Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Good morning, everyone. This is Gerard Cassidy from RBC Capital Markets with our second fireside chat for our Virtual Financial Institutions Conference. Joining me today is Kelly King, Chairman and Chief Executive Officer from Truist Financial Corporation; as well as Daryl Bible, Chief Financial Officer of Truist Financial Corporation. Kelly, Daryl, welcome.

Thank you. Good morning.

As people know, when we take a look at the Truist Financial Corporation, this is, obviously, the merger of BB&T and SunTrust. Today, they have over $473 billion in assets. The market cap of the organization is $48 billion, loans of just over $300 billion and deposits of about $335 billion. Number of branches spread out through their franchise is just under 3,000. Again, gentlemen, thank you for joining us. Really privileged to have both of you here, and we're very happy that you're able to join us.

Maybe we can start off. Kelly, when we take a look at the current events, what's going on here, the unprecedented move in the 10-year treasury rates and how that might be impacting your business overall, but also from a balance sheet standpoint and even in income statement? But with that, Kelly, I'll open it up to you.

Yes. Thanks, Gerard. It's obviously really, really unusual times. Certainly, reminds us all, reminds me of 10 or so years ago. And -- so it's an interesting and challenging time. I would say that today, the most specific reaction that we're seeing is around the 10-year treasury, and it is primarily around what it's doing to the mortgage business. So we're seeing clearly a substantial increase in applications, huge increase in refis. We, like I think most everybody else, are scrambling to try to get more capacity. Spreads are widening, which is not exactly what you would expect. But because the volume is so high, nobody can handle it all, so spreads are widening while volumes are going up. So all of that's good. We're just trying to add capacity as much as we can to help our clients. So the mortgage business is good. In terms of the other effect of lower rates, it's obviously challenging for us in terms of pricing new credits. And so we're beginning to talk with our clients about rate floors because these rates are getting unacceptably low. So we believe that will help us on the downside with regard to NIM. Fortunately, for us, Daryl did a great job pre and post-merger in terms of balance sheet restructuring. He can give you details, but we sold $9 billion worth of mortgages, another $1.5 billion of other commercial loans that positioned us better. So that's a plus for us in terms of pushing us for the downside. We also reinvested the entire SunTrust investment portfolio, which positions us from kind of roll down the curve on that transaction. That was pretty big. And then this accretable yield for us is a plus. I mean, it was already a plus, and now it be an accelerated plus because as the rates go down, particularly with mortgage and commercial loans, where you have the biggest rate impact, there will be a spike in terms of accretable yield. So we are actually in pretty good shape relative to the circumstances that we face.

And Kelly, with your outreach to your customers in your market, can you share with us what they're experiencing? Clearly, the coronavirus has impacted the economy. Things have slowed down in certain markets. Maybe any color that -- from your standpoint and what you're hearing from your customers?

Yes. So [indiscernible] Gerard, most of the people we're talking to today are concerned. I would say, some are worried, but there's no real evidence today that it's impacting their businesses because the underlying businesses are doing pretty well. We have to remember that the underlying economy is really good. We have an extremely low interest rate, extremely low inflation. We just added 273,000 new jobs. So the underlying economy is, in fact, doing well. And that's what we're hearing from our clients. Obviously, if this becomes exacerbated and lots and lots of employees end up having to go home, that will impact everybody, but that's not the case today.

Very good. You mentioned about Daryl positioning the balance sheet or repositioning, I should say, when the transaction was completed last year. Maybe, Daryl, is there anything that can be done today to enhance or protect the net interest margin or the interest sensitivity of the balance sheet? Or is it just too expensive to use derivatives or other types of products to try to lower the sensitivity to rates?

So Gerard, we were fortunate doing what we did when we closed the transaction slightly after that. As rates have come down, we basically have been just aggressively managing the balance sheet, both from instituting floors in our market prices as well as lowering deposit rates pretty aggressively. You see us lowering and our peers are following in our markets, so that's a positive sign there. As far as hedging goes, it's an asymmetric risk right now where if you put on swaps, the benefit if rates go to 0 is probably 50 basis points, plus or minus. And if rates do flip and go the other way, you could be underwater on your swap position for a long time. So I would say it's probably not an advisable transaction from our perspective to be doing interest rate swaps at this point.

Yes, we really think this is the case. While it hasn't been used in a long time, I do recall a couple of times in my career with [ Benues ] that the more natural hedge around interest rate floors is probably the best strategy now.

I see. And Daryl, you touched on deposit rates coming down. Has there been any evidence of customers moving deposits out because of rates coming down? I understand, obviously, rates are falling everywhere. But is there any movement in deposits due to the change in -- lowering rates?

Yes. I would say, overall, it's early, but as rates come down, you would expect high-quality institutions like Truist to benefit from a flight to quality perspective. And early takes are that we are having a little bit more inflows than what we typically would have this time of year. It's too early to say if that's a trend. But I would say early takes are it is positive, and brings back memories back when we had this 10, 12 years ago. We had more deposits coming in than we could actually lend out at that time.

Yes. [indiscernible] times just literally talked this morning, this [indiscernible] somebody had another positive area, and she confirmed the same thing, that, yes, it's happening. And so kind of interesting.

I'm of the belief, I don't know if you guys would agree with this, but if this volatility continues there might be just a reintermediation back into the banks because all of you, including Truist, are well-capitalized, plenty of liquidity, made it through the stress test successfully. And I'm wondering if maybe we're starting to see some early trends of that.

No, I think you are. I think that when people get scared, they resort back to what they have confidence in, and they still have tremendous confidence in the banking system, notwithstanding all the rhetoric over the last several years. They know, fundamentally, we're here, we're capitalized. We've got great liquidity. And for the communities and clients at large, we've been the primary ones that have stood by them in difficult times. And they expect us to stand by again this time, and I believe we will.

Speaking about that, Kelly, a couple of years ago, obviously, we've had a terrible hurricane that hit Puerto Rico, and I remember to help those people back on their feet, some of the banks, in conjunction with the regulators, allowed people to miss some payments to the banks as they got back up on their feet. Should this coronavirus really lead to some serious economic, short-term problems with the expectation that we snap back in the second half of the year, are you aware of any discussions with regulators or others that may move down that path like we saw a couple of years ago?

Yes. I was actually out a meeting last week where 2 of the top 3 regulators were, and we talked about this sort of issue. And the CEOs present asked them to do what they can do to support us in helping our clients. I mean, that's really what we need, which we think they did not have in the great recession around. So we've asked them to give us some relief on the handling of TDRs, of nonperformers, because you know what happens, I mean, the really good businesses and consumers, they need help. And a lot of times is they can pay the bill, they just need a little extension on terms or maybe we want to drop the rate for them a little bit. But the minute we do that, it becomes a TDR. So we are appealing to the regulators. They seem receptive. We've got to do some work to try to get FASB on board because that's part of the problem, too. So we're going to be working on it I promise you, and hope that we'll get some relief. But we would do all we can, but for those that have a voice in this, we need help from the regulators and other agencies.

Very good. And Kelly, coming back to the residential mortgage business, it's an important business for you folks. You talked about, obviously, the inflow of applications being incredibly high. When do you think that you get to process that? Or is there going to be backlogs? How long does it take to kind of work through this incredible volume that you and your peers are seeing?

Well, as you all know, some of that is mathematics. Like, for example, how long the rates stay low? And do they go lower? Because every time you go down 50 basis points, there's another inventory of people who say, "Well, now I can do it again, I just did it 9 months ago." So it's -- as long as rates go down, the pipeline will be there a long time but just probably do not have -- industry does not have the capacity to handle it. So everybody is trying to staff up, but I expect, certainly, this full year will be high volume and it may extend beyond that.

Very good. Coming back to the purchase accounting accretion comments that you guys made. Daryl, maybe you can share with us the interesting development that you had with the CECL reserve, life of loan loss reserves that you built up, of course, in January. But you also had to mark SunTrust loan book to market in December with that same very issue, life of loan losses. So can you share with us the extra level of cushion that you have in loan loss reserves because of the oddity of CECL?

Yes. So we did close the transaction before year-end, and we're going to take a purchase accounting mark of little less than $4.5 billion. That is the discount on SunTrust loan book. And then if you -- with the adoption of CECL that we had and when we put on CECL, we had a relatively conservative assumption at that time, but it has reserves a little bit north of 1.5%. And if you look at the combination of both with [indiscernible] reserves and purchase accounting mark, it's approaching $9 billion that you can basically apply to the loan book. So it's approximately 3% discount if you look at it from that perspective, that basically handle. So we view ourselves as much more of a defensive company than most of our peers in the industry because we have our book value on these loans much lower than anybody else does. If we do go down, interest will slow down.

Very good. And just real quickly because I know you're not a big energy lender, we've seen what's happened with the price of oil in the last 24 to 48 hours, how are you guys approaching that in your energy loan book?

So we've looked at that, as you imagine, like everybody else, we're stressing it. And we, right now, don't anticipate any problems. Our book is relatively small compared to -- I mean, it's like 1.5%. So it's very small. And it's mostly in E&P, we don't have much in oilfield services and that kind of thing. So it's high quality. I mean, like 40% of the book is like investment grade. So it's really, really high quality. We don't anticipate any problems. Obviously, price of WTI goes really, really low, but we've already stressed it into the low 30s and we don't have pretty big issues. We are now running stress at even lower levels, just to be sure. But right now, we don't see any problems.

Very good. I've seen some questions about -- you guys had a slight delay in filing the 10-K. And I think, Daryl, I think you pushed back maybe your first quarter earnings release date. Can you give us some color behind those 2 issues?

Yes. I would tell you, from a 10-K perspective, putting a 10-K together for the first time of a new company, we've tried to take the best of both companies. And then we had one of the large New York law firms basically assist us in putting that together. And I believe we came out with a high-quality product. What happened on the last day, there was a small deposit category that we caught was basically different than what we had in our Y-9C. It was a couple of billion dollars in a certain maturity bucket. The Y-9C had it in less than a year and the 10-K had it in over 5 years. And we wanted to align it and found out that the Y-9C was correct and we made the correction. When we filed, we actually thought that we had up until 10:00. If you look on the website, on the SEC, they say they accept through 10:00, but what we found out when we came in the next morning on Tuesday is that the cutoff was actually at 6:00 in the evening, and we missed it. So that's really the unfortunate part. We filed a form, basically for an extension, we already filed it that evening. So all that was already done, but that was an unfortunate mistake. And as far as pushing back earnings, we are trying really hard to get on our normal schedule. It's taken us about 2 days longer to close the books. And we basically pushed our earnings back from a Thursday to a Monday. So it's about 2 days. We get a weekend from that perspective. But our hope is over the next couple of quarters, we'll get back into our normal time frame, but we're still running with multiple general ledgers, and we're going to take a little bit of time to make sure the numbers are accurate.

And Gerard, there should be no interpretation of any issues, any problems or concerns there. We just -- we're trying to be, frankly, humane to our people. And they just need a little bit of time, another 2 or 3 days. It keeps them from complete -- breaking down. We think that's the right thing to do. So that's all this is, is trying to be sensitive to our people.

Understood. And maybe, Kelly, shifting over to the combination of the 2 organizations forming Truist. Obviously, as CEO, you were the CEO of BB&T with about $237 billion in assets. Now it's about twice that size. How have -- done it now for about 3 or 4 months, officially closing, I know you did a lot of work, getting ready for this. But how has the performance been compared to your expectations? And how is it going?

Yes. It's going great. We're twice the size, so I'm having twice as much fun. But really, I've been around a long time, as you know, I mean, this is really energizing. It's very fulfilling I mean, we have this opportunity to have a new team, which is awesome. One of the great things -- this is our second MOE. One of the great things about an MOE is you get -- you put the best people on the field. So we've got a great team and really when Bill Rodgers and I came together on this, we talked about from day one, we knew the economics would be good. But we really wanted to do a company that would stand for better and so we have this very inspiring purpose now to inspire and build better lives and communities, build into very assets of our culture, and it's fantastic. We've already done 35 -- 34 of 39 town halls in the last few weeks. And I'll tell you, Gerard, the feedback is just incredible, much better than I expected. And I expected it would be great, but it's off the chart, people having a lot of fun. They're excited. Alignment of our teammates is almost 100%. And they're really inspired by the fact that we are of the size now -- we're still not a big bank, but we're large enough that we can make a bigger contribution to the community. And people get excited about that. So I'd say, overall, right now, it's going great. People are having fun. They are working hard, I'm not saying, there are not super tired. It's hard work. But everybody is inspired and feel that they're doing worthwhile and fulfilling work.

Can you share with us -- I know we're about 3 months into the process, and I know you folks have time lines on what you want to achieve by certain dates. Can you just give us an update on how that is going? And have the time lines changed in any way?

No, I don't think the general time lines have changed. Overall, we feel good about things. I mean, it's -- there's no big surprises. I mean, it's a normal process of a merger, is what I would say. Nothing big, nothing pronounced, nothing that I would say, "Oh, my goodness, this crazy big thing happened." None of that. It's just the hard work of pulling together 2 very large companies, and it is hard, but nothing surprising or in my view to be concerned about.

Kelly, you just shared with us the invigoration of the workforce. People are inspired by what you've done with this merger. How about your corporate or your commercial customers, what are you hearing from them?

They are interestingly also very excited. They are actually ahead of us. They want us to do more larger deals right now. They are -- they obviously know and many, many of these large corporate clients, both heritage companies were already doing business with these clients, and so they like it. They are eager about it. They know we have more capacity. And by and large, most cases, they like both companies. And they see the synergistic opportunities that we offer like, for example, we now bring to the table for the SunTrust, our clients, the fifth largest U.S. insurance broker. That's a big deal because, I mean, all of these companies, they need insurance. And when you're that large, you bring a lot of capacity that flows to the benefit of the clients. So I would say the receptivity is extremely positive. And if anything, they're just ready for us to get on with it and get the conversion done, so they can do more business with us.

And can you share with us -- clearly, you'll probably lose some loan officers along the way, that's understandable, and maybe a customer or 2. Can you share with us any color there? Is it going according to plan in terms of the people you wanted to retain, the customers that you wanted to retain?

Yes, it's going fantastic. Our attrition rate is better with regard to clients and teammates than it was before the merger. The teammates are inspired. We put together a really best-in-class benefit program, world-class pension benefit program, 6% on 6% 401(k) match, great health benefits, et cetera, et cetera. We've got this clear notion that if you take care of your teammates, they'll take care of your clients, take care of your clients, they'll take care of your shareholders. And so we focus on taking care of our teammates because this is the right business thing to do and it's morally right. So a huge amount of absolute enthusiasm. And see, normally -- and when you go through mergers that you hear about where a big company buys a small company, and we've done a lot of those, as you know, you do hear about turnover of clients and turnover of teammates. That's typically because the teammates and many of the clients have chosen to bank with a small bank for whatever reason. And when a large bank comes and buys them, there's just a certain -- relatively small, but a certain percentage that just say, I just don't want to bank with a big bank. On the other hand, there are many, many others that come back to that bank because they had needs that a small bank couldn't handle or now the big bank can. So it's a mixed bag. But overall, today, I would say that the performance to this point is an A-plus.

Kelly, I couldn't agree with you more on your thinking with the merger. I know, in my experience, over the years, when we've seen these transactions, you're absolutely spot on when the big bank buys the small bank, there seems to be greater risk to losing customers and employees than when you have the big merger, as you just described.

Yes. And the other thing, Gerard, is different. In this case, all the mergers I've been through in my career, the biggest issue to the client is they don't like change, and they really don't like it when you make them order new checks and you get new account numbers. So here, we went to our operations people early on, and we've said, we're going to do it different. You find a way, so we don't have to change these account numbers, and they did. So except in a tiny, tiny sliver of minority, our clients in this are not going to have to change account numbers and order new checks and all that. So -- and we published that, we've told it to our people and our clients. And so we've taken away the big issue, which is don't change by my account number. The second big issue is, I don't want my teller, I don't want my people that I'm dealing with to go away. And we said -- I said day 1 on announcement of the merger, and I reiterate often to all of our client-facing performing teammates have a job. Period. End of story. So they're not going to face dealing with new people, they're not going to have their account numbers changed. And so the only thing to change for them now, they get to use twice as many ATMs for free.

And then that seems like a pretty good deal for many of the customers, that's for sure. And speaking of just ATMs and the whole digital channels that you've been a big proponent of, obviously, when you're at BB&T. How -- can you share with us, how do you manage that when you're integrating the 2 companies and making sure that you've still got a really good product for your customers through that digital channel?

Yes. So the main thing is -- and we did this day 1, is have an absolute commitment to your commitment to technology and innovation and the whole digital capability. That's why we came out of the shoot with our commitment to building a state of the art technology and innovation center here in shop. We are already starting on that. That will allow us to execute on what I call T3, which is the seamless integration of touch and technology, so that we yield the highest level of trust, which is ultimately what clients are looking for. And so we are executing on that. And that's really about having a cultural imperative that T3 will be pervasive throughout the entire company. No longer can companies survive and do well by having technology in the backroom and touch in the front room. It has to be fully seamlessly integrated. So we're way down the road with regard to that. And what that does is when you're thinking in terms of closing branches or new products, you make sure that you integrate how the technology and the touch works closely together. So as we know now, what happens is the vast majority of all clients, regardless of age and other characteristics, do a huge amount of their interaction with the bank digitally. But they also know sometimes digital doesn't work. You look at one morning, the battery is dead, you've got a real problem. And so they want easy access to the tech side. So heavy investment in digital, appropriate investment in branches and the tech side, care centers, et cetera, is the right model. We're developing all of that right as we speak, moving carefully, and we will make the technological investments that are necessary to be not only a good provider, but a leading provider of digital services. And at the same time, I believe we will be a leader with regard to integrating touch and technology, so that the clients will finally be able to say, "I can finally have the best of both worlds." So historically, they used to get some digital from some of the largest institutions, but the touch wasn't there. They got the touch from some of the smallest institutions, and the digital was not there. At Truist, you get both.

Very good. We're down to less than 5 minutes here. Maybe pivoting back to Daryl. Obviously, CCAR submissions are coming up. Can you share with us your thoughts about, with the current events and the volatility in interest rates, how that might influence the CCAR for you -- not just for the Truist, but for all the banks?

Yes. So Truist, we're always going to have a priority on how we allocate capital. First and foremost, we want to serve our clients and make sure they are financially successful. Secondly, we want to make sure we pay a good, attractive dividend to our shareholders with good yields, consistent over time that we can continue to pay. And then third, we look at acquisition/buybacks. Right now, we're looking at potential opportunities down the road next year or 2, that increase maybe some fee businesses, maybe coupled with buybacks at some point down the road, but really a combination of all that. That said, if you look at our base scenario and the Fed base scenario that we have in the last 2 to 3 months, the market conditions have changed. So I know the industry and Truist itself is rerunning an alternative base scenario right now that we are basically modeling and just layering in what our capital ask was when we modeled it a month or 2 ago and just see what the impact of that is. We're in the midst of doing that as we speak. The submissions are due on April 5. So we need to finish that. But we're just double checking to make sure whatever capital ask that we thought we were going to do, we still feel comfortable with the economic environment that we have.

Very good. And I'm seeing here on the clock in the conference room that we're at the 10:30 mark. And we've run out of time, but I really want to thank both Kelly and Daryl for joining us today. It's a real privilege to have both of you gentlemen with us, and thank you very much.

Thank you, Gerard. Have a great day.

Thank you.