Truist Financial Corp
NYSE:TFC
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Truist Financial Corp
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Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Third Quarter 2020 Earnings Conference. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded.
It is now my pleasure to introduce your host, Mr. Ryan Richards, Director of Investor Relations for Truist Financial Corporation.
Thank you, Vijay, 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 third quarter results and provide some thoughts for the fourth quarter of 2020.
We also have Bill Rogers, our President and Chief Operating Officer; Chris Henson, our Head of Banking and Insurance; and Clarke Starnes, our Chief Risk Officer, to participate in the Q&A session.
As with the prior quarters, we are conducting our call today from different locations to help protect our executives and teammates. We will reference a slide presentation during today's call. A copy of the presentation, as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website.
Please also note, Truist does not provide public earnings predictions or forecasts. However, there may be statements made during this call that express management's intentions, beliefs or expectations. These statements are subject to inherent risks and uncertainties, and Truist's actual results may differ materially from those contemplated by these forward-looking statements.
Please refer to the cautionary notes regarding forward-looking information in our presentation and our SEC filings. Please also note, our presentation includes certain non-GAAP financial measures. Please refer to page three, and the appendix of our presentation for the appropriate reconciliations to GAAP.
And now, I will turn it over to Kelly.
Thanks, Ryan. Good morning, everybody. I really appreciate you all joining our call. And 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 call a great quarter, strong balance sheet, particularly an 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 conversations, really focused on our culture, especially our purpose to inspire and build better lives and communities.
And I want to show on slide 5, a few of the things we're doing to live out our purpose. So, we announced recently something we're very excited about a $40 million donation to help establish an organization called CornerSquare Community Capital. This is a new organization that will be focusing on funding to racially and ethnically diverse small business owners, women and individuals, and LMI communities. This will be done through CDFIs, community development financial institutions, and it's a very exciting opportunity to get funds exactly where they're needed.
We're real proud of our first Truist CSR report. I hope you've had a chance to read it. We launched recently, our Truist Momentum, which is continuation of a SunTrust program that focuses on financial wellbeing. We partnered with EverFi to introduce -- this is something we're very excited about a game called WORD Force, which helps kids in K-2, learn how to read. You've heard me say in the past, unfortunately, in our country today, two thirds of the kids in the public school system in the third grade cannot read. This is a way of getting at that. It may not be the all-in answer, but it's a really good start. We're excited about it. We're in our beta test, but we already have over 4,000 students and over 200 schools participating.
We are doing a really good job in terms of conservation of energy, water and making good progress 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 billion Community Benefits Plan over the next three years. We're very excited about that. As you can see on the slide, a number of areas that we're really committed to. I would particularly point out that we will be investing in loans and/or investments $32 billion over the next three 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 three years to improve our senior leadership diversity from 12% in 2019 to 15%. You can see there that we have a very good and effective diverse Board with 45% being women and minorities. So, we feel really good about that.
I'd also point out we were honored to receive a perfect score of 100 on the Human Rights Campaign Foundation's 2020 Corporate Equality Index. So, we're doing a really good job with regard to living our purpose.
If you look at slide 6, I’d just point out a few highlights, we did have taxable equivalent revenue of $5.6 billion. Net income available to common shareholders of $1 billion, but adjusted net income available to common was $1.3 billion. 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 nonperforming assets at 0.26%. And we recognize that there's more to come with regard to credit quality deterioration, depending on what happens with regard to the economy. 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, our net charge-offs were 0.42%, at the low end of what we had talked about. We're very pleased that our common equity Tier 1 is now at 10%. So, we feel really good about our capital position.
If you look at some selective items on slide 7, I’d just point out we did have security gains of $104 million, which was a positive $0.06 per share. We had merger and restructuring charges of $236 million, which is $0.13. We did have incremental operating expenses related to the merger. Remember, these are expenses that don't qualify for MRRC [ph] in terms of calling out because they do have future benefits, but they're not a part of our longer term run rate. That was $152 million, and that was $0.08. And we did make a $50 million unusual contribution to our charitable foundation, and 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 these selected items.
On slide eight, just a couple of comments with regard to loans. As you all know, loans are a real challenge for us and for the industry now because of what's going on in the economy. Of course, we did see a big run-up in loans in the second quarter. And likewise, we saw a big rundown in loans into third, as a large number of the corporate line draw-downs were repaid. So, we saw total loan reductions of $11 billion. $9.5 billion of that was in the C&I area. So, that's principally what happened.
We did have some bright spots. We had growth in LightStream, our national consumer digital platform. Sheffield had a growth, recreational lending, prime auto. We did have some decreases in some other consumer areas, like resi mortgage and so forth. So, it's kind of a 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 was relative flat. I would say to you that we do expect future headwinds. With regard to the PPP loans, we have about $12.5 billion there. That will begin to pay off as we head into the fourth and the first and probably the second.
Loan growth is really challenging now, obviously. But, 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 all ways of material precipitating event. So, in 1991, we had the commercial real estate bubble; 2001, we had the technology bubble; 2008, we had the residential real estate bubble; this one didn't have a bubble. This was a very strong 10-year economy, 3.5% unemployment rate. We just shut it down, appropriately so for medical reasons, but we shut it down.
I'll make that point to say that if this pandemic doesn't go on too much longer, there's a chance that we can get a snap back in the economy that most people would not expect, because it wasn't structurally in trouble to start with. Now, if it stays on a long time, then all bets are off. I personally believe, as we head into the first quarter, we'll begin to see some real developments with regard to bank names. We certainly have already had substantial developments, positive developments with regard to medical -- mitigation of ramification. So, we are somewhat optimistic, although cautious, as we think about the economy going forward.
I will tell you, as I get feedback from our client-facing people, while they're not facing them in person as much today, we're talking to people more probably than we ever did now, although virtually. David Weaver, who runs our Commercial Community Bank, told me the other day, he had nine calls in one day. So, we've been very, very efficient. But to his point, clients are being very resilient. I'm speaking particularly of middle and upper market. One of the quotes that I got recently was clients to say, it's time to move on. And to be honest, that's kind of what we said. We set back for a while and didn't make virtual calls and said we were 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 today is there saying kind of 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've got to hope that this moves along as rapidly as possible. I'll say finally that our pipelines are improving. Our calling activity is robust. And we feel very good about where we're going relative to what happens to the economy.
On slide 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 $1.4 billion increase in deposits on a linked-quarter basis. We had a $10 billion increase following other previous quarter increases in noninterest-bearing deposits. So, we feel really good about that. Our noninterest-bearing deposits today are 33.3% of total deposits versus 27.8% in the first quarter. So, you can see how rapidly our DDA or noninterest-bearing deposits have increased.
We've been focusing a lot of attention with regard to getting our cost down, with regard to our deposit structure. And we've made really good progress. Our total deposit costs decreased from 12 basis points to 10 basis points. Average interest-bearing deposits decreased 17 basis points, down to 15 basis points. So, really good progress in managing our cost of deposits.
I would point out, if you’re following the math and all of our deposit activity there, we did divest $2.2 billion 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 third quarter and provide our fourth quarter 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 first quarter of 2019. Core margin benefited from strong DDA growth, lower funding costs, lower COVID-related deferred interest. Lower yields on loans and securities remain a headwind.
During the quarter, we used excess reserves to purchase $5 billion of high-quality securities, improving our yield on those assets by approximately 100 basis points. Our asset sensitivity increased in the third quarter, and we plan to stay slightly asset sensitive. We will continue to protect our margin by placing rate floors on commercial loans and manage deposit costs.
Due to our excess funding position, we are being strategic about deposit costs by focusing on growing noninterest-bearing deposits. Given the low rate environment, we are placing 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 noninterest income was relatively flat versus a robust second quarter. Fee income categories impacted by the pandemic continued to improve. Our activity on deposits is normalizing, coupled with lower fee waivers. Card and payment-related fees increased as payment volumes improved. Wealth management income increased as a result of higher market valuations. Despite the seasonally weak quarter, insurance income grew 6.4% on a like-quarter basis due to firmer pricing and an uptick in new business. Residential mortgage income decreased, primarily due to a $72 million change in the net MSR valuation, driven by higher prepayments. Investment banking had a record quarter, but trading was off from a great second quarter, resulting in lower revenue. Other income increased due to the increase in the value of nonqualified plan assets and other investments.
Turning to slide 12. Noninterest expense decreased $123 million as losses on debt extinguishment and higher intangible amortization during the second quarter were partially offset by higher merger-related costs and a charitable contribution. Adjusted noninterest expense increased $20 million, primarily due to an increased personnel expense, marketing costs and professional services. The 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 and January and are looking at ways to bring forward more branch closures in 2021.
Turning to slide 13. Asset quality ratios remained 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&I loans. Annualized net charge-offs relative to average loans and leases increased 3 basis points to 42 basis points.
We took a $97 million PCD adjustment to net charge-offs. Excluding that, net charge-offs would have been 29 basis points. The provision of $421 million exceeded net charge-offs of $326 million, increasing an allowance by $95 million. The allowance was 1.91% of loans and leases, up from 1.81%.
Coverage ratios remained strong at 4.52 times net charge-offs and 2 -- 5.22 times nonperforming loans. The combination of our allowance and unamortized fair value work remains very robust at 2.76% of total loans.
Turning to slide 14. Our exposure to sensitive industries continues to decline to a low of 9.1% of loans held for investment. Outstanding balances to sensitive industries decreased $2.2 billion to $27.9 billion. We continue to closely monitor and manage our sensitive industry portfolios.
Turning to slide 15. The volume of loans with the accommodations have decreased significantly since June 30th. Approximately $692 million of commercial loans had an active activation at the end of September 30, down from $21.2 billion. In consumer, $6.2 billion had active accommodation, down from $11.3 billion. The declines reflect expiration of the initial payment relief, which was not renewed by the borrower. Since June 30th, approximately 98% of the commercial borrowers and 94.5% of the consumer borrowers who exited payment relief, either paid off their balance or are in current status.
Turning to slide 16. The allowance for credit losses increased $96 million to reflect loan re-grading uncertainty related to the expiration of government stimulus programs. Our economic assumptions include extended GDP recovery, high-single-digit unemployment through mid-2021, followed by continued improvement through the remaining reasonable and supportable forecast period. Our ACL estimates also reflect qualitative adjustments for model limitations, government stimulus, accommodation and the review of SNC.
Turning to slide 17. Capital ratios improved for the second straight quarter and are strong relative to regulatory requirements. Our reported CET1 ratio increased to 10% from 9.7% last quarter. We also issued $925 million of preferred stock to strengthen our Tier 1 and total capital ratios. The recent assigned stress capital buffer of 270 basis points remained in effect until September when a revised stress capital buffer will be provided. We plan to submit our capital plan in early November as required by the Federal Reserve. Our purpose of capital priorities continues 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 liquid asset buffer of 18.6%. Our access to secured funding sources is robust with over $200 billion of cash, securities and secured borrowings. Parent company is sufficient to cover 22 months of contractual and expected outflows with no inflows.
Turning to slide 19. We continue to see strong growth in digital banking. Truist opened up 56,000 net new accounts versus 15,000 last quarter, driven by digital and increased branch traffic. For the 12 months through August, we experienced a 21% increase in digital sales, 8% increase in active mobile users, 23% increase in mobile check deposits and a 5% increase in statement suppression. We are also proud of the recognition we received recently from Javelin. Heritage BB&T was recognized as a leader in ease-of-use and financial fitness in mobile banking and a leader in financial fitness in 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 $1.6 billion in net cost saves and continue to make good progress on personnel expense, corporate real estate, branch rationalization, third-party spend and system decommissioning and data center closures. At the same time, we are also investing in digital, marketing and technology. We are also investing in talent, including areas outside of digital and our revenue businesses. Together, these investments and cost saves will allow us to generate best-in-class returns versus our peers while providing distinctive, secure and successful client experiences through touch and technology.
Now, I will provide our fourth quarter guidance, which is based on linked-quarter changes versus the third quarter where our guidance provides a path to positive operating leverage. We expect taxable equivalent revenue, excluding onetime security gains to be down 1% to 3%, driven by lower purchase accounting accretion. We expect reported net interest margin to be down 3 to 5 basis points due to lower purchase accounting accretion and core margin to be relatively flat. Core noninterest expense adjusted for merger costs and amortization is expected to be down 2% to 4%, reflecting lower personnel expense. We also anticipate net charge-offs to between 40 and 60 basis points.
Now, let me turn it back to Kelly for a merger update, closing remarks, and Q&A.
Thanks, Daryl.
If you follow along on slide '21, I would say to you, generally, the merger is on track. Integration and conversion, we feel really good about where we are. We're making really great progress. Most importantly, our culture is really strong. 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, really tough time and you’re kind of thrown in the boat together, it encourages our strength in terms of development relationships, trust and bonding. So, we could not feel better about how strong our culture is and how well it is developing.
Some very notable activities in terms of the integration and conversion, we did complete the branch divestiture, as I mentioned. We recently announced something we're very excited about, what we call Truist Ventures. This is where we are making relatively small, but important investments in technology platforms that we can build into our value proposition. We are testing now for our client conversion at wealth and mortgage, which will come up in the spring. So, there will be a number of conversions that have occurred or will occur on the way towards the core conversion. We did launch our dual service branch pilots. This is a technical theme, 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 is a big deal. As we know, this is the first virtual conversion that has occurred, and it was seamless. Our people did a fantastic job. And it's a big deal because we are really big securities operation now, backing up our corporate and investment banking business. Core conversion is on track for the first half of '22. 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 the commitment we made to our shareholders. We base that on a very exceptional franchise with diverse products, services and markets. As we said, we are the sixth largest commercial bank in the U.S. today that gives us scale to be able to compete. We're very strong in our marketplace, and that gives us the efficiency that we need.
We are the sixth largest insurance broker. We have really strong growth there. I think, we're going to report a 5.3% organic growth, which we believe will probably top in the market. We're the number one regional bank on investment firm; we’re the number two regional bank originator -- 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 $1.6 billion 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, is going great. As you know, in the beginning, we've said there were huge opportunities to leverage the strength that SunTrust had and the strength BB&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're very prudent, disciplined in risk in financial management. We have a very conservative risk culture. We have heard diversified benefits arising from the merger that was just kind of naturally implicit in the merger. We've stressed that very well, as you've seen, with very strong capital, very strong liquidity. And we have a very strong and defensive balance sheet, which is insulated by purchase accounting marks, combined with the CECL 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. Ryan?
Thank you, Kelly. Vijay, at this time, will you please explain how our listeners can participate in the Q&A session?
Sure. Thank you. [Operator Instructions] We will now take our first question from Ken Usdin from Jefferies.
Thanks. Good morning. Daryl, I wanted to ask you a question on the expense side. Clear that your timing on the cost saves is on track from a long-term perspective. Two pieces. Number one, at what point do we see the incremental operating expenses start to settle back down? They've been on a steady increase since September of last year. And then, two, can you give us any update in terms of your expected realization of those cost saves as we kind of reset the bar 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, is that we are still on the uptick in our merger and MOE-related expenses. We are just going through the developing phases of that. Testing starts in the first quarter as we start with kit testing and then we go onto UAT testing as we get ready for client day one in early part of 2022. So, I would say, we're still on the uptick there.
To-date, since we announced the transaction in February '19, we have about $1.5 billion of combined MRRC and MOE-related expenses. And at that time, we said we would be at $2 billion.
I don't have a number of what it is going yet. We will probably give that to you in January. We will probably exceed that number sometime in the first quarter, the $2 billion number. I want to give you a number and make sure we hit the number that I gave 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. But, 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. And 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, we chose to choose the better of the two when we had our choices. We didn't take the easy way out and just convert everything all one way or the other. So, for a commercial platform, we chose to use the heritage BB&T servicing system, AFS, coupled with the heritage SunTrust and CNO piece. That takes a lot more time, a lot more complexity. But, when we get it done, we will be so far better. We're doing it in the retail banking platform as well where we have the BB&T heritage deposit system, coupled with heritage SunTrust automated teller. Again, more complexity. But when we get through all this in '22, 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 '22 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?
So, Ken, we still feel confident over the long term and the original expectation of low 20s ROTCE. Remember, we're already very, very strong in the environment that we're in today. And as Daryl described, we're really just getting started in terms of getting the long-term investment -- investments made and related expense reductions that will follow. And then, of course, you've got all the revenue synergies that I alluded to. So, we are very, very good about that. Obviously, we'll ebb and flow some based on the economy. But, that's still a reasonable number for Q4.
[Operator Instructions] We will now take our next question from Michael Rose from Raymond James.
I just wanted to get -- Daryl, I just wanted to get some color on this quarter's PCD review. And then, if you can give us 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 in some of those at-risk exposures? Thanks.
Yes. So, Michael, I'll take the PCD question, then I'll pick to Clarke, and he can maybe answer the accommodation piece of it. So on the PCD, remember, when we closed in December, we closed under the -- now what I would say, old accounting method where we had to set up PCI. When CECL came in into January, we went from PCI to PCD. In that process, we went through -- we grossed up loans and carrying values in connection with the establishment of PCD of our best estimates.
As we -- as the year played out, what we realized is we grossed up the loans, and we should have not gross them up to the full value. They should have been today 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 first quarter when we got our CECL numbers. But, it was an adjustment that we made. It's a noncash item. And we had really good charge-off. If you exclude that $29 million we had good charge-off, even if you add that in, it’s $42 million. Both beat guidance.
Clarke? Thanks, Daryl. Hey, Michael. As far as the sensitive entry, you see on the slide there we've got in the deck, we had a nice couple of billion dollar 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 of the quarter there is we worked very aggressively to get a handle on, particularly in the energy portfolio and hospitality side. We actually sold $300 million worth of hotel credits at pretty good pricing and also address good bit of the energy book.
So to give you some context, nonperformers in that portfolio of sensitive industries are still less than 100 basis points. And we have less than 2% of those balances there in any kind of accommodation or deferral. So, I 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 as my follow-up, you guys had 10% CET1. Obviously, buybacks 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.
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 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 has stabilized and growing, if we look forward in terms of the pandemic, it'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, is shooting in the dark. I do think as we head into next year, we'll see clarity with regard to the pandemic. We'll see clarity with regard to the economy. As I said earlier, I think the chance is that economy will still be better than the most things. So, there's a decent chance we'll have that decision to make as we head into the, let's call it, first half of next year. But today, it's just a tad premature.
We will now take the next question from Gerard Cassidy from RBC.
Daryl, can you share with us -- you mentioned that you guys purchased $5 billion of securities using your excess reserves, and you helped the NIM by about a basis point. What's left? I mean, how much more of the excess 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 interest margin even though it was only 1 basis point?
Yes. So, Gerard, so our current duration of our portfolio because of prepayment speeds picked up were just a tad over 3 years right now, 3.1. But, they do have negative convexities. So, it is -- can move in and out from that perspective.
What I would say is, that we are in the midst of moving some more of our liquidity that we have -- in fact, we have a little over $30 billion at the Fed. Currently, we are moving that over, some of it this quarter, maybe more of it into early next year. We are layering in some hedges. Now, I would tell you, the hedges that we're putting on are pay fixed hedges. We're buying mortgage back, which as you know, has cash flows that paid out 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 get come through and allow us to use maybe amortizing swaps instead of just bullet swaps, that would significantly improve the performance of those hedges. So, we're hopeful about that. But, we are trying to hedge it the best that we can. Right now the costs of these pay fixed swaps are really low at 12 basis points. So it doesn't really impact it. So, we are in the midst of moving over.
I always look at it as an opportunity cost right now. We could have lower rates for the next three years. That's what's in the forecast, five years, you just don't know. And I think it's good to be deployed. The way I would think of it, though is that if rates were to go up or we started to lose some of the search deposits, our cash flows from this investment portfolio we're building could be easily $10 billion a quarter. So, we could just not reinvest. If we have strong loan growth, we could use that cash flow to deploy into loan growth. So, it gives us a lot more flexibility, a lot more optionality. And it also helps protect our margin and help run 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 share your view about vaccines in this COVID and the 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 second quarter or the first quarter, when do you really start to get concerned about that fallout?
Well, Gerard, that's something else, we don't know. But I think today that some of course have already gone away. I mean, they couldn't -- for whatever reason, they couldn't qualify by the stimulus. They chose not to. They just threw in the towel. But that's a small percentage. Most have been buoyed by the stimulus support, PPP and other loan assistance programs. As that begins to phase out, these businesses will have tougher decisions to make. But, I'll tell you that a lot of these small businesses are pretty creative. I mean, they're pretty resilient. And so, 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 all business people are. That -- basically, my whole career, and they're pretty tough group. So, I wouldn't write them off. I'm just saying that it has gone into the second quarter and [indiscernible] someone back out buying again, and we will see a shakeout. Here's the thing today, consumer purchases are back up. The 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, but buying in different ways. So, what these small businesses have to do is figure out whether it's carryout or dine out in the backyard or whatever it is if you're a restaurant. The creative ones will figure it out. Some won't be able to figure it out, and they'll have to find another career. But, I think that all will begin to be clear, Gerard, as we head into the second quarter.
We will now take our next question from John Pancari of Evercore ISI.
Hi. Just on credit, so a couple -- two-part question there. First, on the delinquencies, it looks like both, 90-plus and 30 to 89 increase. 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 reserves, 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?
John, this is -- yes, this is Clarke. 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, third 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, if you take that out, particularly for 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. This is very likely. And that's all been included in our estimate to date.
Okay. Good. That's helpful. And then, secondly, on the net interest margin front. I know that you indicated that -- Daryl, that the reported margin should see some slight pressure through the remainder of the year. I just wanted to get your thoughts on the core margin outlook, just given some of the actions you've taken, and how you're thinking about that from here?
Yes. So, I would tell you, we had a good drop in deposit cost this past quarter. We still think we have room to go there. So, our interest-bearing costs are 15%. My guess is over the next quarter or two, will be single digit. I think, that's just the direction that we're headed right now. I think 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 were able to 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 of 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 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 you get PPP pay downs. Our guess is the bulk of our pay-downs will come in the first quarter or maybe second quarter. We'll get some this quarter. Recall, our company has about $12.5 billion of PPP loans on the books.
We are planning to have invitations sent to all of our clients in the month of November, so they will all get 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 '21 than in this quarter, but you don't really know. It's an unknown right now.
Well, a couple of other things. Keep in mind that our people have been very successful in terms of floors with regard to new loans and existing renewals. The other thing is that if the economy comes back faster, which I think it may, there's going to be a substantial pent-up demand for expansions. And so, we will see an increase in loan demand for, I call it, normally priced loans, which will be a plus to grow the 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 behavior beyond that. Thank you. I appreciate it.
We'll now take our next question from Betsy Graseck from Morgan Stanley.
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 just trying to understand what your thought process is with regard to when you would start to release reserves? Is it to match any net charge-offs that you get from here, or maybe there's something else you're thinking about you could let us in on? Thanks.
Clarke, do you want to take that or...
Yes. Maybe I'll start and then Daryl or Kelly can kick in. I mean certainly, Betsy, we think it's premature to be talking about releases right now, given the environment. So, 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 whether there'll be any more stimulus, what the ultimate outcome of these accommodations are and just pace 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 client performance be at a really strong level before I think you see us consider releases.
And, I guess the question -- yes, go ahead.
One of the things, kind of interesting -- so to your point, if everything were precise, as I understand it, the economy performs as we expected in terms of our CECL projections, rates are as we projected, so our net present value is the same as projected, if all of that would happen, it would be a hands down correlation between reserve reductions productions and [indiscernible] But as Clarke said, it's 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 the regulators to hold theirs up even though all the math and all the concepts say should be coming down? We've not heard think about that, but that's how the way it goes.
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 -- 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 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 expected loss, can you shift the reserves around? And the question really ends up being, how fungible are the reserves that you put up against these specific asset classes that you've identified? Thanks.
Clarke, I'll start, if you want to, maybe add to it. But, I mean we do it both ways, Betsy, and that we do a bottom-up analysis. So, our modelers go through, when we model, all of the portfolios, and we've brought it against the scenario, and we come up with a bottom-up analysis. Given the limitations of the models and the uncertainty in the environment, there's always top-down adjustments that occur that are basically in play there. So, it's really -- it's a process you go through. And you have to know what you have in the models today. If the economy gets better and everything else stays the same, you could see a release potentially. But, that's not reality. Things are always changing. Things are always getting regarded, up and down in the portfolio. Client behaviors are changing, more charge-offs or whatever. So, it's always a dynamic process. I think, Clarke and his team do a great job in analyzing it. We thoroughly review it several times before we come 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. Mark?
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.
Our next question is from Mike Mayo from Wells Fargo.
Hi. My question goes to slide 12 where the efficiency trends have not gone the right direction the last couple of quarters, but you just gave guidance for that to improve in the fourth quarter. You talked about personnel savings, CRE, branch, third-party systems and closing 104 branches. 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 being too safe to get the merger integration smooth? I mean, you are growing deposits, no blow ups, and I'm sure you're protecting the long-term franchise. 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 five 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 time frame. I also said that we're looking at opportunities to pull forward some other branch closures in 2021. We aren't at the stage yet to announce exactly what we're going to do there. But, we did give you an indication that there is a possibility, and we wouldn't have said that if it wasn't a strong reality that we're going to pull forward a significant piece of some branch closures in 2021. We'll give you that once we are able to do that.
If you look at our third-party spend, the third-party providers, to date, right now, with -- dealing with vendors, our sourcing and procurement teams have basically realized $266 million of savings from that. We think that run rate translates into about $300 million in 2021. They are not at their goals yet. They're still trying to get more savings. We think that will occur over the next year or so. We hope those numbers will exceed $400 million before it's all said and done from a run rate perspective. As contracts come up, as we redeploy, we're still going through the process of negotiating contracts with an end provider of these services that we are having right now. So everything can be fully negotiated yet.
Next one would be in our non-branch facilities. We talked about that in our last earnings call. We have 29 million square feet outstanding, if you add branches and non-branches out there. We talked about potentially taking 5 million square feet out in our non-branch areas this next year. We said the average cost of that on a gross basis was $30 a square foot. There 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 surviving. We have branches that will probably have another 2 million to 3 million square feet there. So, we'll be close to 20 million square feet probably by the end of 2021 in our company from that perspective. So, that's a third that we're taking out very aggressively, very quickly.
The fourth area is in technology. I talked about it in the prepared remarks. We're just now getting in the midst of getting through conversions. We've done some small conversions, not client facing, and we started to decommission systems, started to get systems there. We just did a conversion in those area in capital markets, large corporate area and all that stuff. So, those savings are going to be captured. As we get through conversions in the first quarter in Joe's area with wealth and broker dealer that we have there in that, one is in the first quarter, the other one is second quarter. It takes probably three to six months before we get through and get those systems decommissioned. Scott has plans to -- 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 have been falling in FTEs that 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 areas on the support side as we go through these conversions and get things finalized. So, there's a lot to come. We are not backing down from the $1.6 billion. We aren't backing down from the timing, where we're going to come through on target like we said we were, and this is just a way of doing it.
And Mike, just to amplify, your question is a good one. It's appropriate about the branches. But two points. Up to this point, we have been cautious in terms of closing branches because we want to have -- we wanted to have maximum availability for our clients. Keep in mind that we've had to basically close down the lobbies. And now, we're fortunate about 98-plus percent of our branches have drive-thrus. So, our drive-thrus have been open throughout. For the last several months, we've had in-branch activity based on phones [ph] only. We just opened up this week like 1,500 branches full-service and the lobbies. So, once we get the branches back to kind of normal and our client service capability is back to normal, then, we will be more aggressive in terms of the closings. Because we have a large number of branches that are literally side to side, actually, in many cases, sharing the many parking lot, and our people, as Daryl alluded, are literally in the process of developing an aggressive plan with regard to that. So, don't hear us say we're not going to be best in with regard with branch closures. But, we're not just going to announce it today because they're literally in the process of putting 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 third quarter run rate, and what do you expect for 2021 and 2022 again?
So, for the third quarter, we're probably around 35%, give or take. We're still targeting 40% in the fourth quarter. The guidance that we gave is in the middle of that range that I gave you there, so plus or minus on that side of that. For the end of fourth quarter of '21, we're still at 65% of the $1.6 billion, and then the whole $1.6 billion by the end of 2022. So, we are not changing the timing of that.
We will now take our next question from Saul Martinez from UBS.
Good morning. Following up a little bit on NII, Daryl, Ken. Daryl, what is embedded in your fourth quarter core NIM -- reported NIM guidance for PPP forgiveness, if anything? And can you just remind us or give us an update as to what you are thinking right now for forgiveness rates over, 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 with that accelerated forgiveness.
Yes. So, what I would say, when we talked about this last quarter, our estimate hasn't really changed and that we still think 75% of it will pay off with this forgiveness piece. That's a guesstimate. We really don't know. We are, like I said earlier, sending invitations out to everybody from that.
For this fourth quarter, of that 75%, we're probably around 20%, but a shot in the dark of what actually might get paid off. We really don't know the timing. If you look at the news that came out last week from the SBA and the two-pager for the $50,000 and less, the numbers on that is out of our 80,000 clients, we have 45,000 clients that are $50,000 or less, 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 forgiveness 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 out to everybody at once, once we got the processes all lined up. So, we're gearing up for that.
We think the first quarter, Saul, will be our biggest quarter. Right now, the estimate is around 60% and the rest would be in second quarter. But you really don't know. I mean, it's 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 the first quarter. But, does your fourth quarter guidance explicitly incorporate that 20% forgiveness in certain fee rate on top of that? I know I'm getting a little bit nitpicky here, but if we kind of strip that out -- yes. Okay.
There's risk. I mean, if it's less than 20, we may miss 4; if it's more than 20, we may exceed 4. But that will be the only end [indiscernible] other variables. But that is an assumption that plays out, absolutely, there. Maybe the other thing you have to think about, Saul -- sorry, when can you realize it just. Because somebody sends it in, do you realize it, when they send it in or when actually they get the dollars wired back into us? So, we're working with our external auditors and the timing of when we recognize that payoffs.
Right. Without PPP forgiveness, can you maintain core NIM swap or is it pretty much impossible to do that, given the environment?
My guess is that the core margin without PPP is probably in the high 260s right now. That would be my guess, maybe still 270. I mean, it 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, invest some of the excess liquidity that we have in loans versus securities or Fed balances, that's a really positive way to help your core margin. It's just a matter of trying to get the loan volume to support that.
Just one final quickie, just absolutely, just want to make sure. The guidance for expenses and revenue, that is based on the adjusted noninterest expense number of 3,147 and incorporates the adjusted noninterest income, I guess, of 2,106. Just want to clarify that.
Yes. In my prepared remarks, I adjusted both, the expense side and the revenue side.
Okay. I just wanted to make sure. Thank you.
That concludes our Q&A session. Thank you, Vijay. And thank you, everyone, for joining us today. I apologize for those with questions we didn't have time to get to. We're happy to reach out to you later today to address those questions. We wish you all the best. Goodbye.
This concludes today's conference call. Thank you for your participation. You may now disconnect your call.