Greetings, ladies and gentlemen, and welcome to the Trust 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 Trust Financial Corporation.
Thank you, Vijay, and 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 Q3 results and provide some thoughts for the Q4 of 2020. We also have Bill Rogers, our President and Chief Operating Officer Chris Henson, our Head of Banking and Insurance and Clark Starnes, our Chief Risk Officer to participate in the Q and A session. As with prior quarters, we are conducting our call today from different locations to help protect our executives You 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 notes regarding forward looking information in our presentation and in our SEC filings. Please also note our presentation includes certain non GAAP financial measures. Please refer to Page 3 and the appendix of our presentation for the conference. And now I will turn it over to Kelly.
Thanks, Ryan. Good morning, everybody. I really appreciate you all joining our call. 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.
Strong balance sheet, particularly in asset quality, liquidity and capital, relatively strong earnings, Great value proposition for our clients, particularly in our digital offerings. 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 conversation, really focused on our culture, Essentially, our purpose to inspire and build better lives and communities. And I want to show on Slide 5 Few of the things we're doing to live out our purpose. So we announced recently something we're very excited about, a $40,000,000 donation to help Established an organization called Quantum Square Community Capital.
This is a new organization that will be focusing on funding to racially and ethnically Diverse small business owners, women and individuals and LMI communities. So 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 proud of our first Truist CSR report. I hope you've got a That's a 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 Workforce, which helps kids in K through 2 learn how to read. You've heard me say in the past, unfortunately in our country today, 2 thirds of the kids in the public school system In the 3rd grade, then I'll read. This is a way of getting at that. It may not be the only announcement, but it's a really good start. We're excited about it.
We're in our beta test, 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 on 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 part of the merger our $60,000,000,000 community benefits plan over the next 3 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, dollars 32,000,000,000 over the next 3 years in home purchase mortgage loans and To LMI and minority borrowers. So 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 3 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.
So 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 6, I'll just point out a few highlights. We did have Taxable equivalent revenue was $5,600,000,000 Net income to available to common shareholders was 1 $1,000,000,000 but adjusted net income available to common was $1,300,000,000 That resulted in diluting 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. Now we recognize that there's more to come with regard to credit quality deterioration Depending on what happens with regard to the economy. But still, given where we are today and recognizing there are some positive impacts with regard to accommodations there, That's a really good number.
We feel really good about that. And likewise, on the charge offs, we're 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 7, I just point out we did have Security gains of $104,000,000 which was a positive $0.06 per share. We had merger and structuring Our charges are $236,000,000 with the $0.13 We did have incremental operating expenses related to the merger.
Remember, these are Expenses that don't qualify for Merck in terms of calling out because they do have future benefits, but they're not a part of our longer term run rate. That was $152,000,000 and that was $0.08 And we did make a $58,000,000 unusual contribution to our charitable Foundation, that was $0.03 So if you put all that together, it was a negative impact to EPS of about $0.18 So we feel Good about the adjusted number because of the quality of the selected items. On tab 8, 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 Q2.
And likewise, we saw a big run down in loans in the 3rd as A large number of the corporate line drawdown were repaid. So we saw total loan reductions of $20,500,000,000 of that was in the C and I area. So that's principally what happened. We did have some bright spots. We had growth in LightStream, our national consumer From a digital platform, Sheffield had a growth recreational lending, prime auto.
We did have some decreases in some other consumer areas like mortgage and so forth. So it's kind of mixed bag with regard to Consumer, but 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, relatively flat. I would say to you that we do expect future headwinds. With regard to the PPP loans, we have about $12,500,000,000 there. That will begin to pay off as we head into the 4th and the first and probably the second.
Loan growth is really challenging now. Obviously, that banks are a reflection of the economy, and so we should not be surprised about that. The real question is what's going to happen to the economy. I would just point out and this is just one person's opinion, it's important to look back At previous corrections that we've had and there's virtually always a material precipitating event. So in 1991, we had the commercial real estate bubble 2,001, we had the technology bubble.
2,008, we had the residential real estate bubble. This one didn't have a bubble. This was the first strong 10 year 3.5 percent 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 snapback in the economy that most people would not expect Because it wasn't structurally in trouble to start with.
Now if it stays on a long time, then all bets are off. Approximately, as we head into the Q1, 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, sickness, ramifications. So we are somewhat optimistic, All the cost as we think about the economy going forward. I will tell you, as I get feedback from our client facing people, Well, 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 9 calls in one day. So we're being very, very Efficient. But 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.
And to be honest, that's kind of what we said. We sat back for a while and didn't make virtual calls and said we're waiting for the pandemic. And then several months ago, we just kind of said, We got to get on with running our business because our clients need us. So our clients are being excited, say, hey, 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 will reshuffle and reallocate itself. But at a personal level, for those small business people, that's a very sad story. So we got to hope that this moves along as rapidly as possible. I'd say finally that our pipelines are improving.
Our call in activity is robust, And we feel very good about where we're going relative to what happens to the economy. On Slide 9, 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 $1,400,000,000 increase in deposits on linked quarter basis. We had a $10,000,000,000 increase following other previous quarter increases in noninterest bearing deposits.
So we feel really good about that. Our non interest bearing deposits today are 33.3 percent of total deposits versus 27.8% in the Q1. So 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 deposit structure, we've made really good progress here. 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 So 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 though, We did divest $2,200,000,000 in deposits this quarter, and so that's a material factor. So overall, I would say our deposits are doing great. With that, let me turn it to Daryl for some more detail.
Thank you, Kelly, and good morning, everyone. Today, I want to cover highlights from the Q3 and provide our Q4 outlook. Turning to Slide 10. Reported net interest margin decreased 3 basis points, primarily due to lower purchase accounting accretion. Core net interest margin increased 5 basis points, the first increase since the Q1 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 $5,000,000,000 of high quality securities, improving our yield on those assets by approximately 100 basis points. Our asset sensitivity increased in the 3rd 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 noninterest bearing deposits. Given the low Great environment. We're replacing pay fixed 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 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 light quarter basis due to firmer pricing and an uptick in new business. Residential mortgage income decreased primarily due to a 72,000,000 Change in the net MSR valuation driven by higher prepayments.
Investment Banking had a record quarter, but trading was off from a great Q2, 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 123,000,000 as losses on debt extinguishment and higher intangible amortization during the Q2 were partially offset by higher merger related costs and a charitable contribution. Adjusted non interest expense increased $20,000,000 primarily due to an increased personnel expense, marketing costs and professional services.
The increase in personnel expense reflects higher nonqualified 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 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 1 basis point to 26 basis points and the NPL ratio increased 2 basis points to 37 basis points, primarily due to C and I loans. Annualized net charge offs relative to average loans and leases increased 3 basis points to 42 basis points. We took a $97,000,000 PCD adjustment to net charge offs. Excluding that, net charge offs would have been 29 basis points.
The provision of $421,000,000 exceeded net charge offs of $326,000,000 increasing an allowance by $95,000,000 The allowance was 1.91 percent of loans and leases, up from 1.81%. Coverage ratios remain strong at 4.52x net charge offs and 2 at 5.22x nonperforming loans. The 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 industry decreased $2,200,000,000 to 27,900,000,000 We continue to closely monitor and manage our sensitive industry portfolios. Turning to Slide 15. The volume of loans with accommodations have decreased significantly since June 30. Approximately $692,000,000 of commercial loans had an active activation at the end of September 30, down from $21,200,000,000 And consumer, dollars 6,200,000,000 at active accommodation, down from $11,300,000,000 The declines reflect expiration of the initial payment relief, which was not renewed by the borrower. Since June 30, 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 $96,000,000 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-twenty 21 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 our strong well accepted regulatory requirements. Our reported CET1 ratio increased to 10% from 9.7% last quarter. We also issued $925,000,000 of preferred stock to strengthen our Tier 1 and total capital ratios. The recent assigned stress capital buffer of 2 70 basis points will remain in effect until September when a revised stress capital buffer will be provided. This will 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 $200,000,000,000 of cash, security 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 and statement suppression.
We are also proud of the recognition we received recently from Javelin. Heritage BB and T was recognized as a leader in ease of use and financial fitness and mobile banking and a leader in financial fitness and online banking. Heritage SunTrust was recognized as a leader in ease of use and 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 $1,600,000,000 in net cost saves and continue to make good progress on personnel expense, Corporate real estate, branch rationalization, 3rd 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. Now I will provide our 4th quarter guidance, which is based on linked quarter changes versus the Q3. For our guidance, provide the path to positive operating leverage. We expect taxable equivalent revenue, excluding one time security gains, to be down 1% to 3%, driven by lower purchase accounting accretion. We expect reported net interest margin to be down 3 to 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% to 4%, reflecting lower personnel expense. We also anticipate net charge offs to between 40 60 basis points. Now let me turn it back to Kelly for a merger update, closing remarks and Q and 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 and making really great Progress. Most importantly, our culture is really strong. And I would say to you kind of interestingly that the COVID experience has actually bonded our team Together even faster than we would have expected because when you go through a really tough time and you kind of thrown in the boat together, it encourages Our strength in terms of developing relationships, trust and bonding.
So we could not feel better about how strong our culture is Not 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. So there'll be a number of conversions that have occurred or will occur on the way towards the final core conversion. We did launch our dual service branch Alex, 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 we know, this is the first virtual conversion That has occurred and it was seamless. I think we did a fantastic job. And it's a big deal because we're really big for our securities operation now backing up our Corporate and Investment Banking Business. Our core conversion is on track for first half of twenty twenty two. So 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 make to our shareholders. We base that on a very exceptional Franchise with diverse products, services and markets.
As we said, we are the 6th 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 efficiencies that we need. We are the 6th 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 on investment firm. We're the number 2 regional bank originator, a mortgage originator and servicer. So very, 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 $1,600,000,000 of net cost savings. At the same time, we'll be investing In our revenue synergy operation, I would tell you that our IRM, our integrated relationship management strategy It's going great. As you know, in the beginning, we said there were huge opportunities to leverage the strength that SunTrust had and the strength that BB and T had.
And 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 and 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 are very prudent and disciplined in risk and financial management.
We have a very conservative risk culture. We have heard diversified benefits arising from the merger that's just going to naturally implicit in the merger. We stress that very well, as you've seen. We have very strong capital, very strong liquidity, and we have a very strong and defensive balance sheet, which is insulated by purchase accounting mark combined with the seasonal credit reserve. So overall, I would say we have a great culture, we have a great franchise, we have a great team, And we fully believe I fully believe our best days are ahead.
Brian?
Thank you, Kelly. Vijay, at this
Sure, sir. Thank
We will now take our first question from Ken Usdin from Jefferies.
Hey, thanks.
There we go. Thanks. Good morning.
Good morning, Tom. 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 1, at what point do we see the incremental operating expenses start to settle back down? They've been on a Steady increase since September of last year.
And then 2, 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 like just your timing recognition of those cost saves? Thanks.
Yes. So 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 Q1 We start with SIT testing and then we go into UAT testing as we get ready for client day 1 in early part of 2022. So I would say we're still on the uptick there. Today, since we announced the transaction in February 2019, we have about $1,500,000,000 Of a combined Merck and MOE related expenses.
And at that time, we said we would be at $2,000,000,000 I don't have a number Of what it is going? Yes. We will probably give that to you in January. And we will probably exceed that number sometime in the Q1, the $2,000,000,000 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.
So 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 and we have thousands and thousands of people right now Working on hundreds of systems, getting them ready, getting them tested. And we just got to make sure this is flawless. I mean, we have to be 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, Yes, we chose to choose the better of the 2 when we had our choices. We didn't take the easy way out and just convert everything all one way or the other. So for in the commercial platform, we chose to use the heritage BB and T servicing system, AFS, coupled with the heritage SunTrust And Sino 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 BB and 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. So 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. And 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 like what you Think is doable longer term? Obviously, the provision is 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 and the original expectation of low 20 20 earnings ROTCE. Remember, we are already very, very strong in the environment that we're in today. And 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. And then of course, you got all the revenue Synergies that I alluded to. So we feel very, very good about that.
Obviously, it will have in flow some based on the economy, but that's still a reasonable number to shoot for.
Next question, please.
Thank
you. We We will now take our next question from Michael Rose from Raymond James.
Hey, good morning guys. Hope you're doing well. Just wanted
to get Daryl, just wanted
to get some color on this quarter's PCB review. And then if you can give us You have some credit metrics around the kind of 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.
Yes. So Michael, I'll take the PCD question, then I'll pick the Clark and he can maybe answer the accommodation piece of it. So on the PCD, Yes. 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 PCB.
In that process, we went through we grossed up Loans and carrying values in connection with the establishment of PCB as well 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, so it was an adjustment that we made this quarter. We think we've gone through the book and we've caught everything there. So In essence, we would have just had a different number in the Q1 when we adopted our CECL numbers.
But It was an adjustment that we made. It's a non cash item, and we had really good charge offs. If you exclude that 29, we had good charge offs even if you add that in at 42, Perfect, guidance. Mark? 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 of $1,000,000,000 reduction this quarter. It's been a very targeted effort to work with those borrowers and reduce the exposure. So I would say The highlights in the quarter there is we worked very aggressively to get a handle on pursuing the energy portfolio and hospitality side. We actually $300,000,000 worth of hotel credits at pretty good pricing and also address A good bit of the energy book.
So 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 there in any kind of accommodation or deferral. So I consider really strong progress, and we'll continue to watch that closely, and it's all considered in our reserves as well.
Okay. I appreciate that. And maybe just my follow-up. You guys said 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.
So Mike, we're really happy to be at 10%. And as you know, we have said that, that was our target. So that's a very comfortable position. As we think about it going forward, it's really a function of, of Of course, when we're actually able to do buybacks and dividend increases. But the way we think about it is about risk projection.
And so if we look forward and we feel like the Economy is stabilized and growing if we look forward in terms of the pandemic that's under control, and we can feel comfortable in terms of a projected Relatively stable, less volatile growing revenue streams, 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 they're just shooting in the dark. I do think as we head into next Here, 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 chance this economy could be better than the most things. So there's a decent chance we'll have that decision to make as we head into the, call it, first half of next year. But today, it's just a task to bring the truth.
We will now take our next question from Devaraj Khati from RBC.
Good morning, Kelly.
Hey, Dara.
Good morning, Kelly. Good morning. Hi, Dara. Good morning, Kelly.
Good. Thank you. Daryl, can you share with
us, you mentioned that you guys purchased $5,000,000,000 of So these are your excess reserves, and you helped the NIM by about a basis point. What's left? I mean, how much more of the So as reserves can you put to work? And can you also share with us what was the duration of those purchases to be able to get that higher The interest margin is only 1 basis point.
Yes. So Gerard, so our current duration of our portfolio Because of prepayment fees picked up, we're just a tad over 3 years right now, 3.1. But we can they do have negative Actually, so it is can move in and out from that perspective. What I would say is that we are in the midst of moving So more of our liquidity that we have at the Fed. We have a little over $30,000,000,000 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 our basic hedges. We're buying mortgage backed, which as you know has cash flows that pay down over the life of those assets. The way, FASB has approved a 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 this, it's called last layer of hedging. And we're hopeful that we'll be able to put on a little stronger hedges. But the hedges 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 improved the performance of those hedges. So we're hopeful about that.
But we are trying to hedge it The best that you can right now, but the cost of these PayFac swaps are really low at 12 basis points. So it doesn't really impact it. So we're only missing $1,000,000 whatever. Yes. I always look at it as an opportunity cost right now.
We could have lower rates for the next 3 years. That's what's in the forecast 5 years, if you just don't know. And I think it's good to be deployed. But the way I would think of it though is that if rates were to go up or we started to lose some of the surge deposits, Our cash flows from this investment portfolio we're building could be easily $10,000,000,000 a quarter. So we could just not reinvest.
If we have strong loan growth, we could use that cash flow to deploy into loan growth. So it gives us a lot more flexibility, a lot more optionality. And it also helps protect our margin and help run 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. And as a follow-up, Kelly, I shared your view about The vaccine for this COVID and therapeutics that we'll have next year and hopefully the economy really starts to open up. But 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 more meaningful fallout. Can you kind of frame for us, and I know it's subjective, but can you frame for us when does if the economy doesn't come back by the Q2 or 1st quarter, when do you really start to get concerned about that fallout?
Well, Gerrard, that's something else we don't know. But I think today that some of course have already gone away. I mean they just they couldn't for whatever reason, they couldn't qualify for the stimulus. They chose not to. They just threw in the towel, but that's a small percentage.
Most have been buoyed by the Consumer For PPP and other loan assistance programs. As that begins to phase out, these businesses will have Tougher decision to make. But I'll tell you that a lot of these small businesses are pretty creative and they're pretty resilient. And so I mean, 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 pretty a tough group. So I wouldn't write them off. I'm just saying that it hangs on into the Q2 and the stimulus is out and Consumers aren't back out buying again and we will see a shakeout. But here's the thing today, Consumer purchases are back up.
I mean, you look at credit card activity, I mean, it's up year over year. So it went through a trough, it's back up year over year. So they're buying, they're buying in different ways. So what these small businesses have to do is figure out what this 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. They'll have to find another career. But I think that all will But again, I'll begin to be clear, there are as we head into the 2nd quarter.
Great. Thank you.
Vijay, please transition to our next question.
Sure. We will now take our next question from John Pancari of Evercore ISI.
Go ahead.
Hi. Just on credit, just a Couple 2 part question there. First, on the delinquencies, looks like both 90 plus and 30 to 89 increased. I just want to get some color What you're seeing beginning to migrate, if there's any concentration there, what's driving that? And then 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.
All right, John. This is yes, this is Clark. I'll answer that, John. On the delinquency side, We typically see in consumer anyway some elevated early stage as you go through the second half of the year. So 3rd quarter is going up a little bit, part of that seasonal.
You'll see a lot of it's concentrated in the government guaranteed portfolios Around student and mortgage. So that if you take that out, particularly through your 90 plus, that was the majority there. It was flat otherwise. So Again, nothing alarming at this point. We anticipate part of that each year.
And 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. So yes, I think we've assumed there will be further deterioration as we move forward. It's very likely and that's all included in our estimate Today.
Okay, good. That's helpful. And then secondly, on the management's 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 want 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?
Yes. So I would tell you, we had a good drop in deposit costs this past quarter. We still think we have room to go there. So our interest bearing costs are $15,000,000 My guess is over the next quarter or 2, 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 portfolio 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 We'll be successful in growing that. And 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 It's hard to predict. It depends on how the loans pay down on that. My guess right now is that it would be down 3% to 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. But With PPP coming out over the next couple of 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 PPP paydowns.
Yes. Our guess is the bulk of our paydowns will come in the Q1 or maybe Q2. We'll get some this quarter. Recall, our company has about $12,500,000,000 of PPP loans on the books. We are planning to have Invitation sent to all of our clients in the month of November.
So they're all good invitations. How quickly they can respond with the documentation and we submit it to SBA is just a huge process. That's why we're thinking it's more Centered in the first half of twenty twenty one and in this quarter, but you don't really know. It's an unknown right now.
A couple of things keep in mind that I think we've 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. And so we will see a new increase in loan demand for, I call it, normally priced loans, Right, which will be a plus with regard to NIM. So 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 A behavior beyond that.
Thank you.
Appreciate it.
Thank you. D. J, we're ready for next question.
Hi. Hi, Kathleen.
Hi. Good morning. Okay, a couple of questions. One is On how you think about the reserve release. I know it's early to ask this question, but we all model out a couple of years.
So I'm 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? Or maybe there's something else you're thinking about you could let us in on? Thanks.
Mark, do you want to take that or
Yes.
Maybe I'll start and then Daryl Kelly, you
can kick in. I mean certainly, Bexy, we
think it's premature to be talking about releases right now given the environment. So I 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 where whether there'll be any more stimulus, what the ultimate outcome of these accommodations are and just the PACE and of the recovery. So 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 at a really strong level before I think you see us consider releases.
And I guess the question Yes, go ahead.
Just one of the things that's kind of interesting. So to your point, if everything were precise, As I understand it, the economy was performed as we expected in terms of our CECL projections, rates are as we projected for our net For the value analysis, it's the same project. If all of that would happen, it'd be 100% correlation between reserve productions and drug costs. But as far as it is not going to be 100% correlation. And the other thing is, and I hope this is not true, but Do we get any pressure from regulators to hold theirs up even though all the math and all the concepts they should be coming down?
We've not heard anything about that, So that's all the way in the long haul.
Yes. So 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, but on this topic. But the question really is around How to think about the trajectory of the reserves from here? Like in the old incurred loss model, there was Yes, some general reserve that you could have. And 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 Did loss. Can you shift the reserves around?
And the question really ends up being how fungible are the reserves you put up against these specific asset classes that you've identified? Thanks.
Hey, Corke, I'll start. If you want to maybe add to it, but I mean, we do it both ways, Betsy, in that we do a bottom up analysis. So our modelers go through and we model all of the portfolios And we've brought it against the scenario as 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. So it's really It's a process you go through and it's 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. But 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. So it's always a dynamic process.
I think Clark 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. So it's just it's hard to predict right now, especially with the uncertainty, how high the economic variables are today and the model limitations out there. There's a lot of qualitative adjustments occurring right now. Clark?
No, 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. And so you could have differences quarter to quarter by those different segments and that could impact the level of the estimate.
Thanks very much, dear Ankur. Appreciate it.
Thanks, Bharti. Great. We are ready for the next question.
So we'll take our next question from Mike Mayo from 12,000.
Hi. My question goes to Slide 12, where the efficiency trends have not gone in the right direction the last couple of quarters, But you just gave guidance for that to improve in the Q4. You talked about personnel savings, CRE, branch, 3rd party systems And closing 104 branches. So I think I'm summarizing what I heard. So 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. And are you just being too safe to get the merger integration smooth? I mean, you are growing deposits, No blow ups. I'm sure you're protecting the long term franchise, but I thought that efficiency story would be coming in a little sooner than it's come in.
Thanks.
So Mike, I'll start with that and others can help me finish the answer. So I'll start with, we have 5 buckets of cost savings. You started with the branch system. So 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 from other branch closures in 2021.
We aren't at It's not yet to announce exactly what we're going to do there, but we did give you an indication that there is a possibility and we wouldn't have said that if it wasn't A strong reality that we're going to pull forward a significant piece of some branch closures in 2021. We'll give you that once we are able to do that. If you look at our 3rd party spend, the 3rd party providers, to date right now, I was dealing with vendors, our sourcing and procurement teams have Basically realized $266,000,000 of savings from that. We think that run rate translates into about $300,000,000 in 2021. They are not at their goals yet.
They're still trying to get more savings. We think that will occur over the next year or so. We hope those numbers will exceed $400,000,000 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 so right now. So not everything can be fully negotiated yet.
Next one would be in our non branch facilities. We talked about that in our last Earnings call. We have 29,000,000 square feet outstanding if you add branches and non branches out there. Yes. We talked about potentially taking 5,000,000 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 will be a little bit of investment come back as we refit under the socially distanced areas and all that for the buildings that are The distance areas and all that for the buildings that are surviving. We have branches that will probably now have another 2,000,000 to 3,000,000 square feet there. So That will be close to 20,000,000 square feet probably by the end of 2021 in our company from that perspective. So That's a third that were taken out very aggressively, very quickly.
The 4th 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 that client facing, and we've started to decommission systems, started to get Systems there. We just did the conversion in both area and capital markets, large corporate area and all that stuff.
So that those savings are going to be captured. As we get through conversions in the Q1 in Joe's area with wealth and broker dealer that we have there in that Yes. One is in the Q1, the other one is in the Q2. It takes probably 3 to 6 months before we get through and get those systems decommissioned. Scott has plans We don't need 4 data centers right now.
We're going to end up with a couple of data centers at the end of the day. That will probably be a 22 savings. So We will get those savings. It's just a matter of when we are able to get those closed and get everything transferred. And the last one on personnel, if you look at our FTEs, every quarter They've been falling in FTEs and we 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 the areas on the support side as
we go through the
conversions and get things finalized. So there's a lot We are not backing down from the $1,600,000,000 We are backing down from the timing where we're going to come through on target like we said we were, and This is just the way of doing it.
And Mike, just to amplify your questions, it's a good one, it's appropriate about the branches, but Two points. Up to this point, we have been cautious in terms of closing practice, but 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 Plus percent of our branches have drop throughs. Our drop 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 1500 frac is full service in the lobby. So 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 size to size, actually in many cases, sharing the same parking lot. And our people, as Dale alluded, are literally in the process of developing aggressive plan with regard to that. So don't hear us say we're not going to be aggressive with regard to grant closures But 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.
And then one follow-up, just to put a bow around it, How much in merger cost savings do you have so far in the Q3 run rate? And what do you expect For 2021 and 2022 again?
So for the Q3, we're probably around 35 Percent, give or take. We're still targeting 40% in the 4th quarter. The guidance that we gave was in the middle of that range that I gave you Eric, so plus or minus on that side of that. For the end of Q4 of 2021, we're still at 65% of the $1,600,000,000 And then the whole $1,600,000,000 by the end of 2022. So we are not changing the timing of that.
Okay. Thank you.
Operator, we're ready for the next question.
We will now take our next question from Saul Martinez from UBS.
Hey, good morning. Following up a little bit on NII. Daryl, can Daryl, what is embedded In your 4th quarter core NIM reported NIM guidance for PPP forgiveness and 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, I guess, the next three quarters. And any color on what the Sort of the fee rate is on that forgiveness because obviously it does move the needle a bit On NII, that accelerates forgiveness.
Yes. So what I would say when we talked about this last quarter, No, 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. Yes. For this Q4 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 2 pager for the $3,000 less. The numbers on that is out of our 80,000 clients, we have 45,000 clients that are $50,000 or less, But it only represents 7% of the dollars. So it's a huge volume piece. So Hopefully, a lot of that most of that will probably get processed very quickly. But we've actually gone through and done some forgivances on a Limited basis just to learn the process and we've actually gotten paid from the SBA on a couple.
So we're learning and gearing up and we're getting ready to do it Holistically, I'll say to everybody at once once we get the processes all lined up. So we're gearing up for that. We think the first quarter, Sal, will be our biggest Quarter? Yes. Right now, the estimates are around 60% and the rest would be in the Q2.
But you really don't know. I mean, it's I'm wondering the timing of it is. It's a pure shot in the dark, but that's what's in our numbers right now.
Right. And I know it's more tilted towards Q1, but does your 4th Quarter guidance is supposed to be incorporated that 20%, forgive me, it's in a certain fee rate on top of that. I know I'm getting a little bit nitpicky here, but
You're right. We can't strip
that out.
Yes. Okay.
There's a third risk. I mean, if it's less than 20, we may miss 4. If it's more than 20, we may Yes, we exceed core, but that won't be the only end all VR in core core and a lot of other variables. But that is an assumption that plays out absolutely There. And the other thing you need to think about Sal 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? So we're working with our external auditors on the timing of when they recognize that The payoff. Right.
Without PTP forgiveness, can you maintain quarterly slack? Or is that already Think it was impossible to do that given the environment.
My guess is that the core margin without PPP is probably in the Too high 260s right now would be my guess. Maybe still 270. I mean, we are All depends on what Kelly said, the loan growth, the ability to grow the higher yielding portfolios and really get a mix change. If we could just mix And that's 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 of 3,147,000 and incorporates the It's a non interest income, I guess, of $2,106,000,000 Just want to clarify that.
Yes. 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 and A session. Thank you, BJ, and thank you everyone for joining us today. I apologize to those with questions we didn't have time to get to. We're happy to reach out to you later today with to address those questions. We wish you all the best.
Goodbye.
This concludes today's conference call. Thank you for your participation. You may now disconnect your call.