Greetings, ladies and gentlemen, welcome to the Truist Financial Corporation third quarter 2020 earnings conference. Currently, all participants are in a listen-only mode. A brief question- and- answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Ryan Richards, Director of Investor Relations for Truist Financial Corporation.
Thank you, Vijay. Good morning, everyone. We appreciate you joining us today. On today's call, our Chairman and CEO, Kelly King, and our CFO, Daryl Bible, will review our third quarter results and provide some thoughts for the fourth quarter of 2020. We also have Bill Rogers, our President and Chief Operating Officer, Chris Henson, our Head of Banking and Insurance, and Clarke Starnes, our Chief Risk Officer, to participate in the Q&A session. As with prior quarters, we are conducting our call today from different locations to help protect our executives and 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 Truist investor relations website. Please also note Truist does not provide public earnings predictions or forecasts.
However, there may be statements made during this call that express management's intentions, beliefs, or expectations. These statements are subject to inherent risks and uncertainties, and Truist's 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 and our SEC filings. Please also note our presentation includes certain non-GAAP financial measures. Please refer to page three in the appendix of our presentation for the appropriate reconciliations to GAAP. Now I will turn it over to Kelly.
Thanks, Ryan. Good morning, everybody. I really appreciate you all joining our call, a nd I hope you and your family are doing well. Now, I would say relative to the challenges that we're all facing, we're really happy to report what I'd call a great quarter. A strong balance sheet, particularly in asset quality, liquidity, and capital, relatively strong earnings, great value proposition for our clients, particularly in our digital offerings, a great team, which I am extraordinarily proud of, and a strong commitment to our communities and other stakeholders. We are, as you know from our previous conversations, really focused on our culture, especially our purpose to inspire and build better lives and communities. I want to show on slide five a few of the things we're doing to live out our purpose.
We announced recently something we're very excited about, a $40 million donation to help establish an organization called CornerSquare Community Capital. This is a new organization that will be focusing on funding to racially and ethnically diverse small business owners, women, and individuals in LMI communities. This will be done through CDFIs, Community Development Financial Institutions, and it's a very exciting opportunity to get funds exactly where they're needed. We're real proud of our first Truist CSR report. I hope you've had a chance to read it. We launched recently our Truist Momentum, which is a continuation of a SunTrust program that focuses on financial well-being. We partnered with EVERFI to introduce, this is something we're very excited about, a game called WORD Force which helps kids in K- 2 learn how to read.
You've heard me say in the past, unfortunately, in our country today, two-thirds of the kids in the public school system in the third grade cannot read. This is a way of getting at that. It may not be the only answer, but it's a really good start. We're excited about it. We're in our beta test, but we already have over 4,000 students and over 200 schools participating. We are doing a really good job in terms of conservation of energy, water, and making good progress in a number of areas like that, investing in those areas to make our climate and our environment better. We did, as you know, announce as a part of the merger, a $60 billion community benefits plan over the next three years. We're very excited about that. You can see on the slide a number of areas that we're really committed to.
I would particularly point out that we will be investing in loans and/or investments, $32 billion over these next three years in home purchase mortgage loans and to LMI and minority borrowers. This is a big part of helping to deal with some of the social injustice and racial inequity problems that we have in our country, and a number of other programs that you can see there. I would also point out that we are committed at the executive level to improving our diversity. We said in our 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 see there that we have a very good and effective diverse board with 45% being women and minorities. We feel really good about that.
I'll also point out we were very honored to receive a perfect score of 100 on the Human Rights Campaign Foundation's 2020 Corporate Equality Index. We're doing a really good job with regard to living our purpose. If you look at slide six, I'll just point out a few highlights. We did have taxable equivalent revenue of $5.6 billion. Net income available to common shareholders was $1 billion, adjusted net income available to common was $1.3 billion. That resulted in diluted earnings per share on adjusted of $0.97. Return on average tangible common equity adjusted was 16.0%, very strong, and a really good efficiency ratio adjusted at 57.3%. We were really pleased about our non-performing assets at 0.26%, and we recognize that there's more to come with regard to credit quality deterioration depending on what happens with regard to the economy.
Still, given where we are today, and recognizing there are some positive impacts with regard to accommodations there, that's a really good number. We feel really good about that. Likewise, our net charge-offs were 0.42% at the low end of what we had talked about. We're very pleased that our common equity Tier 1 is now at 10%, so we feel really good about our capital position. If you look at some selected items on slide seven, I did point out we did have security gains of $104 million, which was a positive $0.06 per share. We had merger and structuring charges of $236 million, which is $0.13. We did have incremental operating expenses related to the merger. Remember, these are expenses that don't qualify for merger in terms of calling out because they do have future benefits, but they're not a part of our longer-term run rate.
That was $152 million, and that was $0.08. We did make a $50 million non-recurring contribution to our charitable foundation, and that was $0.03. If you put all that together, it was a negative impact to EPS of about $0.18. We feel good about the adjusted number because of the quality of the selected items. On tab A, just a couple of comments with regard to loans. As you all know, loans are a real challenge for us and for the industry now because of what's going on in the economy. Of course, we did see a big run-up in loans in the second quarter, and likewise, we saw a big run-down in loans in the third as a large number of the corporate line draw-downs were repaid. We saw total loan reductions of $11 billion.
$9.5 billion of that was in the C&I area. That's principally what happened. We did have some bright spots. We had growth in LightStream, our national consumer digital platform. Sheffield had a growth, recreational lending, Prime Auto. We did have some decreases in some other consumer areas like residential mortgage and so forth. It was kind of a mixed bag with regard to consumer. Overall, the big story in loans is if you exclude the run-up in balances in the second and the run-down in the third was relative flat, I would say to you that we do expect future headwinds. With regard to the PPP loans, we have about $12.5 billion there. That'll begin to pay off as we head into the fourth and the first and probably the second. Loan growth is really challenging now.
Obviously, banks are a reflection of the economy. We should not be surprised about that. The real question is what's going to happen to the economy. I would just point out, this is just one person's opinion, it's important to look back at previous corrections that we've had. There's virtually always a material precipitating event. In 1991, we had the commercial real estate bubble. 2001, we had the technology bubble. 2008, we had the residential real estate bubble. This one didn't have a bubble. This was a very strong 10-year economy, 3.5% unemployment rate. We just shut it down, appropriately so for medical reasons. We shut it down.
I make that point to say that if this pandemic doesn't go on too much longer, there's a chance that we can get a snap back in the economy that most people would not expect because it wasn't structurally in trouble to start with. If it stays on a long time, then all bets are off. I personally believe as we head into the first quarter, we'll begin to see some real developments with regard to vaccines. We certainly have already had substantial developments, positive developments with regard to medical mitigation of sickness ramifications. We are somewhat optimistic, although cautious, as we think about the economy going forward. I will tell you, as I get feedback from our client-facing people, and while they're not facing them in person as much today, we're talking to people more probably than we ever did now, although virtually.
David Weaver, who runs our commercial community bank, told me the other day he had nine calls in one day, we're being very efficient. Here's the point. Clients are being very resilient. I'm thinking particularly of middle and upper market. One of the quotes that I got recently was clients that say, it's time to move on. To be honest, that's kind of what we said. We sat back for a while and didn't make virtual calls until we were waiting for the pandemic, several months ago, we just kind of said, we got to get on with running our business because our clients need us. Our clients are being resilient.
They're saying, my business is okay. Now, the small, very small micro end is struggling, and depending on how long this lasts, we will see a substantial shakeout in the small business micro market. At the aggregate economic level, that'll reshuffle and reallocate itself, but at a personal level, for those small business people, that's a very sad story. We've got to hope that this moves along as rapidly as possible. I'll say finally that our pipelines are improving, our calling activity is robust, and we feel very good about where we're going relative to what happens to the economy. On slide nine, just a brief comment about deposits, which are doing great. We continue to have a nice inflow somewhat because of the flight to quality. We had $1.4 billion increase in deposits on linked quarter basis.
We had a $10 billion increase following other previous quarter increases in non-interest-bearing deposits. We feel really good about that. Our non-interest-bearing deposits today are 33.3% of total deposits, versus 27.8% in the first quarter. You can see how rapidly our DDA or non-interest-bearing deposits have increased. We've been focusing a lot of attention with regard to getting our costs down, with regard to our deposit structure, and we've made really good progress there.
Our total deposit costs decreased from 12 basis points to 10 basis points. Average interest-bearing deposits decreased 17 basis points down to 15 basis points. Really good progress in managing our cost of deposits. I would point out if you're following the math in all of our deposit activity there, we did divest $2.2 billion in deposits this quarter, and so that's the material factor. 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 of 2019. Core margin benefited from strong DDA growth, lower funding costs, lower COVID related deferred interest. 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 are being strategic about deposit costs by focusing on growing non-interest bearing deposits. Given the low rate environment, we're replacing basic swaps to partially hedge our investment securities and associated changes in OCI. We expect the reported net interest margin to 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 the pandemic continue to improve. Our activity on deposits is normalizing, coupled with lower fee waivers. Card and payment-related fees increased as payment volumes improved. Wealth management income increased as a result of higher market valuations. Despite the seasonally weak quarter, insurance income grew 6.4% on a like quarter basis due to firmer pricing and an 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. Trading was off from a great second quarter, resulting in lower revenue. Other income increased due to the increase in the value of non-qualified plan assets and other investments. 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 non-interest expense increased $20 million, primarily due to an increase in personnel expense, marketing costs, and professional services. The increase in personnel expense reflects higher non-qualified plan costs that were offset by other income, higher medical costs due to normalization, pension cost adjustment, and a reduced labor cost capitalization due to lower loan volume.
Truist remains highly disciplined on core expenses. Average FTEs decreased 769 during the quarter, and we expect further reductions this year. We plan to close 104 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 NPA ratio increased one basis point to 26 basis points, and the NPL ratio increased 2 basis points to 37 basis points, primarily due to C&I loans. Annualized net charge-offs relative to average loans and leases increased 3 basis points to 42 basis points. We took a $97 million PCD adjustment to net charge-offs. Excluding that, net charge-offs would have been 29 basis points. The provision of $421 million exceeded net charge-offs of $326 million, increasing in 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 5.22 times non-performing loans. A combination of our allowance and unamortized 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 low of 9.1% of loans held for investment. Outstanding balances to sensitive industries decreased $2.2 billion to $27.9 billion. 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 30th. Approximately $692 million of commercial loans had an active activation at the end of September 30, down from $21.2 billion. In consumer, $6.2 billion had active accommodation, down from $11.3 billion. The declines reflect expiration of the initial payment relief, which was not renewed by the borrower.
Since June 30th, approximately 98% of the commercial borrowers and 94.5% of the consumer borrowers who 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 regrading and uncertainty related to the expiration of government stimulus programs. Our economic assumptions include extended GDP recovery, high single-digit unemployment through mid-2021, followed by continued improvement through the remaining reasonable and supportable forecast period. Our ACL estimate also reflects qualitative adjustments for model limitations, government stimulus, accommodation, and the review of SNC. Turning to slide 17. Capital ratios improved for the second straight quarter and are strong well ahead of regulatory requirements. Our reported CET1 ratio increased to 10% from 9.7 last quarter. We also issued $925 million of preferred stock to strengthen our Tier 1 and total capital ratios.
The recent assigned stress capital buffer of 270 basis points will remain in effect until September, when a revised stress capital buffer will be provided. 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 remain open to bolt-on acquisitions with fee income businesses. Turning to slide 18. Liquidity remains strong with an LCR ratio of 117% and a liquid asset buffer of 18.6%. Our access to secured funding sources is robust, with over $200 billion of cash, securities, and secured borrowing. Parent company is sufficient to cover 22 months of contractual and expected outflows with no inflows. Turning to slide 19. We continue to see strong growth in digital banking. Truist opened up 56,000 net new accounts versus 15,000 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 deposits, and a 5% increase in statement suppression. We are also proud of the recognition we received recently from Javelin. Heritage BB&T was recognized as a leader in ease of use in financial fitness and mobile banking, and a leader in financial fitness in online banking. Heritage SunTrust was recognized as a leader in ease of use in online banking. These awards demonstrate the strength of our Heritage platforms and the opportunities as Truist advances digital capabilities. Turning to slide 20. As we have said, our primary reason for the merger is to exceed client expectations through seamless integration of touch and technology to create trust.
To get there, we are harvesting cost saves from combined companies to fund increased investment and ultimately drive best-in-class performance. We are fully committed to achieving $1.6 billion in net cost saves and continue to make good progress on personnel expense, corporate real estate, branch rationalization, third-party spend, and system decommissioning and data center closures. At the same time, we are also investing in digital marketing and technology. We are also investing in talent, including areas outside of digital and our revenue businesses. Together, these investments and cost saves will allow us to generate best-in-class returns versus our peers while providing distinctive, secure, and successful client experiences through touch and technology. I will provide our fourth quarter guidance, which is based on linked-quarter changes versus the third quarter. For our guidance, provide the path to positive operating leverage.
We expect taxable equivalent revenue, excluding one-time security gains, to be down 1%-3%, driven by lower purchase accounting accretion. We expect reported net interest margin to be down 3-5 basis points due to lower purchase accounting accretion and core margin to be relatively flat. Core non-interest expense, adjusted for merger costs and amortization, is expected to be down 2%-4%, reflecting lower personnel expense. We also anticipate net charge-offs to between 40 and 60 basis points. Let me turn it back to Kelly for a merger update, closing remarks, and Q&A.
Thanks, Daryl. If you follow 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. We're making really great progress. Most importantly, our culture is really strong. I would say to you, kind of interestingly, that the COVID experience has actually bonded our team together even faster than we would've expected. When you go through a really tough time and you're kind of thrown in the boat together, it encourages a lot of strength in terms of developing relationships, trust, and bonding. We could not feel better about how strong our culture is and how well it is developing. Some very notable activities in terms of the integration and conversion. We did complete the branch divestiture, as I mentioned. We recently announced something we're very excited about, what we call Truist Ventures.
This is where we are making relatively small but important investments in technology platforms that we can build into our value proposition. We are testing now for our client conversions as wealth and mortgage, which will come up in the spring. There'll be a number of conversions that have occurred or will occur as we're on the way towards the final core 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, as Daryl alluded to, in terms of accelerating our branch closings as we head into next year. Very importantly, we did complete our end-to-end Truist Securities conversion. This was a big deal. As far as we know, this is the first virtual conversion that has occurred, and it was seamless. Our people did a fantastic job.
It's a big deal because we're a really big securities operation now backing up our corporate and investment banking business. Our core conversion is on track for the first half of 2022. We feel good about where everything is with regard to integration and conversion. If you look at slide 22, just a word about our value proposition as we wrap up. We are, as I said in the beginning, driven by our purpose, which is to inspire and build better lives and communities. Our goal long term is to grow earnings with less volatility relative to our peers over the long term. That's kind of a commitment we made to our shareholders. We base that on a very exceptional franchise with diverse products, services, and markets. As we said, we are the sixth largest commercial bank in the U.S. today.
That gives us the scale to be able to compete. We're very strong in our marketplace, and that gives us the efficiency that we need. We are the sixth largest insurance broker. We have really strong growth there. I think we're going to report 5.3% organic growth, which we believe will probably be top in the market. We're the number one regional bank-owned investment firm. We're the number two regional bank originator or mortgage originator and servicer. Very strong franchise. We're really positioned well to be best in class in terms of efficiency and returns. At the same time, we'll be investing heavily in the future. As Daryl said, we are confident in achieving our $1.6 billion of net cost savings. At the same time, we'll be investing in our revenue synergy operation. I will tell you that our IRM, our integrated relationship management strategy, is going great.
As you know, in the beginning, we said there were huge opportunities to leverage the strengths that SunTrust had and the strengths that BB&T had. I would say that is ahead of schedule. The receptivity of our people with regard to cross-selling, if you will, these products and services across the organization is robust. Frankly, there's just a lot of enthusiasm about it. We are making key investments in technology, in our teammates, in marketing, and in advertising, all of which will drive our above-average organic growth, and long-term stable and growing profitability. At the same time, we have a very strong capital base, as you can see, very strong liquidity, and a very resilient risk profile. We're very prudent and disciplined in risk and financial management. We have a very conservative risk culture.
We have very diversified benefits arising from the merger that was just kind of naturally implicit in the merger. We've stretched that very well, as you've seen. We have very strong capital, very strong liquidity. We have a very strong and defensive balance sheet, which is insulated by purchase accounting marks combined with a CECL credit reserve. Overall, I would say we have a great culture, we have a great franchise, we have a great team. I fully believe our best days are ahead. Ryan?
Thank you, Kelly. Vijay, at this time, will you please explain how our listeners can participate in the Q&A session?
Sure, sir. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Ken Usdin from Jefferies.
Hey, thanks. There we go. Thanks. Good morning.
Goodmorning , Ken.
Daryl, I want to ask you a question 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 the incremental operating expenses start to settle back down? Because they've been on a steady increase since September of last year. Two, can you give us any update in terms of your expected realization of those cost saves as we kind of reset the bar in a COVID world and understand just your timing recognition of those cost saves? Thanks.
Yes. Ken, what I would tell you is that we are still on the uptick in our merger and MOE- related expenses. We are just going through the developing phases of that. Testing starts in the first quarter, as we start with SIT testing, and then we go into UAT testing as we get ready for client day one in early part of 2022. I would say we're still on the uptick there. To date, since we announced the transaction in February 19, we have about $1.5 billion of combined merger and MOE related expenses. At that time, we said we would be at $2 billion. I don't have a number of what it is going yet. We will probably give that to you in January, and we will probably exceed that number sometime in the first quarter, the $2 billion number.
I want to give you a number and make sure we hit the number that I give you in our earnings call in January from that standpoint. We're coming through figuring all that out, and we'll get back to you on that. I would say we'll still stay elevated for the next several quarters as we have thousands and thousands of people right now working on hundreds of systems, getting them ready, getting them tested. we just got to make sure this is flawless. I mean, we have to have a great client experience. We have to make sure everything goes right. It costs a little bit of money. You have to remember, Ken, on this, we chose to choose the better of the two when we had our choices.
We didn't take the easy way out and just convert everything all one way or the other. For in the commercial platform, we chose to use the Heritage BB&T servicing system, AFS, coupled with the Heritage SunTrust and nCino 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 the BB&T Heritage deposit system coupled with the Heritage SunTrust automated teller. Again, more complexity, but when we get through all this in 2022, we will be light years ahead of most of our peers because of what we're doing from that. It's the right thing to do. It costs a lot of money to do it. We're going to do it right and we're going to execute.
Got it. One long-term question. I know that with the low 20s ROTCE, the outlook that you had previously was pre-COVID. A lot of changes out there. Consensus for 2022 is obviously nowhere near it. Can you help us understand what you think is doable longer term? Obviously, the provision's a 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.
Ken, we still feel confident over the long term in the original expectation of low 20s ROTCE. Remember, we're already very strong in the environment that we're in today. As Daryl described, we are really just getting started in terms of getting the long-term investments made and the related expense reductions that will follow. Of course, you've got all the revenue synergies that I alluded to. We feel very good about that. Obviously, it will ebb and flow some based on the economy, but that's still a reasonable number to shoot for.
Next question. Next question, please.
Sure. Thank you. If you find that your question has been answered, you may remove yourself from the queue by pressing star two. We will now take our next question from Michael Rose from Raymond James.
Hey. Good morning, guys. Hope you're doing well. Daryl, just wanted to get some color on this quarter's PCD review, and then if you can give us some credit metrics around the select at-risk exposures. I obviously saw the balances drop, but if you can give us any sort of sense on what the migration looked like this quarter and some of those at-risk exposures. Thanks.
Yeah. Michael, I'll take the PCD question, then I'll kick to Clarke, and he can maybe answer the accommodation piece of it. On the PCD, remember when we closed in December, we closed under the, and now what I would say old accounting method, where we had to set up PCI. When CECL came in into January, we went from PCI to PCD. In that process, we went through, we grossed up the loans and carrying values in connection with the establishment of PCD of all our best estimates.
As the year played out, what we realized is we grossed up the loans, and we should have not grossed them up to the full value. They should have been, say, charged off from that perspective. It was an adjustment that we made this quarter. We think we've gone through the book, and we've caught everything there. In that sense, we would've just had a different number in the first quarter when we got our CECL numbers. It was an adjustment that we made. It's a non-cash item. We had really big charge-offs. If you exclude that 29, we had good charge-offs, even if you add that in at 42, both beat guidance. Clarke?
Thanks, Daryl. 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 billion dollar reduction this quarter. It's been a very targeted effort to work with those borrowers and reduce the exposure. I would say the highlights of the quarter there is we worked very aggressively to get a handle on particularly the energy portfolio and hospitality side.
We actually sold $300 million worth of hotel credits at a pretty good pricing and also addressed a good bit of the energy book. To give you some context Non-performers in that portfolio of sensitive industries are still less than 100 basis points, and we have less than 2% of those balances that are in any kind of accommodation or deferral. I consider really strong progress, and we'll continue to watch that closely, and it's all considered in our reserves as well.
Okay. Appreciate that. Maybe this is my follow-up. You guys hit 10% CET1. Obviously, buyback's on hold for you and others this quarter. How should we think about capital deployment? Any updated thoughts that you guys have would be appreciated. Thanks.
Mike, we're really happy to be at 10%, and as you know, we have said that that was our target. That's a very comfortable position. As we think about it going forward, it's really a function of course, when we're actually able to do buybacks and dividend increases. The way we think about it is about risk projection. If we look forward and we feel like the economy is stabilized and growing, if we look forward in terms of the pandemic and it's 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 of turning back on buybacks and considering dividend increases. I'd say today it's just premature.
We just don't know what we don't know, and to go out there today and try to make those kind of assumptions, I think is just shooting in the dark. I do think as we head into next year, we'll see clarity with regard to the pandemic. We'll see clarity with regard to the economy. As I said earlier, I think the chances the economy could be better than most think. There's a decent chance we'll have that decision to make as we head into the, let's call it the first half of next year. Today, it's just a tad premature.
Understood.
Vijay, will you take our next question?
Thank you.
Sure.
Sure. We will now take our next question from Gerard Cassidy from RBC.
Good morning, Kelly.
Hey, Gerard.
Good morning, Kelly. Good morning. Hi, Daryl. Good morning, Kelly.
Hi. How are you?
Good, thank you. Daryl, can you share with us, you mentioned that you guys purchased $5 billion of securities using your excess reserves, and you helped the margin by about a basis point. What's left? How much more of the excess reserves can you put to work? Can you also share with us what was the duration of those purchases to be able to get that higher net interest margin, even though it was only one basis point?
Yeah. Gerard, so our current duration of our portfolio, because of prepayment speeds picked up, we're just a tad over three years right now, 3.1. They do have negative convexity, so it 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 have at the Fed. We have a little over $30 billion at the Fed currently. We are moving that over, some of it this quarter, maybe more of it into early next year. We are layering in some hedges. Now, I would tell you, the hedges that we're putting on are pay fixed hedges. We're buying more MBSs, which, as you know, has cash flows that pay down over the life of those assets.
The way FASB has approved hedge accounting on this, it's 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 these, it's called last layer of hedging, and we're hopeful that we'll be able to put on a little stronger hedges. The hedges we're putting on will mute some of the OCI volatility. If they could come through and allow us to use maybe amortizing swaps instead of just bullet swaps, that would significantly improve the performance of those hedges. We're hopeful about that. We are trying to hedge it the best we can right now that the cost of these pay fixed swaps are really low. It's 12 basis points, so it doesn't really impact it. We're in the midst of moving it over.
Yeah, 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 know. I think it's good to be deployed. The way I would think of it, though, is that, if rates were to go up or if we started to lose some of the surge deposits, our cash flows from this investment portfolio we're building, could be easily $10 billion a quarter.
We could just not reinvest. If we have strong loan growth, we could use that cash flow to deploy into loan growth. It gives us a lot more flexibility, a lot more optionality, and it also helps protect our margin and helps run rate. 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. As a follow-up, Kelly, I share your view about the vaccine for this COVID and the therapeutics that we'll have next year, and hopefully, the economy really starts to open up. I want to come back to something you said about the small business owners, and if the economy doesn't come back, there could be some real meaningful fallout. Can you kind of frame for us, and I know it's subjective, but can you frame for us, if the economy doesn't come back by the second quarter or the first quarter, when do you really start to get concerned about that fallout?
Well, Gerard, that's something else that we don't know. I think today that some, of course, have already gone away. They just, for whatever reason, they couldn't qualify for the stimulus. They chose not to. They just threw in the towel. That's a small percentage. Most have been buoyed by the consumer support, PPP, and other loan assistance programs. As that begins to phase out, these businesses will have tougher decisions to make. I'll tell you that a lot of these small businesses are pretty creative, and they're pretty resilient. I wouldn't expect to see a majority of small businesses fold or anywhere close to that. I think most are going to find ways to reinvent their business. It's incredible how smart small business people are. I've dealt with them basically my whole career, and they're a pretty tough group. I wouldn't write them off.
I'm just saying that as it hangs on into the second quarter and attendance is out, and consumers aren't back out buying again, and we will see a shakeout. Here's the thing today, consumer purchases are back up. If you look at the credit card activity, it's up year-over-year. It went through a trough, it's back up over year-over-year. They're buying, just buying in different ways. What these small businesses have to do is figure out whether it's carry out or dine out in the backyard or whatever it is if you're a restaurant. The creative ones will figure it out. Some won't be able to figure it out, and they'll have to find another career. I think that all will begin to be clear, Gerard, as we head into the second quarter.
Great. Thank you. Okay. Vijay, please transition to our next question.
Sure. We will now take our next question from John Pancari of Evercore ISI. John.
Hi. Just on credit, just a two-part question there. First, on the delinquencies, looks like both 90+ and 30 to 89 increased. I just want to get some color on what you're seeing beginning to migrate, if there's any concentration there, what's driving that? Separately on the loan loss reserve, if we do see the delinquencies start to interpret into a steady rise in charge-offs, is it fair to assume as charge-offs rise, that you're adequately reserved and accordingly you could see the reserve-to- loan ratio decline as that happens? Thanks.
Hey. All right, John, this is Clarke. I'll answer that, John. On the delinquency side, we typically see, in consumer anyway, some elevated early stages. You go through the second half of the year, so third quarter's going up a little bit, part of that's seasonal. You'll see a lot of it's concentrated in the government-guaranteed portfolios around student and mortgage. If you take that out, particularly for your 90+ , that was the majority there. It was flat otherwise. Again, nothing alarming at this point. We anticipate part of that each year. To your second question, all of that is considered as we go through our modeling and our allowance and our view of the scenarios that we selected. Yes, I think we've assumed there will be further deterioration as we move forward. That's very likely, and that's all been included in our estimate to date.
Okay, good. That's helpful. Secondly, on the net interest margin front, I know that you indicated that, Daryl, 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 given some of the actions you've taken and how you're thinking about that from here.
Yeah. I would tell you, we had a good drop in deposit costs this past quarter. We still think we have room to go there. Our interest-bearing costs are 15. My guess is over the next quarter or two, we'll be single digit. I think that's just the direction that we're headed right now. I think that's 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're able to be successful in growing that. The other thing I would just tell you is that we are doing everything we can to protect our core margin and try to grow as much as we can to offset the runoff.
The runoff for purchase accounting is a little bit hard to predict. It depends on how the loans pay down on that. My guess right now is that it'd be down 3%-5% right now, but you really don't know what's going to come through from that. You just have to do the best that you can with what's running off from that. With PPP coming out over the next couple quarters, that will help keep core margin probably in the 270s, and that will help mitigate the reduction of GAAP to what, depending how much you get PPP pay downs. Our guess is the bulk of our pay downs will come in the first quarter, maybe second quarter. We'll get some this quarter. Recall our company has about $12.5 billion of PPP loans on the books.
We are planning to have invitations sent to all of our clients in the month of November. They'll all get invitations. How quickly they can respond with the documentation and resubmit it to SBA is just a huge process. We're thinking it's more centered in the first half of 2021 than in this quarter. You don't really know. It's an unknown right now.
A couple other things. Keep in mind that our people have been very successful in terms of floors with regard to new loans and existing renewals. The other thing is that if the economy comes back faster, which I think it may, there's going to be a substantial pent-up demand for expansions. We will see an increase in loan demand for, I call it, normally priced loans, which will be a plus for the growth in NIM. A couple of things there could really help us on NIM in addition to what Daryl said.
Got it. Thank you. That's helpful. I know you said relatively flat on the core NIM in your guidance. I was just looking for the drivers behind it and then maybe the behavior beyond that. Thank you. Appreciate it.
Thank you. Vijay, we're ready for our next question.
Sure. now take our next question from Betsy Graseck of Morgan Stanley.
Hi.
Hey, Betsy.
Hi, good morning. Okay, a couple questions. One is on how you think about the reserve release. I know it's early to ask this question, we all model out a couple of years, so I'm just trying to understand 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? Maybe there's something else you're thinking about you could let us in on. Thanks.
Clarke, do you want to take that?
Yeah. Maybe I'll start, and then Daryl and Kelly, you can kick in. Certainly, Betsy, we think it's premature to be talking about releases right now given the environment. I think you'll see in our estimate this quarter, we've been, I think, prudent around considering there's still a lot of economic uncertainty around it, whether there'll be any more stimulus, what the ultimate outcome of these accommodations are, and just the pace of the recovery. I think for us, we would want to be sure we have much better clarity there and see the economy on very firm ground and the client performance be at a really strong level before I think you'd see us consider releases.
And I guess the question-
Betsy, one other thing.
Yeah, go ahead.
It's one of the things that can be kind of interesting. To your point, if everything were precise, as I understand it, and the economy performed as we expected in terms of our CECL projections, the rates are as we projected, so our net present value analysis is the same as what we projected. If all of that would happen, there'd be 100% correlation between reserve projections and charge-offs. As Clarke said, it's not going to be 100% correlation. The other thing is, and I hope this is not true, but do we get any pressure from regulators to hold reserves up even though all the math and all the concepts say it should be coming down? We've not heard anything about that, but that's always a wild card.
Yeah. How does it work with CECL as my follow-up question? I know maybe that's a little bit longer than the time you want to spend on it, on this topic. The question really is around how to think about the trajectory of the reserves from here. Like in the old incurred loss model, there was some general reserve that you could have. I'm just wondering, as we go through this recession and we have maybe some asset classes are experiencing greater than expected loss, others less than expected loss, can you shift the reserves around? The question really ends up being, how fungible are the reserves that you put up against these specific asset classes that you've identified? Thanks.
Hey, Clarke, I'll start this. You want to maybe add to it, we do it both ways, Betsy, in that we do a bottom-up analysis. Our modelers go through and we model all the portfolios and we run it against the scenarios and we come up with a bottom-up analysis. Given the limitations of the models and the uncertainty in the environment, there's always top-down adjustments that occur that are basically in play there. It's a process you go through, and you have to know what you have in the models today. If the economy gets better and everything else stays the same, you could see a release potentially. That's not reality. Things are always changing. Things are always getting re-graded up and down in the portfolio. Client behaviors are changing, more charge-offs or whatever. It's always a dynamic process.
I think Clarke and his team do a great job in analyzing it. We thoroughly review it several times before we come up with our numbers each quarter. 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's a lot of qualitative adjustments occurring right now. Clarke?
No, I think you said it well, Daryl. I think it's very granular by segment, and that segment analysis in our view of the economy and the impact on all of that does allow us to adjust the estimate as needed. You could have differences quarter to quarter by those different segments, and that could impact the level of the estimate.
Thanks very much, Daryl and Clarke. Appreciate it.
Sure. Thanks, Betsy. Great. We are ready for the next question.
Yeah. We'll take our next question from Mike Mayo from Wells Fargo.
Hi. My question goes to slide 12, where the efficiency trends have not gone in the right direction the last couple quarters, but you just gave guidance for that to improve in the fourth quarter. You talked about personnel savings, CRE, branch, third-party systems, and closing 104 branches. I think I'm summarizing what I heard. My question is, why not more? Why not faster?
This is one of the biggest merger overlaps that you've seen. You're allowed to close branches starting in December. Yesterday, U.S. 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. Are you just being too safe to get the merger integration smooth? I mean, you are growing deposits, no blow-ups, and I'm sure you're protecting the long-term franchise. I thought that efficiency story would be coming in a little sooner than it's come in. Thanks.
Mike, I'll start with that, and others can help me finish the answer. I'll start with, we have five buckets of cost savings. You started with the branch system. We are closing 104 branches, as I said in my prepared remarks, in the December-January timeframe. I also said that we're looking at opportunities to pull forward some other branch closures in 2021. We aren't at the stage yet to announce exactly what we're going to do there, but we did give you an indication that there is a possibility. 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 spend with third-party providers, to date right now with dealing with vendors, 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 see $400 million before it's all said and done from a run rate perspective. As contracts come up, as we redeploy, we're still going through the process of negotiating contracts with an end provider of these services that we are having right now. 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 sq ft outstanding if you add branches and non-branches out there. We talked about potentially taking five million square feet out in our non-branch areas this next year. We said the average cost of that on a gross basis was $30 a square foot. There'll be a little bit of investment come back as we refit under the socially distanced areas and all that for the buildings that are surviving. We have branches that will probably not have another two to three million square feet there. We'll be close to 20 million sq ft probably by the end of 2021 in our company from that perspective. That's a third that we're taking out very aggressively, very quickly. The fourth area is in technology. I talked about it in the prepared remarks. We're just now getting in the midst of getting through conversions.
We've done some small conversions, not client-facing, and we've started to decommission systems, started to get systems there. We just did the conversion in those area in the capital markets, large corporate area, and all that stuff. Those savings are going to be captured. As we get through conversions in the first quarter in Joe's area with wealth and broker dealer that we have there in that. One's in the first quarter, the other one second quarter. It takes probably three to six months before we get through and get those systems decommissioned. Scott has plans. We don't need four data centers right now. We're going to end up with a couple data centers at the end of the day. That will probably be a 2022 savings. We will get those savings.
It's just a matter of when we are able to get those closed and get everything transferred. The last one on personnel. If you look at our FTE, every quarter, they've been falling in FTEs, and we've pulled forward FTEs. As we go through these conversions, we're going to have continued FTE closures. I mean, we don't need as much of areas on the support side as we go through these conversions and get things finalized. There's a lot to come. We're not backing down from the $1.6 billion. We aren't backing down from the timing, where we're going to come through on target like we said we were, and this is just a way of doing it.
Mike, just to amplify. Your question is a good one. It's appropriate about the branches. Two points. Up to this point, we have been cautious in terms of closing branches because we want to have maximum availability for our clients. Keep in mind that we've had to basically close down the lobbies. Now we're fortunate about 98%+ of our branches have drive-throughs, so our drive-throughs have been open throughout. For the last several months, we've had in-branch activity based on appointments only. We just opened up this week, like 1,500 branches, full service in the lobby. Once we get the branches back to kind of normal and our client service capabilities back to normal, then we will be more aggressive in terms of the closings.
Because we have a large number of branches that are literally side by side, in many cases sharing the same parking lot. Our people, as Daryl alluded, are literally in the process of developing an aggressive plan with regard to that. Don't hear us say we're not going to be aggressive with regard to branch closures. We're not just going to announce it today because they're literally in the process of putting the final touches on what it's going to look like.
One follow-up, just to put a bow around it. How much in merger cost savings do you have so far in the third quarter run rate? What do you expect for 2021 and 2022 again?
For the third quarter, we're probably around 35%, give or take. We're still targeting 40% in the fourth quarter. The guidance that we gave is in the middle of that range that I gave you there, so we're plus or minus on that side of that. For the end of fourth quarter of 2021, we're still at 65% of the $1.6 billion, and then the whole $1.6 billion by the end of 2022. We are not changing the timing of that.
Okay. Thank you.
Yeah. Operator, are we ready for the next question?
Yeah, we will now take our next question from Saul Martinez from UBS.
Hey, good morning. Following up a little bit on NII. Daryl, what is embedded in your fourth quarter core NIM and reported NIM guidance for PPP forgiveness, if anything? can you just remind us or give us an update as to what you are thinking right now for forgiveness rates over, I'd say, maybe it's the next three quarters, and any color on what the fee rate is on that forgiveness? Because obviously it does move the needle a bit on NII with that accelerated forgiveness.
Yeah. what I would say, and we talked about this last quarter, our estimate hasn't really changed in that we still think 75% of it will pay off with this forgiveness piece. That's a guesstimate. We really don't know. We are, like I said earlier, sending invitations out to everybody from that. For this fourth quarter, of that 75%, we're probably around 20%. That's a shot in the dark of what actually might get paid off. We really don't know the timing. If you look at the news that came out last week from the SBA and the two-pager for the $50,000 and less, the numbers on that is out of our 80,000 clients, we have 45,000 clients that are $50,000 or less. It only represents 7% of the dollars. it's a huge-
Right
...volume piece. Hopefully a lot of that, most of that will probably get processed very quickly. We've actually gone through and done some forgivenesses on a limited basis just to learn the process, and we've actually gotten paid from the SBA on a couple. We're learning and gearing up, and we're getting ready to do it holistically out to everybody at once once we get the processes all lined up. We're gearing up for that. We think the first quarter, Saul, will be our biggest quarter. Right now the estimates are on 60% and the rest would be in the second quarter. You really don't know. When the timing of it is, it's a pure shot in the dark. That's what's in our numbers right now.
Right. I know it's more tilted towards first quarter, but does your fourth quarter guidance explicitly incorporate that 20% forgiveness and a certain fee rate on top of that? I know I'm getting a little bit nitpicky here.
Hey, you're right. It does
Strip that out. Yeah. Okay.
There's risk. If it's less than 20%, we may miss core. If it's more than 20%, we may exceed core. That won't be the only end-all, be-all in core. Core is a lot of other variables. That is an assumption that plays out absolutely there. The other thing you have to think about, Saul-
Sure
...is when can you realize it? Just because somebody sends it in, do you realize it when they send it in or when they actually get the dollars wired back into us? we're working with our external auditors on the timing of when to recognize that fee payoff.
Right. Without PPP forgiveness, can you maintain core NIM swap, or is that already pretty much impossible to do that given the environment?
My guess is that the core margin without PPP is probably in the high 260s right now. What would be my guess? Maybe still 270. It all depends on what Kelly said, the loan growth, the ability to grow the higher yielding portfolios and to really get a mix change. If we could just mix and invest some of the excess liquidity that we have in loans versus securities or Fed balances, that's a really positive way to help your core margin. It's just a matter of trying to get the loan volume to support that.
Got it. Just one final quickie, just absolutely just want to make sure. The guidance for expenses and revenue, that is based on the adjusted non-interest expense number 3147 and incorporates the adjusted non-interest income, I guess at 2106. Just want to clarify that.
Yeah. In my prepared remarks, I adjusted both the expense side and the revenue side.
Okay. Just wanted to make sure. Thank you.
That concludes our Q&A session. Thank you, Vijay, and thank you everyone for joining us today. I apologize to those with questions we didn't have time to get to. We're happy to reach out to you later today to address those questions. We wish you all the best. Goodbye.
This concludes today's conference call. Thank you for your participation. You may now disconnect your call.