Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us on our second day of the BancAnalysts Association of Boston, our 39th Annual Fall Conference. I'm very pleased to introduce our first presentation, Truist Financial Corporation. As many of you know, this was the combination, a historic combination between the old BB&T and SunTrust. The deal was announced in early 2019 and closed in December of last year. Today, combined, there's about $500 billion in total assets and is one of the premier franchises in the southeastern and southwestern part of the United States. Joining us today is Senior Executive Vice President, Daryl Bible and CFO (sic) [ Senior Executive Vice President and CFO, Daryl Bible ]. And what the plan is for today, Daryl has some prepared remarks with slides, which will last about 25 minutes, followed by Q&A. And as a reminder, for people that would like to ask questions, please send them in through the dashboard at the bottom of your screen. With that, Daryl, I'll hand it over to you.

Good morning, everybody. Thank you, Gerard. I'm excited to be here to be able to present Truist and our outlook and how we're doing putting our 2 heritage companies together and creating a great company, Truist. As you can see, I'll always start out with our vision, our purpose, mission and values. Our purpose is to inspire and build better lives and communities. We do that through our mission. We provide distinctive, secure and successful client experiences through touch and technology. We create inclusive and energizing environment that empowers teammates to learn, grow and have meaningful careers and optimize the long-term value for the people in the audience here through safe, sound and ethical practices. We activate this purpose and mission through the values. These values are really important so that we attract and retain teammates that have similar beliefs as we do here at Truist. These 5 values come to life when you're part of Truist. Trustworthy is very important. We served with integrity. Caring, caring came out really in scope in March when COVID first hit. Our primary directive before that was to get the conversion done. But once COVID hit, our primary directive to make sure it was safe, and our teammates could operate in an environment to serve clients in a safe way, and that was our #1 priority and still remains the #1 priority with the conversion being #2. We want to act with one team. Together, we can accomplish anything together. Success. We feel we are successful when our clients are successful. And finally, when you put it all together and you work at Truist and you have a great day, and you feel really good about it, you get pride and happiness out of that. And that, at the end of the day, is what really what is important for the long term. Our purpose comes to life, how we live it out. We basically have on this slide, lots of commitments that we made, our community benefits agreement. We also have other commitments that we have made in the last several months and quarters. I just want to highlight a few of these. This past week, we committed $15 million to the housing impact front to provide affordable housing to approximately 1,500 low-income families in Charlotte. This was the seed funding of a $40 million total fund. Secondly, about a month ago, we donated about $40 million to CornerSquare Capital. CornerSquare supports CDIFs (sic) [ CDFIs ] by funding to racially and ethnically diverse small business owners, women and low and moderate-income communities, really important in helping solve the inequalities that we see in the marketplace today. And finally, and you see this through action, this is really, really important is that our Board and our executive leadership, we have committed to basically -- in our CSR report you saw this, but we are increasing the number of racially and ethically diverse teammates in our senior leadership positions from 12% to at least 15% over the next 3 years. And we think that will make us a lot much better and much stronger company as we accomplish that, and we think we can do that and be really successful with that. I want to now look at our franchise. When I look at this page, what I see is I see scale and I see density here. We operate in 17 states in the District of Columbia. If you look at the top 20 MSAs, we are in the top 3 in 13 of those MSAs where we have a lot of scale and pricing power. And you've seen that as rates have come down, we've been in lockstep, lowering deposit rates and still growing deposits very aggressively. When you look at that -- this page, combined with this next page and you want to see where do you want to operate in the United States, what are the 10 most attractive growth markets projected over the next 5 years out of the top 10, our footprint, those 17 states are 7 of the top 10, and we think we are in a great, great position to capture and take share in the markets as these markets are growing very lively. As you look at our next page in leading recognitions, we have lots of recognitions. Here, we have some that we're really proud of. Truist continues to receive industry recognition on all of our commitments to the diversity and inclusion. The Greater Women's Business Council selected Truist to be a TOP Corporation of the Year. And Forbes recognized Truist as one of the Best Places to Work for Women in 2020. We also scored 100 on the Human Rights Campaign Corporate Equality Index. And in the state of Florida, we received the President's Award for a minority supplier diversification. And finally, Truist received the 2020 U.S. Black Chambers Corporation of the Year Award. All great recognitions, and very proud of our teammates helping make this happen. As you look at some of the numbers on this page, you saw this in October when we had our earnings. We had strong financial performance. The net income to common was a little bit over $1 billion. Our return on tangible common equity, and we'll talk about this a little bit later in the presentation, on an adjusted basis was a little over 16%. We did reach our 10% CET1 ratio. That was our objective for the merger. And then one of the most significant accomplishments that we had in the third quarter is we had our first client-facing conversion in August, and we created Truist Securities and it was came -- it was flawless execution. Everything converted very well, and we have a lot of happy clients together, and our teams are all now working together as Truist Securities. Beau Cummins and his team did a great job making that happen. That was great effort for everybody. The next page here, we actually look at our year-to-date performance. Now our year-to-date numbers versus peer are really strong. If you just want to look at the adjusted return on tangible common equity, we're about double what the peer median is. If you look at our adjusted efficiency ratio, here we show strong operating margins and good core discipline. And if you look at the NPA ratio, this shows strong credit quality, the diversification and benefits that we have from the merger, all coming together and playing out nicely. The next couple of slides really talk about interest rate sensitivity. If you look at the first chart that we have here, this is the chart that we usually have on our earnings. It's our ramp. And for an up 50, we increased our net interest income 2.68%, that relates to 9 basis points in margin. And if it goes up gradually over a whole year, 25 basis points a quarter, then it gets up to 12 basis points -- or 11 basis points. What we also put in here was a shock, though. That's the light blue line. And the reason why we put a shock there is because we got a shock down of 150 in March, and that's really where our margins are now. And pretty much it was -- what happened is what we expected it to happen with the 150 immediate drop there. But what you may see this here, you're up 50 basis points on a shock, it's up 3.86% or 12 basis points or up 100, it's 25 basis points. So we are becoming a little bit more asset sensitive. We've done that through terminating our received-fixed swaps on the books. We are putting on some pay-fixed swaps now as we move forward. We also are in the midst of -- the forgiveness of PPP loans have started now. We will play now over the next several quarters. And then our deposit mix continues to core DDA and transaction accounts, which also provides long-term funding, makes us more asset sensitive. The other thing I want to point out is, if we did a steepener, I have a 2s, 10s steepener in here, just to give you a little feeling of how asset sensitive that is, that would probably generate 4 basis points if that were to occur. If you look -- pull that all together, operating in a low interest rate environment is challenging. And with the revenue being -- the majority of our revenue being net interest income, these are the 5 major strategies that we've used to help counteract that. First, loan mix changes. We are trying and moving forward at growing our mortgage portfolio. Our mortgage portfolio provides about 60 basis point benefit over our C&I portfolio on a spread basis. So that helps from a net interest income perspective. If you look at our consumer portfolios, whether it's the blend of auto, LightStream and then Sheffield, you blend that all together, those portfolios have about 250 basis point advantage over a C&I new loan going on the books. So growth of those is really important. We talked at earnings in October and we continue this quarter, we are moving fairly aggressively to invest our excess balances at the fed into the investment portfolio. We are putting partial hedges on, like I said, was pay-fixed swaps there. But we'll probably, by the end of the year, have well over $100 billion in the investment portfolio and still have probably $10-plus billion at the fed with all the excess liquidity that we have on our balance sheet. We continue to layer in rate floors as we have new and modified loans coming on, 80% of those loans are coming in with floors, reinforce prepayment penalties. And you've seen what we've done with deposit rates, we were down 17 basis points last quarter linked, and we're targeting 0, or at 0, single-digit rates by first quarter of '21. If you look at our digital acceleration, here we continue to see positive trends in digital banking. We opened up 56 net new accounts in the third quarter, up from 15,000 second quarter 2020, driven by digital and branch reopenings. In terms of new production, nearly half of the retail accounts were opened up through digital. So if you look at digital commerce, on a year-over-year basis, we're up 24%. We're up 8% on active mobile users. And if you look at check mobile deposit activity, that has pulled back a little bit, and that was just due to the reopening of the branches. Here, we continue to make good progress on the merger. On the left side, it shows significant milestones we achieved in the third quarter. On the right, we are launching what we call a blended branch pilot. The criteria here is to have the branches within a quarter mile of each other. In some instances, they actually share the same parking lot. Don't be confused, this is not the ending state of our merger, this is basically a way for us to accelerate branch closures when we have to serve both clients. The systems have not converted yet. So the remaining branches that survived actually got rewired, so we basically can serve the other heritage company clients together. When we actually go through and complete our conversions in the early part of '22, we'll all be branded with Truist, with Truist signs as we move forward here. With this 104 branches that we are moving forward with, we will probably look at this strategy and probably do more as we move out into 2021 as well. When you look at this page, this page really came to life in February '19 when Bill and Kelly announced the merger of the 2 companies. Here, we talk about generating net $1.6 billion cost saves. We're going to do that. And at the same time, making investments in digital, marketing, talent and tech, and at the same time, provide leading industry returns on return on tangible common equity and efficiency. That has not changed, and we're going to all do this and utilize T3 such that we have touch in technology, which allows us -- clients to trust us. When you look at the cost savings, if you look at the 5 major buckets where we're going to get the [ savings ], we have third party spend. Third party spend, we have about $4.5 billion of sourceable spend here. We think we're going to obtain 8% to 10% of that when it's all said and done. And by '22, we're well on the path of getting a big chunk of those savings. Talk about the branches, we originally targeted 800 branches of closures. Right now, we have 44. We're going to add another 104 starting in December and January. And then we'll probably do more in '21 there as we get these branch closures to the combination of savings with branch real estate as well as personnel over time. And you got the just [Technical Difficulty], the nonbranch facilities. We talk about that on the earnings call a little bit. We're closing approximately 5 million square feet or $30 a square foot over the next 6 months. We will probably have most of that activated and kind of finished out as '21 plays out. Technology, it really comes down to as we close and finish our conversions. We have to basically turn off the applications that we aren't using, either redeploy the hardware or turn off the hardware depending on how old the hardware is. And then the staff that was supporting it needs to be rationalized. And then finally, from a personnel perspective, from a year ago, we'll be down about 8% in FTEs. That's about 4,500 FTEs. About 1,800 of that isn't coming from the branch area, but 2,700 is coming from nonbranch areas. That will continue to grow as we get through these conversions and convert to a one system sort of supporting our clients as we move forward. We are still committed to our cost saves. We're still committed to the timing that we had. We're going to get 40% by the end of this quarter of this year, 2020; 65% in '21; and 100% by the end of 2022. One thing to put in there, though, we are a dynamic company and things are changing constantly. So it's hard to peg exactly an expense number. So I just want to make you aware and make cognizant of, there will be some inflation in the numbers. It would be due to like merit increases, some vendor increases potentially. We may have some bolt-on acquisitions where you'd have revenue and expense come in, in some of our fee-based businesses. We also have -- and we'll talk about this shortly, is we're growing incrementally revenue. If you look at it, insurance is up year-over-year. As insurance revenue grows, obviously, what comes with that is expenses. Same with CIG, same with wealth. So all those come with expenses. And then we have a pension plan, defined pension plan. That could be a good guy or a bad guy, depending on which way rates go and markets perform there. As we move forward and look at the success that we are having with our relationship, we call it IRM, relationship management, we basically are being energized by our leadership. When COVID first hit in March, the momentum kind of fell out of us. But Bill and Kelly and the whole executive leadership team got together. Since it's hard to originate new volume, new clients right now in this virtual environment, although that is slowly building and getting -- coming back, we are doubling down on our IRM relationships. So we're having a lot of success and very good positive reception. We're identifying clients. We are aggressively reaching out to clients, and we're having a lot of success in mortgage, business loans, insurance products as we introduce them to our financial experts. We have a culture of collaboration. In September and October, our teammates have collaborated across heritage institutions to deliver over 20% year-over-year growth and overall referral volumes. That's huge. And that will play out now over the next 3 to 6 months, success with some revenue attached to it. So we have all that. We've also had some anecdotal benefits and pipelines, whether it's in the insurance or CIG areas, referrals are building up and doing really well. So that's how we're going to grow revenue until we get back to more business as usual. The next couple of slides we have here is just how do we look what we're doing in today's environment, and then what's possible as the environment potentially normalizes. So if you look at it starting with -- we started here with our 2020 year-to-date returns. What we did is we adjusted the numbers as if rates were down for the whole year to kind of make it look like what is the return in this rate environment. So you can see we went from 12.8% reported to an adjusted 15% by taking out our nonrecurring items. We then adjusted our margin to 2.70%, as just said, margin would be 2.70% throughout the whole year, and we took out all the purchase and accounting benefit. We put in the remaining cost saves with some added inflation numbers in there. So that's a net number in there. We normalized credit, and we added some fee revenue that we would get from our IRM products. And you can see that the 15% return stays where it is as an as if basis, which is still top tier performance. However, we get the question now when we talk to a lot of analysts, portfolio managers, is 20% still possible? Kelly answered that on the earnings call, yes, it is possible. There's lots of levers that you have to pull and various things can happen. So this isn't really changing any guidance. This is just saying what levels (sic) [ levers ] can we pull, what are the ranges that are really possible. So obviously, margin is dependent on interest rates, but margin could go up 10 to 50 basis points, depending on what happens with interest rates. If you look at leverage, right now, we're 10 -- going over 10% CET1. We'll probably be 10.25% by the end of this year. You can decide to leverage. We aren't going to leverage now. We're in a stressed environment, but potentially down the road, Kelly, Bill and the Board will make decisions to kind of maybe potentially lever the company at some point. Revenue synergies. As we add revenue synergies, we will add expenses, but that'd still be a net good, net to the bottom line positive. And then credit will continue to improve and get better and normalized. So you can see, this is just one path to get to 20%. There are multiple paths here depending on how this plays out and how aggressive and which ones are successful. So 20% is definitely in reach. It really just depends on what variables and what the environment is to see how quickly we can get there. Next, we want to look at our risk management. Risk management, we had this slide on our earnings deck. We did add the NPL numbers as well as our prepayment deferrals. You can see, it's almost a nonevent on both of those pieces. We did have a nice decrease in this selected credit exposure portfolio, down $2.2 billion a linked quarter. If you look at the numbers on the bottom, our leverage numbers also came down nicely, down 9.5%, which is a nice drop. Some thing to point out is that about $1.5 billion of what's in the leveraged loan portfolio is also in the upper chart that we have there. But really good progress in shrinking our higher risk portfolios. And then if you look at our stress resiliency, look at the allowance, fair value mark, put that all together, we're in a very, very strong position to weather any stresses that could come. The value proposition that we have here is we have an exceptional franchise with diverse products and services and markets. We are uniquely positioned to deliver best-in-class efficiency and returns while investing in the future. We have strong capital liquidity with resilient risk profiles. Right now, our dividend yield is 4%. We had one of the strongest return on tangible common equity numbers out there. We are very good from a conservative risk culture. We're diversified in revenue, geography. We're in growing markets. We are a growing and conservative company to move forward. And finally, I'll end. In 2008, heritage BB&T had an Investor Day, we hosted that at the new Leadership Institute. You can see it's been rebranded, the Kelly S. King Center. But if you look at this, no other company has this in our industry. This is basically one of our crown jewels that we have, and it's a differentiating factor. We serve clients here. And here, we're trying to help our clients run their companies better, grow their leadership and be sustainable and be able to adapt to changing market conditions. We use this center and its teammates here to serve our other teammates throughout the company to build our middle and higher-level managers into the future leaders of tomorrow for Truist. From an education perspective, we are offering free leadership classes through public school principals throughout our footprint. And finally, we have a student leadership program where we are providing leadership development to lots and lots of students. This entity in and of itself, if you survey the people that have been through it, 66% of the clients have said that this differentiates us from others, and it creates loyalty. 92% says, by having this, that bankers at Truist are trusted that they know that they will do the right thing. So as you can see, this is [ differentiating ], we think this is key to the future of our company. So with that, I will end, Gerard, and open it up for questions. Thank you.

Daryl, thank you very much for the presentation. As a reminder to the participants, please send in your questions. A number of them are coming into the queue as I see. Daryl, maybe we could start off about what you're doing on the business. From a business integrated management standpoint, how does that relate when you talk about the insurance and the CIG businesses. Can you expand upon the success that you're seeing from the early days of the merger?

Yes. I would say there's been many, many meetings over the last several months between the insurance group that John Howard runs as well as Beau Cummins' group in CIG and David Weaver's group in commercial. And they really have spent time to get to know each other to see what clients each one has, and they're looking for opportunities to see if we can cross sell. There's probably over 500 initiatives that have been passed from either David and Beau's role to insurance as possible referrals. And then on the way back from the insurance side to Beau and David's role, there's a couple of hundred referrals going there. We've had huge successful wins by these referrals. Sometimes when we talk -- go out and virtually meet with clients now, we basically have the whole team there, and it's been a very successful formula as we move forward. So this is the way to go right now to really drive our revenue and success that we have. Our teams are doing great with that, and we'll continue to execute well. Thank you.

Daryl, we're getting, as I mentioned, questions coming in here on the dashboard for Truist. Can you share with us, when you look at what's happening with the yield curve flattening, obviously, rates are low, and you're extending out on the securities in terms of the duration picking up spread. Can you just expand upon that strategy as you go forward?

Yes. I would say we know that we have a lot of deposits in our balance sheet, surge deposits that have been created by the stimulus that the federal government and the fed has generated. We really don't know how long those deposits are going to last. When we look at it, our deposits are up probably north of $40 billion since the crisis. When you look at the strategy that we're doing is we are investing the excess cash flows. But the way we look at it is we will have anywhere from $10-plus billion of cash flows every quarter. And what we're going to do is if we start to see deposits start to shrink, not saying we don't think that's going to happen in the near future, but if it were, we just wouldn't reinvest the securities, so we would shrink a little bit on the balance sheet size from that standpoint. But if we don't see that, we will continue to invest. But ideally, the real strategy is to take those cash flows from securities and redeploy them in loans and grow loans. I know we have headwinds now with now the PPP loans that have to pay off over the next 3 quarters. But as we get through those payoffs and into the middle of 2021 and as our other loan portfolio start to grow and the balance sheet grows ex -- less the PPP, our hope really is to move from a 1.5% security in the 2.5% to 4.5% loan. And that's really where you get the advantage in the -- the yield advantage there as we move forward. So that would be the ideal goal if the economy recovers and starts to take off. That's really what we would like to see happen.

It's interesting bringing that up about the loan growth though. Obviously, Truist has the number of national platforms for consumer lending, specialty lending. Can you share with us the impact that CECL has on that type of lending? Let's assume that demand does pick up in 2021, will that somehow maybe hold back some of the growth because of the new CECL accounting for loan loss reserves?

So the way I would caveat that, it really depends on, I think, the fed stance on how we look at dividends and the stress in the economy, all that would be tied together. If the economy starts to recover and our CECL numbers start to come down, whatever, and earnings aren't that critical to supporting the dividend so that you can basically pay your dividends on the earnings you're generating, I think all that would be good. Where you're in a situation right now where your dividends have to basically be earned to be paid out as you look at that on a go-forward basis, there are some portfolios, and it's the ones that probably need it the most, whether it's your lower prime or subprime type clients and some of your longer-term consumer assets, where a bank such as ours, with our allowance numbers really do not generate any profits for the first 18 months to 24 months. So it's actually a negative earner for us, which makes it hard to grow that portfolio. In those cases, we're trying to maintain the portfolios or shrink the portfolios a little bit. But hopefully, the economy will recover. And hopefully, the regulators become more amenable for dividends from that perspective. That said, if you look at the other consumer portfolios like prime auto, prime auto is doing well. LightStream, that is a really prime business that's growing really nicely. Our mortgage jumbo is growing nicely. So we do have some consumer portfolios growing. It's just more the nonprime are the ones that are a little bit harder to grow at this situation right now.

Sticking with this, the consumer side, obviously, Truist, similar to your peers, has seen some really strong numbers in the residential mortgage area. One of the questions coming in over the dashboard is asking about, can you give us some color? Are you seeing more jumbo mortgage originations versus nonconforming? Are you shifting more to conventional loans in the mortgage portfolio? And then second, what's the yield trajectory look like for the portfolio?

Yes. Good questions. Yes, I would say right now the volume is really, really high in our mortgage areas. Todd Chamberlain, who works for Chris, runs a great mortgage shop. His team is -- when you think of this, we're having record refi business going on right now, and he's got a big conversion in the first quarter, and he's doing both of it together, which hats off to his team and his -- everybody in his team making that work and happen. So challenging, but they're doing a great job pulling all that off. What I would tell you is we are portfolio-ing more jumbo out of the correspondent channels. We are looking more at super conforming, putting those on the balance sheet to help augment some of the high prepayments that we're seeing. Our hope is that we'll start to see the mortgage portfolios move from a runoff portfolio to a growing portfolio, hopefully, sometime in the first half of 2021. If you look at yields in that portfolio, yields you're booking in that portfolio are now south of 3% overall. But here again, you have to look at that versus your investment alternatives. You got the same type of cash flow, so you're still picking up north of 100 basis points from that. So just like we did back in the Great Recession, we grew our mortgage portfolios at that time, we're kind of doing the same thing there. We are kind of basically -- any on the conforming side, selling and selling that out and just taking the fee income. Spreads are down a little bit from where they were last quarter, but still much better than historical averages right now. So mortgage business is strong and going stronger, and Todd is going to have a great conversion in another quarter or 2.

Very good. Another question that's come in, Daryl. It has to do with the NSFR ratio. The questioner would like to see how are you positioned? And what is your NFSR ratio today?

If you look at the corporation ratio right now, we're probably in the 130s, plus or minus. When we actually build out our system for LCR, at that time, we had the NSFR formula. So we did build it out with a little bit of refinements that we're making to it. But yes, we'll be in good shape to deliver that when it goes live next year from that perspective. So I think all is good, not a binding constraint ratio from where we stand today. And I think it's just something else that we will report out.

Very good. One of the questions coming in, again, would like to come back to the insurance brokerage business. You've seen some nice organic growth. What's your outlook there for organic growth for the insurance business? Could it accelerate?

I think it really depends on how quickly the economy opens up and in the regions that it's opening up right now. So it's kind of hit or miss. You are right, though, we had really good origination growth this past quarter at over 8%. If you look at the true revenue year-over-year, it was up a little over 6%. So John Howard and team are doing a tremendous job running that business. I would say where we are right now with the environment, and you're partially opened up, still doing a lot of things virtually. We will have positive organic growth, but it's probably more single digit, mid-single-digit area than in the higher single digit. But once that, I think, the economy opens up, his team and all his sales force is ready to go and really make that happen. Insurance is one of the areas where we actually are growing and adding more producers aggressively. And we think that's important to our key strategy. And hopefully, over the longer term, we can maybe grow it from a strategic perspective as well.