Greetings, ladies and gentlemen, and welcome to Truist Financial Corporation First Quarter 2020 Earnings Conference Call. 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. Please go ahead.
Thank you, John, and good morning, everyone. We appreciate you joining us today and sincerely hope that you're doing well. On today's call, our Chairman and Chief Executive Officer, Kelly Keane and our Chief Financial Officer, Daryl Bible, will review our Q1 results and provide some thoughts for the Q2 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. Note that we are conducting our call today from different locations to protect our executives and teammates.
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 note that 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, Including the impact of COVID-nineteen, insurers' 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 our SEC filings. Please also note that our presentation includes certain non GAAP financial measures. Please refer to Page 3 in the appendix of our presentation for the appropriate reconciliations to GAAP. And now I will turn it over to Kelly. Thank you, Ryan.
Good morning, everybody. Thank you for joining our call. I certainly hope you and your families are safe and well in this difficult environment we're all living in. I want to take a minute before we get into the numbers to just talk about culture because I believe now more than ever, culture matters most of all of the things we can talk about. So you've heard us say that our purpose is to inspire and build better lives and communities.
This is absolutely a critical time for us to live out that purpose. So I mentioned it's focusing on our clients, our teammates and our stakeholders in that order, and we do that further and seriously every day. Our values are to be trustworthy, caring, operate as one team, focus on success and ultimately, happiness for our teammates. We are focusing during this environment, number 1, on the health and safety of our teammates. We are pleased that about 35,000 of our 58,000 teammates are able to work remotely.
We are spending a lot of time supporting our clients, particularly on the payroll protection program. We're spending a lot of energy and focus supporting our communities through our truest share of $25,000,000 philanthropic donation that we did early I'll tell you that our teammates are working really, really hard. They're working 20 fourseven in many cases. They're working very, very closely together. It's incredible to see the kind of positive results that we're getting, particularly like in the PPP program For our people, we're able to stand up literally overnight and automated portals to allow our clients to access automatically with us in terms of getting their applications in.
Our
teammates are bonding faster than we would ever have expected. And I can say to you today that our culture at Truist is really, really strong. If you're following on the presentation, I'm on Slide 5. Just as a reminder, after the combination, we are the 6th largest share of commercial banks by asset and market value. We have a very strong number 2 weighted average deposit market share in our top 20 MSAs.
We have 12,000,000 households, 58,000 teammates. We are very well positioned, we think, to achieve our purpose. We are recognized as one of the highest rated financial institutions, And we're continuing to grow loans and deposits, particularly in this period of slight quality. Dale is going to cover a lot of information about our 3rd strong capital and liquidity in just a in just a bit. But I would point out that our diversification is a real strength.
We are very diversified in products, services and geographies. On Slide 6, we talk about some of the things we're doing with regards to the crisis. Like others, we have been providing payment relief assistance, So there's been forbearance, referrals, extensions, other ways we can help our clients. We've already done over 300,000 accommodations for $16,000 for our commercial clients. We temporarily waived ATM service charges, and we are uniquely offering a 5% cashback on qualifying card purchases for important basic needs.
We're real pleased that we've been able to continue to allow appointment interventions with our clients in terms of particular needs they have. We're fortunate that 90% of our branches have drive So we've been able to keep those branches open in terms of activity. We've been really focused on the Check Protection Program. Our average loan amount is about $323,000 We've been authorized for 32,000 companies, representing about 1,000,000 employees, and we're expecting funding to be a little more than $10,000,000,000 on the first round, and it will likely be more on the 2nd round if it is in fact approved. We're providing financial relief programs for our small businesses in many other ways also.
And we've been able to fund, without hesitation, extensive line draw for our commercial clients. For our teammates, we've awarded $1200 coronavirus for relief bonuses to about 78% of our teammates making less than $100,000 a year. We've been very aggressive in providing work from home and other alternative work strategies for our teammates, provide safety for them. We also increased our on-site special rate pay for those that have to be working critical roles. The $6.25 special pay for those on hourly and $50 a day for those that are not.
Our Truist Foundation is contributing $4 for every $1 that our Truist teammates donate to our OneTEAM fund, which helps our teammates that are in financial hardship and need assistance. For our communities, we announced earlier a $25,000,000 fill and socket contribution. This has really gone a long way to help. We I donated $1,000,000 to each of the CDC Foundation and Johns Hopkins, and our Truitt Foundation donated $3,000,000 to local United Way organizations. On Page 7, just a few financial highlights.
We did have $5,600,000,000 in Our taxable equivalent revenue. Our adjusted net income available to common shareholders was 1,180,000,000 5, which is very strong in this environment, and our adjusted efficiency ratio was 53.4%. So we feel really good about that. Our January February were, like a lot of people, really strong. And then we, of course, ran into all the challenges that we're all experiencing because of Interestingly, insurance and mortgage continued to have strong performance throughout the entire quarter.
So quality of the Clarksville side to you is actually very good right now, but we know that's the calm before the storm. And that's why we added a strong $893,000,000 provision in anticipation of the challenges that we know we will face. We have a tight focus on our teammates and our clients and our communities, which we believe is our job number 1 right now. If you go to Slide 8, just a couple of the unusual items this quarter. We know it's a little messy, but we got the issue of the merger And the COVID impact.
So our merger related charges are $107,000,000 before tax, about 0 point 0 $6 negative impact after tax. The incremental operating expenses, they're the ones that provide future benefits, but they're not a part of our ongoing run rate. We call them out separately, and that's $74,000,000 or $0.04 a share. And then the COVID impact in terms of cost and foregone revenues It's about $71,000,000 or $0.04 So there really is, in my view, about $0.14 of unusual items, which gets you to the $0.87 If you go to Deck 9, Slide 9. In loans and leases, it's been an interesting period.
You can see that our first quarter average Loans were $301,000,000,000 but by the end of the period, it was $319,000,000,000 very modest. And we had a surge At the end of March, we had about 18,000,000,000 dollars in drawdowns. That continued into early part of April. We had another about 1.4,000,000,000 has been relatively flat since then. We do expect substantial PPP funding.
As I said, we have in process about $10,000,000,000 in committed loans that we expect will be drawn down relatively soon. In terms of the market, I know everybody wants to know what's going to happen. I do, too. But the truth is we just don't know. It depends, obviously, on the depth and the length of the health crisis as we work through that and then how that has the knockoff effect with regard to the economy.
The good news is going into this economy was very strong. That new biz, small businesses will really struggle to recover from this. Still, I would say to you, Americans are resilient, And I believe our country is likely to outperform the worst expectations. If you look at deposits on Page 10, Same kind of thing. Our average balances were $334,000,000,000 It cost up to $350,000,000,000 as we had an increase of $15,000,000,000 during that period of time.
About $7,000,000,000 of that was line draws, but then we also had some seasonal increases and some flat quality deposits have moved in, which we were very pleased to see. Our total average cost of deposits decreased by 6 basis points, which we're We're very happy to say. So let me turn it to Dale now and let him do some detail. Thank you, Kelly, and good morning, everyone. I want to talk about the key points from the Q1 and provide some color on current business conditions.
Turning to Slide 11. Net interest margin was 3.58 percent, up 17 basis points. Purchase accounting contributed 52 basis points to reported net interest margin. Core net interest margin was 3.06%, down 8 basis points. The decline reflected the full quarter impact of the merger of equals, lower interest rates and our liquidity build in March.
The yield on loans and leases held for investment increased 8 basis points as the benefit from purchase accounting more than offset lower short term rates. The yield on our portfolio securities portfolio decreased 3 basis points. We became more asset sensitive due to floating rate loan growth, expected higher prepayments, turning out Federal Home Loan Bank advances and increased noninterest bearing deposits. Our loan mix was 55% floating and 45% fixed. Current trends suggest our net interest margin will decline further from a full quarter impact of lower rates, line draws, PPP funding and elevated reserves at the Fed.
To protect loan yields, we are implementing forward on all new production, and we continue to aggressively reduce deposit costs. Turning to Slide 12. Noninterest income increased $563,000,000 reflecting a full quarter from merger of equals. Insurance income increased $39,000,000 or 7.6 percent versus Q1 2019 due to higher P and C commissions, organic growth, strong retention and increased pricing. Revenues after mortgage income was strong with origination volumes at $11,700,000,000 Refi was 56% of origination and gain on certain margins were 176 basis While forbearance is a potential headwind that could be offset by higher volume and spreads.
This quarter, several fee income categories were impacted by the pandemic. Investment Banking and Trading was impacted by a $92,000,000 due to the increase in CVA reserves arising from lower interest rates and wider credit spreads. As shown on the slide, discretionary actions resulted in lower service charges on deposits and card and payment related fees. Current trends include seasonally strong insurance income, strong residential mortgage production, partially offset by lower service income due to forbearance, lower asset valuations and lower purchase volume related to COVID. Turning to Slide 13.
Noninterest expense increased 856,000,000 reflecting a full quarter impact from the merger. Merger related costs included $107,000,000 of merger related and restructuring charges and $74,000,000 of incremental operating expenses related to the merger. Discretionary actions in response to COVID impacted noninterest expense by approximately $65,000,000 and included a $1200 bonus to all teammates earning less than $100,000 Personnel expense included $44,000,000 of incremental operating expenses related to the merger. This was positively impacted by the decrease in the market value of nonqualified plan assets, which is offset in net interest income and other income. We also updated our intangible valuation.
As a result, annualized full year amortization expense for 2020 was revised to about 660,000,000 Current trends in expenses include relief measures, such as special pay for some client facing teammates and measures to better protect our teammates, clients and communities. We continue to have Good core expense discipline even in the face of COVID health crisis. Turning to Slide 14. Asset quality remains strong, but economic conditions have deteriorated. Truist will continue to apply The CECL standard adopted January 1.
Our NPA ratio increased 9 basis points to 23 basis points, largely due to the adoption of CECL and the transition from PCI to PCB. NPLs were 32 basis to total loans, up 17 basis points from year end, primarily due to the PCI to PCB transition. Adjusting for this transition, our NPA and NPL ratios were essentially flat from last quarter. Net charge offs were 36 basis points of average loans down 4 basis points. The provision was $893,000,000 and reflected the reserving in accordance with CECL.
The increased provision was mostly due to a significant loan growth and scenarios reflecting a weaker economic outlook. The increase also reflected a full quarter of post merger activity. Our allowance coverage ratio was 1.63%. The combination of our allowance and the unamortized fair value mark remained a very robust 2.71% of total loans. The adoption of CECL resulted in strong coverage ratios at 4.76x for net charge offs and 5.04x for NPLs.
We expect 2nd quarter asset quality metrics to be elevated, reflecting COVID stress across the loan portfolios. Turning to Slide 15. The table on the left summarizes our exposure to industries we believe are most vulnerable in the current environment. We have very low exposure, reflecting meaningful diversification from our merger. Outstanding loans to the group totaled $28,400,000,000 or 8.9 percent of loans held for investment at the end of March.
Our oil and gas portfolio is weighted towards lower risk factors. Outstanding balances on levered loans totaled 10 point $5,000,000,000 or $3,300,000,000 of loans held for investment. 42% of our leverage loans are investment grade for the equivalent. We are actively managing these portfolios and will continue to make underwriting or risk acceptance adjustments as appropriate. Turning to Slide 16.
The $582,000,000 increase in the ABL from the initial CECL adoption reflects rapidly evolving market conditions. Our standard practice is to use 3 scenarios to inform the CECL allowance, implying judgment to assign the probability of each scenario. These scenarios include Moody's baseline with implied rates One optimistic scenario and one's direct scenario. We also consider heightened industry concerns from the pandemic effects. Together with the impact of government relief packages when calculating the CECL estimate.
Slide 17 adds additional details on our loss estimation approach. Turning to Slide 18. Our capital ratios declined slightly, mostly due to a significant balance sheet growth related to line draws. However, our capital levels remain strong relative to regulatory levels for well capitalized banks. Our CET1 ratio was 9.3%, down 9.5% in the 4th quarter.
Our dividend and total payouts were 61.4% for the Q1. We are taking a prudent approach to capital due to the uncertainty of the economy. Our 2020 CCAR submission incorporated this impact. Ending CET1 ratios for the internal baseline and severely adverse scenarios well exceeded regulatory minimums and internal post stress policy goals. We intend to utilize the 5 year CECL transition for regulatory capital purposes, which provides a 17 basis point benefit to CET1.
We expect to grow capital and serve our clients throughout this challenging time. Turning to Slide 19. This slide shows the 2nd best performance among peers under stress conditions and from a capital resiliency perspective due to strong PPNR and lower credit losses. The table compares credit loss reserves Reported by Truist and its peers at March 31 for their respective stress losses under 2018 DFAST. We used dress losses from 2018 as this was the last year the Fed published DFAST results for BB and T and SunTrust.
We think that 2019 will be similar given the improved risk profile and earnings power of the combined company. As the column on the right shows, Truett's 35% ratio of credit loss reserves to stress losses is above the peer average of 33%. However, after layering in the unamortized fair value marks On the SunTrust portfolio, which totaled $3,500,000,000 on March 31, Truist stress loss coverage increased to 58%. This is a great illustration of how the merger enhanced the risk profile of both companies and resulted in a defensive balance sheet. That is insulated by purchase accounting marks and CECL reserves.
It is also another example of why we believe we are better together at Truist. Turning to Slide 20. We acted quickly in response to the pandemic to turn out short term borrowings and increase cash to meet capital funding needs. As such, our liquidity ratios remain strong with an average LCR of 117% and a liquid asset buffer of 19.6%. Our access to secure funding sources remains robust.
We have experienced a flight to quality Amid recent market volatility with total deposits increasing $15,500,000,000 and we continue to see robust growth this quarter. We have sufficient liquidity to fund our PPP loans from our existing Fed balances at the Fed. In addition, holding company cash is sufficient to cover 17 months of contractual expected outflows with no inflows. We are withdrawing our guidance for 2020 given the uncertainty going forward. For the Q2, We are providing guidance on several categories based on linked quarter changes versus the Q1 of 2020.
We expect earning assets to grow in excess of 5% on linked quarter average basis, reflecting the increase in loans from C and I line draws and the PPP programs. Total taxable equivalent revenue will be down a few percent linked quarter, reflecting a meaningful decline in net interest margin driven by lower rates, liquidity build and fee income pressure, as noted earlier. Core noninterest expense adjusted for the merger amortization and COVID expenses is expected to be flat linked quarter excluding the adjustment for the nonqualified plan. We're making good progress generating savings from 3rd party spend and facilities optimization. Depending on the length of the economic downturn, how deep the downturn goes and how effective the government programs play out will influence scenarios that unfold.
You can see net charge offs increase throughout the year and possibly add more pressure to build the allowance. We are also striving to achieve positive operating leverage despite this challenging environment. Now let me turn it back to Kelly for an update on the merger and closing thoughts and Q and Thanks, Al. So in terms of the accomplishments, and keep in mind, we really just The emergency issues company is in December, so we've accomplished a lot. Most importantly, we rolled out the truest culture.
We were able to complete 32 town hall meetings. We had a few at the very end that we had to cancel or defer because of COVID-nineteen, but we got through most of the enterprise and the reception to it was extremely good. We introduced and rolled out our Truist Visual Identity and logo. We did complete the purchase of Truist Center, which is our corporate headquarters here in Charlotte. We launched our Truitt Foundation, and we were able to go ahead and begin consolidating some redundant real estate portfolios that we had that we could go ahead and begin to get some early calls saved.
So in terms of the next steps, if you think about it right now, we really have 2 major Priorities, number one priority is focusing on COVID-nineteen. We are laser focused on taking care of our teammates, making sure everybody safe and well. We're doing everything we can possibly do to support our clients, not only in terms of their safety, in terms of interaction with us, also in terms of helping them sustain the economic challenges that are going along with this terrible experience we're all going through. We're trying to be very willing to invest and be creative in terms of how to support our communities. And we're doing some really interesting things there in terms of broadband and all types of things that we can do to help communities that are really, really Struggling.
So the second priority, of course, is keeping the integration and conversion on track. We believe we are in a good place there. It's hard to know exactly what may happen with regard to any delays. We it really depends on The depth and the lift of the health crisis. But at this point, we still feel good about where we are in terms of our planned conversion and integration activities.
In terms of our performance targets, we still believe In the medium term, we would project a return on tangible common equity in the low 20s, adjusted efficiency in the low 50s. You can see we're already Pretty much there. And we're still remaining very confident in terms of our $1,600,000,000 in net cost base. Exactly when we achieve that kind of depends on the obviously the environment we're living in. If it's a fee, Then we'll recover pretty quickly, and we'll hit these in a not too distant medium target type of range.
If it's a yield, it'll take a little bit longer, and that's just Pretty obvious. Regardless, we believe that we will be a top tier performer, whatever the absolute numbers are. I will say to you that all of the benefits of the merger look better now than they did a year ago. Finally, if you look at our value proposition slide, we believe we provide a really strong value proposition. We are a purpose driven company committed to inspiring and building better lives and communities.
That's really important, more important than ever in today's world. We have an exceptional franchise with diverse product services and markets. We have strong market share in fiber, fast growing MSAs in the Southeast, Mid Atlantic and a growing national presence. We have a very comprehensive and diverse business mix In Banking, Capital Markets and Insurance. And very importantly, we are simply better together.
We're stronger, we are more resilient, we are best in breed in terms of talent, technology, strategy and processes. We are very uniquely positioned to deliver best in class efficiency and returns while investing in the future.
As I
said, we have net revenue increases as we develop these synergies. Our returns in capital are buoyed by our purchase accounting accretion, which Daryl has described to you. And we're making meaningful investments in technology capabilities, our teammates, marketing and advertising. We have a very strong capital and liquidity with resilient risk profile enhanced by the merger. We are very prudent and disciplined in risk management and financial management.
We have a very conservative risk culture, leading credit metrics among the highest rated lowest banks. We have diversification benefits that arise from the mergers, which we've discussed. We spread tests very, very well separately and together. We have a very strong capital and liquidity position and being enhanced even with the flight to quality. And we have a very defensive, and I would call it, strong and resilient balance sheet supported by purchase accounting marks combined with CECL credit reserves.
Because of the strength of our balance sheet And our liquidity, I would expect us to continue our dividend as we move forward into as far as we can see. So like I said in January, if you liked us a year ago, you should love us now as we continue to believe our best days are ahead. Ryan, I'll turn it back over to you. Thank you, Kelly. John, at this time, will you please explain how our listeners can participate in the Q and A session?
Certainly. We will take our first question from Saul Martinez I wanted to ask a little bit about the outlook for credit and the interplay with the accounting and a lot of the moving parts there. So on Slide 16, you go through your day 1, January 1 true up and the additional reserve in the Q1. But Daryl, how much of it can you just tell us how much of the $3,500,000,000 credit mark is $3,500,000,000 loan mark, sorry, is for credit versus liquidity and rates.
Yes, Sal. So first, I would tell you, when we came up with our day 1 estimate on our reserve, We had 3 scenarios that we came up with, and we weighted our stress scenario 40% on day 1. So we started the year off with a strong reserve from that perspective. When we moved over and made our provision this quarter, We went through multiple scenarios that we always run. And then with Moody's changing their scenarios every few days, We actually ended up running 10 different scenarios through quarter end into early April, trying to help use an overlay to help us adjust on that CECL number that we came up with.
And then at the end of the day, You're back to using expert judgment. I mean, we always have qualitative factors this year or this time. Clark and Ellen and the team really had to a lot of time qualitatively because the models have limitations when the government's infusing over $5,000,000,000,000 And they have to weigh in on what the effectiveness is. You have all these payment plans basically out there, and You need the expert judgments on how effective those programs might be. So there's lots of qualitative adjustments that we came up with.
We feel very good about the reserves that we have there. As far as your fair value, Mark, we basically it's a combination of credit, liquidity and interest rate, and it's at 3,500,000,000
Okay. How much of that is, right, versus interest rates?
Yes. We didn't disclose that out, Sal. No clue fair enough.
So going forward I
mean, at the end of the day, I mean, it's all going to accrete into earnings. It's all going to be used as a lower value for when we are out, you get a little bit of benefit because you have a lower book value. So when you apply your reserves, so it's all going to whether it's credit, interest rate or liquidity. It really doesn't matter.
Okay. Got it. But I'm trying to understand the loss of joy in capacity for credit A little bit more. And then just going forward, though, I mean, you did mention that there is a possibility for reserve builds. And if I think about going forward, if the economic environment does worsen and credit does worsen more than what's sort of embedded in your outlook.
How does that play out? Obviously, on the SunTrust book, you'll have to And on your BB and T legacy book, you'll have to true up your ACLs. But on the credit mark, Do you if it turns out that whatever that portion of the $3,500,000,000 for credit marks is insufficient and the losses will be larger than that, How does that work in terms of the accounting? Do you need to re estimate that down and then get a subsequent benefit on purchase accounting accretion? I guess what I'm asking is even going forward, do you get a risk of sort of a double hit to your equity base from reserve builds and credit mark adjustments that only come back over
So when you come up with your CECL reserves, you really don't take into account the fair value mark. It is a lower book value, so you end up providing less. It really is going to depend on What I said in my prepared remarks, what happens in the economy? Is it going to be more stressful? If the government plans, how effective they're going to be and then how deep it really is.
Clark and Sal, we assume through a
weighted probability of all those scenarios Darryl described when we did our estimate, we assumed very sharp initial GDP contraction, spike in unemployment and then lingering high single digit unemployment for the 2 year reasonable supportable period and our mean reversion was basically similar to what we experienced after the great recession. And so when we did, to Daryl's point, a good bit of sensitivity analysis around the different stress portfolios. We looked at the historical and projected re default rates on the different mods and deferrals, We take all of that into our qualitative overlays. So we feel like the estimate today is the best we know. Obviously, if things deteriorate worse, We would have to provide more.
If it holds up as we projected, then we're well reserved. I understand it on the CECL reserve, but on the unamortized loan market, the losses are greater than $3,500,000,000
and you recalibrate those estimates. And now how does that work?
So you have a year up to true up your goodwill, but that's based upon any miscalculations you had at the 12.6. So we feel pretty good. We finalized all the marks. I think I mentioned what the new amortization amount is on the intangible. So all that was trued up this quarter.
Actually, we had a table on it and the debt. So all that kind of finalized from that perspective. You really can't go back and readjust any of that.
Okay. Okay. So there's no there's not really a risk there that there's an incremental
loss associated with that on top of the subsidiaries,
That's correct. Yes, that's right, John. We
We will now take our next question from Gerard Cassidy of RBC. Please go ahead. Your line is open. Can you share with us, it looked like your purchase accounting accretion came in stronger this quarter. Your change in the You obviously jumped up to $26 a share.
That was probably attributed to, I guess, stronger purchase accounting equation. Can you give us some color on how that worked out this quarter versus maybe prior expectation?
Yes. So We came in higher than expected, and it was mainly due to loans paying off, both on the corporate side and on the consumer side. So it was a little bit above our own estimate that we had. On a go forward basis, I would say that You can't count on that basically overestimating throughout the year. It's possible, but you wouldn't count on it.
So if you look at core versus Reported margin were 52 basis points difference. I would probably think it averages closer to 40 basis points on a consistent basis, but you never know what's going to happen on a quarter to quarter basis on payoffs. It's just So people pay off their loans, you have to basically take in all the accretion?
The moment on Slide 19, which We're very insightful and appreciate you putting that together. So can you share with us And maybe it's as simple as the economic assumptions are not are different than the stress test. So why if in CECL accounting, if everyone knew in the fields are looking at life of loan losses, Why aren't the resilience even higher and losing the highest relative to the stress process? Why don't they match What the stress test we're testing for, is it as simple as these kind of assumptions?
Yes. So there's a difference between CECL and stress testing. Stress testing is a dynamic living, breathing process. So you basically have to project new volumes and growth or runoff depending on whatever happens. CECL is basically a static balance sheet with runoff assumptions.
So there's differences there. The chart that we put in on 'nineteen, Just to give credit, we basically plagiarized that from Jason Goldberg. I give Jason a lot of credit for that. But I think on that table, it clearly shows that are reserves that we have versus combined company losses that we added together 2018 to 35%. That's a little bit above the peer group.
And if you add in the fair market value, that's 58%. One thing to note though, if you actually look at our company run results on a combined basis in 'eighteen, That number was basically 44%. The reason I'm telling you that is that we don't have our 2020 CCAR stress results yet from the Fed. That will come later this quarter. But we do have what we submitted to the Fed a few weeks ago.
And if you look at what the company run stress results were in, severely adverse, We were basically at 52%. So I think that shows a good indication that as we put the company together, Clark and Ellen that had really derisked the company, and we just are less riskier company than we would have been on a combined 2018 basis. So our reserves Then at 52%, and then if you add in the fair value mark, you're at 84% of our we came up with $10,800,000,000 of losses in our
We'll now take our next question from Betsy Gaffek Morgan Stanley. Thanks for the call and the color. Two questions. One, just you gave us the number of customers that have been requesting deferrals, I think it's 330,000 on the $15,000 on the wholesale side. Can you give us a sense as to the percentage of balances that those each represent?
Betsy, this is Clark. On the consumer side, it's about $9,000,000,000 That's for both own us and service for others. So it's about $8,000,000,000 for balance sheet, so roughly 3%. On the commercial side, it's about roughly $10,000,000,000 or so, 5% or 6%. So again, I would note The far majority of all of our reagings have been with accounts that are current to start with even in our subprime although as an example.
So Again, I think this is a very unusual environment. So you have a lot of people that are worried that have Maybe it had Walter Java, maybe a nut that they're worried in, but it's a little different than normal and that most are current to start with. And in your forward look on the CECL that we're just talking through, how high do you expect those numbers to go?
I mean, it really depends on the three factors I said earlier, Betsy. I mean, right now, we feel we are adequately reserved from what we know. There's a lot more that we don't know than what we know, though, and how things are going to impact. I mean, the government is going to have over $6,000,000,000,000 of stimulus It's all said and done. At 3x lower than what they had in the Great Recession, we really don't know how effective those programs are going to be.
So you really need to let a lot of that play out. All the forbearance that's being occurring right now, I mean, that all has to play out. And Some of the clients may not make it, but it is we feel really comfortable where we are reserved today, and we'll just see what happens as we look forward. So that's to keep in mind, too, that the effects of the payroll protection program will keep people whole in terms of their income and those that are furloughed, in most cases, as I understand that, their unemployment insurance There was an increase in the normalized unemployment insurance substantially. In many cases, people have more take home income than they had before.
So it's hard to see exactly today in the short run that there would be a huge negative impact. Obviously, this is extended and the government programs don't provide continued standards, and it will be a factor. But in the short run, the government's actually done a pretty good job in terms of providing short term buffer.
Got it. Okay. And then just moving to expenses on the $1,600,000,000 I understand it's hard to know the time frame given everything that's going on. Just wondering how much of that 1.6 do you feel you can control today versus maybe you put on the tape put aside because it's redundancies that you don't want to touch at this stage. Well, it's all of it is over the
term is still achievable. You're right, though. Some of it may be deferred because of the environment we're in today, Because of more people being working away from the office Connectivity, etcetera, there may be some things that we're not able to do as quickly as we had anticipated. But our people are studying this daily. And as of today, they have not discovered any material issues that will dramatically slow down our progression in terms of integration.
And the progression of the integration is what drives call centers. Yes. I'll give you a couple of examples. So on a 3rd party vendor, right now, our teams are still working on it, but we're 35% to 40% of the way of our target. So we'll have about a close to $100,000,000 annual run rate save this year.
And the next couple of years, we have already locked in $135,000,000 of that. So that's progressing well. We're making really good progress on our real estate portfolio, we have over 30,000 square feet. Right now, we have known savings in there of about $66,000,000,000 of what we're executing on. If you look at what we're going through right now with people working at home, we have to really evaluate the impacts of that after it's all said and done.
But that could be an opportunity for much more saves. So we have $30,000,000 we might go down to $20,000,000 over the next 3 to 5 years. I mean, you just don't know that. So that could be even a bigger opportunity. So those are just a few examples, Betsy.
Thanks. I will now take our next question from
Mike Mayo of Wells Fargo Securities.
A few more questions about your forward guidance. Kelly, I thought you said, Maybe Daryl talked about the potential for positive operating results this year, which seems pretty tough with your 2nd quarter guidance As it relates to that guidance, only flat expenses in the Q2. You just mentioned vendor, real estate, all these other things that we said that was the ex the COVID effect. And then the other part of the guidance, some other banks have said expect much higher reserves. These are building in the Q2.
I know you've given some numbers on that, but just exactly where you stand.
Yes, Mike. So I would definitely say it's going to be a challenge from late quarter from first to second. We will continue to and do the best that we can within the parameters that we have. And we aren't giving up on our positive operating leverage. We're going to do the best we can.
We may not achieve it this year, but we still may. It is not out of the woods. It all depends on how quickly the economy recovers. And if it shows V, we have a shot at it.
Any other questions? The reserve build in the 2nd quarter. I mean, some thanks saying, hey, look, since the end of the Q1, conditions gotten worse. I guess you said you used Moody's. I guess maybe you have some flexibility to use your own capital markets for forecast like in the larger banks?
Or Given the decline since the end of the Q1, would you expect more reserve billings? And even though you said you're 84% reserve Your 2020 bank submitted stress test, that looks like a big number. That's all in with your Coach, the challenge marks, if I got that correct.
Yes. You're right on that. As far as We use Moody's, and we also have a couple other scenarios that we run. But we went into early April running scenarios on adjusting our reserve. So we didn't cut it off on the 31st one.
We closed a little later this quarter just because we're later in the cycle. So we went through at least the 1st week of April That information. Yes. And again,
if the times we actually underperformed those scenarios, we would have to But based on what we know today, we think we're well reserved, but we're certainly watching it. Okay. And so how much of the expense savings have you achieved so far? And you said some of the time And you mentioned some areas that you still have. But it's I mean, you have a pandemic with the data from originator history happening at the same time.
It's a tough situation. It's not looking anything through it, but maybe let's get out on the table now what we should expect as opposed to later.
Yes. So from a specific expense savings, we have some savings. There has been some So please just with what happened in March in that with COVID, some of our expenses are a little bit elevated. We pulled forward buying a bunch of our laptops and MiFis and other equipment that got pulled forward into the Q1 that we were planning on later in the year. We're a little bit elevated from that perspective.
Our goal was to try to get our expenses down up to 30% out of $1,600,000,000 by the end of the year. We are on track so far this quarter to doing that. We were trying to have some buffer and be ahead of that. It doesn't get any easier as we get into this next quarter, to be honest with you. But we still have a shot at getting our 30% at the end of the year if we have a Sharp recovery.
We will take our next question from John Pancari of Evercore ISI. Please go ahead.
Regarding the exposures, the at risk Credit exposures on Slide 15, the $28,500,000,000 I know you indicated on
that slide that you have qualitative overlays For
the affected industries, so can you give us a little bit more color on that, on the magnitude and maybe the amount of loan loss reserve against those portfolios and maybe the loan mark against them?
So we haven't disclosed that level of detail. I would tell you this that for each of those segments, we have done detailed analysis, things like risk grade notching and a good bit of sensitivity to the downside in each and every one of those. We've looked at the in each and every one of those. We've looked at the modification or deferral request. And so We use that to add additional overlays on top of what the models would have driven, and they're considerably higher than the other segments.
I would just tell you that. Okay. All
right. And then the In terms of the insurance business, I know you indicated in your 2nd quarter outlook that you or in your outlook that you do expect COVID could dampen organic trends in the business.
Can you give us a little bit
more detail how that could play out? And is there I'm all set from perhaps any better pricing that
you see in the industry. Just wanted to
see how you think about how that plays out.
Yes. This is Chris, John. Thank you for the question. First off, We would expect 2nd quarter to be up about 3%. That's our season strongest quarter of the year.
And you're right, the slowdown as we saw the COVID really is creating declining exposure units That could be lost people, lost business, what have you, and that will slow economic and new business production. But to your point, there will be a potential pickup in pricing. When we went into the Great Recession, we went in with the backdrop in a soft insurance market. We go into this one. It's actually a very strong market on the back of 2017 2018 being the 2 largest insurers that was used in history.
So We're kind of in the up 4.5%, 5% range right now, which is if you got to go into 1, that's a good backdrop to have it through the range and have it to back. And just for this quarter, for example, rates were up 4.5%. If you throw on top of that lower interest rates, These rights I mean these P and C Underwriters are going to be struggling on the investment returns, so they will likely continue to keep upward pressure on the rate environment. So I think your intuition is exactly right. We've reached that momentum in pricing look at the balance of the year.
But we do see tough new business reduction. So We might have been looking at this past quarter, we had 7.2% organic growth. Kind of looking forward, it's looking more like maybe in the flat to 2% kind of range for the balance of the year. We'll now take our next question from Ken Usdin of Jefferies. Please go ahead.
Your line is open.
Thank you. Good morning. Daryl, just wondering if we could step back out a step on the revenue side. You talked about 2nd quarter revenues Down a few percent. And just following on the bit of the fee part that was just talked about, can you help us just understand NII versus fees.
There's so many moving parts in both, but if you can directionally just help us understand the moving parts and direction for you, that would be helpful. Thank you.
Yes. Just high level, Ken. I will tell you, when Chris commented on insurance, insurance is seasonally strong 2nd quarter. That will I changed from that perspective. Service charges, we have some programs in place to help our clients during this time of stress.
That's what Kelly talked about, the 5% cash back. We are waiving ATM fees so people can keep their banking services. People are coming in now. We're getting more requests for relief on NSF, and we're granting that. So I would say Service charges overall might be down a touch from that perspective.
Depending on what interest rates do and Credit spreads, those areas, while the volumes are all lower there, his CBA, the 92,000,000 That line item has a chance of recovering potentially on what happens with that. And then mortgage. Mortgage We'll have good volumes strong. The offset will be the impact on forbearance on the servicing. We did try to factor in Some estimates on the MSR valuation already.
We don't know if that's the full impact of that, but it is embedded in there. So we did adjust for that accordingly. So mortgage will probably have a decent quarter, would be my guess.
And on the NII side, also, can you just help us understand the sheet looks like it's going to keep growing. You mentioned the difference between stated and core NIM. But can you help us understand just Most a lot of other peers are talking about NII growing from here. You guys have the purchase accounting as an extra factor in that? Any way you can help us just parse out the moving parts there, too?
Yes.
I don't foresee our unless purchase accounting really Hopefully, it's stronger than we think. I don't foresee NII being positive second quarter versus first. Core margin, If you look at our sensitivities, and you probably need to go back to our disclosures back in January And when we disclose what a down 100 basis points was. Now our disclosures that we show on our earnings reports are gradual. So assuming that the 100 basis points would go down throughout the 12 months, at that point in January, it was a negative 1.78% 1.72%.
If you say that's equivalent to like a shock of 50. So what we experienced in March was a shock of $150,000,000 Now you had a little bit weird going on with LIBOR and LIBOR, and we'll talk about in a second, but So you had a shock of $150,000,000 So if you take the 1.72 and multiply it by 3, that would probably be what the impact would be, rough estimate on what our NII change might be for Q2 from that perspective. Then we have built a lot of liquidity. Now we built liquidity. And because we're in a stress period, we want to make sure we can meet our clients' needs, both from a funding And from a deposit perspective, so our the cost of carrying what we're carrying at the Fed right now is anywhere from 10 to 15 basis points.
And if you look at our balance sheet right now and through Friday, on March or on April 17, Our balance sheet and total balances are $518,000,000,000 Our deposits now are $364,000,000,000 So all the government stimulus checks have started to come in last week. We had one day, I think it was Wednesday, where we went up $6,000,000 in deposits in that one time period. Our PPP funding is going to start going on the books. It started last week. It's going to go on this week and the following week.
We'll probably have $330,000,000,000 of loans. So we're definitely going to have much higher earning assets. The other thing I would note is that our deposit costs, We were at 7 basis points, down 12 on an interest bearing basis. And if you look at March, Our interest bearing deposit costs were already 56 basis points. When you go back and look at the Great Recession And you look at how far your deposit costs get down to back then, we got down to about 23 basis points.
So I don't think we're going to get to 23% in the second quarter, but we're going to get in the 20s for sure over the next couple of quarters as we continue to push down rates, if these rates stay where they are. So I think we got a lot of things that we have to manage with, but our margin will be down. We'll be down because of liquidity. But Once we feel that the stress is over, we can reverse the liquidity pressure there pretty easily, and you get that core margin back. So hopefully, that's helpful.
Very much so, Daryl. We were going to talk about LIBOR, and that is a point I was wondering if you could talk about. How are you seeing LIBOR normalize down as
Yes. So it peaked on April 1 at 102. It's now at 67, 1 month LIBOR. We have about $130,000,000,000 net LIBOR asset tied to 1 month LIBOR right now. So as that migrate down, that will kind of put in that full effect of that interest rate sensitivity that you saw there.
We aren't there yet. It still has room to come down some more. But that will also allow us to push down our deposit costs faster, too, as LIBOR is coming down as well. And you look at the money market equivalent, that will all kind of come down together. So it will hurt our asset side, but we're going to make it up on the deposit side.
We will now take our next question from Matt O'Connor of Deutsche Bank.
So you guys have addressed the risk that some of the integration gets delayed if we don't get a V shaped recovery here. I guess on the flip side, The risk of losing customers and staff to competitors is probably a lot less than maybe some people feared, partly because of the virus, partly that you're doing for your staff seems very generous. So maybe you could just talk, Kelly, Bill, about the engagement of your staff and how you keep the cultures kind of both in the same direction. You can't do it from the town halls that you were doing before. But just talk about some of those kind of softer aspects of doing the business and the customer base, completely based.
Yes, why don't you go ahead and maybe I'll add a comment at the end.
Okay. Thanks, Matt. I think as you point out, I mean, the Retention numbers were already good coming in from a teammate perspective, and we just did a survey that was an engagement proxy. And In this incredible environment, the survey actually showed high levels of engagement from our teammates. In many ways, the Cultural integration has been accelerated by months, if not years, because people are operating under Stressful conditions, the teamwork has been spectacular.
I think, Kelly, you would Echo that. No one's wearing a jersey because they're all headed towards the same objective. So I think you came out accurately. There are elements of this that are advantageous as we go through this process. And I personally have been just really, really proud of the work that our teammates have done.
The town halls and the rollout of purpose, mission and values, we were Well underway there, and that has been a really good catalyst because everybody's got something to lean forward on. They're all speaking the same language and operating from the same playbook.
And I would just point out one additional point. As I said earlier, Culture matters always. It really matters in a time like this. And a really big part of our culture is just taking care of our teammates. And We get that our clients come first, but you can't take care of your clients without doing a really good job for your teammates.
And so Assurity is unique in terms of having Fully paid for pension plan and a 6 on 6 401 match. And then we do things like $1200 bonuses and premium pay for people on the line. So all of those things, our teammates really appreciate. And so they see that during difficult times, we're going to take care of them. Even if there's some sacrifice in terms of choice and profitability, going to take care of our teammates so they can feel safe and secure, and then they can help our clients feel safe and secure.
Those memories will be here for decades. And so we feel very good about our culture. As Bill said, it is accelerating, and it is strong as steel. That's helpful. And then just a separate question for Daryl.
You talked about for new loans Implementing some floors. Can you talk about the rate, how much above the floors that you are? And I assume as loans come up for renewal, you'll account to do the same thing on those loans? Yes. So David reported, I think, A week or 2 ago, the floors that he's putting in range anywhere from, I think, 25 to 75 basis points From a LIBOR perspective, I think those are the 4 that Pete put you in from that perspective.
That's the LIBOR rate. That's the spread over. Okay. Thank you. Welcome.
And we will take our next question from Erika Najarian of Bank of America. Please go ahead. Your line is open. Hi, good morning. I just had one follow-up question.
Of the $480,000,000 in annualized How much of that is achievable without interruption to pandemic related support of your employees and your clients. And interpreting, Daryl, your answer to Beckon's question, $100,000,000 of annual run rate savings compared to our new vendors, dollars 66,000,000 from loan savings in corporate real estate. So it sounds like at least $166,000,000 of that store in the would have nothing to do with supporting your employees or clients.
So Erica, just one comment, Daryl, can I have? You're right. You can count, I think, in terms of expenses being bifurcated. There are expenses that are Independent of COVID, like Phil said, some of our vendor contracts are independent of COVID. And we've seen substantial reductions in run rate under contracts already and more to come.
With regard to the teammates, There's a onetime big charge we have with regard to the $1200 bonus, but the ongoing from this point forward, Teammate charges are not marginally incremental. And in terms of the impact on the conversion, It really depends. But today, our people are functioning very well working off-site. And keep in mind, we in the Technology area, we've already we've got thousands of people working outside forever. So this is not a new idea.
It's just more people doing it. And so as long as they're able to continue to do their scoping and their mapping and their programming remotely, which now we see that they can, It's not self evident that there will be a dramatic change with regard to our integration and conversion schedule. Yes. For the Q2, Erica, We are paying a premium to our teammates right now that are on the front lines. You're going to see an elevated charge in personnel with that.
Depending on how quickly we basically can adjust from work at home, that will fade away. We also are actively Getting more laptops in, so more people in the call centers can do more of their work at home. So that will subside as we get more of that equipment in as well that we've accelerated From that perspective, as far as like the implementation of 3rd party and facilities, As they execute and play out, that's when we get the savings. So you may not see as much early on this year. But as it goes out throughout year and as we continue to move and we'll start to build, that's at the 4th quarter, we'll have a higher annualized impact than what you would see at this point from that perspective.
So a lot of good things. Although some of the 3rd party savings is tied to conversions. Just to be transparent, Yes, there is some big card conversions coming up, some big conversions coming up in the wealth and broker dealer areas. So like right now in Joe's world, he's planning to still stay on track with an earlier conversion in his broker dealer. I think that's to be in the 1st part of 'twenty one.
If that stays on track, that might miss a little bit at the end of 'twenty, but he wasn't supposed to be there at the end of 'twenty. He's scheduled more for early 'twenty one. But if that plays out, then some of those statements will come in at that point in time.
We will now take our next question From Stephen Scouten of Piper Sandler. First, I want to say thank you guys for the way you all are leading in community impact being in one of your affected communities. I'd say leadership is appreciated and important. So thank you guys for that. I wanted to ask you as it pertains to your capital and your you talked about longer term, you can get back to 10% To regime buyback, I know this is a huge environment.
We're probably a far way out. But I'm just curious, how are you thinking about that number, the 9.3% CET1 versus kind of the 8.7% if you had fully faced in the CECL impact and kind of How that
could change that 10% target?
And where you think about buybacks way down the line?
So nobody's thinking about buybacks today. We are in a very strong capital position and are still bringing capital. I mean, we still made very dollars even for adjustments this year, This quarter, so we will be steadily moving up unless there are dramatic increases in loan losses, which we did not project At this time, again, if it's a long view, that makes a difference. We all understand that. So we had said that our intermediate term target was 10%.
We said we did that because of The uncertainties that we knew about with regard to the merger, we've said we were doing that because uncertainties we didn't know about. We didn't know about COVID, of course. But thank goodness, we did prepare for that, and we're in a really good position. Now as those uncertainties subside in terms of the merger integration And surely, the health crisis will go away and surely, the economy will improve, then we have said, and I would reaffirm, we have capital opportunities As we go forward, below that 10% level, it will depend on the then existing circumstances, But there are opportunities available for our shareholders. The other minor point is, remember, the PPP loans we're putting on the books have a 0% risk weighted.
So we put $10,000,000,000 on from the 1st round. That's not going to cost us any risk weighted capital. And then from a leverage number, even though we're going to fund it ourselves, It's not going to really cost us because we're basically just trading out at 10 basis points balance at the Fed to 100 basis points Only asset from PPP. So from a capital perspective, those should be fine.
Great. Helpful. And then one other thing. I'm curious, we've seen some Others in the industry is going to tighten underwriting standards around levy mortgage, keyed off, other categories. Have you guys and you've always been fairly conservative on lending, but have you further any of your underwriting standards?
And kind of within that, what are you seeing with the forbearance request in terms of industry concentrations? This is Clark. I would say yes to that question. Across all our asset classes, we've Done pretty extensive reviews, and we have made underwriting and risk acceptance changes as appropriate as you would expect us to do.
So I think we would be We're
on the conservative end, and they are in place today. We've also worked hard to be very careful about what we call any nonessential lending right now given the uncertainty. So as far as the Modification requests, I'd say from the commercial side, we've had a lot in the distressed industries that we laid out, things like hospitality, etcetera. And then on the consumer side, it's been predominantly on the mortgage and auto side right now.
And you recall, we have made some adjustments with regard to underwriting San Diego pre COVID. So that's why we've already been anticipating a potential slowdown. We've made adjustments already.
We will take our next question from Christopher Marinac of Janney Montgomery Scott. Daryl, is there an average life on the PPP loans that we should expect?
Chris, we don't really have a good estimate on how much forgiveness is going to be out there. If I gave you a number, it would be a pure guess right now. So I don't really know. Whether it goes out, I guess, is we're everybody is making the loans now, so you got a big tsunami. Remember, the SBA has to process all these forgivenesses In 60 days, it probably will take some time to process all that.
So my guess is it might linger on into 3, 4, 5 months before all the forgivenesses are happening. We'll see how quickly they do that. But then there will be some portions of some loans that will stay the full 2 years. We will accrete the earnings, and we're booking them at a discount. The last time I looked at our average discount that we'll put on the books about 2.7% discount, and that will accrete in.
And then when it pays off for forgiveness, we'll take all that in at that point in time. The play is after 2 years, and you just turn it over that time period.
And we will take our final question from John McDonald A quick follow-up. Wondering if you could give any color on how the reserve is allocated between consumer and commercial buckets as of today? John, I would just say and one noteworthy thing for the increase for Q1, about 70% of that reserve that provision increase was related to commercial and about 30% was consumer. As far as also looking to see on the split between
I guess we can get back to you on that, John. In the actual amounts of sales, we can get you that. Okay.
And then just kind of wondering, this comes up With questions frequently, is there a dumb down example you guys could give us of how the marks absorb
credit and
how that helps? Is it just the idea that If you have a write off on a mark loan, you're marking it down from a smaller amount.
So it's $100 loan. You're running
it down from $95 as opposed to $100,000,000 so it's a smaller charge off. That's kind of the question. Like how does that mechanic work of helping build losses from March?
Yes. That's exactly right. So that basically, your book value is lower, so you apply your reserve against the lower balance. So it helps you a little bit. But I think of it as it's earnings that are coming in, whether it can be used to provide for other provisions or could follow the bottom line from an earnings perspective Yes, exactly.
I think to your first question, You got it? Yes, John, back to
the your first question. The wholesale reserves for Q1 are about 2,270,000,000 And the consumer is $2,941,000 Okay. Daryl, when you think about the loss absorbency, It comes in the form of PAA. So you've got an extra cushion. That's how you kind of think of it absorbing losses.
You have more cushion on the PAA side?
Yes. We definitely have more absorption, more cushion from that perspective. But also, I think when we just cut the bank coming together and the
diversification of how we came together, I mean,
we really, the of how we came together. I mean, we really don't have any really significant exposure to any of our portfolios as we came together, we were much more diversified. And that should play out when the new stress tests come out from the Fed later this quarter. Our hope is that we're going to have a really strong PPNR and a really strong loss number and very resilient capital ratio. We should Hopefully, be well under the 2 50 basis point spread capital buffer.
And remember that in all of our portfolios, essentially, The exposure reduced in half as well as the doubling of the denominator. So there's an automatic diversification that's material in this kind of environment. Okay. Thanks very much, and thank you, everyone, for joining us today. Hope everybody has a good day, and please stay well.