clients keep in mind that you know we've had to basically flows down the lobbies and our reports of about 90 plus percent of our prices have dropped group saw a drop through balchem throughout for the last several months. We've had in branch activity based on home as always we're just opening up if we'd like 1500.
Branches of full service into lobby. So once we get the branches that to kind of normal and our client service capabilities back to normal.
Then we will be more aggressive in terms of the closings but.
Because we have a large number of branches that are literally thousands of active in many cases sharing this having parking lot.
And our people are they'll alluded on literally in the process of developing an aggressive plan with regard to that so don't hear us say, we're not going to be aggressive with regard to grass flows closures.
We're not just going on out there today, but from then literally in the process of putting that touches on what is going on.
And then one follow up just to put a bowl round it how much in merger cost savings do you have.
So far in the third quarter run rate.
And what do you expect for 2021 22 again.
So for the third quarter were probably around 35% give or take yes, we're still targeting 40% in the fourth quarter. The guidance that we gave it in that middle of that range that I gave you there so plus or minus on that side of that.
For the end up fourth quarter 21 were still at 65% of the $1.6 billion and then the whole one quick.
1.6 billion by the end of 2022.
So we're not changing the timing of that.
Okay. Thank you.
Yep.
Operator, we're ready for the next question.
Kevin I will take our next question from Paul watching it some you'll be.
Hey, good morning.
Following up a little bit on on Eni General Ken.
What is embedded in your.
In your fourth quarter core needn't reported maybe guidance for PGP forgiveness.
Oh, it's anything in can you just remind us or give us an update as to what you will be working right now through procurements rates over.
Yes, the next three quarters and.
Any any color on what the.
Sort of the fee rate is on calling that sort of good news because obviously it does move the needle on.
You know on an item that accelerates forgiveness.
Yeah, So what I would say when we talked about that last quarter now our estimate hasn't really changed in that we sell thanks, 75% of that will pay off.
With this forgiveness gaze at the I guess the map, we really don't know we are like I said earlier, sending invitations out to everybody from that further.
For this fourth quarter of that 75% were probably around 20%. That's a shot anadarko what actually might get paid off we really don't know the timing if you look at the new.
That came out last week from the SP a in a two page or for the 50000 unless you have the numbers on that is out of our 80000 clients. We have 45000 clients that are 50000 or less but it only represents 7% of the dollars. So.
So it's not that huge right.
MP felt hopefully a lot of that most of that will probably get process very quickly, but you know weve actually gone through and done. Some forgiveness is that high that limited basis, just to learn the process and we've actually gotten paid from the SBA into capital. So we're learning and gearing up and we're getting ready to do it you know holistically.
Okay to everybody at once once we got the processes all all lined up so were gearing up for that we think the first quarter style will be our biggest quarter air right now the estimates around 60% and the rest would be in.
During the second quarter, but he really down now I mean it.
When the timing of it as a pure shop in a dark but that's what's in our numbers right now.
Right in anyway.
It's more tilted towards first quarter, but do it.
Does your fourth quarter guidance explicitly incorporate that 20% forgiveness certain fee rate on top of that and don't give you a little bit of mid fiftys here, but you're right. If you strip that out.
Yeah, there is risk I mean, if it's less than 20, we may miss or if it's more than 20, we may.
Hi, exceed corebody that won't be the only and I'll be arent CLARCOR is outside of other variables that as an assumption that that plays out absolutely there and the other thing and snake amounts out Sir.
When you realize it just because somebody sends it anyway do you realize that when they send it down or when they actually get the dollar's wired back into us. So we're working with our external auditors and the timing of when we recognize that the pay offs.
Right would know PTT forgiveness can you make inquiries slow or is that already.
It's impossible to do that.
Right.
You know my guess is that the core margin without TPP is probably and that too high to Sixtys right now, but would be my guess, maybe still to 70 I mean, Ed. We are all depends on what Kelly said the loan growth the ability that to grow to higher yielding portfolios and that really get a mix change if we.
Just mix.
Yes, some of that excess liquidity that we have in wells versus securities are fed balances that they really positive way to help your core margin. It's just a matter of trying to get the loan volume that to support that.
Got it just one final clichy Gisler, just absolutely just want to make sure that the guidance for expenses and revenue that is based on the adjusted non interest expense number frequent for seven and incorporates the which is non interest income I guess as to when those centers.
I want to clarify that.
Okay I in my prepared remarks I adjusted those.
<unk> expenses side and the revenue side.
Just want to mention ticket.
Yeah.
That concludes our Q and a session. Thank you BJ and thank you everyone for joining us today I apologize to those with questions. We didn't have time to get to we are happy to reach out to you later today with to address those questions. We wish you all the best.
Goodbye.
This concludes today's conference call. Thank you see pockets station you may now disconnect the call.
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Hmm.
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