Truist Financial Corp Q2 FY2021 Earnings Call

Greetings, ladies and gentlemen, and welcome to the Truist Corporation Second Quarter 2021 Earnings Conference Call. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host Mr. Ankur Vyas, Truist Financial Corporation.

Thank you, Shannon, and good morning, everyone. Welcome to Truist second quarter 2021 earnings call. With us today are our Chairman and Chief Executive Officer, Kelly King; President and COO, Bill Rogers; and our CFO, Daryl Bible. During this morning's call they will discuss Truist second quarter results and also share perspectives on how we continue to activate upon our purpose, our progress on our merger, and current business conditions. Chris Henson, Head of Banking and Insurance and Clarke Starnes, our Chief Risk Officer are also in attendance to participate in the Q&A portion of our call. The accompanying presentation, as well as our earnings release, and supplemental financial information are available on the Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slides two and three of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP. In addition Truist is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcast are located on our website. With that, I'll turn it over to Kelly.

Thanks Ankur, and thanks to all of you for joining us. We really appreciate your support. So, it's a really strong quarter, which reflects our diverse business mix, our consistent risk management. We did have a negative provision, and importantly, I would point out investments that we have made in insurance, investment banking, wealth and digital capabilities, and excellent progress in our conversion. As you've heard us say before, we believe culture continues to be the primary driver of our success. I will point out today in these times, our purpose really resonates with teammates and others as our purpose of inspiring and building better lives and communities is motivational and satisfying to our teammates being involved in helping make the world a better place. We're now focused, you may be interested in knowing, on helping each of our teammates align with our culture on a personal basis because we find that engagement really excels when people are aligned with the personal purpose and the cultural purpose. Our integration and operations team is highly focused on cultural integration and activation and as a primary focus for all of us. If you're following the slides, if you look on Slide 5, just want to point out that for us, purpose is not just a banner, it's the way we live. It's truly trying to inspire and build better lives and communities. We focus a lot of attention, especially now and increasing on diversity, equity, and inclusion. I would point out some of the major investments we're making in our communities. For example, this quarter, we contributed a combined $200 million of Truist Foundation and Truist Charitable Fund to support important work of our organizations across our diverse markets and communities. We're very excited that we were able to invest $22 million in Atlanta's Mercy Care, which is a fantastic federally qualified healthcare program for the homeless. We expanded our partnership with Operation HOPE with a $20 million investment to help provide more education, insights, and tools to help more people build better lives. And we invested $2.5 million in a grant to the National Institute for Student Success to improve the financial education and graduation rates for underserved students. This is a fantastic program. But it's not just about philanthropy, it's about the way we live around here every day. So, I'm very proud that we released our inaugural Supplier Diversity Impact Report, which outlined a $1 billion total economic impact through supplier diversity relationships in 2020. We're at 114% prorated on our goal for our three-year $60 billion community benefit plan, which is really helping our communities. And through second quarter 2021, we've originated about $17 billion of Paycheck Protection Program loans, which really have supported our business clients and employees and our communities. We're very active and increasing our engagement with regard to environmental, social, and governance initiatives. We're very focused on energy and sustainable-related financing. In the second quarter continuing from 2020, we've invested $2.4 billion in clean energy and sustainable-related financing. Look forward soon into the next few weeks for the second Truist CSR and ESG report, which I think you will enjoy. So now, if you flip with us to Slide 7, I just want to point out some of the key performance highlights. So, a very strong quarter. We had taxable equivalent revenue of $5.6 billion, which was up a strong 4% sequentially from first quarter. We had $5.6 billion in taxable equivalent revenue, net income was $2.1 billion, which was up 30% sequentially. Very proud of our $1.55 diluted EPS which was up 31% sequentially and a strong 89% over last year. Our adjusted return on average tangible common equity was a very strong 24.7%. But even if you take out the reserve release, it's still a really, really strong 20.9%, which is driven by strong performance in insurance, investment banking, wealth, card and payment fees, and our commercial real estate-related income. We had strong performance in terms of revenue. As I said, it did drive a 2% increase in adjusted non-interest expenses due to incentives, but frankly, this is exactly the kind of expense increase we like to have. When you put that together, revenue and expenses, we had a solid adjusted operating leverage of 2% and our adjusted pre-provision and pre-tax result was $2.5 billion, up 6% compared to last quarter. Our asset quality is great. We performed well in CCAR, which allowed us to be in a position to propose a 7% increase in our dividend, a record $0.48 per quarter. Our merger integration is going very, very well and top performance and improved economic conditions give us confidence to reduce our CET1 target to 9.75% and Daryl will talk more about that. So, our total performance for the quarter, we think was very, very strong and very comprehensive, which we feel very, very good about. If you'll flip with us to Slide 8, I just want to point out a few of the selected items that impacted adjusted income. First, we had merger-related and restructuring charges of $297 million, $228 million after-tax, which was a diluted impact of $0.17. Incremental operating expenses related to the merger, I'll point out again, these are merger-related expenses but don't meet the technical definition of merger-related and restructuring charges, but they're not in our run rate going forward. That's $190 million, $146 million after-tax and $0.11 diluted negative impact. As I mentioned, we did have a $200 million contribution to our Truist Foundation and Truist Charitable Fund, which had a $0.11 impact. I would point out in the merger-related and restructuring charges, included in that is a $111 million after-tax accrual related to our voluntary separation and retirement program, which was a program that we offered in June. We had approximately 2,000 teammates that elected to participate. These were totally voluntary decisions on their part, and I want to really thank and appreciate those teammates for their commitment and support and helping us build a foundation of Truist. This program does help us reduce costs and create capacity to invest in needed services for our clients. It's really part of our overall intense focus on reconceptualizing our businesses. To thrive in today's world requires a deep commitment to continuously reevaluating yesterday's activities and expenses associated with that, so that we can afford to invest in new activities for today's demands. With that, let me turn it to Bill to talk about some of our key trends.

Thank you, Kelly, and good morning, everybody. As you can see on Slide 9, we continue to experience robust demand for digital banking services as our clients look for more convenient and more effective ways to transact and manage their finances. The pace of digital adoption has been especially rapid and mobile. Since the second quarter of 2020, our active user base has increased by 9% to over 4.1 million active clients. Yet the digital growth story is a lot more than that — it's not just one-dimensional. In addition to growing active users, we're deepening our relationships as we accompany clients along their digital journey. By providing the premier digital experience, we build trust with our clients. They then entrust us to facilitate a broader range of transactions. A great example of this is in mobile payments where Zelle transactions were up 60% compared to a year ago. We're also excited about the rollout of our new digital experience that's beginning now ahead of our physical conversion. After completing a successful internal pilot, we're beginning to migrate the Truist Digital offering to a small number of clients; rollout will happen in a series of waves throughout the back half of the year. We anticipate that up to 0.5 million clients could be on the digital platform by the end of this month, with more to be added in each successive wave. On the right, you can see just one example of how we're using digital to meet clients where they are in the small business space. A single sign-on focus for clients with personal and business accounts has a significant benefit, allowing our small business clients to toggle back and forth seamlessly between their business and personal finances. Our clients are also able to customize their dashboard and notifications, so they can focus on what matters to them. In addition, our fraud detection technology will help small business clients from fraudulent transactions and provide a more secure banking experience. The attractiveness of our overall approach is that we've created a common platform for retail, wealth, and small business, which creates agility and seamless client experiences, but the experiences are tailored and designed for the unique needs of each client segment. Now, let me move to Slide 10. Loan growth remained challenging in the second quarter given strong liquidity levels in the marketplace and amongst our clients. Supply chain disruptions and low levels of rates are driving high levels of refinance activity. Average loans decreased $6.1 billion compared to the first quarter, driven by $3.3 billion in commercial loans and a $2.2 billion decline in residential mortgages. Average C&I balances decreased $2.4 billion, reflecting a $1.3 billion impact from PPP forgiveness and $1.2 billion from lower dealer floor plan outstandings. Nevertheless, we're encouraged about potential green shoots in C&I. Excluding the impacts of PPP and dealer floorplan, C&I loans grew modestly due to an increase in production and stable utilization late in the quarter. Several of our markets and specialties saw growth, particularly middle market. June production in the corporate institutional group was the highest it's been since the merger and June production in the Commercial Community Bank was the highest it's been in 18 months, if you exclude April 2020, which was unusual due to elevated line draws. Our revolver exposure continued to grow by month, evidence of our relevance and that our clients are building capacity for investments or expansion. Average consumer loans decreased $2.7 billion as a result of ongoing refinance activity in our residential mortgage, home equity, and direct portfolios. Residential mortgages held for investment decreased $2.2 billion as prepayment speeds remained elevated despite some moderation from first quarter levels. We're expanding our correspondent capacity and transferring some correspondent production to hold for investment to support future growth. We also believe prepayment speeds will continue to moderate. Indirect remains a bright spot due to growth in our prime marine, RV portfolios, and LightStream. Overall, loan growth remained elusive in the second quarter, both for the industry and for Truist. As indicated earlier, we're seeing evidence of things beginning to turn and our execution is improving at Truist with a keen focus on balance sheet diversity and prudent risk management. Long-term loan growth is highly correlated to economic growth and we firmly believe the economy, particularly in our key markets, is on a very solid footing and on an expansion trajectory. Let me turn to Slide 11. Average deposits increased 3.4% compared to the first quarter, largely due to the continuing effects of recent government stimulus. We experienced strong deposit inflows while maximizing our value proposition to clients outside of rate paid as average total deposit costs decreased one basis point sequentially to four basis points. More importantly, Truist continues to resonate with clients. During the second quarter, we had a record personal checking account production and added more than 51,000 net new accounts which attests to the strength of our franchise. We're also doing an excellent job retaining clients as attrition rates from recently closed branches continue to be significantly more favorable than plan. We believe these favorable client dynamics reflect our robust markets, strong digital commerce, production, and solid execution by our teammates in the retail community bank. And with that Daryl, let me turn it over to you for our financial performance.

Thank you and good morning everyone. Continuing on Slide 12, net interest income decreased $40 million, largely due to $32 million lower purchase accounting accretion. Net interest margin decreased 13 basis points; purchase accounting accretion was a four basis point headwind. Core net interest margin decreased nine basis points due to the continued build of excess liquidity, which was approximately $18 billion this quarter as well as the impact of a persistent low rate environment. Asset sensitivity increased modestly due to the increase in DDA and the favorable deposit mix changes, partially offset by the increase in the investment portfolio. I would also note almost 60% of our asset sensitivity is from the short end of the curve, giving a solid upside when short-term rates begin to rise. Our diverse business mix is a key strength and continues to provide revenue momentum in a low rate environment. Adjusted non-interest income grew 11% sequentially and 13% year-over-year, driven by record results in multiple fee businesses. Insurance income was a record $690 million driven by strong organic growth and new business, excellent retention rates, and a firm pricing market. Organic revenue grew 15% versus a COVID-impacted light quarter. And we continue to forecast very healthy organic growth. Given the various uncertainties that exist in the marketplace, this is clearly a good time to be in a business that helps clients manage risk. Fee income from investment banking reflected strong results in syndicated finance and M&A; trading income was offset by a $60 million swing in the CVA. We have been consistently investing in and building our corporate and investment banking business for over 15 years and this quarter's results are a reflection of that. Record CRE income was driven by strong structured real estate transaction activity. Our strong performance is also a testament to the teams' experience and deep client relationships. Other income benefited from valuation gains on our longstanding partnerships related to our SBIC funds and also investments we've made through our Truist Ventures unit. When small businesses win, our communities win. So, we are thrilled with the success we have had over many years with our SBIC program. Continuing on Slide 14, interest expense increased $401 million from the prior quarter. Drivers included a $200 million charitable contribution to the Truist Foundation and Truist Charitable Fund to support our purpose to inspire and build better lives and communities. In addition, merger-related restructuring charges and incremental operating expenses increased $171 million, largely due to the voluntary separation and retirement program that Kelly mentioned earlier. Adjusted non-interest expense increased 2.1% modestly due to higher variable compensation related to the stronger performance of our fee businesses and overall strong corporate performance. Adjusted non-interest expense was also favorable relative to adjusted revenue growth driving sequential positive operating leverage this quarter. Turning to Slide 15, asset quality remains excellent, reflecting our prudent risk culture and diverse portfolio as well as a stronger economy. Non-performing assets decreased two basis points. Net charge-offs decreased 13 basis points to 20 basis points, a pro forma post-financial crisis low. Lower charge-offs reflect improvements in our indirect auto and C&I portfolios as well as an uptick in recoveries. Our allowance for loan and lease losses remained strong at 1.79% with excellent coverage ratios. Due to the improved economic outlook, our provision was a negative $434 million and we released $560 million of reserves. Continuing on Slide 16. Capital remained strong. Our CET1 ratio increased to 10.2%. Our total payout ratio was 78% and included $610 million of share repurchases. We continue to optimize our capital stack by redeeming our Series H preferred stock. Our latest CCAR results reflect our prudent risk management and resiliency under stress. Truist had the second lowest loss rate in our peer group, as well as above average stress pre-provision and pre-tax result relative to peers. Our preliminary stress capital buffer was reduced to 2.5% from 2.7%. Our strong CCAR results, improving economy, and merger progress provide additional capital flexibility. Our Board will consider a proposal to increase the dividend by 7% to $0.48 per share in its July meeting. We also intend to manage to approximately a 9.75% CET1 ratio over the near-term, which would reflect approximately $4 billion to $5 billion of potential capital deployment, either through repurchases or acquisitions over the next five quarters. Turning to Slide 18, we are making steady progress in our integration plan, and our risk profile improves with each conversion. During the second quarter, we successfully converted our Wealth Truist platform. We are very proud of our wealth, digital, and technology teammates for their hard work completing this conversion and the brokerage platform conversion in February. More impressively, our advisors continue to produce positive net organic asset flows, which combined with strong market conditions, produced excellent results in wealth management fee income. We also performed extensive testing to prepare for the upcoming core bank conversions. After each milestone, we reflect on what we've learned, apply those learnings to the future integration activities. This reduces the risk and helps us ensure we get better with each step of the integration. As we look to the third quarter, much of our focus will be on the final preparations for the conversion of our heritage BB&T clients to the Truist ecosystem later this year. This will be followed by the heritage SunTrust conversion in the first quarter of 2022. Continuing on Slide 19, we are committed to achieving $1.6 billion of net cost saves and continue to make progress across those five categories. Third party spend is down 10.3% versus a baseline and now exceeds our revised target of 10%. And retail banking remains at 374 cumulative branch closures and are on track to achieve approximately 800 total closures by the first quarter of 2022 including 39 closures we are expecting in July. Non-branch facility space is down 3.8 million square feet and we are closing in on our target of 4.8 million. We appreciate all the hard work our teammates have done to keep us on track to achieve these goals. Average full-time equivalents decreased 11% since the merger announcement and will decrease even further given the voluntary separation and retirement program. Technology savings will materialize after redundant systems are decommissioned in 2022. We're also making critical investments in digital and technology. Since the merger closed, we have doubled our digital agile teams and tripled our total agile teams, which makes us nimbler and improves our speed-to-market enhancing our client experience. Turning to Slide 20. We still expect to incur a total merger cost of approximately $4 billion through 2022. We have incurred cumulative merger costs of $2.7 billion through the second quarter, reflecting considerable integration work on Slide 18. Looking ahead, we expect these costs to decrease significantly after our first quarter core bank conversion and then drop off entirely after 2022. Continuing on Slide 21, our core non-interest expense was $2.952 billion in the second quarter. This calculation removes the effects from asset value changes for our retirement plans, our insurance acquisitions, and higher variable compensation through the fee income and corporate performance. This makes it much more comparable to the baseline expenses at the time the merger closed. Based on the trajectory of our ongoing cost save initiatives, we are on track to achieve our fourth quarter core expense target of $2.94 billion. We are fully committed to this target and we are confident in our ability to meet it. Now, I provide guidance for the third quarter. We expect total net interest income to be relatively stable versus the linked quarter as one additional day combined with moderate loan growth, excluding PPP, offsets declines in purchase accounting accretion and PPP revenue. Core net interest margin is expected to be relatively stable, however, reported net interest margin will continue to decline as a result of diminishing purchase accounting accretion. These should remain healthy, given investments we've made in our businesses, robust market conditions, and continued economic recovery. They will not be as strong as second quarter performance. This is partially due to insurance seasonality, but we would expect solid growth compared to the third quarter of last year. Adjusted expenses should be relatively flat linked quarter, but will decline in the fourth quarter as lower personnel costs are realized from the voluntary separation and retirement program. We expect the net charge-off ratio to be 25 basis points to 35 basis points given the continued strengthening of the economy. Also if the strong credit quality performance continues, we would expect further reductions in our loan loss allowance ratio. Overall, we had an excellent operating quarter as strong fee income more than offset modestly lower spread income and outpaced expenses to drive 2% sequential operating leverage.

Just want to make a couple of comments with regard to our value proposition this quarter focusing on our markets and capital. We are really very, very pleased that 70% of our net new accounts are opened by new households. We think this shows market share gains in migration in our markets and our digital advantage as about half of our new accounts are opened online. All of this, interestingly, is happening in the face of large number of branch closures that Daryl described where client retention is a very strong 98% plus, which is really fantastic in any type of merger. As mentioned, our CCAR performance lowered risk in the economy, reduced risk in our conversion process, which Daryl discussed gives us great confidence to propose a meaningful increase in our dividend to a record $0.48 and reduce our target CET1 to 9.75%. Just wanted to emphasize that again to make sure you get that, because that's important. We also are very confident in achieving, as Daryl said, our $1.6 billion net cost saves based on a number of initiatives that are driving the reconceptualization of our business; our expense reductions and our industry-leading profitability. We believe that the combination of that will support our investments in future strategies and leading technology investments. Then finally, if you'll just flip to Slide 23, just wanted to make a couple of points about how the metrics and numbers support that value proposition. As we've said before, we have a really exceptional franchise; we have the highest projected population growth compared to our peers in our marketplaces; we have really good fee income diversity with our investments in insurance, investment banking, and wealth; we are really uniquely positioned from a profitability perspective with our adjusted diluted EPS at $1.55, up 89% adjusted return on average tangible common equity at a strong 24.7% and we have strong capital, as Daryl described as well. So, if you look at the quarter overall, it was a strong quarter based on our strong culture, great markets, and awesome team. There are plenty of challenges out there, the pandemic is getting better, the economy is getting better and overall at Truist, we fully believe our best days are ahead. Ankur, we'll turn it back to you.

Thank you, Kelly. Before we move to Q&A though, I'd like to quickly turn it to Bill who'd like to share a few concluding thoughts.

Might make you feel a little uncomfortable, but so bear with me. So, given this is Kelly's last and 50th earnings call as CEO, I just want to spend a few minutes highlighting his legacy, just incredible positive impact on BB&T, Truist, the banking industry, and our communities during his 49-year career in banking. I could take hours to do this, but I won't given that we only have a few minutes, but I thought this group of analysts and investors would appreciate who followed his career. Kelly joined BB&T in 1972 and I thought it was great irony that earlier this week he spoke to our leadership development program, individuals, and teammates who joined just the same way you did, Kelly. When he speaks about the benefits of a growth mindset, positive thinking, choosing to be happy, and seeing opportunities and change just like he just did, he speaks from his personal experience and his heart. Kelly's humble roots give him a genuine appreciation for all people. They've driven his Seeds of Hope initiative and played a key role in our value of caring which says everyone and every moment matters. He's also the driving force with our happiness value. Positive energy changes lives and he exhibits that daily for our teammates and for our clients. Kelly became CEO in 2009 in the depths of the global financial crisis. BB&T was one of the few banks to remain profitable through every quarter through that crisis. When he began at BB&T, it was a small bank in Eastern North Carolina with about $250 million in assets. When he became CEO, the bank had $152 billion in assets, and today, Truist has $520 billion in assets. Market cap is four times during his tenure. Always a forward thinker, Kelly is a purpose-driven leader who steered BB&T through tremendous change, not just to survive, but to thrive through the Great Recession, multiple economic downturns, and now, through a global pandemic and our merger of equals. In addition to traversing tumultuous business headwinds, I admire that he's never lost sight of his personal purpose, which is to make a positive meaningful difference in the lives of as many people as possible. His empathy, compassion, and leadership had tremendous impact on just to name a few initiatives: financial education for more than 1 million high school students through the Truist Financial Foundations; childhood literacy, which is a passion of his through a new reading app called WORD Force, which is just getting started; community service through the Lighthouse Project, positively impacting the lives of more than 20 million people since its inception in 2009. Kelly has always had an interest in and a commitment to leadership development. It's the foundation for the Truist Leadership Institute in Greensboro, many of you've been there. It has been renamed the Kelly S. King Center in his honor. It not only trains executives to become better and more self-aware leaders, but it also offers customized training at no cost for principals and has certified many, many students at no cost through our Emerging Leaders curriculum, which is provided in partnership with over 80 colleges and universities. Kelly is known for saying there's no facet of society that cannot be improved through better leadership. Before our merger, I knew Kelly well. I also listened to these calls Kelly, many of your 50 calls. We joined forces with a concept that we can truly build a purposeful company that stood for something better and outperformed with consistency over the long-term. Kelly, you were the perfect leader to start us on that journey. Your inspirational leadership was a positive catalyst for all of us. So, with a heartfelt thank you for your leadership, your contributions to Truist, to our industry, and personally for our friendship. I look forward to our continued partnership and collaboration with you going forward as you transition to the role of Executive Chair for our Board of Directors. So, now we can turn it over to Q&A. Kelly, thank you.

Can I make just one quick comment?

You're still in charge.

I do just want to note that this is also Daryl's 50th conference call. So, congratulations to Daryl, but thank you, Bill, for that. I just wanted to say to our audience that has supported us over all these years, it has been an honor and a blessing to have worked with thousands of Truist teammates over all these years to serve our communities and I really, really cherish that opportunity. I'll also just say to all of us that banking is an honorable profession, which serves to help build better lives and communities every single day. I am humbled and proud to have been a part of it. Thank you for your support. We appreciate it and as I've said many times, I truly believe our best days are ahead.

Thank you, Kelly. Thank you, Bill. Shannon, at this time, we're now ready to start Q&A. So, if you'll explain to our listeners how they can participate in the Q&A session. I'd like to ask the participants to limit yourselves to one primary and one follow-up so that we can accommodate as many of you as possible today.

Thank you. Our first question comes from Gerard Cassidy with RBC.

Good morning, Kelly. Good morning, Bill.

Hey, Gerard.

To start off, on behalf of many on this call, Kelly, I would also reiterate Bill's fabulous comments about your career, and congratulate you on being an outstanding community, spiritual, and commercial bank leader. I think you will be missed by many. So congratulations. On questions, maybe starting with you, Bill, can you give us some further color or elaborate on the green shoots that you guys are seeing in the loan growth area for possibly the second half of the year, Daryl touched on in as well. And where you're seeing some of this potential growth coming from?

Yes. Sure, Gerard. As I've mentioned, production in June in CIG and CCB was sort of hitting some high points. So, we started to see a little bit of an inflection point. In CIG, a lot of that came from industrials, healthcare, tech, that probably doesn't surprise you. I think infrastructure is ahead of us. I think energy is a potential for the future. I'll put that a little bit as a lighter green of a green shoot. And in CCB, really good progress in our middle market, a lot in our verticals. Senior care, I think, that's really coming back strong. Our dealer network, so despite the outstandings, our exposure to dealers is going up and then just sort of our government services. Again, I don't think those are surprises. Those are pretty core parts of our economy. Overall, revolver commitments were up. So, as I said earlier, I think the capacity of our clients to invest is improving. The timing of when this will come, I think that's the question. I don't think it's an if; I think it's about timing. Whether that manifests itself so much in the second half, remember, we still have some headwinds with PPP. But our tailwinds, I think the dealer part will rebound. I mean, you'll see the supply chain start to normalize whether that happens at the end of this year or first next year, I don't know, but that will rebound. The economy, particularly in our markets, utilization, and just as Kelly mentioned, our core execution just gets better every day. So, I think those are tailwinds.

Very good.

Hey, Gerard, I would like to add. Bill and I and others have been on regional visits virtually so far this year, and we've talked with hundreds of business clients and heard feedback. And I think it's a really big deal. Universally they have been extremely confident and positive. They're all talking about projects that they're working on. As Bill just mentioned, I personally think it will really begin to show up as we head into third and fourth quarter and certainly into a strong 2022, but the confidence level is very, very high.

Gerard, this is Chris. I might just add that we had 16 of our 22 regions that were actually positive in C&I growth, less dealer, this quarter.

Very good. And maybe shifting over to Daryl, you talked a little bit, Daryl, about the possibility of bringing the loan loss reserves down. You mentioned that in the DFAST tests, you're the second best in terms of credit losses. I see if I recall, your day one reserves back in January of 2020 were 1.61%. Can you give us maybe some color and maybe Clarke as well about the outlook — could that reserve level fall below the day one now that the outlook might be even stronger today than it was in January of 2020, excluding the pandemic situation?

Yes, thanks for the question, Gerard. What I would tell you is that when we established our CECL day one number, we weighted our pessimistic scenario at 40%. If you look at the economy now and the growth that we're seeing and the outlook, our weighting is much less than that. So, as the economy plays out throughout this year, there is a chance that we could pierce through and maybe go under our CECL day one number that we started with in January of 2020 from that perspective. I think you have to take it quarter-by-quarter and see how it's performing. But right now, the economy seems to be going on really strong and gaining momentum.

Great. Thank you.

And our next question will come from Mike Mayo of Wells Fargo.

Hi. You don't have revenue synergies built in your final numbers, but it seems like you might have some revenue synergies here. So, specifically, I'm asking off the record in insurance and off the record in investment banking, how much of those revenues are driven by cross-selling versus just the core organic growth? And I have my insurance analyst colleague at Wells Fargo Securities to ask on that second part, Elyse?

Yes. Thanks. Go ahead.

Go ahead.

I was just going to build upon my question on the insurance, I'm just hoping that you guys had an impressive organic growth quarter, hoping to get an update on your outlook for the rest of the year, how things can trend versus the 15% this quarter? And how the different roles within retail and wholesale segments of the business?

Right, I'd be happy to do that. Maybe Bill and I will take the ERM question first and then I'll jump back and answer your question, Elyse. From an enterprise relationship management perspective, I will tell you it is going really well. For the past 18 months, we've been in the behavior-building phase. When I look at this quarter, I see very strong contributions from the Commercial Community Bank to our strategic side, and from CIG for capital market services. I see very strong growth — mortgage up in the mid-30s, and CIG up well over 100% in terms of growth. In fairness, we have some other areas that have some opportunity, but I would say I like what I see and I think what we're building really is the right foundation for behavioral jumping-off across the company. It is something that Bill and I have been partially monitoring and working with each one of the business lines and we're in kind of still a build-out process in terms of understanding what's possible and we're really trying to push a lot of business leaders to think bigger, because we think the opportunity is a very substantial. Bill, anything you want to add to that?

Yes, I think Chris had it exactly right. And remember, Mike, I mean, these cut across a lot of different parts and we like to think about the term of integrated relationship management so that it cuts across client teams and we're meeting clients’ needs and working backwards. But just to give an example in the Commercial Community Bank, we doubled the number of transactions that we did in the quarter versus last quarter. These might be where we were left lead, this might be where we were in M&A transaction. And the pipeline has also doubled where it was before. So, as a percent of the growth — as a percent of the total, it's a smaller percent; as a percent of the incremental growth, it's a larger percent. And I think that's going to continue to grow the momentum, the cultural alignment, all the parts that we've built as part of One Truist, I just feel great about it, and that momentum will continue. You'll see it as incremental growth relative to others.

And coming back, Elyse, to your question, and I just preface this with comments that we took a white sheet of paper to this business back in early 2018, brought in a consultant and really began to break the business down and look at all the opportunities to put the pieces back together. I think what you're seeing here is the end of a three-year period where we have really taken a lot of steps to build back a business in the most effective way possible in a really good operating environment. So, I would have to say this is fundamentally the best quarter I have seen in this business in my career and I've been working on this business a long time. And we are, by the way, cranking off as we conclude the first three-year period, we're kicking off another three-year period, because we think there's more that we can do and will do to improve this business. But to get to your question, what's really driving organic growth is pricing in the industry. I think pricing probably peaked in the fourth quarter of 2020 or first quarter this year, it was sort of in the up-7% range where we're now, if you read all the industry information, kind of in the up-6% range. We believe while rates have moderated a little, we believe that it's still going to be very positive throughout the balance of 2021. You might have potential for a slight moderation, but we still think it's very strong in the mid-5% to 6% range. And we just entered hurricane season; in the fall was wildfire season. So, you never know, it could hold or even increase from there depending on what happens. Our client retention in retail is at 91.8% and that's up 1% over the last year. And in a hard market environment that favors wholesale more, that is a positive. Our wholesale business retention is 86.1%, it's up 2%, also very strong. But we are continuing to see risk shift from the standard market that supports retail to wholesale. Probably the most notable driver of organic growth was just our new business production and that is driven just by core GDP growth. We're in the up portion of the V right now from an economic perspective. So, 24.5% new business growth is double the best I've seen historically; year-to-date, we're up 19%. So, we get an overall organic growth rate of 18.8%, but when you strip out acquisitions organic is 14.8%. We are including in this quarter $29 million of revenue from prior acquisitions; that does not include Constellation, which we just closed on July 1, but includes, if you looked at annual run rates, it's about $130 million of prior acquisitions we did in the back half of last year and the first part of this year. So, that's sort of the organic growth question. But to get to your outlook, just remember we're going from our seasonally strongest quarter of the year to our seasonally weakest quarter from second to third. So, we expect commissions to be down about 8% going from second to third. And there's still certainly uncertainties, but we just think the environment looking forward is still very favorable. When you think of an improving economy with the GDP and improving employment, which really drives our AB business, increasing pricing as we just said in the 6% range, and then we benefit from the shift to the excess & surplus market via our very strong wholesale business. While we operate a diversified model, frankly we think pricing is going to continue to be strong. You're seeing the drivers in the industry this quarter: umbrella and excess is up 11.6%, D&O is up 11%, commercial property, which we have a disproportionate exposure to, is up 9.6%, that's really good for us. So, we expect for the third quarter high single-digit organic growth in our weakest quarter, that would be the highest growth that I've seen historically, period. But we're expecting high single-digit growth in our weakest quarter, which I think is fantastic for the business. And just remember, we did close Constellation on July 1st and that adds $160 million in revenue and really helps us form one of the largest programs divisions in wholesale going forward.

Great. Well, thank you very much.

And our next question will come from Betsy Graseck with Morgan Stanley.

Hey, good morning.

Hey.

Hi Chris. Just a quick follow-up on that $160 million — is that additive so your 8% quarter-over-quarter is not including that acquisition, just want to clarify that.

No, it is in our forecast. So, what you're typically saying — last year, you'd have seen second to third, we would drop maybe $75 million; this year, you would have seen a $90 million drop, but with the addition of this number, you'd see something like $50 million because you've got $160 million annually.

Got it. Okay. And then just the expenses associated with Constellation that we should be thinking about — anything there to — no doubt?

There are expense synergies, so this business actually the margin is accretive for overall margin. So, I think there are expenses, but they're synergies that are coming out.

Okay, great.

I think the operating ratio initially is like 70% for Constellation, if you want to add any expenses for the transaction.

Yes, and generally Betsy, it's about a 12-month integration.

Yes. No, you've done a great job at improving the operating efficiency of that business over the past several years. So, congratulations to you on that. I did have a couple other questions. First off, imitation is often the best form of flattery and there are plenty of people imitating you on your specialty finance lending focus that has been a hallmark of Truist for many decades. Could you give us a sense as to how you're thinking about that business and where you want to be leaning into growth?

Absolutely, Betsy. That has been a focus of ours. We really think of it in terms of point of sale. And when we talk about insurance and wealth and CIG, we probably should add sort of a point of sale focus through our core, Sheffield and also LightStream. We also have a group of partnerships that are a little bit more indirect. Buying patterns have clearly changed by consumers. I no longer come to my bank to purchase items; I buy on the spot, and now they want it digitally the same way. So, we're working on all the above. I think we have opportunities within our current business to expand verticals like hearing aids and do more in the way of trailers and that kind of thing. So, there are opportunities there, but I think we're also looking at other opportunities to expand like in the home improvement space, which would be a good place; there's a lot going on there. So, it's an area we're really focused on and something that we're really excited about. It's an industry that has north of 20% kind of growth rates. So, we're very excited about the opportunity.

Okay, thanks. And then Daryl, just a couple for you — one ticky-tacky one is just on the fees, you mentioned, down sequentially. We talked about the insurance seasonality, but up year-on-year, could you just remind us what kind of base level fees you're looking at year-on-year with some one-timers in last year, I just want to make sure I'm on the right base?

If you look at it versus prior year, we'll probably be up anywhere from 5% to 10% range in that neighborhood. We did have some other income in there from our venture capital portfolios, but to be honest with you, we continue to invest in that. And that continues to be part of our run rate as we move forward. So, it's going to be lumpy back and forth, but it is going to continue to grow over time from that.

Okay. All right, that's helpful. And then just on the net charge-off ratio guide of 25 to 35 basis points, I think it came in this quarter around 20 basis points and credit looks great. So, is this you being conservative with the 25 to 35? Or is there something in the book that you would suggest you're expecting a little bit of a deterioration quarter-over-quarter on the ratio?

Betsy, this is Clarke. It's primarily seasonality. In the second half of the year, we always have some seasonality uptick in some of the consumer portfolios. So, we're assuming we'll have some of that normal trend. I would also say this was an outstanding quarter, we did have all-time lows in our auto business, we had really low C&I, and higher recoveries. So, we had some really strong tailwinds this quarter. But all that being said, we still feel like we're going to have very strong loss performance as we move forward, given what we see today.

Got it. Okay. Thanks so much. And Kelly, it's been phenomenal working with you over the past several decades. So, very much appreciate the time that you spent with us and Bill, looking forward to working with you more closely going forward. Thanks.

Thank you, Betsy and appreciate it.

And our next question will come from Matt O'Connor with Deutsche Bank.

Good morning. I just want to circle back on the expense target for 4Q, the $2.94 billion. I guess, first clarification, does that include the impact of the insurance deals or I would assume we got to top it up for the one that just closed and maybe the others too?

Yes, Matt. In our deck, we have that waterfall slide where we actually take our adjusted numbers and we back out three things: our non-qualified items, we back that out; we back out insurance acquisitions and run rate because we're trying to compare back to what we looked like in 2019. And then with the huge growth that we've seen in our CIG area and our wealth area and our insurance area, just organic growth, that's great to have those revenues. But those revenues do have expenses, but those are good expenses. We're adjusting for those as well. So, that's what we're adjusting to, to try to get back to what we looked like when we put the merger together in 2019.

That's Slide 21, or Page 21, that's very helpful. But when we see the 4Q adjusted expenses, will it be the $2.94 billion or we have to add that $20 million for insurance plus the one that you just did?

It's going to be the number, the $2.94 billion will be the number on the right at the end of the waterfall. That's a core expense; it's not a run rate number. The run rate number is the adjusted number, which basically backs out your merger and restructuring charges, and your incremental merger related operating expenses. That will tend to basically come down dramatically after the first quarter of next year when we finish our core bank conversions and go away totally by the end of 2022.

Okay, sorry — so just to clarify that like, when we see the 4Q cost base, we'll take out the merger charges, we'll take out the incremental costs and should we still focus — will we see the core number or the adjusted number?

The adjusted number is the run rate number on a go-forward basis. All 'core' does is basically try to back out because we're a dynamic company that's constantly changing and growing and doing things, we have to back out our expense bases that basically have benefited over the last two years of coming together. So, we're trying to show you that we're getting the $1.6 billion off of that original expense base by not penalizing us for the additional fee revenue growth that we received over the last couple years and acquisitions that we've done.

Okay, that makes sense. Sorry to make you go through all that. And then as we kind of think through next year, do we take that 4Q level, annualize it and obviously, you got some more cost saves coming, maybe a little seasonality in 1Q, but can you run rate that for a key level and then be lower than that for next year full year?

We will get into the $1.6 billion cost saves. So, we'll get that by the end of 2022. We have a lot of things going on in the company right now, besides those five buckets of savings, which we're making tremendous progress in. Kelly talked about the voluntary separation and retirement program that we announced — we have some teammates that volunteered to go — basically the first wave of that will happen on 9/30, so you'll see the impact of that in the fourth quarter. That will continue to come down over the next couple quarters. The waves will be three or four overall to get everybody that volunteers to exit the company. And then Kelly and Bill talked about basically going through all of our processes and adjustments that we're making to come together and get more efficiencies and scale. When we came together in 2019, we knew what we knew then; we know a lot more now and we're continuing to make our company much more efficient and improved. We'll have savings from that all through 2022. But to be honest with you, we're creating fuel that will not only fall to the bottom line, but we're also continuing to make a lot more investments in our businesses, in wealth, insurance, CIG, and other areas and we're also investing in technology and digital with these savings that we're getting.

Okay. Thank you.

We'll now hear from John McDonald of Autonomous Research.

Yes, hi. I wanted to follow up on the new capital target — Daryl said it creates $4 billion or $5 billion of incremental excess capital. I was wondering Bill, Kelly, how you're thinking about that between M&A opportunities and share repurchases, any thoughts you could share on that?

So, John, our waterfall of priorities has not changed in all these years. And it's what we would think good stable long-term investors would appreciate. The number one is always organic growth — it's the highest payback for your shareholders. The second is a good stable long-term increasing dividend payout. Third is M&A and we have good opportunities there and that's been very encouraging. And fourth is buyback and we will do that aggressively when it's appropriate.

John, just to emphasize that, and Kelly said it, I mean, these organic opportunities are significant. So what we see in our markets where we see our ability to invest and — so that's going to be priority one, and it continues to enhance.

Okay. And then just to follow up on that, is it a target we should think about for the next year or so? Is that how you're thinking about maybe moving down over the next year to that 9.75%?

I think what we've said consistently is as the risk of the merger comes down and our confidence in the economy goes up, we'll evaluate that target. So, I think we're going to be on that trajectory. We don't want to time-bound that decision. It's really time-bound by what's happening in our company and what's happening in the general economy.

Okay, fair enough. Thanks.

And I think we've got time for one more question.

Certainly. Thank you. Our final question will come from John Pancari of Evercore ISI.

Morning. Just on the M&A front, I know you indicated that there are good opportunities there. Could you just give us your updated thoughts on that front? What type of M&A are you most interested in? And then separately, I'm curious to get your thoughts on President Biden's Executive Order, which seems to be implying greater scrutiny around larger bank deals. Want to see if that makes you think any differently about future deals? Thanks.

Yes, John, on the M&A side, I think we'll be consistent with the things that we've seen. Obviously, in the insurance side, we've had really good experience there and I would expect that to continue. We talked in Betsy's question about some of the enterprise payments and some of the opportunities we have there, some of the point-of-sale opportunities, digital perhaps, but things that have been important to us strategically — we'll be consistent. We won't go off-track from our core consistency. As it relates to President Biden's order, as it relates to our business, let's maybe take large bank M&A off the table — we've already done one of those. So, we feel good about that. But as it relates to our business, this really plays well with our core middle market business. If you think about the place where we offer advice and where we see activity in the future, we think we're actually really, really well-positioned.

Great, that's helpful Bill. And then separately just on your systems conversion, could you just give us a status update on where you stand on your core deposit conversion system? Just I want to confirm, are you definitely moving to a new system and not a legacy system when it comes to the core deposit banking system? And then where are you on that progress in that actual tech migration?

Daryl outlined in that one chart sort of all the different components that we're doing. As relates to the core conversion, we outline in there that in the fall we'll convert the heritage BB&T clients. In the first quarter, we'll convert the heritage SunTrust clients. That's on a much more agile platform that exists today. So, we're going to have a lot more flexibility in the things that we can do and the movements we can make and the assimilation of acquisitions, the ability to leverage APIs and do more things with that platform, and we are absolutely on track and as you can imagine we're monitoring this on a daily, hourly basis. We're in just about the dress rehearsal part for the fall. We're well into the UAT and SIT testing and feel good about where we are.

Great. Thanks Bill. And Kelly, I wish you all the best. It's been a great ride and you should be proud.

Thank you, John. Appreciate it very much. Thanks for your support.

All right, Shannon.

And that does conclude our conference for today.

That concludes our call. Thank you, Shannon. Thanks everybody for joining. If you have any additional questions, please feel free to reach out to the Investor Relations team. Thank you for your interest in Truist. We hope you have a great day. Shannon, you can now disconnect the call.

Thank you. Once again ladies and gentlemen, that does conclude today's teleconference. Thank you all for your participation.