Fifth Third Bancorp (FITB) — Q3 2020 Earnings Call Transcript

Thanks, Chris, and thank all of you for joining us this morning. I hope you are all doing well and staying healthy. Once again, our financial results were strong despite the challenges associated with the current environment. As an essential business, we continue to take appropriate actions for our customers, our employees, and our communities during the pandemic. Earlier today, we reported third quarter net income available to common shareholders of $562 million or $0.78 per share. Our reported EPS included a negative $0.07 impact from the items shown on Page 2 of our release. Excluding these items, adjusted third quarter earnings were $0.85 per share. Tayfun will provide more details on the quarterly financial results in his remarks. But I will share some highlights. Our reported adjusted return metrics were solid, reflecting our strong operating results, including a provision for credit loss performance. Our credit losses were significantly better than expectations. At 35 basis points, our third quarter charge-offs were the lowest level in over a year, with improvement in both consumer and commercial portfolios. Consumer net charge-offs of 40 basis points is the lowest in the past 15-plus years, reflecting our consistently strong approach to underwriting, as well as the benefits of fiscal stimulus and payment deferrals. Our already strong capital position further improved this quarter. Our CET1 ratio of 10.1% is well above our stated target of around 9.5%, and our income levels, combined with the outcomes from our quarterly stress test continue to suggest that we will maintain our current dividend. Furthermore, we have grown tangible book value per share for 6 consecutive quarters. Our PPNR results were better than our previous expectations, reflecting the strength and resilience of our diverse revenue mix in retail, commercial and wealth and asset management. Based on our fee-based businesses, many of our fee-based businesses are generating strong results that are helping to cushion the impact of lower rates. For instance, wealth and asset management revenue increased 10% sequentially as we generated positive AUM inflows again this quarter as we have done in 9 out of the last 10 quarters. Capital markets revenue was up 8% from last year, and was down slightly relative to the record second quarter. On a year-to-date basis, total commercial banking fee revenue was up 16% compared to last year. Topline mortgage revenue is up 45% from the year-ago quarter, with a low rate environment impacting servicing revenue and the MSR valuation. Deposit fees increased 18%, and processing revenue increased 12% sequentially, both better than our previous guidance as we are seeing early signs of normalization in business and consumer spending patterns. While we continue to streamline our operations and position the bank for long-term success, we continue to assess strategic investments in non-bank acquisitions and our fee-based businesses to accelerate revenue growth. For instance, we recently increased our strategic investment in Bellwether Enterprise, a national multiproduct CRE firm, which we originally announced in April. This investment provides clients with a broader set of permanent financing solutions without Fifth Third being exposed to the balance sheet risk associated with longer duration CRE assets. Commercial loan production was relatively stable this quarter compared to the second quarter, offset by further declines in line utilization. Total average loans declined 4% sequentially. Within our previous guidance range, we expect near-term pressure in the loan portfolio to continue. Despite the tepid loan environment, net interest income exceeded our previous guidance as we aggressively reduced our deposit costs in excess of our prior expectations. While the environment remains uncertain, our commercial loan pipelines are beginning to improve in certain areas, particularly in technology, telecom, health care and industrials, which should provide support as we head into next year. Before I turn it over to Tayfun to further discuss the results and outlook, and I'll review our guiding principles, strategic actions and key strategic priorities, which will enable us to continue to generate long-term shareholder value. We have consistently communicated our through-the-cycle principles of disciplined client selection, conservative underwriting and overall balance sheet management approach focused on long-term performance. Our unwavering adherence to these principles and our balance sheet strength gives us confidence as we navigate this environment. We have executed numerous strategic actions over the past five years in anticipation of a downturn, which will continue to serve us well. We've reduced our credit risk exposures and built strong reserve coverage. We've built long-term protection to mitigate the impact of lower interest rates. We took decisive actions to reduce our expense base, and we successfully invested in and diversified our fee businesses. From a commercial client standpoint, we continue to focus on generating relationships with clients who have more diversified and resilient businesses. We are confident in our client selection process and proactive approach to credit risk management. We continue to believe we are well positioned relative to peers in commercial real estate, an area where we have been named disciplined. We have focused predominantly on top-tier developers with a track record of resiliency. Our portfolio is well diversified by geography and property type. And as we have discussed before, we continue to be at the low end of peers as a percentage of total capital. In addition to the CRE portfolio, our other lending portfolios continue to do well, be well positioned, combining our strong retail and regional commercial banking franchises in the Midwest and Southeast with our national lending businesses. These portfolios will be instrumental in delivering a differentiated credit performance, given the likelihood of an uneven economic recovery. We're mining our exposures across our total commercial loan portfolio, utilizing early warning systems through a combination of internal portfolio analysis, and third party data. Our relationship teams receive timely alerts that we detect any sign of credit deterioration. This helps us make prompt, prudent and accurate credit rating determinations proactively without waiting for customer statements. Looking ahead to 2021, we continue to expect full year net charge-offs to come in well below 1%. We have also strengthened our balance sheet by building long-term protection, the positioning of our securities, and hedge portfolios. With a high likelihood of lower rates for the next several years, our prudent interest rate risk management should help preserve our core margin. Our very strong balance sheet liquidity has enabled us to decisively act in aggressively lower deposit rates. Given the industry-wide revenue headwinds, including a strong likelihood of persistently low interest rates, we recently announced an expense optimization plan. We are taking decisive and appropriate actions to reduce our expense base, both temporarily reflecting the weaker revenue environment, and also permanently based on long-term structural saving opportunities. Our four key strategic priorities remain intact, leveraging technology to accelerate our digital transformation, driving organic growth and profitability, expanding market share in key geographies, and maintaining a disciplined approach on expenses and client selection. We will put the appropriate level of prioritization and focus on the areas that have the highest probability of driving strong financial returns and generate long-term value for shareholders in order for us to emerge from the current environment, a top-performing regional bank. Our balance sheet strength, diversified revenues, we continue to focus on disciplined expense management to serve us well as we navigate this challenging environment. I would like to once again thank our employees. I'm very proud of the way you have responded in extraordinary ways to support our customers, our communities, and each other during these unprecedented times. Our commitment to generating sustainable value for our stakeholders is evident in our inaugural environmental, social, and governance report as we also became the first U.S. commercial bank to join the SASB alliance in the GRI community report, and other health disclosures are available for your review on a dedicated ESG page on our Investor Relations' website. With that, I'll turn it over to Tayfun to discuss our third quarter results, our current outlook.

Thank you, Greg. Good morning and thank you for joining us today. Let's discuss the financial highlights from the earnings presentation. This quarter's reported results faced challenges due to three significant items: a $30 million after-tax charge related to our restructuring plan, a $17 million after-tax negative mark linked to the Visa total return swap, and $4 million after-tax expenses due to COVID. Despite these impacts, strong operating results demonstrated solid business performance across the bank, particularly in our provision, marking our best quarterly charge-off results since mid-2019 and improved macroeconomic indicators. We remain cautious due to uncertainties surrounding the pandemic and the economy. Our base case macroeconomic scenario predicts GDP to stay below the end of 2019 levels until the second quarter of 2022, with an unemployment rate above 8% throughout 2021. Our more conservative base case differs from the Fed's scenario published last month. In the downside scenario, we expect GDP to lag behind 2019 levels until the second quarter of 2023, with unemployment potentially exceeding 12%. If we assign a full probability to the downside scenario, we'd likely need an additional $1.2 billion in reserves based on our exposures. Reported and adjusted revenue increased by 2%, despite a generally weak environment, as we exceeded previous fee and net interest income expectations. Total non-interest income, excluding security gains, rose 5% sequentially, outperforming our prior guidance by 3 percentage points. Notably, our unrealized gains in the portfolio at quarter-end remained robust at $2.7 billion. Our proactive portfolio structuring should provide us with a strong hedge against rate headwinds. Although our gains can be volatile, we are prudent in managing them for an optimal outcome for our shareholders. This quarter, a small part of our portfolio gains mitigated the restructuring charges we incurred due to our expense reduction plan. Reported and adjusted non-interest expenses remained flat year-over-year, with adjusted expenses rising slightly more than our previous guidance of a 2% increase. We are currently executing our announced expense reduction actions, aiming for annual savings of $200 million starting in 2021, with an additional $100 million to $150 million in annual savings beginning in 2022. Our strong revenue performance and disciplined expense management led to an increase in pre-provision net revenue that exceeded our July guidance by about $15 million. Our effective PPNR performance, alongside credit-related improvements, resulted in strong return metrics. Adjusted return on assets was 1.24%, and adjusted return on tangible common equity was 18.2%, excluding ALCI, even as we grew our regulatory capital by 42 basis points this quarter. Excluding security gains, our adjusted return on tangible common equity was nearly 17%. Even on a credit-normalized basis, our underlying performance reflects the strength of our franchise and our capability to navigate a low-rate environment. Moving to total average loans, we saw a 4% sequential decline, aligning with our guidance. CNI loan balance trends showed lower revolving utilization rates, declining by 15% since April's peak and 5% since June's end. We noted a slight increase in average auto loan balances. Given the varying revolving utilization rates and the impact of PPP loans, we are sharing period-end loan balance performance. Revolving line of credit balances fell by more than $3 billion, representing about three-fourths of the quarterly end balance decline. Current trends indicate continued low utilization, which may persist until year-end. C&I client pipelines are generally soft but have improved relative to last quarter. Average and period-end CRE loans dropped 1% sequentially, with the commercial real estate sector remaining vulnerable in the current economic climate. Average total consumer loans increased by 1% due to growth in auto loans, offset by declines in home equity and credit card balances. Auto production for the quarter was strong at $1.8 billion, with favorable lending conditions. Other consumer loan categories continue to show subdued borrower demand. Our securities portfolio decreased by 2% compared to last quarter, due to sales and continued paydowns, and we are unlikely to use excess liquidity for long-term investment growth unless the market changes. Average short-term investments, including interest-bearing cash, increased significantly due to falling loan balances and record deposit growth. On the deposit side, average core deposits rose by 4% compared to the previous quarter, with growth across all categories except other time deposits. Demand deposits made up 33% of total core deposits. Growth in deposits indicates strong relationships with clients and their desire for liquidity. Our actions on the interest-bearing core deposit rates yielded further reductions, with our rates now significantly below previous cycles. We expect fourth-quarter interest-bearing core deposit costs to decrease slightly. Our loan-to-core deposit ratio improved, indicating stable liquidity, which we plan to maintain given the current loan growth environment. Reported and adjusted net interest income decreased by 2%, primarily due to lower C&I balances and market rates, partially mitigated by reduced deposit costs and the full effect of PPP loans. Notably, cash flow hedges contributed significantly to our net interest income. Adjusted net interest margin saw a decrease, driven by elevated cash balances and lower market rates but offset slightly by deposit cost reductions. Our interest rate risk hedging strategy continues to prove effective, and we expect a normalized net interest margin of around 3% in the future. Non-interest income saw robust growth this quarter, highlighting our revenue diversification. Excluding securities gains, adjusted non-interest income rose sequentially. Strong performances from capital markets and asset management contributed positively, as did rebounds in deposit service charges and leasing. As for expenses, adjusting for restructuring and other charges, our non-interest expenses increased marginally. We remain committed to targeting a significant reduction in 2021 expenses, with efforts now underway. We’ll provide a full update in January, including an outlook for 2021. As for our COVID-19 portfolio, we experienced a modest decline, driven by paydowns in various subsectors. Our client selection has been disciplined, focusing on larger, more resilient companies. Regarding credit results, our net charge-off ratio improved sequentially, reflecting favorable outcomes across portfolios. Our allowance for credit losses remains stable, and we believe there’s little need for increased reserves unless economic circumstances worsen. Our capital and liquidity positions remain strong, supported by a solid CET1 ratio well above our target. We anticipate maintaining our dividend based on our capital strength. Our tangible book value continues to grow, and we have substantial liquidity available. Looking ahead to the fourth quarter, we expect a slight decline in average loan balances, particularly in commercial loans, while consumer balances may see a modest increase. We anticipate net interest income to remain stable and non-interest income to rise modestly. Overall, our strong third-quarter results reflect the significant progress we have made in enhancing resilience, diversifying revenues, and managing our balance sheet effectively. We will uphold our commitment to client selection, conservative underwriting, and a long-term performance focus as we navigate this environment. We are dedicated to optimizing our operations while ensuring investments critical to sustaining our earnings power and resilience. With that, I will turn it over to Chris for the Q&A session.

Great. Thank you. In terms of your expense initiatives, just given that most of that falls to the bottom line, is it possible that we see expenses down on an absolute basis in 2021?

Ken this is Greg. First off we provide 2021 guidance after our fourth quarter earnings call. We'll talk more about that. As we talk about our expense optimization plans, $200 million that we expect to be out by the end of the first quarter, 75% of the actions necessary to accomplish that objective have already been completed. So we're highly confident in our ability to take out that $200 million by the end of the first quarter. And then we mentioned another $100 million to 150 million that will show up in 2022. Once again we focused mainly on automation, investing in our technology platforms. So we're very confident. But we'll provide guidance as far as our expense numbers as we get through the fourth quarter.

Yeah. I think Ken and the other point that I want to make about the program is we stated that the composition is 80% to 20% between currently in savings and environment-related savings of 20%. But that environment-related savings number is really, how we see 2021. So the other lever that we have here is if things actually look worse or will be worse next year compared to our assumptions, we will still continue to adjust those numbers. So we say that part of it is going to be variable. And it does have more potential depending upon the economic environment. Obviously, our preference would be that the environment is stronger. And we don't have to necessarily go back to that world, but we do have the availability.

All right, great. And just one follow-up, Tayfun you mentioned that you don't expect to invest the excess cash, can you just help us understand why not invest in it sounds like something very short-term securities with little risk that would generate a lot more than or at least a little more than cash returns?

Ken, we think that the small incremental increase in net interest income compared to the exposure to the market isn't a worthwhile tradeoff right now. From your standpoint, our capacity to invest short-term doesn't significantly enhance the company's long-term performance. We believe that cash will eventually leave the company, so we prefer to protect ourselves from market exposure due to ongoing market volatility, which remains a concern for all our investments.

All right. Great. Thank you.

Hey, thanks, guys. Good morning. A follow-up on the loan side. So obviously you guys have I think been more forthright than others about the declines in loans that you're expecting and the quality of the commercial book. Can you just give us some thoughts just as you look across the footprint of where, if at all, you see activity starting to change from a pacing perspective and at what point would you see the loan book especially the commercial side C&I starting to bottom out?

This is Greg. First off, on the loan side on commercial, look at our pipelines, we're seeing some growth in positive forward progress in the area of healthcare, telecom and technology would be two other areas that we're seeing some good growth. And also, the industrials would be the areas that we're most encouraged by as we look ahead here. So we feel pretty good. As we mentioned on the consumer side, we expect the growth 1% to 2% the next quarter and that business continues to perform well. So that's where I think we have the biggest opportunities.

Okay. Got it. And then in terms of the deposit side, you've got good growth and you mentioned some opportunities to still re-price. What other offsets do you have on the right side of the balance sheet, if any to continue to roll down either the fixed term – fixed short-term borrowings, long-term debt footprint in addition to deposit pricing?

We don't really have a lot of long-term debt opportunities other than just running the maturity schedules at this point. So, you know, we've pretty much executed what was available to us. We're looking at some small items maybe bad debt we securitized in the past. But those are small opportunities, so there's not a whole lot remaining there.

Okay. And then last quick one, Tayfun you mentioned that you're not really interested in building the securities portfolio. Other banks have started to put some of their liquidity to work in contrast. Can you just walk through your philosophy on that and how you expect to just manage overall balance sheet size then if you are not net reinvesting?

Again, as I mentioned, when Ken asked the question. At this point, we don't believe that the trade-off between incremental NII associated with margin investments and continuing to expose ourselves to an unattractive mark-to-market environment related to those investments is as attractive. So, at this point, we will continue to watch. Now, those decisions are made on a week-to-week, month-to-month basis. If we find opportunities, we will be in the market. But at this point, given what we know today, we are currently choosing to be on the sidelines.

Hey. I guess, I have a wow on the positive side and a wow on the negative side. So the wow on the positive side would be only 35 basis points of loan losses and lowest consumer charges off in 15 years. So that's quite noteworthy. But the wow on the negative side is, a negative provision seems like an outlier. And do you really want to set a tone at this stage of the cycle of taking a negative provision? I mean, you might be right, but you might be wrong. But we don't really know how this is going to play out. So I guess, my questions are, you said if you had your downside scenario at 100%, that would be 1.3 billion of additional reserves. How much overlay do you have for that downside scenario now? That's number one. Number two, when you mentioned that there were commercial extensions, what does that mean? Is that delaying some of the inevitable? And you did say that loan losses would go up from here. And then third, just the whole tone perspective like it sets the tone that things are okay.

So, this is Tayfun. Let me take the first part of that and then I'll turn it over to Jamie for his comments. Look, I mean I think as you know at the end of the first quarter, at the end of the second quarter, we came out much more aggressively in terms of building reserves relative to the peers. And when you look at our coverage, it is 2.49% or 2.62% or 2.75%, we are still above the median levels of our peers. And internally obviously when we look at the risk profile of our loan book, we feel very good about it. And, two, we really did not take the cover ratio down. It's only from 2.50% to 2.49%. And the balances obviously are lower at the end of the quarter, which have an impact. In terms of rating of the base scenario, we actually increased the lowest wage of the base of the base scenario this and increase the wage of the scenario this quarter. So we are quite cognizant of potential downturns in the economy. But, look, I mean, the underlying profile, credit profile of our balance sheet and the outstanding balances resulted in a release. And we have to abide by certain accounting principles and do the right thing. So that's from my side. Jamie, any comments from your side?

Yeah, and Mike, thanks for the question. When we looked at the net provision, it really is an output. And when we break it down into the two inputs, the CECL reserve, the release was $116 million in the quarter. And as we said, it's driven primarily by the payoffs and paydowns in the commercial loan book. And as Tayfun mentioned, the economic outlook did improve during the quarter, both from unemployment and GDP perspective, which does lower our loss expectations in the portfolio. But given the uncertainty in the environment of especially related to additional government support, we increased the weightings on the upside and downside in the scenarios from 10% last quarter to 20% this quarter. And those scenarios really have an asymmetrical profile, so it ultimately increases the required CECL reserve and essentially offsets the benefit from the improvement in the economic outlook. And to your other question then, if we were to run a scenario where there are no upside or downside scenario and we just said 100% is base, then the reserve requirement would be $250 million less than what it is today. So to your point, the downside scenario does result in a higher CECL reserve than roughly $250 million or so range.

The other part of the question is about your role in working with borrowers to bridge the gap between pre and post-COVID economies. Many are focused on commercial extensions and accepting changes like extending terms and loosening covenants. There are several options available to make things easier for borrowers, which could be beneficial in most cases. However, there are situations where it may not be appropriate. What actions are you taking regarding the commercial extensions you mentioned earlier?

Hey, Mike, it's Richard, I'll take that one. It really is, as you described, working with the borrowers, trying to understand their cash flow needs, their cash flow availability, the collateral that's available that maybe we don't have as part of a security package. So it's really just reworking the transactions, making sure that we're being thoughtful about things like maturity dates and extending maturity dates so that or reamortizing transactions with the cash flow. So it's really part of the workout process to make sure that we can be as accommodative as we can within the risk appetite to support our customers and minimize losses over the long-term.

All right. Thank you.

Good morning. Sorry if I missed it, but did you guys say how much of the $200 million of savings is in the third quarter runrate?

In the fourth quarter run rate or third quarter?

I guess…

There's nothing in the third quarter and large majority of the savings will come in the first quarter of 2021.

Okay. So not now and most of the $200 million will be in 1Q on average and then in the second quarter.

Correct. That's correct.

Good morning guys. Thanks for taking my question.

Good morning, Scott.

Hey. Appreciate you taking the question. You guys are one of the few guys that have offered a charge-off assumption for next year and you said it a few times well below a percent. So, I guess in that vein, curious how you guys are thinking about how this cycle will end up trajecting? In other words, will we be taking care of most of the losses from this cycle next year? Or will they bleed into 2022 at a higher rate, as well? And I guess part of that question is because you guys have such a strong reserve that if losses indeed stay well below a percent, I guess I'm curious under CECL, at what point it becomes more challenging even to substantiate today's reserves? In other words, you don't just look adequately reserved, but potentially very over-reserved. So I'm just curious about how you just think about those dynamics?

There's a lot of moving pieces, Scott, as you think about what's occurring right now with the amount of stimulus that was thrown at the pandemic, whether we get the CARES Act next iteration of that, how that's going to be distributed with respect to PPP potential, consumer stimulus opportunities. So, there's a lot of variables involved here. But what we have visibility of right now as you think about the consumer side. We can see forward looking our roll rates, and we think we're in pretty good shape. The consumers are in pretty good shape as we get into the – until we get into the second half of next year and it’s going to depend on the variables I mentioned and some of the actions that are being taken. So more to come there, that's probably more of the second half of 2021, and we start to see those losses creep up if we don't get the next iteration in the CARES Act. On the commercial side once again, a lot of challenges with respect to how we think about the sector because it really gets back to when do we see a vaccine out there? How effective is it? How is it being distributed certain parts of the economy are opening reopening quicker than the other parts of the economy? Southeast is reopened quicker right now. We’re seeing positive outcomes there from a production standpoint. So this is a lot going on right now, which you can show yourself, because that's going to be very cautious. We came out with aggressive reserve levels. We're going to be very thoughtful and mindful about how we map our environment looks going forward and expectations.

As we look out at 2021 and we say well below 1%, that for us our models would indicate loss rate in the 70 basis points to 80 basis points range and that's as we sit here today with obviously a lot of uncertainty between the path of the virus and the path of stimulus. And when we look at and analyze a lot of data, especially consumer portfolios as Greg said a little bit easier to predict model, but we get through all the data, really the simple answer when you pulling it out down as that if you were delinquent going into the pandemic you're going to be delinquent coming out. And if you're healthy going in, you're going healthy coming out. And that's what we're seeing and internally we call it the wind-chill effect. So if it's 50 degrees outside and it could be you get a pretty big tailwind and it feels like it's 30 degrees outside really from an unemployment perspective, the wind-chill was reported numbers of 13% and now we're sitting around 8%. But the wind-chill, because of all of the stimulus programs and hardship relief, it's actually behaving at a 3% level. And that's why you see such good loss rates from us and our forecast assumption for next year has some stimulus round two backed into it. But if we get more than what we've assumed then those numbers could continue to improve from there.

All right. That's perfect. Thank you guys very much for your thoughts.

Good morning, everyone.

Good morning Gerard.

Thanks. Can you share with us, I know you touched on the capital position in your prepared remarks and your CET1 ratio now is over 10%. Can you remind us what your ideal ratio would be in terms of the amount of capital you want to carry to run the company? And then second, obviously the Fed has suspended buybacks for all the large banks including your own. What's your view that once the gate is lifted, assuming it will be, how quickly would you go back into re-purchasing your stock?

Gerard, we are at the 10.1% to 4% of CET1 today. I suspect as we look ahead by the end of the year, we will be approaching 10.5% likely and we entered this year coming out of 2019 with a capital ratio target of 9.5%. And that was actually elevated relative to our 9% target just about a year ago before that and we think that even then, back in 2017 and '18, we were making comments that we can run this company with an eight-handle capital ratio, but we are very cognizant of where the peers are and the regulators are? So we said okay, 9% probably. And then as we saw the probability of a recession going up, we lifted back to 9.5%. So from 10.5% to 9.5% assuming that we look ahead to a normalized economy, that’s 1% of capital that we either consume by growing loans or we return to shareholders. Tough to predict the timing of the regulatory change in their current position, but I suspect that when we see the results of this CCAR run and when we find out what the regulators are going to do. If the gate opens, I don’t why it would take us a long time to go back to a buyback scenario environment. Our view on the interest rate outlook is that we will remain in this environment for the next two to three years. It's difficult to disagree with the market's pricing of the upcoming rate changes. We are concerned about exposing ourselves to market fluctuations. Additionally, we believe that in the current climate, the spreads are not indicative of the actual risk-return profiles, as they are distorted by the Fed's aggressive actions, resulting in inverted credit spreads. Given this uncertainty and the expectation that the low rate environment will persist for some time, we have chosen to remain on the sidelines. We anticipate that eventually, whether in 2021 or 2022, as the Fed moderates its approach and the market forms expectations regarding inflation or the conclusion of this rate cycle, the yield curve will begin to steepen. However, we do not expect this to occur in the near term. Thus, a combination of cash flow leaving the bank and our belief that it is wiser to wait for a better investment environment is why we are staying out for now.

Hey, good morning. What weighted average remaining maturity are you using in calculating your CECL results?

I’m sorry. Can you repeat that question again?

Yeah. What is the weighted average remaining maturity of your loan book that you are using as the basis for your CECL calculation?

I don't necessarily have a number ready, sort of, to give you right now. But I suspect that number is between three and five years.

I believe a part of your Commercial & Industrial book has a shorter duration since it's linked to contract maturity. You also have several annual revolvers. One way to consider this is based on the implicit loss content. Using a four-year duration suggests that a 2.5% reserve ratio indicates an average annual loss ratio of about 60 basis points. You might experience higher losses during peak periods and lower when the credit cycle normalizes. Is this a reasonable way to approach it? The three and five-year durations can lead to significant differences in the underlying assumptions for annual loss content. So, is this a good perspective on what might be significant in your estimate?

I think your comment is logical. If you look at page 13 and examine the data, you'll see that the portfolio falls within the commercial book. The coverage ratio for commercial mortgage loans is 3.4%, while for the C&I book, it's 2%. Your question and reasoning are reasonable, but it can become skewed in this environment. The primary influence on the commercial book comes from the reasonable supportable period, which is solely driven by the economic outlook. This is why I'm hesitant to fully agree with you, as that relationship does not directly translate to a reasonable annual loss content. I wanted to clarify that point.

Got it. You know that well understood. But I guess my point is that the weighted average the main maturity is arguably the most important input into this calculation. And this isn't a comment on two-thirds of the general comment. And we received virtually no information on that from any bank. So it is, you know, it is a little bit of a disconnect that. I think..

We can provide you that information, and we can do that in a couple of ways, which will give you a better flow of content.

I have one more question regarding expenses. The $200 million represents nearly 5% of your current expense base. In the past, you've indicated that a significant portion of that would contribute to the bottom line, along with additional expense savings. Should we expect your run rate expenses to decrease compared to their current levels? Additionally, could you provide insights on the timing? I understand you won't provide guidance for 2021 yet, but for next quarter, I anticipate costs may rise slightly, especially in the first quarter due to seasonality. Is it reasonable to think we could see expenses at around $12 billion instead of the current $11 billion by the first quarter? Can you confirm if my reasoning is correct that we should expect a reduction in expenses in dollar terms at some point during 2021, along with any details on the timing and extent of that change?

So, we will maintain our discipline and not give you color on 2021 today.

All right.

But what goes against that $200 million expense save is going to be some natural built-in inflation, whether it's related to merit increases or other compensation-related inflation. And, two, is going to be investments in our company. We will continue to make investments in our company. And the technology line item for all the right reasons is going up. What we feel good about it, though, is that we have now established a discipline the company, so look at those investments that are technology-related with a very disciplined return requirement. So, whatever the built-in expense growth is, is not going to be driven by head count increases.

Right.

It's going to be driven by very reasonable investments in our business that have a return profile that we all feel comfortable with and that we believe is prioritized based on our corporate objectives.

Hi. Just one follow-up question, I know we're almost over time. As we think about that adjusted NIM of 255, assuming no impact from PPP and also, assuming a static balance sheet, how close are we to the trough?

I think we're getting close, Erika. Looking ahead, we feel we have a level of stability that we're comfortable with. This might fluctuate within 2, 3, or 4 basis points. The current margin is possibly less significant as a metric than it has ever been due to the impact of the cash balances we hold. However, I believe that assuming we remain in this highly liquid environment for a while, we've nearly reached stability, even if we keep our cash levels the same. The quicker we move out of our cash position, the sooner we can work towards the 3% target that we believe our natural NIM suggests. Our confidence comes from having $35 billion in the investment portfolio, while our typical earning assets level is around $150 billion. It might take us two to three years to align closer to our peers' investment portfolios in this low-rate environment, which gives us a significant advantage. Additionally, we have a much longer derivative portfolio compared to most of our competitors. These factors give us reasonable confidence that once we exit the liquidity environment, we will demonstrate solid margin performance.

Good morning. Thanks for squeezing me in. If we set hedging benefits aside, could you discuss the impact of rates at the long end of the curve remaining low, how much are you receiving each quarter on loan and securities portfolio paydowns from your back book? And what's the yield differential between what's coming off and what you're putting on across products that should also give us a sense of how much you could benefit from curve steeping?

Yeah. So, on the investment portfolio, you have seen our yields went down by 7 basis points and we're not investing anything. And the cash flows are reasonably small, so that's the step down in portfolio yields could be relatively small compared to what's happening, I will say about that. In terms of the other fixed portfolios, in the auto portfolio, which is really the portfolio that is growing right now, we are probably the current coupons are probably about 20 basis points or so below the portfolio yield. So when you think about that, that really is the portfolio, loan portfolio, that's the only one that's exposed to a fixed rate repricing.

Good morning. Just a couple on the credit front. Do you have what your criticized or classified assets did in the third quarter?

Yeah. Hey – it's Richard. We had a slight uptick in the third quarter. We'll give you the details in the Q. It was – it was really around the things that you would imagine across leisure as the cycle continues to extend.

Okay. All right. Regarding the credit situation, specifically not on the loan side, I understand that commercial mortgage-backed securities comprise a larger portion of your securities portfolio compared to your peers. You mentioned that commercial real estate is particularly at risk. Are you concerned about how this credit situation in commercial real estate might affect your bond investments?

We don't, I think we've – the commercial real estate the non-agency commercial – I'm sorry, non-agency commercial real estate book that we have is smaller portion. It's about $3 billion or so in the portfolio. And it's all super senior. So the built-in credit content of that portfolio does not give us any concern.

And John, it's Jamie, I guess since I bought a lot of those bonds, I can tell you that I keep an eye on them in the delinquency rates, like high single digits in the book. And the credit enhancement is approaching 40%. So we are a long way away from having any credit issues in that portfolio.

All right, Jamie. Thank you. That's helpful. If I can ask just one more question, I know you mentioned you're prioritizing investments in your asset and wealth management, including acquisitions, and we actually have seen some asset manager deals, larger ones, in the industry recently. Is that something you will consider as a potential acquisition of an asset manager for your business there?

Yeah. This is Greg. First off, as I mentioned in my prepared remarks, we’ve invested heavily in our fee businesses and registration of our fee businesses and diversification of our fee businesses. That's going to shoot well, wealth and asset management is one of the areas that we're very focused on with respect to additional opportunities both from the acquisition of an entity of nature speaking up or account NIM in that business, and as you've seen, that business has grown really well for us over the years, up 10% sequentially. So we'll continue to look for those opportunities. And, yes, that will be included in that potential opportunity.

Anything that was slightly larger than our size? So appetite, so we just read that one, right?

Excited similar question that Jonathan Callie asked about classified and criticized. So when you have the commercial extensions, do those get picked up a special mention? Or there is something else has to happen before those would migrate?

It's Richard again. If the two words are separate, we think about, when we think about workouts. The rating is the rating and then the workout strategies to workout strategy. Now, I think when we think about things that impact or reduce charge offs, clearly that's going to be in the criticize category, whether it's special mention or substandard. But we don't have the details about the breakup, between those two. Remember, if you think about as Tayfun mention that is a potential weakness. And there's a ton of judgment of what a potential weakness looks like. It just effectively means higher probability of default, substandard, again, another step down in terms of the fault probability. But again, that's a place where we're mitigates like collateral starts to come into play.

For squeezing me in just a couple of questions. Jamie, I think you mentioned if you're healthy going in, you'll be healthy going out, we're referring to consumers, corporates. And how are you thinking about, what the pandemic does change in the economy. And the way things work?

Yeah, I was referring to the consumer portfolio, where we have, so much me of information. And then we are just trying to make it as simple as possible. No matter how you slice and dice the data. The bottom line is and there was such a big focus on hardship related and hardship programs and deferral ways all of those things. And no matter how you slice it, it really just comes down to something as simple as you're coming in, you're going to be helping coming out, from a consumer perspective. And that's why that consumer performance really does reflect, frankly, credit losses and credit projections, as if unemployment weren't 3%. So we feel very, very good about that. I think, to your point about, how this ultimately plays out in the economy, it really is the competing forces of the path of the virus versus the path of further stimulus. So if we get an additional round of stimulus, we think the loss curves continue to flatten, perhaps elongate. But again, the peak charge-offs, aren't going to be all that high, relative to the great financial crisis, especially for a bank like the third. Where we've put a lot of thought and effort over the last five years to position the company, as well as we have so that we think our loss rates are a fourth of what they were in the great financial crisis. So we feel good about that.

So that means even with, if you think post-pandemic, even if unemployment runs at a higher run-rate, you think you'll be fine is what you're assuming?

We do, but again the stimulus and what that looks like will certainly be a big swing factor in those loss projections. So, for example, on the consumer side, we also are in different model efforts where we took out stimulus altogether, and so, we modeled that as a 20 basis point change in our outcomes if they are going to be no stimulus, so just to put guardrails on what these outcomes might look like.

One more, if I may, completely different topic. What are you seeing in terms deposits on the pure end basis were flattish, but more if you think about consumer and corporate deposits, Tayfun, Jamie, what are you all seeing in terms of the trends there? Slowing static? Still growing? Any color on that?

Vivek, we are seeing stable consumer deposits. They're not going down, but we're not seeing any noticeable increases in consumer deposits at very healthy levels there. But we are not seeing further increases. The commercial balance has continued to pick up and I suspect that will in the fourth quarter. It's an election quarter. And there's a lot of hesitancy on the corporate side to do anything different at this point. I do believe that come early 2021, hopefully, we will see some more emerging signs. It’s hard to predict yet which side it will go. But that will be dependent on the economy. So for the foreseeable future, we see maybe small upticks in corporate balances and stable consumer balance.