US Bancorp (NYSE: USB) Q3 2020 earnings call dated Oct. 14, 2020
Corporate Participants:
Jennifer A. Thompson — Executive Vice President, Investor Relations
Andrew Cecere — President and Chief Executive Officer
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Mark G. Runkel — Executive Vice President and Chief Credit Officer
Analysts:
John Pancari — Evercore ISI — Analyst
Bill Carcache — Wolfe Research — Analyst
Gerard Cassidy — RBC Capital Markets — Analyst
Erika Najarian — Bank of America — Analyst
Vivek Juneja — J.P. Morgan — Analyst
Peter Winter — Wedbush Securities — Analyst
Christopher Spahr — Wells Fargo Securities — Analyst
Scott Siefers — Piper Sandler — Analyst
David Smith — Autonomous — Analyst
Presentation:
Operator
Welcome to the U.S. Bancorp’s Third 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 o’clock p.m. Eastern Time through Wednesday, October 21 at 12 o’clock midnight Eastern Time.
I will now turn the conference over to Jen Thompson, Director of Investor Relations and Economic Analysis for U.S. Bancorp.
Jennifer A. Thompson — Executive Vice President, Investor Relations
Thank you, Cindy, 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 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’d like to remind you that any forward-looking statements made during today’s call are subject to risks 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.
Andrew Cecere — President and Chief Executive Officer
Thanks, Jen. Good morning, everyone, and 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 third quarter, we reported earnings per share of $0.99. Our revenue of $6 billion was higher on both the linked quarter and year-over-year basis, driven by strong fee income performance across a number of business lines. Credit quality metrics deteriorated, in line with our expectations, primarily reflecting more challenging operating conditions for some commercial sectors impacted by COVID-19. However, our reserve build in the third quarter was limited to the addition related to our acquisition of $1.2 billion of credit card loans from State Farm.
Our capital and liquidity positions remained strong and our deposit mix improved in the third quarter as demand deposits increased sharply, while higher cost time deposits declined. The bottom right quadrant of this slide shows our strong capital position. At September 30, our common equity Tier 1 capital ratio was 9.4%.
Slide 4 provides key performance metrics. In the third quarter, we delivered a 16.6% return on tangible common equity. Slide 5 shows steady improvement in digital activities, notably, digital sales now account for more than half of all loan sales, highlighting how our business investments are supporting our customers’ evolving behavior. Digital remains a focused investment area for us, and as more activity moves to the digital channel, it will drive customer loyalty and top line growth as well as cost savings and efficiency opportunities.
Now, let me turn the call over to Terry, who will provide more color on the quarter.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Thanks, Andy. If you turn to Slide 6, I’ll start with the balance sheet review, followed by a discussion of third quarter earnings trends. Average loans declined 2.2% compared with the second quarter. In early July, we added $1.2 billion in credit card loans acquired as part of our new alliance with State Farm. Additionally, loans made under the SBA Paycheck Protection Program increased by $2.8 billion on average in the quarter. Excluding the State Farm and PPP loans, average loans declined by 3.5% as strong residential mortgage growth was more than offset by the impact of paydowns in the C&I portfolio, given strong capital markets activities during the third quarter.
Turning to Slide 7, average deposits increased 0.6% compared with the second quarter, and the overall deposit mix continues to be favorable. Our non-interest bearing deposits grew 15.0%, while time deposits declined 21.7%. In early October, we closed on the acquisition of $10 billion of deposits from State Farm, which will add to deposit balances and increase liquidity in the fourth quarter.
Turning to Slide 8, as expected, under the current economic environment, credit quality deteriorated in the third quarter. Our net charge-off ratio was 0.66% in the third quarter, up 11 basis points compared with the second quarter as higher losses in our commercial and commercial real estate portfolios were partially offset by lower credit card and total other retail net charge-offs. The ratio of non-performing assets to loans and other real estate was 0.41% at the end of the third quarter, compared with 0.38% at the end of the second quarter. Our loan loss provision was $635 million in the third quarter. The provision amount included $120 million related to the credit card loans acquired from State Farm at the beginning of the quarter. Our allowance for credit losses as of September 30 totaled $8.0 billion or 2.61% of loans. The allowance level reflected our best estimate of the impact of slower economic growth and elevated unemployment, partially offset by the consideration of benefits of government stimulus programs. While estimates are based on many quantitative factors and qualitative judgments, our base case outlook assumes an unemployment rate of 8.9% for the third quarter, increasing slightly to 9.1% in the fourth quarter of 2020 before declining somewhat to 7.8% by the fourth quarter of 2021.
Slide 9 highlights our key underwriting metrics and loan loss allowance breakdown by loan category. 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.
Turning to Slide 10, exposures to certain at-risk segments and — given the current environment are stable compared with the second quarter. The top left table shows that the volume of payment relief has declined meaningfully since the second quarter. New requests have reached a steady state since peaking in April.
Slide 11 provides an earnings summary. In the third quarter of 2020, we earned $0.99 per diluted share. Turning to Slide 12, net interest income on a fully taxable equivalent basis of $3.3 billion was up 0.9% compared with the second quarter as a 5 basis point increase in our net interest margin offset the impact of a decrease in loan volume. The increase in the net interest margin was driven by lower cash balances. We expect cash balances to increase in the fourth quarter, primarily due to the recent acquisition of the deposits from State Farm.
Slide 13 highlights trends in non-interest income. Strength in mortgage banking and commercial product revenue drove the year-over-year increase, while linked quarter growth reflected higher payments revenue and deposit service charges as consumer spend activity continued to recover from second quarter lows.
Slide 14 provides information about our payment services business lines, including exposures to the impacted industries. Year-over-year payments revenue was pressured by reduced consumer spend compared with pre-COVID levels. However, consumer sales trends improved throughout the quarter, as state and local economies continued to improve and spend activity increased. In the third quarter, credit and debit card revenue benefited from the processing of state unemployment distribution programs that utilize our prepaid cards. We expect this activity to moderate in the fourth quarter. Over the long term, payments revenues are closely tied to spend activity and the resulting sales volume trends.
Turning to Slide 15, non-interest expenses increased 7.2% on a year-over-year basis, driven by higher costs related to the pre-card business, COVID-19-related expenses, and higher revenue-related costs from mortgage and capital markets production. On a linked quarter basis, non-interest expenses increased 1.6%. Relative to our expectations we saw an increase in medical claims expenses as employees regained access to medical services following the stay-at-home orders and higher revenue-related costs tied to the mortgage and capital markets activities, and most notably, higher prepaid card processing activities. Slide 16 highlights our capital position. Our common equity Tier 1 capital ratio at September 30 was 9.4%.
I’ll now provide some forward-looking guidance. For the fourth quarter of 2020, we expect fully taxable equivalent net interest income to be flat to down slightly. We expect mortgage revenue to decline somewhat compared to the third quarter, reflecting slower refinancing activity for the industry and seasonality. Payments revenue is likely to continue to be adversely affected on a year-over-year basis due to reduced consumer and business spend activity. We expect non-interest expenses to be relatively stable compared to the third quarter. We expect net charge-offs and non-performing assets to continue to increase from current levels, reflective of economic conditions. Future levels of reserves will depend on a number of factors, including loan production, size and mix, changes in the outlook of credit — for credit quality, reflecting both economic conditions and portfolio performance, and any beneficial offset from government stimulus. We will continue to assess the adequacy of the allowance for losses as credit conditions change. For the full year of 2020, we expect taxable equivalent — our taxable equivalent tax rate to be approximately 19%.
I will hand it back to Andy for closing remarks.
Andrew Cecere — President and Chief Executive Officer
Thanks, Terry. The economy is showing signs of recovery, but consumer spending remains below pre-COVID levels, the unemployment rate is high by historical standards, and the outlook remains uncertain. However, we are well positioned to navigate through a more challenging economic and interest rate environment. We are well reserved, well capitalized, and our liquidity position is strong. We remain committed to creating long-term value for our shareholders by delivering above average returns on equity through this cycle, driven by both superior PPNR results and credit performance.
Our third quarter earnings result highlights the benefits of our diversified business mix and our credit underwriting discipline. We are optimistic that we can continue to win market share over time across our high return fee businesses such as mortgage, payments, and trust and investment services. We will continue to adjust our strategy as consumer preferences evolve, including adjusting our distribution network. Our alliance with State Farm, which brings our digital banking capabilities together with over 1,900 State Farm agents is an example how we can meaningfully expand our reach in a low cost, highly efficient way.
Separately, about 18 months ago, we announced the branch transformation initiative aimed at better serving our customers in light of their evolving preferences. At that time, we announced that we would close 10% to 15% of our branches by early 2021. To date, we have closed about 10%. We now plan to close an additional 15% by early 2021. The rate majority of these additional closures were branches that were impacted by COVID-19 and they will remain closed. While physical branches and personal interactions will always be important, we need fewer branches today than we did even a few years ago, and the branches of the future need to be more advice centers than locations where transactions take place.
I’ll conclude on Slide 17. Our culture has always been a key differentiator of the U.S. bank story, and we remain committed to supporting our customers, our communities, and our employees in the good times as well as the more challenging times. While it has always been important to us, today, there is even a greater emphasis on ensuring that we do that in a deliberately inclusive way. I want to thank our employees who bring our culture to life every day and for all their hard work throughout the year. We’ll now open up the call to Q&A.
Questions and Answers:
Operator
Your first question is from John Pancari with Evercore ISI.
John Pancari — Evercore ISI — Analyst
Good morning.
Andrew Cecere — President and Chief Executive Officer
Good morning, John.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Hey, John.
John Pancari — Evercore ISI — Analyst
Just on the — on that comment regarding the branches, is that — can you help us think about the cost impact of the step-up in the consolidation of the branches? Is that factored into your expectations on expenses? And I guess if you can kind of just elaborate on how you see expenses trajecting and if this could impact your efficiency expectations. Thanks.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah, John. Great question. And when we think about expenses, our goal is, especially in this environment, to be able to manage expenses relatively flat. And it is one of the things that we have kind of considered or factored into that process. The cost saves associated with the branches will be important, part of that we do expect will flow to the bottom line, and part of it, we’ll continue to use to reinvest in our business, particularly in the digital capabilities, and kind of as you can imagine, the more we’re investing in that, the greater the opportunity with respect to future cost savings will come as well. So, that’s kind of how we’re thinking about it.
John Pancari — Evercore ISI — Analyst
Okay. And then just one more thing on that front, are you also — do you also see opportunities to ratchet up corporate real estate rationalization outside of the branches and could that be incremental savings on top of this?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. So, we’ll look not only at the branches, we’ll also look at our corporate real estate. One of the things we’re still kind of working through is like, what is the next horizon from a workforce management perspective look like, because that will obviously impact corporate real estate. But I do think that there is opportunity for us to be able to consolidate as we think about 2021.
John Pancari — Evercore ISI — Analyst
Okay. Thanks, Terry. And then just one more thing on the revenue side, I know that your fees definitely came in better this quarter, helped by the card and processing fees, and I just want to get your thoughts on your payments revenues, given just where you see payment — consumer and corporate payments trajecting through the — over the next several months. I know you comment on the prepaid card expectation, but wanted to get your thoughts more broadly on the payments trajectory here.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. So one thing I would say is that since the second quarter, we’ve continued to see improvement in consumer and business spend, which is good across all of those different areas. And at the end of looking at the one slide, you will see that excluding the airline, travel, entertainment, the sales consumer spend has actually come back very nicely. And so, I think that on a go-forward basis, the impacts will be really some of those at-risk industries for some period of time. Ultimately, the trajectory of growth in the payments business will be tied to that consumer and business spend overall. There will be a little bit of lumpiness in the third quarter, for example, with respect to the prepaid card, which is really driven by the stimulus programs. If we see a stimulus program in the fourth and first quarter, that might give us a little bit of lift, but it’s not something that we’re contemplating at this particular point in time.
Andrew Cecere — President and Chief Executive Officer
And I would just add, this is Andy, John, as Terry mentioned, we see continued improvement across all three categories; merchant acquiring, credit card issuing; as well as the corporate payment system. The trough for all those were occurred in April, and each and every month since then there has been slight improvement in spend across all those categories.
John Pancari — Evercore ISI — Analyst
Got it. Okay, great. Thanks, Andy. Thanks, Terry.
Andrew Cecere — President and Chief Executive Officer
Yeah.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah.
Operator
Your next question is from Bill Carcache with Wolfe Research.
Bill Carcache — Wolfe Research — Analyst
Thanks. Good morning, Andy. Hi, good morning, Andy and Terry. It sounds like you guys have the unemployment rate rising from here. Is that just conservatism or is there something else that you guys are seeing? If you could just give a little bit of color on the top line.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. I don’t think it’s anything specific that we’re seeing. I do think though that maybe our expectation, if you think about Corporate America, you’re starting to see some reductions in force, whether it’s in the airline industry and some of the entertainment industries. I think that because of the stimulus programs that have existed, some of those companies have deferred taking some of those actions. Our expectation, as we think about the fourth quarter, is some of those actions are going to impact the unemployment levels before they start to come back down.
Bill Carcache — Wolfe Research — Analyst
Understood. And I guess a separate question is how would you characterize your gearing to the short end versus the long end of the curve? And if there is any sensitivity that you could give that would be great.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
How we are — I’m sorry?
Andrew Cecere — President and Chief Executive Officer
Interest rate sensitivity in short and long end.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. So, maybe just stepping back, our balance sheet is about 50% floating, 50% fixed. We’ll continue to see a little bit of churn on the fixed side for some period of time. The — we’re always looking for opportunities to be able to reinvest in the investment portfolio with a little bit more duration and we’ll kind of continue to manage that. Our asset liability position widened, so we’re asset sensitive and that widened in the first quarter quite a bit, and since then, it’s been relatively stable, and we’ll continue to kind of manage that way for some period of time. When we bring on the deposits as an example, we’ll hold that generally on the short end by increasing liquidity levels because I think that future opportunity in terms of rate increases is a better trade-off than investing immediately today.
Bill Carcache — Wolfe Research — Analyst
Got it. Thanks, Terry. And if I could squeeze in one last one. Some of your competitors have hedging programs in place that have served as a source of support for their net interest margins, but you guys haven’t benefited materially from hedges. And I guess as hedges begin to roll off, that should benefit you guys relative to others because you won’t just have — you won’t have to deal with those future headwinds. Is that by design or I guess — just wondering if there is any color that you can give around hedging strategy and positioning?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. Historically, we typically just use the balance sheet as a way of kind of hedging or setting up our asset liability position. So, we utilize, for example, duration and composition of our investment portfolio in order to do that. So we don’t do a lot of active hedging. I will tell you, though, we did do some hedging middle of last year, and when rates came down nicely, we were able to lock in the gains associated with it, which I think will help a bit, but it’s not a major part of our program.
Bill Carcache — Wolfe Research — Analyst
Understood. Thank you for taking my questions.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Thanks, Bill.
Andrew Cecere — President and Chief Executive Officer
Thank you.
Operator
Your next question comes from Gerard Cassidy from RBC.
Andrew Cecere — President and Chief Executive Officer
Hey, Gerard. Good morning.
Gerard Cassidy — RBC Capital Markets — Analyst
Good morning, Andy. Good morning, Terry. Good morning, Andy. Can you guys give us some additional color, I noticed and you pointed out in the call that you took some charge-offs in commercial real estate in the COVID-related sectors? Can you give us some color on what you’re seeing in terms of the write-downs that are required to move through this period of time with these types of sectors?
Mark G. Runkel — Executive Vice President and Chief Credit Officer
Hey, good morning, Gerard, this is Mark Runkel. I’ll answer that question. First off, I would just start off by saying our credit quality is performing in line with our expectations at this point. And as you know, we have a couple of guiding principles in how we think about managing credit. First being is that we stay very consistent in our underwriting throughout the cycle. Number two is, we’re very proactive at identifying and working through problem credits when they arise. And so, what I would say is, the result of that is, is and you have seen this as our criticized commitments did increase early in the downturn in this particular cycle. And so, as we think of our charge-offs, the level of charge-offs at least this quarter did increase as a result of that. So it’s really a timing issue. And in the end, we think we’re going to continue to have very superior credit quality performance throughout the economic cycle.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
And I know Mark, we’ve been very actively managing that portfolio of the at-risk industries in order to bring that exposure down.
Mark G. Runkel — Executive Vice President and Chief Credit Officer
That’s right.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
That’s a driver behind the net charge-off levels.
Mark G. Runkel — Executive Vice President and Chief Credit Officer
That’s right.
Gerard Cassidy — RBC Capital Markets — Analyst
And within these portfolios, I didn’t know if there was any hotel properties that may have had to be written down. What you were actually seeing in terms of on an individual credit basis, are you seeing 10% or 15% write downs, the ones that you do have the write down?
Mark G. Runkel — Executive Vice President and Chief Credit Officer
Yeah, I think — I mean that’s exactly the range that we’re currently seeing on those properties, and it’s really property specific. So it does vary greatly, but those that are most distressed are in that kind of range that you talked about.
Gerard Cassidy — RBC Capital Markets — Analyst
I see. And then just as a follow-up, some of the bigger universal money-centered type banks you have discussed that the consumer net charge-offs because of the support from the fiscal programs and other types of programs may be pushed out into the second half of 2021. So it’s not necessarily avoiding them, it’s just the timing of it. Do you guys have any color on the consumer side, what may — what you’re seeing in terms of the potential for charge-offs?
Andrew Cecere — President and Chief Executive Officer
I would echo those comments, George, this is Andy. We — the credit stats for the consumer portfolio are really good right now. And the indicators, the delinquencies all those facts are more positive than you would expect, given the economic environment that we’re in. Part of that certainly is due to the stimulus plans, the unemployment benefits, all of those things which is creating a bit of a bridge. I do expect that at some point in 2021, we’ll start to see an acceleration of credit deterioration to consumer portfolios once that — once those benefits start to wear down.
Gerard Cassidy — RBC Capital Markets — Analyst
Great. Thank you.
Andrew Cecere — President and Chief Executive Officer
You bet.
Operator
Your next question comes from Erika Najarian from Bank of America.
Erika Najarian — Bank of America — Analyst
Good morning.
Andrew Cecere — President and Chief Executive Officer
Good morning, Erika.
Erika Najarian — Bank of America — Analyst
I’m wondering of big incremental announcement on identifying another 15% of your branches that you will take offline. And I’m wondering if you could help quantify the cost savings that you expect to derive from those closures and the timing of when that starts impacting your run rate positively.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. We end up looking at the potential savings associated with those branches. It’s kind of in that $150 million range, plus or minus. We do expect to see that, that impact will really start to hit our run rate even in the first quarter. But again, just as a reminder, some of that will come through in terms of expense opportunity or benefit and some of that’s going to get reinvested in digital capabilities, which will also have an impact in terms of expenses.
Andrew Cecere — President and Chief Executive Officer
And Erika, I want to reiterate a point I made in my prepared remarks, which is that if you think about the additional 15%, the great majority around 75% or so of those branches already have been closed as a result of COVID during this period. So what they really are is resulting in a permanent closure. And again, all of this reflects changes in customer behaviors and activities. We saw an acceleration of digital transactions and sales. You saw the sales numbers on lending activity and that only accelerated during the COVID period and that’s — the result is what we’re doing. And again, about 75% of those have already been closed for the last few months.
Erika Najarian — Bank of America — Analyst
Got it. Thank you. And as a follow-up to that outside perhaps of those potential savings, you have been pretty good at calling out COVID-related expenses. I guess, it was $49 million this quarter, $79 million last quarter. And as we think about your statement in terms of running expenses flat, shall we think about those expenses dropping off in the 2021 run rate, or are those expenses related to COVID are going to be reinvested elsewhere in 2021?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Well, it’s a little bit of both. So when we think about 2021, we do expect that some of those COVID-related expenses will continue at least into the early part of the year until the kind of return to work environment starts to settle in. And then savings associated with that, again, part of it will accrue to the bottom line and part of it will be a part of our reinvestment in our business as we think about going forward.
Erika Najarian — Bank of America — Analyst
Got it. And just one more follow-up question. Clearly, a strong quarter, I think we continue to get pushback from portfolio managers in terms of owning banks due to the interest rate outlook. And as we think about your outlook for the fourth quarter of NII flat to down slightly, are you confident that without any further changes in the rate outlook that we’ll see the bottom in net interest income in the fourth quarter and anything from here whether it’s higher inflation, better growth or the yield curve re-steepening would be an opportunity?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. I think it’s a little hard to call exactly when net interest income kind of hits the trough. I mean part of it — I mean there’s so many different puts and takes in terms of loan demand and where interest rates kind of go from here, what the impact of premium amortization is, there’s just a lot of puts and takes. So, I think it’s a little bit early for us to say, for example, it’s in 2020.
Erika Najarian — Bank of America — Analyst
Got it. Thank you.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Thanks, Erika.
Operator
Your next question comes from Vivek Juneja with J.P. Morgan.
Vivek Juneja — J.P. Morgan — Analyst
Hi, Andy. Hi, Terry.
Andrew Cecere — President and Chief Executive Officer
Good morning, Vivek.
Vivek Juneja — J.P. Morgan — Analyst
Good morning. So, first, I’m going to make just a request, especially since you’re on the call, Andy, since I know this wouldn’t happen without you. I know you guys just put out your list of earnings calls dates for 2021, two of them overlap at exactly the same starting time as another major bank. So, I’m hoping that you can give Jen and team the authorization to do something so that we all don’t have to choose between which one to listen to, since trying to listen to two is never going to work. So, since it’s one is in April and one is in October, and it’s six and 12 months away, I’m hoping between the two banks, you’ll can find the time and I can follow up with Jen as to which those two are. So, that’s just a — yeah.
Andrew Cecere — President and Chief Executive Officer
[Speech Overlap]
Vivek Juneja — J.P. Morgan — Analyst
We keep trying and I’ve been told by IR, if I don’t ask the question in the call, I can’t get the answers to my questions. So, Terry, a little bit of color, the — your hotel exposure, can you give us some sense of the mix, type of hotels as urban versus small town, upscale, budget, and any color on that and also the percentage of criticized in your COVID-related exposures?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
That’s perfect question for Mark.
Mark G. Runkel — Executive Vice President and Chief Credit Officer
Yeah. No. Maybe I’ll start with the lodging exposure. I’d say we have a great diversification by geography and property types. So, it’s a mix between urban and suburban. So we’ve got great distribution there. And then, so we feel really good with where that’s at. In terms of the criticized commitments for those impacted industries, we’ll have to follow-up and get you that offline.
Vivek Juneja — J.P. Morgan — Analyst
Okay, that’s great. And then, Mark, I’m going to follow-up on credit, a comment that I think Terry made. NCOs to rise further, but Andy, you said consumer charge-offs to come more next year. Terry’s comment was NCOs to rise further in fourth quarter. Is that therefore still to come in commercial and which categories are you expecting that? Any color on that?
Mark G. Runkel — Executive Vice President and Chief Credit Officer
Yeah. I think as Andy noted, the consumer side continues to be very strong and our delinquencies where they ended at the end of the quarter were in a really good spot. So we think that will continue to hold true through the remainder of this year. I think we’re continuing to work through some of those impacted industries on the commercial and commercial real estate side. Really in the commercial real estate side is going to be more in the malls, as well as our lodging exposure that will continue to work through the remainder of this year.
Andrew Cecere — President and Chief Executive Officer
Part of that Vivek is Mark and team being very active in terms of reducing our exposure where we think the highest risk categories are. So we’re as — we’ve talked about in the past we try to be very proactive around this in managing our exposures down in a very early fashion.
Vivek Juneja — J.P. Morgan — Analyst
Okay. Okay, great. Thanks, Andy, Terry, Mark.
Andrew Cecere — President and Chief Executive Officer
Thanks, Vivek.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Thanks.
Operator
Your next question comes from Peter Winter with Wedbush Securities.
Peter Winter — Wedbush Securities — Analyst
Good morning.
Andrew Cecere — President and Chief Executive Officer
Good morning, Peter.
Peter Winter — Wedbush Securities — Analyst
Good morning. I’m just curious with the outlook for the unemployment rate to move higher, would that suggest that there could be some additional reserve building in the fourth quarter?
Andrew Cecere — President and Chief Executive Officer
No. Peter, no, that was something that was — has been a part of our outlook for when we were looking at the analysis in the second quarter. And so, we don’t think that that would have any impact on CECL. In fact, at this particular point in time based upon what we know, we wouldn’t expect any additional reserve build.
Peter Winter — Wedbush Securities — Analyst
Okay. And then Andy, I look at the capital ratios and the reserve levels, which are very strong. If the Fed were to lift that restriction on share buybacks and keep it to the fourth quarter, can you just talk about your view on buying back stock assuming no more Fed restrictions.
Andrew Cecere — President and Chief Executive Officer
If we have capacity, we’ll do that, Peter. We’re all the big — large banks are going through the CCAR resubmission process right now. I think that will inform a lot of us in terms of the Fed’s direction into 2021. So that’s what we’re looking at.
Peter Winter — Wedbush Securities — Analyst
Okay. Thanks.
Andrew Cecere — President and Chief Executive Officer
You bet.
Operator
Your next question comes from Christopher Spahr with Wells Fargo Securities.
Andrew Cecere — President and Chief Executive Officer
Good morning, Christopher.
Christopher Spahr — Wells Fargo Securities — Analyst
Good morning. Hi, how are you? Good morning. So regarding the payments growth this past quarter, how much do you think that it’s kind of green shoots and how much of that was kind of temporary from the — say, from the stimulus? And what do you think it’s going to trend into the fourth quarter?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. Certainly, when you think about the third quarter, I think the trajectory has helped because of the stimulus program. And I think that’s the reason why you saw such a strong kind of recovery from the second quarter. So clearly, it’s been impacted. When we think about the fourth quarter, I think the increase in sales levels will be more commensurate with what we have seen kind of pre-COVID, just in terms of the — what I would call the excluding the airline travel and entertainment. So, on a year-over-year basis, clearly, it’s still going to be down because of those at-risk industries and the impact that consumer spend has had on that. But regarding kind of the core other spend level, it’s recovered very nicely.
Christopher Spahr — Wells Fargo Securities — Analyst
Okay. And then as a follow-up, Andy, you’ve talked about your digital opportunities, whether it’s merchant processing and B2B, and then — but your metrics that you give are mostly consumer-oriented. Can you give some additional color on what you think could be like — how the — your commercial customers changed their behavior and what do you think are going to be the revenue and expense benefits say in 2021?
Andrew Cecere — President and Chief Executive Officer
Yes, Chris. So I think the consumer probably is a little bit ahead of the corporate commercial in terms of migration to digital activities, part of it is because many of them are already there and some of the new rails that are being built will impact that on a go-forward basis. So that continues to remain a huge opportunity probably more into 2021 as we think about the platform around merchant processing, business banking, treasury management and corporate payments, all coming together to serve our corporate, commercial and business customers. So that’s probably a little bit more 2021 event and we’ll continue to report on that for you, so we could report our progress.
Christopher Spahr — Wells Fargo Securities — Analyst
Thank you.
Andrew Cecere — President and Chief Executive Officer
You bet.
Operator
Your next question comes from Scott Siefers with Piper Sandler.
Andrew Cecere — President and Chief Executive Officer
Good morning, Scott.
Scott Siefers — Piper Sandler — Analyst
Good morning, guys, thanks for taking the question. Terry, just sort of a quick question on your thoughts on liquidity deployment. Everybody is sort of I guess struggling with this high-class problem of excess deposits. Just curious about how you’re thinking about willingness or appetite to deploy some of that just given the challenging interest rate environment. So, just a very top-level question.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. Again, when you end up looking at kind of the investment alternatives that are out there, you hate to kind of lock-in to low rates over a long period of time. That’s — so, as a result, I think you’re going to see, not only for us, but in the industry, liquidity levels being fairly high and waiting for the longer end of the curve to kind of come up a bit.
That said, in the investment portfolio, we’ll look for opportunities to extend duration to some extent and to make some investments a little bit further out in the curve in order to be able to deploy it. We feel like the liquidity levels that we — that we have today are pretty good taking into consideration the incremental $10 billion that will come in, which we’ll keep pretty much on the short end.
Scott Siefers — Piper Sandler — Analyst
Okay, perfect. Thank you. And then maybe on the other side of the balance sheet, you can see through the H8 data and in all the numbers that are coming out, I mean, everybody’s kind of struggling with this evaporation of loan demand, just curious at a high level what signs you guys are looking to or what sort of mile markers there are as to when that would begin to reverse. So, I guess, the answer could be whether it’s vaccine, election, more uncertainty, who knows, but just curious, given how much of the country you guys see what you’re thinking.
Andrew Cecere — President and Chief Executive Officer
One of the greatest impacts in the third quarter was the bond issuance. So, if you think about the decline in corporate, commercial, about 40% of that was from companies take advantage of the low interest rate environment in issuing debt and about 60% was related to companies just reducing their balance sheet, because they are seeing strong earnings, they’re seeing high productivity.
So, those two factors, the debt issuance will really be a function of the interest rate environment in the yield curve going forward, and I would expect that to moderate because there is so much activity into the third quarter.
Scott Siefers — Piper Sandler — Analyst
Okay, perfect. Thank you guys very much. I appreciate it.
Andrew Cecere — President and Chief Executive Officer
You bet.
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Thanks, Scott.
Operator
Your next question comes from David Smith with Autonomous.
Andrew Cecere — President and Chief Executive Officer
Good morning, David.
David Smith — Autonomous — Analyst
Good morning. First off, you said that you expected the non-T&E card spend to have the growth recover to around where it was pre-COVID, but in terms of the mix there, are you still expecting a bigger mix in debit than it was the case pre-COVID?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
I’m sorry, the second part of your question was?
David Smith — Autonomous — Analyst
In terms of the mix in the consumer card spend between debit and credit, are you still expecting the mix of debit versus credit to be more weighted towards debit in the near term?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah, I do. I think that people again are being fairly cautious. And so they’re utilizing the debit card because they can more effectively manage their liquidity. So when they have cash balances in their savings account, and as you know, savings levels are fairly high, still on the consumer side, I think they’re using their debit card a little bit more than what they have in the past. And so throughout the entire time frame, debit card sales have actually strengthened during that time frame compared to credit card. So I do think the mix will change — continue to change a little bit.
David Smith — Autonomous — Analyst
And then on the branch closures, it sounds like the gross savings they will be around $150 million. But are you expecting any one-time costs from stepping up the branch consolidation and can you help us get any sense of the timing and magnitude we might expect there?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
Yeah. So, in the third quarter, we did take a charge associated with the closure of the branches. It is included in other revenue, because it’s principally related to asset impairments. Offsetting that though were some equity investment gains that if you end up looking at those two things on a net basis, we’re essentially neutral to the fee income and the bottom line.
David Smith — Autonomous — Analyst
Great. So you’re not expecting any major costs there going forward?
Terrance R. Dolan — Vice Chairman and Chief Financial Officer
We don’t expect any further. We don’t expect any further.
David Smith — Autonomous — Analyst
Great. Thank you.
Operator
There are no further questions at this time.
Jennifer A. Thompson — Executive Vice President, Investor Relations
Okay, everyone, thank you for listening to our earnings call and please call the Investor Relations department if you have any follow-up questions.
Operator
[Operator Closing Remarks]