Q2 2021 Citizens Financial Group Inc Earnings Call
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Good morning, everyone and welcome to citizens financial group second quarter, 'twenty 'twenty, 1 earnings conference call.
My name is Ellen and I'll be your operator today.
Currently all participants are in a listen only mode. Following the presentation, we will conduct a brief question and answer session.
As a reminder of this event is being recorded.
Now I'll turn the call over to Kristen Silverberg Executive Vice President Investor Relations of Christian you may begin.
Alan Good morning, everyone and thank you for joining US first of this morning, our chairman and CEO, Bruce and stone and CFO, John Woods will provide an overview of second quarter results referencing a presentation, which you can find on our Investor Relations website. After the presentation, we'll be happy to take questions Brendan Coughlin.
Head of consumer banking and Don Mccree head of commercial banking are also here to provide additional color and.
Comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are outlined for the overview on page 2 of the presentation. We also reference non-GAAP financial measures. So it's important to review our GAAP results on page 3 of the presentation.
And the reconciliation and the appendix and with that I will hand over to Bruce Thanks, Kristen and good.
Morning, everyone. Thanks for joining our call today.
We continued to execute well through the second quarter driving forward on key initiatives and both consumer and commercial accelerating our digital transformation, making steady progress on top 6 and announcing the acquisition of Hsbc's East coast branches and online bank.
The diversity and resilience of our business model was evident.
The record revenue and capital markets and wealth, partially offset of sizable drop in mortgage.
Credit results continued to be excellent given further improvement and the economy.
The headline numbers for the quarter with EPS of $1.46, and <unk> of $17.7 per set we're flattered by a sizable reserve release and importantly, we feel P. PNR has now bottomed and growth and Brazil in the second half we.
We achieved 1% average loan growth and the quarter, a little less and projected as paydowns on PPP loans and across the back book and commercial offset generally good levels of originations we.
We did a nice job on expenses and protecting the areas aligned with our growth initiatives, while delivering on our expense efficiencies associated with top.
Looking out to the second half we believe we will see a pickup in loan growth, particularly on the consumer side and student point of sales finance and auto.
And the commercial which should start to see gradual growth and line utilization off of flow levels, along with the pick up and deal related financings.
Mortgage revenue should rebound modestly given the hedge losses, and Q2 and generally strong production, while capital markets pipelines remain healthy.
We expect of returned to positive operating leverage in both Q3 and Q4.
Credits and continue to be excellent. We are now calling for further improvement and charge offs to 20 to 25 basis points and the third quarter and 25% to 35 basis points for the full year.
We continue to feel good about our progress and our ability to come out of the pandemic period, with increasing differentiation and growth and franchise value versus our peers over time.
With that I'll turn it over to John.
Thanks, Bruce and good morning, everyone let.
Let me start with the headlines for the quarter.
And we've reported underlying net income of 656 million and EPS of $1.46.
Our underlying rocky for the quarter was 17, 7%, which includes the impact of the sizable credit provision benefit.
Revenue of $1.6 billion was down slightly linked quarter on lower mortgage fee income with net interest income up slightly given interest earning asset growth.
Average loans were up 1% and the quarter on the strength of retail originations hitting an all time high giving us good momentum heading into the second half of the year.
The highlights include record results and capital markets and wealth.
Mortgage fees were lower as margins continue to tighten and although origination volumes remained quite strong.
And we continue to control expenses down 2% quarter over quarter.
We recorded a credit provision benefit of $213 million, which reflects sustained macroeconomic improvement and strong credit performance with lower charge offs.
Our ACL ratio is now at 175%, excluding the PPG launch.
And finally, we are and a very strong capital position with set 1 of 10, 3% after returning $160 million at $68 million to shareholders and dividends during the quarter.
We also continue to grow our tangible book value per share, which was 33 point $95 at quarter end up 6% compared with the Uruguay.
Next I'll refer to a few slides and give you some key takeaways from the second quarter of.
And then outline of our outlook for the third quarter.
Net interest income on slide 6 was up 1% linked quarter, given the interest, earning asset growth and higher day count.
Average loans were up 1% and net interest margin was down slightly.
The net interest margin reflects lower earning asset yields, reflecting the low rate environment spread pressures and elevated lending competition, although improved funding mix and better deposit pricing are helping to mitigate the factors.
The interest bearing deposit costs improved 4 basis points to 16 basis points from continued discipline on deposit pricing.
Our asset sensitivity increased to about 10, 7% from 8.5% at the end of the first quarter.
The increase primarily reflects the ongoing stability and deposit levels and the improvement and funding mix, given the increase and low cost deposits.
Referring to slide 7 we.
We delivered solid fee results again, this quarter with record results and capital markets and wealth, reflecting the ongoing investments and our capabilities and the benefit of acquisitions.
Mortgage fees were down approximately $80 million this quarter as production revenue was impacted by continued pressure on gain on sale margins, particularly in the wholesale and corresponding channels, given the increased industry capacity and competitive pressures.
While we had expected a meaningful decline in mortgage revenue for the quarter and ended up greater than expected due to 2 items that reduced our revenue by a combined $24 million the.
The first we spent $14 million of MSR valuation losses net of hedges driven by changes and implied rate volatility, which moved unexpectedly near the end of the quarter.
Also we were impacted by of $10 million increase and late quarter to mortgage agency fees retroactively apply to existing pipelines and.
We would not expect these impacts of recur in Q3.
Secondary originations remained strong, but we're down about 10% from first quarter levels.
As expected we are seeing a continuing shift towards the purchase originations, which increased from about 35 per cent of the total and first quarter to about 48% and the second quarter.
Also our third party servicing book grew to $85 billion up 3% linked quarter and 6% year over year and.
And servicing contribution improved $13 million linked quarter.
Moving on to some of our positive quarter over quarter of fee contributors, we delivered record results from capital markets and wealth, reflecting our ongoing investments and capabilities and demonstrating diversity and our fee income.
Capital markets fees hit another high of 12% linked quarter with loan syndication fees hitting their highest levels since 2017.
Our M&A pipeline continues to be strong at historic highs.
Additionally, wealth fees had a new record up 3% linked quarter, reflecting an increase and assets under management from net inflows with record sales and strong market levels.
Finally card fees results were strong up 16% linked quarter as debit transactions and credit card spend rebounded to exceed pre pandemic levels, given the strength and the recovery, which also benefited from seasonal strength seasonal trends.
On slide 8 expenses were well controlled down 2% linked quarter with seasonality and salaries and employee benefits.
Average loans on slide 9 were up 643 million of 1% linked quarter given strength in our retail portfolio offsetting a decline and commercial.
Diving into driver and a bit more of the diversity of our retail lending business produced record high retail loan originations and the quarter, which was partially offset by elevated pay downs.
And this was driven by strength in mortgage and auto and education refinance and partially offset by planned rundown of the personal unsecured portfolios.
Commercial was roughly flat and in the quarter excluding ppt.
We had a strong origination quarter led by asset backed and subscription line finance, which had been steady contributors over the last few quarters.
And this was offset by elevated payoff activity, which reflects highly favorable conditions for commercial companies to access the debt capital markets.
Line utilization levels stabilize and your historical historic lows over the course of the quarter.
We saw average commitments for our middle market and mid corporate clients grow by 2% and the second quarter after being flat and the first quarter. This will benefit us as the economic activity drives corporate investment.
Overall spot loan growth for the quarter before the impact of PTP forgiveness was 1.8% given the strong retail and commercial originations.
This provides good underlying momentum for loan growth and the second half of the year.
On slide 10 deposit flows continued to be robust, especially in low cost categories and our liquidity ratios remained strong.
Average deposits were up 3% linked quarter, and 6% year over year with strong growth of demand deposits.
Interest bearing deposits were broadly stable as the decline and term deposits was offset by growth and low cost categories.
We are very pleased with our continued progress on deposit repricing with total deposit costs down 3 basis points to 11 basis points.
Interest bearing deposit costs were down 4 basis points to 16 basis points during the quarter and we expect these costs to continue decreasing to low teens or better by the end of the year.
Moving onto credit on slides 11, and 12, we saw excellent credit results this quarter.
Net charge offs dropped by more than half and stay declined from 52 basis points to 25 basis points linked quarter driven by improvements across the portfolio.
Non accrual loans decreased to $229 million or 23% linked quarter with of $116 million decrease and commercial reflecting repayments and charge offs.
Retail and non accrual loans decreased by $113 million linked quarter, driven by mortgage and home equity.
Given the improvement in outlook and the performance of the portfolio and reserves decreased ending the quarter at 175%, excluding PPP loans compared with 2 tier 3% at the end of the first quarter.
Moving to slide 13, we maintained excellent balance sheet strength, increasing our set 1 ratio from 10, 1% and the first quarter to 10, 3% at the end of the second quarter after returning $168 million of capital to shareholders through dividends and the quarter.
We paused, our stock repurchases and the second quarter and anticipation of strong second half loan growth and the HSBC transaction, which unexpected closing and the first quarter of 2022, we use about 24 basis points of capital.
We have the opportunity to resume repurchases and the second half with about $660 million of capacity remaining under our current board authorization.
The pace and magnitude of repurchases will consider the strength of organic growth as well as the potential for fee based acquisitions, while managing set 1 to within our target range of $9, 75% to 10%.
Before I move onto the second quarter outlook, let me highlight some exciting things that are happening across the company on slide 14, and I Should've said, our <unk> outlook.
If I move on to that as Bruce mentioned, we are now working on further transformation of efficiency opportunities to form the top 7 program for.
For example, based on the work we've done so far we have further opportunities as we mature our agile delivery model and simplify how we operate.
And implement the next wave of of our next Gen technology program, including further rationalization of applications and continue to optimize our branch density.
This quarter, we released our fourth annual corporate responsibility report highlighting our commitment to advancing our environmental social and governance goals, reflecting our core values.
The report provides a snapshot of our significant progress this year, including the establishment of a formal corporate responsibility governments framework and the completion of our first materiality assessment to more specifically define ESG priorities.
For example, we know that it is vitally important that we help create a healthy and sustainable future and we are committed to reducing our impact on the environment.
Therefore, consistent with international of course, we have set ambitious targets to reduce our greenhouse gas emissions from the operations by 30% by 2025 and 50% by 2035.
The last item and I will cover on this page is the acquisition of Hsbc's East coast branches and online deposit franchise.
And there is a recap of the transaction on slide 15, So I won't rehash all of the details other than to read and reiterate the attractive entry. This provides us and the important New York City Metro, Washington, D C and South Florida markets.
The sizeable customer base and solid deposit franchise and provide a springboard for our consumer national expansion strategy in and.
In addition, the $7 billion net deposit position provides a significant long term funding flexibility and support of our attractive loan growth opportunities.
And now for some high level commentary on the outlook on slide 17.
We expect NII to be up 2% to 3% with NIM up low to mid single digits with our outlook based on the 10 year treasury rate expectation of 135% from the third quarter.
We expect average loans to be up slightly and the third quarter with spot loans up about 2 years to 3%.
Earning assets are expected to be broadly stable and the third quarter.
We are well positioned to see overall loan growth accelerated in the second half and into 2022, particularly given the continued strength, we are seeing and mortgage education refi and auto as well as the seasonal benefits expected for in school and point of sale lending and the third quarter.
And commercial we expect a slower recovery and utilization rates of historic lows with modest.
This growth over the second half of the year led by asset back subscription lines and deal related financings.
Fee income is expected to be up 2% to 4%, reflecting improvement and mortgage banking results and other categories and the economic recovery continues and partially offset by seasonal impact and capital markets.
Noninterest expense is expected to be up slightly and the third quarter.
We expect net charge offs will be and the range of 20 to 25 basis points of average loans with the provision less and net charge offs.
With the substantial improvement in credit, we expect that net charge offs will be and the range of 25% to 35 basis points for the full year down from our prior outlook of 35 to 45 basis points.
To wrap up this was a solid quarter for citizens with good momentum heading into the back half of the year.
Our expectation is that P. P and are well grow quarterly and the second half of the year with positive operating leverage each quarter with that I'll hand, it back over to Bruce.
Thank you John operator, let's open it up for Q&A.
Thank you Mr. Benson and we're now ready for the Q&A portion of the call if.
And if he would like to ask a question press..1 then zero on your Touchtone phone, you'll hear the indication and placed into the queue and you may remove yourself from the queue by repeating the 1 and then zero command.
And if youre using a speakerphone, we ask you to please pickup your handset and to make certain of your phone is on mute it before pressing the button.
And the first question will come from the line of Ken Zerbe with Morgan Stanley Go ahead. Please.
Alright, great. Thank you and good morning, good morning.
I saw a few references to top 7 so and in your press release I was I was actually hoping you could talk a little bit more about what we might expect from the new top 7 program and and also how it might differ from top 6 thank you.
Sure Ken and its John here.
Yeah, I mean, I think as you've seen over the years, we've been just been part of our culture to really dig in on on this kind of mindset of continuous improvement.
And last year top tier with 6 of the somewhat unique and it's transformational and sort of 2 year profile.
And we're very pleased with how that played out.
Delivering on and the expectations of 400 gig of $425 million and run rate saves. So we're excited about that and there was a lot of traditional kind of top contributors and top 6 and there was the transformational aspect to it so that made it a little bit unique.
Top 7 may bring us back to some of that foundational sort of continuous approach to driving.
Efficiencies.
And a couple of areas that we're looking at.
Sort of looking at around to some of the areas that we were able to sort of drive and top 6 such as the agile delivery and simplifying how we were operating and next Gen. Tech has another call. It next wave of rationalizing applications associated with it. So I think you could see sort of of 2 <unk> and revisiting some of the transfer.
And Asian era of transformational areas of top 6 but then just continuing on our bread and butter to try to simplify how we operate and fundamentals fundamentals around how.
And how we manage manage the place and I would suggest that maybe there is some of more room to go and optimizing branch density, but really just getting back to what we do which is driving continuous improvement year over year.
Okay.
Pardon me. Our next question will come from the line of Matt O'connor with Deutsche Bank.
Good morning.
Bruce I was hoping you could elaborate a bit on your M&A strategy.
And you just announced the HFF.
The.
Brand scale and have done from fee deal, but there were I guess, some interviews and quotes from new cubic's back about being more open to bank deals I think so maybe just update us 1 of your thinking there. Thanks.
Sure.
Matt I think we've been very clear all along that we.
We had some great strategic initiatives that should lead to very good organic growth.
For citizens and that kind of top of the top of the heap in terms of priorities.
And we've.
The focus next on fee based bolt on acquisitions and.
And with some success I think youre seeing the results and our commercial business now that leave.
And the kind of incorporated M&A capabilities into our offerings to our customer base and the.
And the mortgage acquisition clearly was the thoughtful and well timed and then the.
The wealth the Clearfield acquisition has been a homerun in terms of opening of cross sell particularly to our commercial business owners. So.
We will we are.
Pursuing more of those and so I.
And I feel good that there'll be some announcements over the course of the second half of the year in that regard so.
They tuned there with.
With respect to full bank acquisitions, I think the first step here was the HSBC transaction, which I think strategically makes good sense for us and.
And also financially is very attractive and compelling.
And so.
1 of the things that we like about that is it.
Sales and some geographical holes that we have particularly the New York Metro area, and and pushes us down a little bit mid Atlantic South towards Washington, and then Genesis of beachhead and South Florida. So.
Those are all things that I think fit well with our distribution strategy.
And if we could find potentially other.
Bank transactions that fit that bill.
But.
Potentially could strengthen the footprint and the.
And help our distribution strategy and we can get it at the right price and it's the right culture and.
The nature of the strategy et cetera.
With the compelling financial economics, we'd be open to that.
I don't think it's something that.
Again as is of driving desire here I think will be a bit opportunistic if we can find a good deal.
And would certainly consider it.
We will go next to the line of Ken used and with Jefferies. Go ahead. Please.
Thanks, Good morning, guys.
Wanted to ask on the on the outlook of couple of things about the NII side, John last quarter. You had mentioned that you had expected flat, earning assets and we continue to see the strong deposit growth come through and I'm, just wondering again, you're calling for flat, earning assets, but it looks like the deposit growth remains pretty strong for the for the industry and for you guys. So I'm just wondering you know what.
What are you what are you seeing there and expecting in terms of overall deposit growth and why that would only result, and flattish earning assets.
Yeah, I mean, I think that we have been for some time now thinking that.
And with economic activity you'd start to see potentially some of those deposits to flatten out and they've just been continuing to grow and we've seen strong strong flows and.
And what's been nice about that is that.
And thats been coming and the categories, we want them to show up and meeting demand deposits have been really strong underpinning all of that so that's been quite good I think the.
And what that's of resulted and is continuing to allow us to run out of deposit playbook, and you're seeing our interest bearing deposit costs decline.
The decline and headed towards.
Really low teens or even better by the end of the year. So that's been that's been great I do think that as you see economic recovery and the second half of the year, we would suspect that some of that growth will begin to moderate and possibly even some of it begin to run off but we have most of that surge deposits that we saw and.
And 2020, and early 2021, and we think it's going to stick around and so as much as 2 thirds of more and and then that's great fuel and great support for what we expect to see later in the year with US which is loan growth and as you get into 2022 lots of momentum so.
And those are some of the thoughts I have on the on the deposits and I would just add to the churn the.
The spot numbers are quite optimistic so I think we had a record level of originations for loans and.
And the consumer side and the.
The second quarter, we had a very strong level of debt and commercial.
And which goes back to pre pandemic level of originations, we're still seeing relatively high paydowns.
Which mutes that a little bit, but I think when we look out into Q3 in particular, we have a bunch of seasonal strength in businesses like student and point of sale.
And combined with I think those paydowns should start to moderate a little bit. So we're quite optimistic that we will see.
Very very strong spot loan growth that should kick in in Q3 and extend into Q4.
The average is based on timing of when this all happens and it may not fully reflect that in Q3, but I would stay focused on the on the spot number.
Your next question will come from David George with Baird Go ahead. Please.
Thanks, Good morning, a question on PPP.
Could you disclose the dollar amount of PPP loans and the quarter and then I've got a follow up on the outlook.
Yes.
Basically at the end of the quarter average of average balances during the <unk>. It was about 4 of $4.5 billion.
$4.6 day okay.
Okay, Great I appreciate that and then with respect to.
The Q3 outlook, particularly specifically on fees and it looks like Youre expecting a fairly.
The nice jump in the activity and I Trust part of that is going to come from mortgage John I thought I think you said $14 million relative to Q Q2 that is about $85 million number with MSR related and then there was a $10 million agency fee impact was there anything else that impacted that number and just trying to get a sense as to how much.
Of the bounds of Youre expecting over the next quarter or 2.
Yes, I mean, I think that's right as I may as I mentioned in my remarks, there's about $24 million of unique items that deal is unique to <unk>.
And so that's something that all of that will set us up nicely for the <unk> started starting with that without expecting those things to recur.
And we do think that and the third quarter volumes will help the holdup.
And we may have.
And some modest decline in and.
And games on gain on sale margins, but but but given what's going on with the sort of nonrecurring items from <unk> as well as stone and still a strong volume quarter, and we do think that the mortgage rebounds into the third quarter.
Your next question will come from John <unk> with Evercore ISI your.
Your line is open.
Good morning.
And just on on the loan front I know you mentioned that Youre seeing some loan competition around loan pricing. So I just wanted to if you can elaborate on that and and what areas are you seeing it and if you could.
And maybe give us some color in terms of your new production loan yields and the.
The various areas that that'll be helpful. Then I have a follow up on capital.
John It's it's Don Mccree.
And we definitely are seeing price competition in terms of competition across the board and so part of the reason and our loan growth is a little bit more tepid and it might be as we're trying to stay pretty disciplined on price and terms. So.
Down maybe 10 basis points or something is what I'm, saying generally in terms of of price.
Our spreads across the board.
I think just elaborating on what John and Bruce of set on loan growth.
And with our clients and per.
Person that which is actually quite gratifying and the thing thats kind of restricting utilization is all of the supply chain back ups and some of the labor and as those begin to clear, particularly labor and we think clears up towards the September timeframe and the supply chain against the normalized towards the fourth quarter ish, we would expect more normal working capital build the resumed and so that's what gives.
Me a lot of confidence and then as John said, we've got about <unk>.
Entire downdraft and spot loan growth and the quarter was PPP repayments and that's been going and kind of begin to moderate and so there's some headwinds that we've been selling into and should clear themselves out and give us. Some good momentum as we move into the back end, but we're going to stay disciplined on terms and price and credit and Brendan.
And similar and consumer I'd say ex PPP spot balances were up.
And just shy of 3% so pretty decent growth.
Overall, despite as Bruce pointed out from some rundown and the backlog, we're seeing really good strength and record originations really the highest level of originations we've had.
And since we're a public company and here in Q2, so the momentum should continue and the second half of the year and then as both Bruce and John pointed out adding and IHOP.
The the Apple iPhone upgrade program, which is typically of late summer early fall event and then the seasonality of in school lending should really give us another round of growth heading into the second half of the year. The pricing has been really competitive and a couple of fronts, particularly on the student loan refinancing as rates have ticked up and now are starting to Peel back a little bit.
That's been a particular place of intensity I'd say on an assets like auto while pricing intensity has picked up a little bit spreads still remain pretty high. So we're looking at that business still has a double digit.
ROE business right now with the originations, which is elevated from normalized levels and auto given the short duration. So we're we're able to hit record originations and auto as an example, with still somewhat elevated.
Yields which has been really really good so.
The mystic.
And that's actually the last box home equity, which is probably a little bit unique from what youre hearing against peers, where we've been really really strong and originations for home equity and in fact, you're seeing some benchmarking that puts us and probably the top 2 or 3 lenders across the U S. Although only operating in 11 states right now for home equity lending.
This quarter the spot balances actually grew and from a quarterly basis. That's the first time.
Since the financial crisis, we have seen net loan growth and home equity and our credit card book is and I'll also bottoms. So some of these delevering trends with all of the stimulus out there and the market with consumers I think and our line of credit products that have hit and hit the bottom and we're starting to see signs of those are turning so hopefully of tailwind as we think about H 2.
Greg John did you want to finish up with anything or yes, I think yes.
Oh, sorry go ahead John.
On the <unk> sorry.
Good day.
John and such a unique name.
Yes, I mean I think you were also you were just kind of of asset yields and and you know and the second quarter Reorders, the origination yields up and the the retail side of things due to the.
The number of <unk> due to the diversity of of the of the portfolio and we suspect that that making the that's something that we may see continue into the third quarter with with the origination yields.
Rising and that tends to temper the front book back book dynamic that I think maybe you were trying to get after.
No. That's helpful. Thank you so much for all of that and then on capital I know you saw from good strengthening of the CET 1 the $10.3 Bruce maybe just maybe talk about how you think about that target.
975 to 10, and I mean, we're starting to see some of your peers.
And now it's down their target or internal targets of bad wanted to get your thoughts on that as the room to potentially adopt the lower level there on the CET 1 internal target. Thanks.
Sure.
We're comfortable with that 975 to 10 as you know over time, we brought that down and it was 10 in the quarter than it was 10 to 10 of the quarter the.
10, and it's $9.75 to 10 and so.
I think as we've matured as a company as we've demonstrated.
Good risk discipline, and how we've grown the loan book and.
You can see we've come through the pandemic with the low level of credit losses, I think some of the quote unquote new Guy.
A little bit of conservatism, we had coming off the IPO, we're starting to sort of shed that and move back closer to where our peer targets and ours. So for now we're above the 975 to 10, so I don't see any real burning desire to change it but over time certainly.
<unk> down a little bit the we have plenty of room versus our Seb target and certainly I think the risk profile I would permit that.
Yeah.
Okay.
Your next question will come from Peter Winter with Wedbush Securities. Your line is open.
Good morning.
It doesn't.
Just wanted to ask about the swaps hedging it doesn't look like you're out and any swaps this quarter and I'm just wondering what the plan is going forward I do know rates are obviously lower and just wondering what what level.
Rates need to get to before you think maybe adding some more swaps.
Yeah, we actually did add some swaps this quarter and how're you doing.
Yeah, I mean, we added maybe call it a billion or so and only added.
And $1 billion or so later in the quarter and actually 1 billion right at the beginning of the quarter. So.
Right around $2 billion, you add that to the $6 billion, we executed late in the first quarter and.
And we've got around $8 billion that we've added as part of our kind of sort of early stage.
And kind of dollar cost averaging into the rate environment and when the when you look at the overall averages we did that call. It mid to high <unk> on average, which is mid to high 70 basis points, 75% to 80 basis points on that overall portfolio and you know and the 5 years sort of well below that today.
So and the last couple of $1 billion, which was the I think ultimately the agency that was there.
Over 90 basis points so.
I think that we've been able to start to look opportunistically at ways to to really sort of monetize some of that asset sensitivity over time, and we're still over 10% actually close to 11% asset sensitivity. So theres lots of opportunity to continue.
And to add to the swap portfolio.
And as and when the the rate environment continues to improve and our year over year headwind from the swap has has declined significantly and markedly as a result of all of these actions. So I think we're I think we're in pretty good shape in terms of the swap portfolio.
Yeah.
And as a reminder, ladies and gentlemen, if you do have questions press..1 then zero on your Touchtone phone.
We'll go to the line of the Jared Cassidy with RBC go ahead. Please.
Thank you and good morning, Bruce Good morning, Jenn and good morning.
I guess 2 questions first for you John can.
Can you give us some color I noticed and your outlook you indicated that you guys think that the 10 year what are the expectations of the 10 year will be 1.35%.
Currently today and as you know, it's well below that if it comes and at 115 for the quarter what would the due to the net interest margin assumptions that you have and net interest income and then secondly per you Bruce the.
The president and that obviously came out with the executive order on the M&A to scrutinize deals more closely does that raise the risk of your HSBC deal at all and thank you.
Yeah I'll go ahead and knock off the first part of that Gerard the.
In terms of so we've gotten through a few weeks of the quarter with where rates were a little higher would you have an expectation of of an average of $1.35 for the quarter. If it were to drop off call. It into that range, maybe we would see call it $5 million ish or so of <unk>.
Impact to NII.
And maybe a basis point or 2 on them, but I would hasten to add that there are offsets and the puts and takes when you when you're operating in an environment like that more broadly you could you could find better opportunities in terms of offsetting that on the deposit side you could also see as we demonstrated back.
And the in the crisis and the pandemic the resilience of the franchise broadly you can beyond that net interest income and and and what the downside risk protection that the mortgage company actually provides which is extremely powerful so I think that maybe there is.
Modest impact and it.
From the first order effect if the the.
The 10 year stays down there, but I think we have we of mitigates and terms of on the deposit side, and then more broadly and the key area.
Yep.
Yeah.
Part 2 of the Gerard.
And I don't see the <unk>.
And the executive order impact and the HSBC transaction so.
It's a relatively modest in size transaction that the straightforward and.
And in any case the E O us.
And for comment it's going to take quite a while to.
Settle that wound down and.
More broadly I think bank mergers are probably amongst the most heavily scrutinized as it is sort of weather.
Whether there is a meaningful impact down the track on that range can be seen but certainly as it relates to the HSBC transaction and I don't see any impact at all.
Your next question will be from David Conrad, who K B W. Go ahead.
And then.
Yes, good morning.
Sounds like definitely very positive on loan growth trends, maybe more spot and then average the because of the timing, but just curious I think historically you've talked about of mid single digits. The high single digit full year spot loan growth I, just wondered if youre still comfortable with that.
Yes, I mean, I think that's right I mean, when you look at.
Look at where we're coming out just in the second quarter.
In terms of spot.
And you see that that momentum that's the theme.
<unk> generated and that's continuing into the end of the third quarter with with the 2% to 3% guide that we highlighted I think absolutely it could get to that and and the expectation is to get to that.
Mid single digit range, and I think of I'd hasten to add when you look at it excluding PPP.
That's an important.
And our metric to look at 1 year, considering the underlying fundamentals flows that we're seeing both in commercial and consumer and.
And that was 1.8% Q2, which annualized is to over 7% and then the 2 to 3 were calling out for third quarter net.
And but that included the math on that.
Solid at 1% or more to that ex GTP and.
The <unk> and so I think Europe out so 1 of the aspects I think thats unique to US is just the.
The number of sales, we set out to catch the wind when theres, some wind and so we'd have a very broad lend.
Lending portfolio on the consumer side and we.
Play and some very attractive verticals on the commercial side. So broadly feel good that we can certainly get to nominal GDP growth of recurring basis.
Yes.
And at this time, we have no further questions in queue. You May proceed.
Okay great.
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