美國合眾銀行 (USB) 2020 Q2 法說會逐字稿

Welcome to the U.S. Bancorp's Second Quarter 2020 Earnings Conference Call. Following a review of the results by Andy Cecere, Chairman, President and Chief Executive Officer; and Terry Dolan, Vice Chair and Chief Financial Officer, there will be a formal question-and-answer session. (Operator Instructions) This call will be recorded and available for replay beginning today at approximately 12:00 p.m. Eastern through Wednesday, July 22, at 12 midnight Eastern.

I would now like to turn the conference over to Jen Thompson, Director of Investor Relations and Economic Analysis for U.S. Bancorp.

Thank you, Mitas, and good morning, everyone. With me today are Andy Cecere, our Chairman, President and CEO; and Terry Dolan, our Chief Financial Officer. Also joining us on the call today are our Chief Risk Officer, Jodi Richard; and our Chief Credit Officer, Mark Runkel.

During their prepared remarks, Andy and Terry will be referencing a slide presentation. A copy of the slide presentation as well as our earnings release and supplemental analyst schedules are available on our website at usbank.com.

I would like to remind you that any forward-looking statements made during today's call are subject to risk and uncertainty. Factors that could materially change our current forward-looking assumptions are described on Page 2 of today's presentation, in our press release and in our Form 10-K and subsequent reports on file with the SEC.

I'll now turn the call over to Andy.

Thanks, Jen, and good morning, everyone. Thank you for joining our call. Following our prepared remarks, Terry, Jodi, Mark and I will take any questions you have.

I'll begin on Slide 3. In the second quarter, we reported earnings per share of $0.41. Consistent with the industry, our performance is being impacted by the current economic environment. Loan growth reflected the impact of defensive draws by corporations in March and early April, strong mortgage loan growth, and the impact of the Paycheck Protection Program, which supported small businesses impacted by the COVID-19 situation. Increased liquidity in the financial system and a flight to quality drove strong deposit growth in the quarter.

Our healthy fee income growth this quarter is a testament to our diversified business model. Some fee lines, including our payments businesses, were negatively impacted by slower economic activity. However, we saw very strong growth in our mortgage and commercial products businesses. And while consumer spend activity remains pressured compared with a year ago, volume trends in each of our payments businesses have improved as some economies have started to reopen. Expenses were held relatively flat compared with the first quarter. We continue to manage our cost structure prudently and in line with a slower revenue growth environment.

Credit quality metrics in the second quarter reflected increased economic stress, offset by the beneficial impact of governance stimulus and forbearance and deferral programs. During the quarter, we increased our allowance for loan losses in response to economic conditions. We believe our reserve level at June 30 is appropriate based on the information we have available. Changes in the allowance will be dependent on actual credit performance and changes in economic conditions.

In the lower right quadrant of this slide, you can see that book value per share grew 2.8% compared with a year ago, and we remain well capitalized.

Slide 4 provides key performance metrics. We delivered a 7.1% return on tangible common equity in the second quarter, impacted by lower earnings according to the current economic environment.

Slide 5 shows our continually improving digital uptake trends. Shelter-in-place orders early in the quarter and temporary branch closures due to the COVID-19 have increased and increased in digital adoptions. Digital now accounts for more than 3/4 of all service transactions and about 46% of all loan sales. We expect digital adoption by customers to stick even after the economy fully reopens.

Now let me turn it over to Terry who will provide more color on the quarter.

Thanks, Andy. If you turn to Slide 6, I'll start with the balance sheet review followed by a discussion of second quarter earnings trends. Average loans grew 6.9% on a linked-quarter basis and increased 10.0% year-over-year. Growth includes $7.3 billion of loans made under the SBA's Paycheck Protection Program during the second quarter. The average loan size to these small businesses was approximately $73,000. Excluding the impact of PPP, average loans grew 5.4% on a linked-quarter basis and 8.5% year-over-year. Excluding PPP, linked quarter growth was primarily driven by growth in commercial loans and in mortgage loans.

In late first quarter, business customers drew down their lines to support business activity and future liquidity requirements. We started to see paydowns of commercial loans in May and the paydown activity accelerated in June as many customers access the capital markets. As of last week, about 2/3 of the defensive draws, we saw in the late first quarter and early second quarter, have been repaid. Strong residential mortgage growth reflected the low interest rate environment. Credit card balances declined in the quarter due to lower spend activity.

Turning to Slide 7. Average deposits increased 11.2% on a linked-quarter basis and grew 16.8% year-over-year. Average noninterest-bearing deposits increased 30.1% year-over-year, driven by corporate and commercial banking, consumer and business banking and wealth management and investment services.

Turning to Slide 8. While the net charge-off ratio was relatively stable on a linked-quarter basis, nonperforming assets increased 24% sequentially, reflecting increased economic stress. The nonperforming assets to loans plus other real estate owned ratio totaled 0.38% at June 30 compared with 0.30% at March 31. We have taken a proactive approach in evaluating credit quality across the entire commercial loan portfolio and considered risk rating changes in the evaluation of our allowance for credit losses.

Our loan loss provision was $1.7 billion in the second quarter, inclusive of $437 million of net charge-offs and a reserve build of $1.3 billion. The increase in the reserve was related to changes in risk ratings and deterioration in economic conditions, driven by the impact of COVID-19 on the U.S. and global economies and our expectation that credit losses and nonperforming assets will increase from current levels.

The increase in the allowance for credit loss is considered our best estimate of the impact of slower economic growth and elevated unemployment, partially offset by the benefits of government's stimulus programs as of June 30. While estimates are based on many quantitative factors and qualitative judgments, our base case outlook assumes an unemployment rate of 13% to 14% for the second quarter, declining to 9.0% in the fourth quarter of 2020 and to 7.8% by the fourth quarter of 2021.

Slide 9 highlights our key underwriting metrics and exposures to certain at-risk segments given the current environment. We have a strong relationship-based credit culture at U.S. Bank, supported by cash-flow-based lending that considers sensitivity to stress, proactive management and portfolio diversification, which allows us to support growth throughout the economic cycle and produces consistent results.

Slide 10 provides an earnings summary. In the second quarter of 2020, we reported $0.41 per share. These results were adversely affected by the current economic environment and the related impact to consumer and business spend and the expected increases in credit losses.

Turning to Slide 11. Net interest income on a fully taxable equivalent basis of $3.2 billion was essentially flat compared with the first quarter, in line with our expectations, as the impact of lower interest rates was partially offset by deposit and funding mix and loan growth. Also, as expected, the net interest margin declined by 29 basis points compared with the first quarter. The lower margin reflected lower rates and a flatter yield curve as well as higher cash balance of being maintained for liquidity to accommodate customer demand. While loan mix put pressure on the net interest margin, the earning asset impact was mostly offset by beneficial shifts in deposit and funding mix.

Slide 12 highlights trends in noninterest income. Strength in mortgage banking and commercial product revenue more than offset declines in the payment revenues. Mortgage banking revenue benefited from higher mortgage production and stronger gain-on-sale margins partially offset by the net impact of change in fair value of mortgage servicing rights and related hedging activity. Commercial product revenue reflected higher corporate bond issuance fees and trading revenue.

Slide 13 provides information about our payment services businesses, including exposures to impacted industries. Payments revenues was pressured by the impact of COVID-related shutdowns and reduced economic activity in the quarter. However, consumer sales trends improved throughout the quarter and that trajectory has continued in early July. Credit and debit card revenue declined 22.2% year-over-year and merchant processes services revenue declined 34.2% year-over-year. Both categories performing somewhat better than what we had expected. Corporate payment products revenue declined 39.5% year-over-year, in line with our expectations as business spending continues to reflect cautious sentiment.

Slide 14 -- turning to Slide 14. Noninterest expense was essentially flat on a linked-quarter basis, in line with our expectations. Second quarter expense reflected an increase in revenue related costs from mortgage and capital markets production and expense related to COVID-19 situation. During the quarter, we incurred incremental COVID-19 related costs of approximately $66 million. These expenses consisted of about $13 million related to increasing liabilities for potential future delivery claims related to the airline industry and other merchants and about $50 million related to premium pay for frontline workers and costs tied to providing a safe-working environment for our employees. We expect these incremental COVID expenses to begin to dissipate in the second half of the year.

Slide 15 highlights our capital position. At June 30, our common equity Tier 1 capital ratio, calculated in accordance with transitional regulatory capital requirements related to the current expected credit loss methodology implementation, was 9.0% at June 30. Our common equity Tier 1 capital ratio reflecting the full implementation of the current expected credit loss accounting methodology was 8.7%.

I'll now provide some forward-looking guidance. For the third quarter of 2020, we expect fully taxable equivalent net interest income to be relatively flat compared to the second quarter. We expect mortgage revenue to continue to be strong on a year-over-year basis in the third quarter, but it is likely to decline compared with the second quarter, reflecting slower refinancing activity for the industry. Payments revenue is likely to be adversely affected through the remainder of the year on a year-over-year basis, due to reduced consumer and business spending activity. However, we expect continued gradual improvement in sales volumes. We expect noninterest expenses to be relatively stable compared to the second quarter. Future levels of reserve build will depend on a number of factors, including changes in the outlook for credit quality, reflecting both economic conditions and portfolio performance and any beneficial offset from government stimulus. We will continue to assess the allowance -- the adequacy of the allowance for credit losses as credit conditions change. For the full year 2020, we expect our taxable equivalent tax rate to be approximately 15%.

I'll hand it back to Andy for closing remarks.

Thanks, Terry. I'll end my remarks on Slide 16, which highlights a few of the recent actions we've taken as a company to help support our customers, communities and employees.

We are operating in uncertain times, not only for the economy but for our society in general. However, I am confident that together we can make lasting and impactful changes that will leave us all better on the other side of these trying times. We are well positioned for near-term challenges, and we continue to manage this company with a long-term lens, and focus on maximizing shareholder value. Our capital and liquidity positions are strong, and our unique business model remains a differentiator for us.

I would highlight 3 things that we will continue to support our ability to deliver industry-leading returns through the cycle. First, as our second quarter results indicate, our diversified business mix reduces revenue and earnings volatility. And this quarter, it allowed us to deliver good revenue growth even against a challenging interest rate backdrop and an industry-wide slowdown in consumer spending activity. Second, our time-tested credit underwriting discipline puts us in a strong position to navigate through an economic downturn offsetting this up to return to prudent and consistent growth in the more favorable economic environment. And third, our culture remains the foundation, which informs not only what we do at U.S. Bank but how we do it. I couldn't be more proud of our employees have come together to support our customers and communities, and they face significant economic and social disruption. I want to take this opportunity to thank them for all their hard work and resiliency.

We will now open up the call for Q&A.

(Operator Instructions) Your first question comes from the line of Scott Siefers with Piper Sandler.

Let's say, I guess, Terry, a question for you just on -- you gave the NII expectations for the third quarter. I wonder if you could talk a little bit about the sort of the puts and takes, meaning balance sheet growth. And where you'd see the margin trajecting from here?

Yes. From a loan perspective, again, we would expect that we'll see year-over-year growth. But on a linked-quarter basis, clearly, it's going to be down. We're going to continue to see paydowns associated with those defensive draws that we had at the end of the first quarter and early second quarter. So that will put downward pressure on a linked-quarter basis.

PPP will actually probably help from a growth standpoint as we think about the second quarter, but it does start to dissipate in third and fourth quarter simply because of the loan forgiveness program. So...

On the consumer side, auto lending has generally been a little bit -- it was weak in April and May, and -- but it's gotten stronger in June. So we believe that's going to be a bright spot as we think about the third quarter. But overall, consumer lending is likely to be down simply because consumer spending has been down. So that's kind of the puts and takes if you think about loan growth.

Margin, we believe, is going to be relatively stable. It will be helped a little bit by PPP, but impacted a little bit. There will be a little bit of pressure on the yield curve side of the equation but relatively stable to the second quarter.

Okay. Perfect. And then just given the absolute level of interest rates, do fee waivers start to become an issue for -- in the money market area. And if I recall correctly from the last time rates were this, I think those show up in trust fees. If they are sort of something you guys are thinking about, where would they show up? And what's kind of the impact you guys would see?

Yes. I think the impact would be probably similar to what we saw last time, given -- but it will maybe a little bit more simply because of growth. But it will show up in trust and investment management fees because that's where our money market fund revenue gets recognized.

Your next question comes from the line of Matt O'Connor with Deutsche Bank.

Just to clarify on the net interest income outlook of stable quarter-to-quarter. Does that include some of the kind of benefit from PPP repaying or forbearing? And just what are your assumptions on that in terms of the next couple of quarters?

Yes. So it includes all of the puts and takes. Like I said, it will reflect a decline on a linked-quarter basis in terms of commercial loans because of the draws, but there will be some benefit associated with PPP. So it includes essentially all the puts and takes associated with net interest income.

Okay. And then I am wondering on the PPP, it seems like your kind of approach was more granular or to go after kind of smaller, really, the small, small businesses if I just look at your total amount funded versus applications. And just wondering if you could talk to that approach and maybe give us some insight in terms of the cost that you've incurred to originate those loans?

Matt, this is Andy. We took the applications as they came in, serving our customers initially and then ultimately outside of the bank. As you saw, we had over 101,000 applications, and the average balance was in the $70,000. So a lot of our customers are small business, and we helped a lot of employees, so the team did a great job. We started with a bit of a manual process and went to a much more automated process, certainly in the second round. So it was just based on the request that came in and the priority was really time based.

Okay. And then just the cost to originate, was it just kind of moving resources from one part of the bank to another or...?

Yes. Yes, it was, Matt. We actually had individuals from -- throughout the entire company, help us through this process, particularly the manual process that started and the technology as well. But yes, the entire bank was supportive.

Your next question comes from the line of Saul Martinez with UBS.

I wanted to drill down a little bit on your comments, Terry, on the payments business and sort of a gradual improvement there. I guess, first of all, could you just give us a little bit of a sense for the -- how much the consumer recovered? And they seemed, like, in June, the year-on-year declines in acquiring volumes and in card volumes is really, really lessened. But can you just give us a sense of what, say, the exit rates were in terms of volumes in those categories in June versus March? And I guess, as an adjunct to that, why wouldn't that suggest that, at least sequentially, you should see pretty sharp improvements in terms of the sequential growth in issuing and acquiring revenue versus release versus the second quarter. Obviously, year-on-year is tough, but versus the second quarter, it would seem to suggest that you could see a nice improvement sequentially. And I just want to get your sense as to whether I'm thinking about that right?

Yes. Saul, I think you're right on. I think when we end up looking at our payments business on a sequential basis, we will see growth. Particularly in the credit card and the merchant, the corporate payments, we would also expect growth, but maybe not at the same level, simply because sales volumes there -- our commercial spend -- our commercial customers are still fairly cautious. But to kind of give you some perspective, at the end of -- or in April, we saw on the merchant side of the equation, consumer spend was down almost between 50%, 55% kind of in that ballpark. And today, it's really back to spend levels that are closer to about 20%. So that has come back really very nicely. The things that are going, it's going to continue to impact for a while is the mix associated with the airline industry and some of the entertainment, but it has come back very nice, and to your point on sequential growth, is right on.

With respect to credit card, credit card, we had said, was down kind of in that 30% range in April, and that has come back nicely as well. In terms of credit card, it is still down. It's down around 10% to 12%. We would expect that trajectory to continue so into the third quarter. Debit card revenue -- or sales, excuse me, actually had been pretty strong. And the sales on the debit card side has been kind of up 10% to 12% kind of in that range. And while we wouldn't expect it to be maybe quite at that higher level in the third quarter, it's still, I think, going to be relatively strong.

And then on the CPS side of the equation, CPS, again, the commercial spend has been pretty cautious. It was down kind of in the magnitude of 30% to 35% in that April sort of time frame. And it's still down around somewhere between 25% and 30%. We do expect it to get a little better than that in the third quarter for a couple of reasons, simply because government spend tends to be strongest in the third quarter. So hopefully, that gives you some insights or perspective.

Yes. No, that's super helpful. If I could squeeze another one in on fees. The deposit service charge is obviously down a lot, and you commented about fee waivers related to customer, related to COVID. I mean how do we think about that going forward? And I don't know if you can quantify that? Or how do we -- or just give us a sense of how that, I think, $133 million, how that could compare to maybe a more normalized level in the coming quarters?

Yes. Similar sort of impacts as consumer spend and just activity has declined. And then you have the stimulus checks and all sorts of here facing, just incidence levels related to NSF and fee waivers in terms of helping our customers has impacted the second quarter. On a sequential basis, we would expect that will come back nicely in the third quarter. But on a year-over-year basis, it's still going to be down simply because consumer activity is down, similar to merchant or credit card.

So it will take some time to get back. So it's sort of a more normalized or was more normalized...

Yes, that's right.

Your next question comes from the line of Erika Najarian with Bank of America.

My first question is on the reserve. And this is a question that all your peers have been getting during this earnings season. So I always like to think in a CECL world that your reserve to loan ratio of 2.5%, 4% represents a cumulative loss rate for the recession that represents, let's say, let's say, 2 years. And I guess the question here is that, is that your view? I guess, it's another way of asking, are you done in terms of reserve building? And related to that, your peers have also talked about the base case, but that the base case tends to be one of, let's say, 5-or-so different scenarios and those scenarios are weighted. And so I'm wondering if you could give us some insight in terms of, as you had built your reserve, how much weight that base case was taken into account versus perhaps other scenario?

Yes. So let me take the first question. And when we think about the reserving, you're absolutely right. You make your estimates at the end of any particular quarter based upon the information that you have available at that particular point in time. And certainly at June 30, we believe that the reserve is appropriate for the cumulative losses that are there. So we wouldn't expect future increases in the reserve. But again, that is going to be highly dependent upon what changes, either in terms of economic factors or if our credit quality changes differently than what we had expected. So the important thing is that we're going to continue to assess the reserve every quarter based upon the information that we have available to us. But you are right. Theoretically, that is how CECL works, and that's how we're trying to apply it.

Coming to your second question, the information that I ended up giving to you with respect to unemployment, now keep in mind, unemployment is an important factor, but there's like 200 different multiples that are a part of the modeling process. So it's pretty complex because you've got a lot of different types of portfolios, et cetera. But unemployment, the information I gave you was really the weighted average across many different multiple scenarios that we ended up looking at.

So you are right. When we look at this, we look at information from many sources in terms of things like unemployment, GDP, et cetera, et cetera. We develop a base case, if you will, but then we look at multiple scenarios around that base case and weighed it. But the information that I gave you was weighted based upon those multiples. So it should give you some comparability when you think about that. Andy, have you anything to add?

No, you've said it well.

Got it. And my follow-up question is to Andy. So Andy, I think, what was particularly impressive about this quarter is your PPNR resiliency. And obviously, the forward look would imply that this will continue. And Terry just told us that we could be done in terms of reserve building. As we think about the future and as we think about a more difficult operating environment for banks, how are you thinking about inorganic growth strategies from here?

Well, Erika, first, as you mentioned, I think our diversified revenue mix helps a lot. And this is -- this quarter probably represented it very well. We had some pressure on payments because of the spend activity that Terry talked about. But mortgage and commercial products had a -- it hit it out of the park this quarter in terms of positive. So -- and then the other part of our diversification is how much of our revenue comes from the balance sheet or net interest income as well as fee revenue. It's sort of a mix back 50-50 there. So that really helps in environments like this, and different businesses do well in different economic cycles.

As we think about the future, I think, we are planning for a future that has continued dull rates. It will take a while for spend to get back to normal. So we're going to manage our expenses in that -- with that thought in mind, which is what we're doing today. And we're going to continue to invest in the businesses that have opportunity as well as the digital initiatives that I talked about. And those digital initiatives will offer not only the opportunity for our customers to connect with us in a virtual means, I think it will also offer expense opportunities in the long run. So those are the ways we're thinking about it.

And just any thoughts on inorganic strategies, acquisitions, anything to say more bluntly?

Yes. Thanks for being blunt. So we will look at opportunities that come up. The only thing I'd say is, in this environment, Erika, there's a lot of uncertainty. And it's certainly not a clear vision in terms of the future, even for us. So to look at someone else with that lens will be challenging. But I do think opportunities will come up because of the stresses that are out there, and we'll take a look.

Your next question comes from the line of Mike Mayo with Wells Fargo Securities.

Just I want to challenge your -- look, you're one of the most conservative banks, but I want to challenge some of your conservatism. So on your base case, again, 9% unemployment by the end of this year, I know it's a lot of scenarios, and it's weighted average and all that. But at least one of your peers was more conservative than that. And I know that's the Fed base case, so there's nothing crazy about it. It's just -- I thought why not be more conservative if you have the flexibility or when you take the weighted average of the different scenarios -- I'm pushing back a little bit more, like this seems like peak reserve builds, and you said that, but if your economic assumptions are wrong, then that won't be the case, so why not be more conservative there?

And along those lines, your payments comment that it should improve sequentially kind of makes sense, but look, we just had a big increase in COVID cases, which leads to more deaths, which leads to some closing down, and how are you feeling about that progression?

Yes. So maybe to address the first question. When you end up establishing the reserve, you have to establish what you believe is appropriate based upon the information that you have available to us. And while we use things like Moody's Analytics and other sources in order to kind of come up with that projection of what unemployment, as an example, looks like, so you have to make sure that your reserve is appropriate based upon the information that you have. You can't build in tons of conservatism, so to speak, into it.

But again, part of it is, we'll have to kind of wait and see on the payments side of the equation in terms of COVID cases. Based upon our estimates right now, I think that this go around versus last go around, I think that states are continuing to try to stay open to the best that they can. I think you have different sort of health treatments and all sorts of different things that exist based upon better information or different information than what existed before. But quite honestly, it's -- we're going to find out. There's a lot of uncertainty, and it's too early to know.

Yes. And I'd add on. Mike, I think you're right. Things are changing every day and the facts change daily, weekly, sometimes hourly. So we're just going to continue to assess and manage the company, given the changes that are out there. What Terry is sounding, what are you seeing right now, and as he said, we get data every day, and we're going to continue to assess what we think is going to happen. We're running a lot of models. We're sharing with our Board a lot of scenarios, including a much harsher scenario and understanding what would occur in that. So -- but you're right. I mean there's a lot of unknown yet, and we are being conservative in the way we're approaching our financial modeling.

And then one follow-up question. Look, your third slide of substance, it's Slide #5, but the digital engagement trends, I mean you're certainly putting that front and center. Can you bring us up to date, like, as of like to the moment, of what's happening with your digital engagement? And what does that mean in terms of branches and national expansion and anything else? Because if you're putting this as your third slide in your earnings deck, it's clearly -- I know it's always been important, but it seems like it's now being put on steroids in terms of the way you're highlighting this, which must mean some bigger part of the strategy.

So Mike, it has always been important, but I do think the recent events and the customer behavior changes has even accelerated that further. And you can see that in the numbers, nearly 80% of transactions now occurring in a digital fashion. The branch activity as far as transactions is down a lot. On the sales side, I talked about the loan sales. But actually, total sales in the branches have doubled since -- excuse me, on a digital platform have doubled versus a year ago. And so we do expect those digital investments, both do-it-yourself and do-it-together, in other words, co-browsing or virtual activity is going to continue to be important, not just for the consumer but across many business lines. So that investment that we're making is important on 2 fronts. It's important to make sure we're giving the customer the best experience and connecting with them in the ways they choose to, and it's also offering efficiencies in the long run. As we talked about, we do -- we were -- we announced over a year ago that we expect to have 10% to 15% fewer branches. And I would expect that number to increase in terms of the number of fewer branches that we have because of this change in customer behavior. Branches will still be important, but the number of them and the size of them will be fewer and less.

Any number on those branches, the updated number?

We don't have a number on it yet. We continue to assess. And as we think about the changes that are occurring and the closures that are out there, we'll continue to assess what we expect, but I do expect it to be higher than the 10% to 15%.

Our next question comes from the line of David Long with Raymond James.

Going back to the Paycheck Protection Program, we talked a little bit about the expectations for forgiveness there. But do you have a time line on where you think your $7-plus billion in PPP loans may start to be forgiven?

Yes. Well, we do expect that there's going to be some forgiveness that's going to take place as early as the third quarter. So there's going to be some runoff of the balances just because of that. I think the vast majority of it happens late third, fourth and early first quarter in terms of timing. That's our expectation right now.

Got it. Okay. And then on the deposit side, obviously, very good deposit growth there. How do you see the trajectory of that playing out, taking into consideration the PPP and all liquidity that are -- that's built in now? And how does that impact the size of the balance sheet through the rest of the year?

Yes. Well, our expectation is that deposit growth is going to continue to be strong, at least through the end of the year, if not into early next year. And it's really highly correlated to the amount of liquidity that the Fed is continuing to pump into the system. The impacts from a balance sheet perspective, as you know, I think, you certainly have a funding benefit associated with that. The challenge is always trying to identify if you get the loan growth grade; if you don't, you're going to have to look for opportunities on the investment side of the equation. So -- but we do expect strong growth in deposits into the foreseeable future because of the Fed programs.

Your next question comes from the line of Ken Usdin with Jefferies.

Just one question on the expense side. Obviously, much stronger-than-expected revenues, especially out of mortgage, but noting that you're talking about some of the COVID costs coming off and that even some of the, like, costs -- I would think incentive-related cost type of stuff like mortgage will be softer sequentially. You're still talking about flattish expenses sequentially. And can you -- I was wondering if maybe you can kind of put that in context with some of the broader-reaching comments you just made about the future of the expense base in terms of why you don't only expect to see flat expenses sequentially?

Yes. The areas that we're going to see growth or not -- I mean on a sequential basis, I do think you're going to see revenue related sort of expenses coming down a bit. You will see COVID-related expenses coming down. There's still going to be a fairly significant amount of PPP and costs associated with all sorts of things that will end up happening in the third quarter. The other thing that I think that ends up coming into play is just timing with respect to, for example, other loan expenses and when they end up getting recognized relative to the mortgage production that occurred. So we recognize revenue in the quarter in which the application is taken unlocked, but a lot of the expenses end up happening in a quarter that's following that, simply because of the timing of closing loans and that sort of thing. So that's a big driver that ends up impacting the sequential growth from second to third quarter that you have to keep in mind.

Okay. And a follow-up on the money market fee waivers. You had mentioned earlier that you would expect them to be larger than last time. Can you put that into a numeric context for us? How much were you waiving either on an annual basis or a peak through the last cycle? And how is the asset management complex different in terms of mix today versus then?

Yes. In terms of the mix of the product that we end up offering, I think, there's probably a more government or govi-based sort of money market as opposed to prime based. The prime base declined fairly significantly. But the overall -- when you end up looking at assets under management, it's certainly we're at a higher level today than 10 years ago. That's the reason. I think that the rate of the fee waivers will be pretty similar, but just the assets under management and the wealth management space is higher. And I'm trying to put my fingers on kind of what that looks like right now, but we certainly can kind of get back to you, Ken.

Okay. I'll follow up.

Terry, I think, fee waivers will -- when they are implemented will be somewhere in that $30 million a quarter range, plus or minus.

Yes.

Your next question comes from the line of Vivek Juneja with JPMorgan.

A couple of ones. Firstly, on credit cards, can you give us the reserves to cards? And also, what are you seeing in terms of hard customers where deferrals are coming off? Have you started to see deferrals come off? And what's the reaction been in terms of customers paying the full amount or asking to extend the deferrals?

Thanks, Vivek. I'm going to ask Mark Runkel, our Chief Credit Officer, to respond to that. Mark?

The reserve ratio on the credit card was 10.14% at the end of June, that's question number one. The second in terms of those customers that have come off some of the programs that we've got in place, we've seen very strong payment performance to date. About 70% of those customers have started to make normal payments after those periods of time. We've seen a few of those, about 20% re-enroll and then the rest has moved into delinquency. So -- so far, so good on customer performance.

Okay. That's great. Terry, if I may just sneak in one for you. Other income, I know it had a lot of noise this quarter, what would you suggest as a run rate for us to use?

Yes. So if you kind of think about the -- when I end up looking at the current run rate, just given the environment that we're in -- I would end up looking at second quarter as a pretty good estimate of what future quarters are going to look like, at least for a while.

Meaning at this $130 million that you had?

Yes. Yes.

Your next question comes from the line of Gerard Cassidy with RBC.

Andy, we've seen some real crosscurrents in economic information, for example, the Empire State Manufacturing Index Canal today positive first time since February, and industrial production coming in a little better today as well. But on the other hand, the initial unemployment claims numbers remain very elevated. What are your customers, when you talk to your customers, and I understand the restaurants and the leisure guys are still feeling a lot of pain, but can you give us some color on what are your commercial customers telling you? What are they seeing?

Yes. So first, you're absolutely right, there are some mixed signals. And I think the mixed signals is the sort of the competing factors of the stress in the economy from the shutdown, offset by the stimulus that's occurring across many categories, unemployment benefits, the stimulus checks, PPP, all those things. And those are competing forces, which makes modeling and projecting very difficult in this environment. I would say small businesses are struggling the most, for a lot of different reasons, principally because they have less cushion than the larger companies. The larger companies, as Terry mentioned, initially, they were very defensive, drawing down in excess of $22 billion, but about 2/3 of that is paid back. So while certain industries continue to be stressed, you're seeing other industries that are actually doing a little bit better in this environment. So small, challenged; middle and large, mixed. Some doing well and some not so much. Terry, what would you add or remark?

No, I think that's what, I mean, I think is right.

And then as a follow-up, in the reserving -- in the provisioning you guys did this quarter, I know you mentioned there's a lot of moving parts, as you just touched on it, Andy. But how much would you say of the provisioning was allocated to specific credits that you're now starting to see obviously distressed versus just building up the general reserves?

Yes. I mean I'll have Mark kind of add to this. But certainly, when we end up looking at net charge-offs and things like that, there hasn't been a lot of movement, especially on the consumer side of the equation. You are starting to see nonperforming assets on commercial starting to grow, as we talked about, but it's still, what I would say, relatively early. I think the government stimulus programs and things like that have, kind of, at least, for some period of time, muted; some of those underlying credit characteristics that you typically see. So more of it or most of it is really driven based upon kind of our outlook when we think about the economic conditions going forward.

And then at the end, looking at it, it's kind of a split between products, it's probably more heavily weighted, 60-plus percent of the reserve build really is more focused on wholesale and commercial real estate as opposed to consumer at this particular point in time. Mark, what would you add?

The only other thing I might add is, as you mentioned this in the early comments, we've gone through the portfolio very granular and downgraded the credits appropriately. So we feel like all of that's been factored into the analysis and the allowance. But the bulk of the change is really the economic assumptions as Terry noted.

Ken, coming back to your question on fee waivers, the impact, second to third quarter, so on a sequential basis of fee waivers, will be about $30 million net ballpark.

And your final question comes from the line of David Smith with Autonomous.

Just to clarify on the expense guidance. 3Q stable to 2Q relatively. Does that include the COVID expenses in 2Q?

Yes. That's -- it's total expenses. It's all inclusive. And again, we'll see benefit of COVID coming down, but some of those production-type costs that I talked about earlier are going up.

And also, any particular color you could give on the jump in nonperforming loans in commercial real estate?

Mark?

Yes. I would just say, they are really focused in on a couple of different industries that we've highlighted. One is on the commercial side, there's really heavily energy and the retail sector. And then on the commercial real estate is going to be some of the retail-related exposure as well. It's coming off a very low point, if you note, but those are the industries that have been most impacted to date.

At this time, I would like to turn the call back over to management for any closing remarks.

Thank you, everyone, for listening to our earnings call. Please contact the Investor Relations department if you have any follow-up questions.

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