Truist Financial Corporation

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation first quarter 2020 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. Ryan Richards, Director of Investor Relations for Truist Financial Corporation. Please go ahead. Thank you, John, and good morning, everyone. We appreciate you joining us today and sincerely hope that you're doing well. On today's call, our Chairman and Chief Executive Officer, Kelly King, and our Chief Financial Officer, Darrell Bible, will review our first quarter results and provide some thoughts for the second quarter of 2020. We also have Bill Rogers, our President and Chief Operating Officer, Chris Henson, our Head of Banking and Insurance, and Clark Starnes, our Chief Risk Officer, to participate in the Q&A session. Note that we are conducting our call today from different locations to protect our executives and teammates. We will reference this live presentation during today's call. A copy of the presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website. Please note that Truist does not provide public earnings predictions or forecasts. However, there may be statements made during this call that express management's intentions, beliefs, or expectations. These statements are subject to inherent risks and uncertainties, including the impact of COVID-19, and truest actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary notes regarding forward-looking information in our presentation and our SEC filings. Please also note that our presentation includes certain non-GAAP financial measures. Please refer to page three and the appendix of our presentation for the appropriate reconciliations to GAAP.

And now I will turn it over to Kelly.

Thank you, Ryan. Good morning, everybody. Thank you for joining our call. I certainly hope you and your families are safe and well in this difficult environment we're all living in. I want to take a minute before we get into the numbers to just talk about culture, because I believe now more than ever, culture matters most of all of the things we can talk about. So you've heard us say that our purpose is to inspire and build better lives and communities. This is absolutely a a critical time for us to live out that purpose. Our mission is focusing on our clients, our teammates, and our stakeholders in that order, and we do that very, very seriously every day. Our values are to be trustworthy, caring, operate as one team, focus on success, and ultimately happiness for our teammates. We're focusing during this environment, number one, on the health and safety of our teammates, We are pleased that about 35,000 of our 58,000 teammates are able to work remotely. We are spending a lot of time supporting our clients, particularly on the payroll protection program. We're spending a lot of energy and focus supporting our communities through our truest care of $25 million philanthropic donation that we did early in the cycle. I'll tell you that our teammates are working really, really hard. They're working 24-7 in many cases. They're working very, very closely together. It's incredible to see the kind of positive results that we're getting, particularly like in the PPP program where our people were able to stand up literally overnight and automated portals to allow our clients to access automatically with us in terms of getting their applications in. Our teammates are bonding faster than we would ever have expected. And I can say to you today that our culture at Truist is really, really strong. If you're following on the presentation, I'm on slide five. Just as a reminder, after the combination, we are the sixth largest US commercial bank by assets and market value. We have a very strong number two weighted average deposit market share in the top 20 MSAs. We have 12 million households, 58,000 teammates. we are very well positioned, we think, to achieve our purpose. We are recognized as one of the highest-rated financial institutions, and we're continuing to grow loans and deposits, particularly in this period of flight quality. Dale's going to cover a lot of information about our very strong capital and liquidity in just a bit. But I would point out that our diversification is a real strength. We are very diversified in product services and geographies. On slide six, we talk about some of the things we're doing with regard to the crisis. Like others, we have been providing payment relief assistance, including forbearance, deferrals, extensions, other ways we can help our clients. We've already done over 300,000 accommodations for consumers, 16,000 for our commercial clients. We temporarily waived ATM service charges. and we're uniquely offering a 5% cashback on qualifying card purchases for important basic needs. We're real pleased that we've been able to continue to allow our appointment interventions with our clients in terms of particular needs they have. We're fortunate that 90% of our branches have drive-thrus, so we've been able to keep those branches open in terms of activity. We've been really focused on the Paycheck Protection Program, Our average loan amount is about $323,000. We've been authorized for 32,000 companies, representing about 1 million employees. And we're expecting funding to be a little more than $10 billion on the first round, and it will likely be more on the second round if it is, in fact, approved. We're providing financial relief programs for small businesses in many other ways also. And we've been able to fund, without hesitation, extensive land draws for our commercial clients. For our teammates, we've awarded $1,200 coronavirus virus relief bonuses to about 78% of our teammates, making less than $100,000 a year. We've been very aggressive in providing work from home and other alternative work strategies for our teammates to provide safety for them. We also increase our on-site special rate pay for those that have to be at work in critical conditions. roles and $6.25 in special pay for those on hourly and $50 a day for those that are not. Our Truist Foundation is contributing $4 for every $1 that our Truist teammates donate to our One Team Fund, which helps our teammates that are in financial hardship and need assistance. For our communities, we announced earlier a $25 million philanthropic contribution. This has really gone a long way to help. We donated $1 million to each of the CDC Foundation, and Johns Hopkins. And our Truist Foundation donated $3 million to local United Way organizations. On page seven, just a few financial highlights. We did have $5.6 billion in taxable equivalent revenue. Our adjusted net income available to common shareholders was $1.18 billion. Saluted earnings per share on an adjusted basis was $0.87 billion. Our return on tangible common equity adjusted was 15.5, which is very strong in this environment. And our adjusted efficiency ratio was 53.4%. So we feel really good about that. Our January and February were, like a lot of people, really strong. And then we, of course, ran into all the challenges that we're all experiencing because of COVID-19. Interestingly, insurance and mortgage continued to have strong performance throughout the entire quarter. The quality that Clark will describe to you is actually very good right now, but we know that's the calm before the storm, and that's why we added a strong $893 million provision in anticipation of the challenges that we know we will face. We have a tight focus on our teammates and our clients and our communities, which we believe is our job number one right now. If you'll go to slide eight, just a couple of the unusual items this quarter. We know it's a little messy, but we've got the issue of the merger and the COVID impact. Merger-related charges are $107 million before tax, about $0.06 negative impact after tax. The incremental operating expenses, these are the ones that provide future benefits, but they're not a part of the ongoing run rates. We call them out separately, and that's $74 million or $0.04 a share. And then the COVID impact in terms of cost and foregoing revenues, is about $71 million or $0.04. So there really is, in my view, about $0.14 of unusual items, which gets you to the $0.87. If you go to slide nine, in loans and leases, it's been an interesting period. You can see that our first quarter average loans was $301 billion. But by the end of the period, it was 319 billion. Obviously, we had a surge at the end of March. We had about $18 billion in drawdowns. That continued in the early part of April. We had another about 1.4 billion. Then it kind of subsided and it's been relatively flat since then. We do expect substantial PPP funding. As I said, we have in process about $10 billion in committed loans that we expect will be drawn down relatively soon. You know, in terms of the market, I know everybody wants to know what's going to happen. I do, too. But the truth is we just don't know. It depends, obviously, on the depth and the length of the health crisis as we work through that and then how that has the knockoff effect with regard to the economy. The good news is going into this, the economy was very strong. The bad news is small businesses will really struggle to recover from this. Still, I would say to you, Americans are resilient, and I believe our country is likely to outperform the worst expectations. If you look at the projects on page 10, same kind of thing. Our average balances were $334 billion. It popped up to $350 billion as we had an increase of $15 billion during that period of time. About $7 billion of that was land laws. but then we also had some seasonal increases and some flight quality deposits that moved in, which we were very pleased to see. Our total average cost of deposits decreased by six basis points, which we're very happy to see.

So let me turn it to Dale now and let him give you some detail. Thank you, Kelly, and good morning, everyone. Today I want to talk about the key points from the first quarter and provide some color on current business conditions. Turning to slide 11. Net interest margin was 3.58%, up 17 basis points. Purchase accounting contributed 52 basis points to reported net interest margin. Core net interest margin was 3.06%, down 8 basis points. The decline reflected the full quarter impact of the merger of equals, lower interest rates, and a liquidity bill in March. The yield on loans and leases held for investment increased 8 basis points. as a benefit from purchase accounting more than offset lower short-term rates. The yield on our portfolio, securities portfolio, decreased three basis points. We became more asset sensitive due to floating rate loan growth, expected higher prepayments, terming out federal home loan bank advances, and increased non-interest-bearing deposits. Our loan mix was 55% floating and 45% fixed. Current trends suggest the net interest margin will decline further from a full quarter impact of lower rates, line draws, PPP funding, and elevated reserves at the Fed. To protect loan yields, we are implementing FORD on all new production, and we continue to aggressively reduce deposit costs. Turning to slide 12. Non-interest income increased $563 million reflecting a full quarter from the merger of equals. Insurance income increased $39 million for 7.6% versus first quarter of 19 due to higher P&T commissions, organic growth, strong retention, and increased pricing. Residential mortgage income was strong with origination volumes at $11.7 billion. Refi was 56% of origination and gain on fair margins were 176 basis points. While forbearance is a potential headwind, that could be offset by higher volume and spreads. This quarter, several fee income categories were impacted by the pandemic. Investment banking and trading was impacted by 92 million due to the increase in TVA reserves arising from lower interest rates and wider credit spreads. As shown on the slide, Discretionary actions resulted in lower service charges on deposits and card and payment-related fees. Current trends include seasonally strong insurance income, strong residential mortgage production, partially offset by lower service income due to forbearance, lower asset valuations, and lower purchase volume related to COVID. Turning to slide 13, non-interest expense increased $856 million, reflecting a full quarter impact from the merger. Merger-related costs included $107 million of merger-related and restructuring charges and $74 million of incremental operating expenses related to the merger. Discretionary actions in response to COVID impacted non-interest expense by approximately $65 million and included a $1,200 bonus to all teammates earning less than $100,000. Personnel expense included $44 million of incremental operating expenses related to the merger. This was positively impacted by the decrease in the market value of non-qualified plan assets, which is offset in net interest income and other income. We also updated our intangible valuation. As a result, annualized full-year amortization expense for 2020 was revised to about $660 million. Current trends in expenses include relief measures, such as special pay for some client-facing teammates and measures to better protect our teammates, clients, and communities. We continue to have good core expense discipline, even in the face of COVID health crisis. Turning to slide 14, asset quality remains strong, but economic conditions have deteriorated. Truist will continue to apply the CECL standard adopted January 1st. Our NPA ratio increased nine basis points to 23 basis points, largely due to the adoption of CECL and the transition from PCI to PCD. NPLs were 32 basis points of total loans, up 17 basis points from year end, primarily due to the PCI to PCD transition. Adjusting for this transition, our MPA and NPR ratios were essentially flat from last quarter. Net charge-offs were 36 basis points of average loans down four basis points. The provision was $893 million and reflected the reserving in accordance with CECL. The increased provision was mostly due to a significant loan growth and scenarios reflecting a weaker economic outlook. The increase also reflected a full quarter of post-merger activity. Our allowance coverage ratio was 1.63%. The combination of our allowance and the unamortized fair value mark remains a very robust 2.71% of total loans. The adoption of CISO resulted in strong coverage ratios at 4.76 times for net charge-offs and 5.04 times for MPOs. we expect second quarter asset quality matrix to be elevated, reflecting COVID stress across the loan portfolios. Turning to slide 15. The table on the left summarizes our exposure to industries we believe are most vulnerable in the current environment. We have very low exposure, reflecting meaningful diversification from our merger. Our standing loans to the group totaled $28.4 billion, or 8.9%, of loans held for investment at the end of March. Our oil and gas portfolio is weighted towards lower risk sectors. Outstanding balances on leveraged loans total $10.5 billion or $3.3 billion of loans held for investment. 42% of our leveraged loans are investment grade or the equivalent. We are actively managing these portfolios and will continue to make underwriting or risk acceptance adjustments as appropriate. Turning to slide 16, the $582 million increase in the ACL from the initial CECL adoption reflects rapidly evolving market conditions. Our standard practice is to use three scenarios to inform the CECL allowance, implying judgment to assign the probability of each scenario. These scenarios include Moody's baseline with implied rates, one optimistic scenario, and one stress scenario. We also consider heightened industry concerns from the pandemic effects, together with the impact of government relief packages when calculating the CECL estimate. Slide 17 adds additional details on our loss estimation approach. Turning to slide 18, our capital ratios declined slightly, mostly due to significant balance sheet growth related to line draws. However, our capital levels remain strong relative to regulatory levels for well-capitalized banks. Our CET1 ratio was 9.3%, down 9.5% in the fourth quarter. Our dividend and total payouts were 61.4% for the first quarter. We are taking a prudent approach to capital due to the uncertainty of the economy. Our 2020 CCAR submission incorporated this impact. Pending CET1 ratios for the internal baseline in severely adverse scenarios well exceeded regulatory minimums and internal post-stress policy goals. We intend to utilize the five-year CECL transition for regulatory capital purposes, which provides a 17 basis point benefit to CET1. We expect to grow capital and serve our clients throughout this challenging time. Turning to slide 19. This slide shows the second best performance among peers under stress conditions and from a capital resiliency perspective due to strong PPNR and lower credit losses. The table compares credit loss reserves reported by Truist and its peers at March 31st to the respective stress losses under 2018 DFAST. We used stress losses from 2018 as this was the last year the Fed published DFAS results for BB&T and SunTrust. We think that 2019 would be similar given the improved risk profile and earnings power of the combined company. As the column on the right shows, Truett's 35% ratio of credit loss reserves to stress losses is above the peer average of 33%. However, after layering in the unamortized fair value marks on the SunTrust portfolio, which totaled $3.5 billion on March 31st, Truist's stress loss coverage increased at 58%. This is a great illustration of how the merger enhanced the risk profile of both companies and resulted in a defensive balance sheet. That is insulated by purchase accounting marks and CESA reserves. It is also another example of why we believe we are better together at Truist. Turning to slide 20. We acted quickly in response to the pandemic to turn out short-term borrowings and increase cash to meet capital funding needs. As such, our liquidity ratios remain strong with an average LCR of 117% and a liquid asset buffer of 19.6. Our access to secure funding sources remains robust. We have experienced a flight to quality. amid recent market volatility with total deposits increasing $15.5 billion, and we continue to see robust growth this quarter. We have sufficient liquidity to fund our PPP loans from our existing Fed balances at the Fed. In addition, holding company cash is sufficient to cover 17 months of contractual expected outflows with no inflows. We are withdrawing our guidance for 2020. given the uncertainty going forward. For the second quarter, we are providing guidance on several categories based on linked quarter changes versus the first quarter of 2020. We expect earning assets to grow in excess of 5% on linked quarter average basis, reflecting the increase in loans from C&I line draws and the PPP program. Total taxable equivalent revenue will be down a few percent linked quarter reflecting a meaningful decline in net interest margin driven by lower rates, liquidity build, and fee income pressure, as noted earlier. Core non-interest expense adjusted for the merger, amortization, and COVID expenses is expected to be flat link quarter, excluding the adjustment for the non-qualified plan. We're making good progress generating savings from third-party spend and facilities optimization. Depending on the length of the economic downturn, how deep the downturn goes, and how effective the government programs play out will influence scenarios that unfold. You can see net charge-offs increase throughout the year and possibly add more pressure to build the allowance. We are also striving to achieve positive operating leverage despite this challenging environment. Now let me turn it back to Kelly for an update on the merger and closing thoughts and Q&A.

Thanks, Errol. So in terms of the accomplishments, and keep in mind, we really just did merge these two counties in December, so we've accomplished a lot. Most importantly, we rolled out the truest culture. We were able to complete 32 town hall meetings. We had a few at the very end that we had to cancel or defer because of COVID-19, but we got through most of the and the reception to it was extremely good. We introduced and rolled out our Truist visual identity and logo. We did complete the purchase of Truist Center, which is our corporate headquarters here in Charlotte. We launched our Truist Foundation, and we were able to go ahead and begin consolidating some redundant real estate portfolios that we had that we could go ahead and begin to get some early call saves. So in terms of the next steps, if you think about it right now, we really have two major priorities. Number one priority is focusing on COVID-19. We are laser focused on taking care of our teammates, making sure everybody's safe and well. We're doing everything we can possibly do to support our clients, not only in terms of their safety, in terms of interaction with us, but also in terms of helping them sustained economic challenges that are going along with this terrible experience we're all going through. We're trying to be very willing to invest and be creative in terms of how to support our communities. And we're doing some really interesting things there in terms of broadband and all types of things that we can do to help communities that are really, really struggling. So the second priority, of course, is keeping the integration and conversion on track. We believe we are in a good place there. It's hard to know exactly what may happen with regard to any delays. It really depends on, you know, the depth and the length of the health crisis. But at this point, we still feel good about where we are in terms of our planned conversion and integration activities. In terms of our performance targets, we still believe In the medium term, we would project a return on tangible common equity in the low 20s, adjusted efficiency in the low 50s. You can see we're already pretty much there, and we still remain very confident in terms of our $1.6 billion in net cost savings. You know exactly when we achieve that kind of depends on the obvious, the environment we're living in. If it's a V, then we'll recover pretty quickly and we'll hit these in the and a not too distant medium target type of range. If it's a U, it'll take a little bit longer, and that's just pretty obvious. Regardless, we believe that we will be a top tier performer, whatever the absolute numbers are. I will say to you that all of the benefits of the merger look better now than they did a year ago. Finally, if you look at our value proposition slide, we believe we provide a really strong value proposition We are a purpose-driven company committed to inspiring and building better lives and communities. That's really important, more important than ever in today's world. We have an exceptional franchise with diverse products, services, and markets. We have strong markets here in Viber, Fasco, and MSAs in the Southeast, Mid-Atlantic, and a growing national presence. We have a very comprehensive and diverse business mix in banking, capital markets, and insurance. And Very importantly, we are simply better together. We're stronger. We're more resilient. We have best in breed in terms of talent, technology, strategy, and processes. We are very uniquely positioned to deliver best in class efficiency and returns while investing in the future. As I said, we have net 1.6 billion miles of net cost saved yet to come. These complementary businesses are clearly going to yield substantial revenue increases as we develop these synergies. Our returns in capital are buoyed by our purchase accounting accretion, which Daryl has described to you, and we're making meaningful investments in technology capabilities, our teammates, marketing, and advertising. We have a very strong capital and liquidity with a resilient risk profile enhanced by the merger. We are very accrued and disciplined in risk management and financial management. We have a very conservative risk culture, leading credit metrics among the highest-rated large banks, We have diversification benefits that arise from the mergers we've discussed. We stress test very, very well, separately and together. We have a very strong capital and liquidity position and being enhanced even with the flight equality. And we have a very defensive and I would call it strong and resilient balance sheet supported by purchase accounting marks combined with the CECL credit reserves. Because of the strength of our balance sheet, And our liquidity, I would expect us to continue our dividend as we go forward into as far as we can see. So, like I said in January, if you liked us a year ago, you should love us now. But we continue to believe our best days are ahead. Brian, I'll turn it back over to you.

Thank you, Kelly. John, at this time, will you please explain how our listeners can participate in the Q&A session? Certainly. Okay. If you would like to ask a question on today's call, please press star 1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please speak your name before posing your question. Again, that is star 1 to ask a question. We will take our first question from Saul Martinez of UBS. Please go ahead. Hi, good morning, guys. I wanted to ask a little bit about the outlook for credit and the interplay with the accounting and a lot of the moving parts there. So on slide 16, you go through your day one, January 1st true up and the additional reserve bills in the first quarter. But Daryl, how much of the, can you just tell us how much of the three and a half billion dollar credit mark is, or $3.5 billion loan mark, sorry, is for credit versus liquidity and rates? Yes. So first I would tell you when we came up with our day one estimate on our reserve, you know, we had three scenarios that we came up with and we weighted our stress scenario 40% on day one. So we started the year off with a strong reserve from that perspective. When we moved over and you know, made our provision this quarter, you know, we went through multiple scenarios that we always run. And then with Moody's changing their scenarios every few days, we actually ended up running 10 different scenarios through quarter and into early April, trying to help use an overlay to help us adjust on that TESOL number that we came up with. And then at the end of the day, you're back to using expert judgment. I mean, we always have qualitative factors this year or this time. You know, Clark and Ellen and the team really had to spend a lot of time qualitatively because the models have limitations when the government's infusing over $5 trillion and they have to weigh in on what the effectiveness is. You have all these payment plans basically out there and you need the expert judgments on how effective those programs might be. So there's lots of qualitative adjustments that we came up with. We feel very good about the reserves that we have there. As far as your fair value, Mark, you know, we basically, it's a combination of credit, liquidity, and interest rate, and it's at $3.5 billion. Okay. How much of that is credit versus interest rate? We didn't disclose that. Okay.

So going forward.

I mean, at the end of the day, At the end of the day, I mean, it's all going to create into earnings. It's all going to be used as a lower value for when we get a little bit of benefit because you have a lower book value when you apply your reserve. So it's all going to count whether it's credit, interest rate, or liquidity. It really doesn't matter. Okay. Got it. But I'm trying to understand the loss absorbing capacity for credit a little bit more. And just going forward, though, I mean, you did mention that there is a possibility for reserve bills. And And if I think about going forward, if the economic environment does worsen and credit does worsen more than what's sort of embedded in your outlook, how does that play out?

Obviously, on the SunTrust book, you'll have to, and on your BB&T legacy book, you'll have to true up your ACLs.

But on the credit mark, if it turns out that whatever that portion of the $3.5 billion extra credit mark's is insufficient and the losses will be larger than that. How does that work in terms of the accounting?

Do you need to re-estimate that down and then get a subsequent benefit on purchase accounting accretion? I guess what I'm asking is even going forward, do you get a, is there a risk of sort of a double hit to your equity base from reserve bills and credit market adjustments that only come back over time?

So when you come up with your CESA reserves, you really don't take into account the fair value mark. It is a lower book value to end up providing less. It really is going to depend on what I said in my prepared remarks. What happens in the economy? Is it going to be more stressful if the government plans how effective they're going to be and then how deep it really is? We assume through a weighted probability of all those scenarios that Daryl and we did our estimate, we assumed very sharp initial GDP contraction, a spike in unemployment, and then lingering high single-digit unemployment for the two-year reasonable supportable period. And our mean reversion was basically similar to what we experienced after the Great Recession. And so then we did, to Daryl's point, a good bit of sensitivity analysis around the The different stress portfolios, we looked at the historical and projected redefault rates on the different mods and deferrals, and we baked all of that into our qualitative overlay. So we feel like the estimate today is the best we know. Obviously, if things deteriorate worse, we would have to provide more. If it holds up as we projected, then we're well-reserved. I understand it on the CISO reserve, but on the unamortized loan market, the losses are greater than $3.5 billion. You recalibrate those estimates, and you now – How does that work? So you have a year up to true up your goodwill, but that's based upon any miscalculations you had at that 12-6. So we feel pretty good. We finalized all the marks. I think I mentioned what the new amortization amount is on the intangible loan. So all that was trued up this quarter. Actually, we have a table on it in the deck. So all that kind of finalized from that perspective. You really can't go back and readjust any of that.

Okay. Okay. So there's not really a risk there that there's an incremental loss associated with that on top of the seasonal reserve, I guess. That's correct.

Yeah, that's right, Tom. Okay. Thank you. All right. Thanks a lot. You're welcome. We will now take our next question from Jared Cassidy of RBC. Please go ahead. Your line is open. Thank you. Good morning, Darryl. Good morning, Kelly.

Hey, Jerome.

Darryl, can you share with us, it looked like your purchase accounting accretion came in stronger this quarter. Your change of the book value obviously jumped up to $26 a share. That was probably attributed to, I guess, stronger purchase accounting equation. Can you give us some color on how that worked out this quarter versus maybe your prior expectation? Yeah, so we came in higher than expected, and it was mainly due to loans paying off, both on the corporate side and on the consumer side. So it was a little bit above our own estimates that we had. You know, on a go-forward basis, you know, I would say that you can't count on that, you know, basically overestimating throughout the year. It's possible, but you wouldn't count on it. So if you look at core versus reported margin, we were 52 basis points difference. You know, I would probably think it averages closer to 40 basis points on a consistent basis, but you know, you never know what's going to happen on a quarter quarter basis on playoff payoffs. It's just, So when people pay off their loans, you have to basically take in all the accretion. There's a slide 19, which was very insightful and I appreciate you putting that together. Can you share with us, and maybe it's as simple as the economic assumptions are not, are different than the stress test, but why if in CISO accounting, it's everyone, you and your peers, I'm looking at life of loan losses. Why aren't the reserves even higher? And yours are the highest relative to the stress losses. Why don't they match what the stress tests we're testing for? Again, is it as simple as the economic incentives? Yeah, so there's a difference between CECL and stress testing. Stress testing is a dynamic living-breathing process. process. So you basically have to project new volumes and growth or runoff, depending on whatever happens. CESA was basically a static balance sheet with runoff assumptions. So there's differences there. The chart that we put in on 19, just to give credit, we basically plagiarized that from Jason Goldberg. I give Jason a lot of credit for that. But I think on that table, it clearly shows that our reserves that we have versus the combined company losses that we added together from 2018 is at 35%, so it's a little bit above the peer group. And then if you add in the fair market value, it's at 58%. One thing to note, though, if you actually look at our company run results on a combined basis in 2018, that number was basically 44%. The reason I'm telling you that is that we don't have our 2020 results CCAR stress results yet from the Fed. That will come later this quarter. But we do have what we submitted to the Fed a few weeks ago. And if you look at what the company-run stress results were on the severely adverse, we were basically at 52%. So I think that shows a good indication that as we put the companies together, Clark and Ellen have really de-risked the company and we just are a less riskier company than we would have been on a combined 2018 basis. So our reserves then, you know, at 52%, and then if you add in a fair value mark, you're at 84% of our, we came up with $10.8 billion of losses in our 2020 severely adverse. Very helpful. Thank you. Thank you. We're going to take our next question. from Betsy Grafick of Morgan Stanley. Please go ahead. Your line is open.

Hi, good morning. Thanks for the call. Two questions. One, you gave us the number of customers that have been requesting deferrals. I think it's 330,000 on the consumer side and 15,000 on the wholesale side. Can you give us a sense as to the percentage of balances that those each represent?

Yeah, Betsy, this is Clark. On the consumer side, it's about $9 billion. That's for both own-ups and service for others, so it's about $8 billion for balance sheets, so roughly 3%. On the commercial side, it's about roughly $10 billion or so, 5% or 6%. So, again, I would note the far majority of all of our customers Re-agings have been with accounts that are current to start with, even in our subprime aldo as an example. So, again, I think this is a very unusual environment. So you have a lot of people that are worried that maybe have lost their job or maybe have not, but they're worried. But it's a little different than normal in that most are current to start with.

And in your forward look on the CECL that we were just talking through, how high do you expect those numbers to go?

I mean, it really depends on the three factors I said earlier, Betsy. I mean, right now we feel we are adequately reserved from what we know. There's a lot more that we don't know than what we know, though, and how things are going to impact. I mean, the government's going to have over $6 trillion of stimulus when it's all said and done. That's three times more than what they had in the Great Recession. We really don't know how effective those programs are going to be, so you really need to let a lot of that play out. All the forbearance that's occurring right now, I mean, that all has to play out, and some of the clients may not make it, but we feel really comfortable where we are reserved today, and we're just see what happens as we move forward.

And to keep in mind, too, that the effects of the payroll protection program will keep people whole in terms of their income. And those that are furloughed, in most cases, as I understand it, their unemployment insurance, because there was an increase in the normalized unemployment insurance substantially, in many cases, people have more take-home income than they had before. So it's hard to see exactly today in the short run that there would be a huge negative impact. Obviously, if this is extended and the government programs don't provide continued stimulus, then it will be a factor. But in the short run, the government has actually done a pretty good job in terms of providing short-term buffer.

Got it. Okay. And then just moving to expenses on the $1.6 billion, I understand it's hard to know the timeframe given everything that's going on. I'm just wondering how much of that 1.6 do you feel you can control today versus maybe you put aside because it's redundancies that you don't want to touch at this stage?

Well, all of it is, over time, still achievable. You're right, though. Some of it may be deferred because of the environment we're in today, because of... more people being working away from the office, connectivity, et cetera. There may be some things that we're not able to do as quickly as we had anticipated, but our people are studying this daily. And as of today, they have not discovered any material issues that will dramatically slow down our progression in terms of integration. And the progression of the integration is what drives cost savings.

I'll give you a couple of examples. So on a third-party vendor, right now our teams are still working on it, but we're probably 35% to 40% of the way of our target. So we'll have about close to 100 million annual run rates, say, this year. And for the next couple of years, we have already locked in 135 million of that. So that's progressing well. We're making really good progress on our corporate real estate portfolio. We have over 30,000 square feet. You know, right now we have known savings in there of about $66 million of what we're executing on. If you look at what we're going through right now with people working at home, you know, we have to really evaluate the impact of that after it's all said and done. But that could be an opportunity for much more saves. So, you know, we have $30 million. We might go down to $20 million over the next three to five years. I mean, you just don't know that. So that could be even a bigger opportunity. So those are just a few examples, Betsy.

Thanks.

I will now take our next question from Mike Mayo of Wells Fargo Securities. Please go ahead. Your line is open. Hi. A few more questions about your forward guidance. You know, Kelly, I thought you said maybe Darrell talked about the potential for positive operating results this year, which seems pretty tough with your second quarter guidance as it relates to that guidance. Only flat expenses in the second quarter. You just mentioned vendor, real estate, all these other things. And you said that was the COVID effect. And then the other part of the guidance, you know, some other banks had said expect, you know, much higher reserves. These are building in the second quarter. I know you've given some numbers on that, but just exactly where you stand. Thank you. Yeah, Mike. So I would definitely say it's going to be a challenge from link quarter from first to second. You know, we will continue to execute and do the best that we can within the parameters that we have. And we aren't giving up on our positive operating that we're going to do the best we can. We may not achieve it this year, but we still may. It is not out of the woods. It all depends on how quickly the economy recovers. And if it's a short V, we have a shot at it. Any other questions? The reserve bill in the second quarter. I mean, some banks say, hey, look, since the end of the first quarter, conditions have gotten worse. I guess you say use Moody's. I guess maybe you have some flexibility to use your own capital markets group for forecasts, like from the larger banks or... I mean, given the decline since the end of the first quarter, would you expect more reserve buildings? Even though you said you're 84% reserved for what, your 2020 bank-submitted stress test, which is a big number. That's all in with your purchase accounting marks, if I got that correct. Yes, you're right on that. As far as we use Moody's, and we also have a couple other scenarios that we run, but We went into early April running scenarios and adjusting our reserve. So we didn't cut it off on the 31st. We closed a little later this quarter just because we were later in the cycle. So we went through at least the first week of April with that information. Yeah, and again, if the convoy actually underperformed those scenarios, we would have to provide more. But based on what we know today, we think we're well-reserved, but we're certainly watching it. Okay, and so how much of the expense savings have you achieved so far? And you said some of the timeframes might slip. You mentioned some areas that you'll still have. I mean, you have a pandemic with the biggest merger in your history happening at the same time.

So, you know, it's a tough situation. It sounds like you're managing through it.

But maybe just get out on the table now what we should expect as opposed to waiting until later. Yeah, so from a specific expense savings, we have some savings. There has been some slippage just with what happened in March in that with COVID, some of our expenses are a little bit elevated. We pulled forward buying a bunch of our laptops and MiFis and other equipment that got pulled forward into the first quarter that we were planning on later in the year. So we're a little bit elevated from that perspective. Our goal was to try to get our expenses down to 30% of the $1.6 billion by the end of the year. You know, we are on track so far this quarter to doing that. We were trying to have some buffer and be ahead of that. You know, it doesn't get any easier as we get into this next quarter, to be honest with you, but we still have a shot at getting our 30% at the end of the year if we have a sharp recovery. All right. Thank you. Yep.

We will take our next question from John Pancari of Evercore ISA. Please go ahead.

Morning.

Regarding the exposures, the at-risk credit exposures on slide 15, the $28.5 billion, I know you indicate on that slide that you have qualitative overlays. for the affected industries. So can you give us a little bit more color on that, on the magnitude and maybe the amount of loan loss reserve against those portfolios and maybe the loan mark against them? So we haven't disclosed that level of details. I would tell you this, that for each of those segments, we have done detailed analysis, things like risk rate notching and a good bit of sensitivity to the downside in each and every one of those. We've looked at the modification or deferral request. And so we've used that to add additional overlays on top of what the models would have driven. And, you know, they're considerably higher than the other segments. I will just tell you that. Okay. All right. And then the – in terms of the insurance business, I know you indicated in your second quarter outlook that you – or you're in your outlook that you do expect that COVID could dampen the organic trends in the business. Can you give us a little bit more detail how that could play out? And is there an offset from perhaps any better pricing that you see in the industry? Just want to see how you think about how that plays out. Thanks. Yeah, this is Chris, John. Thank you for the question. First off, we would, We would expect second quarter to be up about 3%. That's our seasonally strongest quarter of the year.

And you're right, the slowdown as a result of COVID really is creating declining exposure units. That could be lost people, lost business, what have you, and that will slow new business production. But to your point, there will be a potential pickup in pricing. You know, when we went into the Great Recession, we went in with a backdrop and a soft insurance market. We go into this one with actually a very strong market on the back of 17 and 18 being the two largest insurable loss years in history.

So we're kind of in the up 4.5%, 5% range right now.

If we've got to go into one, that's a good backdrop to have it to win, to have it to back. And just for this quarter, for example, rates were up 4.5%. If you throw on top of that lower interest rates, these P&C underwriters are going to be struggling on their investment returns, so they will likely continue to keep upward pressure on the rate environment. So I think your intuition is exactly right. We expect momentum in pricing for the balance of the year. But we do see... tough new business production. So, you know, where we might have been looking at, you know, this past quarter we had 7.2% organic growth. Kind of looking forward, it's looking more like maybe in the, you know, flat to 2% kind of range for the balance of the year. Okay, thanks, Chris. We'll now take our next question from Ken Usden of Jefferies. Please go ahead. Your line is open.

Thank you. Good morning. Daryl, just wondering if we could step back out a step on the revenue side. You talked about second quarter revenues down a few percent, and just following on the bit of the feed part that was just talked about, can you help us just understand NII versus fees? There's so many moving parts involved, but if you can directionally just help us understand the moving parts and direction for you, that would be helpful. Thank you.

Yeah, just high level, Ken. I would tell you, I mean, Chris commented on insurance. Insurance is seasonally strong second quarter. That will change from that perspective. You know, service charges, you know, we have some programs in place to help our clients during this time of stress. That's what Kelly talked about, the 5% cash back. We have waiving ATM fees so people can meet their banking services. You know, people are coming in now. We're getting more requests for relief on NSF and, but we're granting that. So I would say that service charges overall might be down a touch from that perspective. You know, depending on what interest rates do and credit spreads, you know, Bo's area, while the volumes are overall lower there, his CBA, the $92 million, that line item has a chance of recovering potentially on what happens with that. And then mortgage, you know, mortgage will have good volumes there. strong. The offset will be the impact on forbearance on the servicing. We did try to factor in some estimates on the MSR valuation already. We don't know if that's the full impact of that, but it is embedded in there. So we did adjust for that accordingly. So mortgage will probably have a decent quarter would be my guess.

And on the NII side, also, can you just help us understand the balance sheet looks like it's going to keep growing. And you mentioned the difference between stated and core NIM. But can you help us understand just most, you know, a lot of other peers are talking about NI growing from here. You guys have the purchase accounting as an extra factor in that. Any way you can help us just parse out the moving parts there too.

Yeah, I don't foresee our, unless purchase accounting really is stronger than we think, I don't foresee NI being positive second quarter versus first. Core margin, if you looked at our sensitivities, and you probably need to go back to our disclosures back in January when we disclosed what a down 100 basis point was. Now, our disclosures that we show on our earnings reports are gradual, so that's assuming that the 100 basis points would go down throughout the 12 months. At that point in January, it was a negative 1.78% or 1.72%. if you say that's equivalent to like a shock of 50. So what we experienced in March was a shock of 150. Now you had a little bit weird going on with LIBOR and LIBOR we'll talk about in a second, but you had a shock of 150. So if you take the 1.72 and multiply it by three, that would probably be what the impact would be, rough estimate on what our NII change might be for second quarter. From that perspective, Then we have built a lot of liquidity. Now, we've built liquidity because we're in a stress period. We want to make sure we can meet our clients' needs both from a funding and from a deposit perspective. So the cost of carrying what we're carrying at the Fed right now is anywhere from 10 to 15 basis points. I mean, if you look at our balance sheet right now and through Friday on March or on April 17th, Our balance sheet and total balances are $518 billion. Our deposits now are $364 billion. So all the government stimulus checks that started to come in last week, we had one day, I think it was Wednesday, where we went up $6 billion in deposits in that one time period. You know, our PPP funding is going to start going on the books. You know, it started last week. It's going to go on this week and the following week. you know, we'll probably have $330 billion of loans. So we're definitely going to have much higher-earning assets. The other thing I would note is that our deposit costs, you know, we were at 70 basis points down 12 on an interest-bearing basis. If you look at March, our interest-bearing deposit costs were already 56 basis points. When you go back and look at the Great Recession and you look at how far did deposit costs get down to back then, we got down to about 23 basis points. So I don't think we're going to get to 23 in the second quarter, but we're going to get in the 20s for sure over the next couple quarters as we continue to push down rates if these rates stay where they are. So I think we've got a lot of things that we have to manage with, but our margin will be down. We'll be down because of liquidity, but once we feel that the stress is over, we can reverse the liquidity pressure there pretty easily and you get that core margin back. So hopefully that's helpful.

Very much so, Darrell. We're going to talk about LIBOR, and that is a point I was wondering if you could talk about. How are you seeing LIBOR normalized down as you look at it over time? Thanks for all the color.

Yeah, so it peaked on April 1st at 102. It's now at 67, one-month LIBOR. We have about 130 billion net LIBOR assets tied to one-month LIBOR right now. So as that migrates down, that will kind of put in that full effect of that interest rate sensitivity that you saw there. You know, we aren't there yet. It still has room to come down some more, but that will also allow us to push down our deposit costs faster, too, as LIBOR is coming down as well. And when you look at the money market equivalent, that will all kind of come down together. So it will hurt our asset side, but we're going to make it up on the deposit side.

Got it. Thanks very much.

You're welcome.

We will now take our next question from Matt O'Connor of Deutsche Bank. Please go ahead. Your line is open.

Good morning.

Good morning.

You guys have addressed the risk that some of the integration gets delayed if we don't get a V-shaped recovery here. I guess on the flip side, the risk of losing customers and staff to competitors is probably a lot less than maybe some people feared, partly because of the virus, partly the actions that you're doing for your staff seem very generous. So maybe you could just talk, Kelly, Bill, about the engagement of your staff and how you keep the cultures both moving in the same direction. You can't do it from the town halls like you were doing before. but just talk about some of those kind of softer aspects of doing the business and the customer base, employee base. Thanks.

Yeah, why don't you go ahead, and maybe I'll add a comment at the end.

Okay. Yeah, thanks, Matt. I think, as you point out, I mean, the retention numbers were already good coming in from a teammate perspective, and we just did a survey that was an engagement proxy, and You know, in this incredible environment, the survey actually showed high levels of engagement from our teammates. In many ways, cultural integration has been accelerated by months, if not years, because people are operating under stressful conditions. The teamwork has been spectacular. I think, Kelly, you would echo that, that No one's wearing a jersey because they're all headed towards the same objective. So I think you point out accurately, you know, there are elements of this that are advantageous as we go through this process.

And I personally have been just really, really proud of the work that our teammates have done

The town halls and the rollout of purpose, mission, and values, we were well underway there, and that has been a really good catalyst because everybody's got something to lean forward on. They're all speaking the same language and operating from the same playbook.

And I would just point out one additional point. You know, I said earlier, culture matters always. It really matters in a time like this. you know, a really big part of our culture is just taking care of our teammates. And we, you know, we get that our clients come first, but you can't take care of your clients without doing a really good job for your teammates. And so, you know, Truist is unique in terms of having a fully paid for pension plan and a six-on-six, four-one-K match. And then we do things like $1,200 bonuses and and premium pay for people on the line. So all of those things our teammates really appreciate. And so they see that during difficult times, we're going to take care of them, even if there's some sacrifice in terms of short-term profitability. We're going to take care of our teammates so they can feel safe and secure, and then they can help our clients feel safe and secure. Those memories will be here for decades. And so we feel very good about our culture. As Bill said, it is accelerated. and it is strong as steel.

That's helpful. And then just a separate question for Daryl. You talked about for new loans implementing some floors. Can you just talk about the rate, how much above the floors that you are? And I assume as loans come up for renewal, you'll attempt to do the same thing on those loans? Yeah, so David reported, I think, a week or two ago that the floors that he's putting in range anywhere from I think 25 to 75 basis points from a LIBOR perspective. I think those are the floors that he's putting in from that perspective. That's the LIBOR rate, not the spread over. Okay, thank you. You're welcome. We will take our next question. From Erica Najarian of Facts America. Please go ahead. Your line is open.

Hi. Good morning. I just had one follow-up question. You know, of the $480 million in annualized cost savings that you noted, how much of that is achievable without interruption to, you know, pandemic-related support of your employees and your clients? And if I'm interpreting, Darrell, your answer to Becky's question, $100 million of annual run rate savings from third-party vendors, $66 million from known savings in corporate real estate. So it sounds like at least $166 million of that $480 million would have nothing to do with supporting your employees or clients.

So, Eric, just one comment. Derek and Ed, you're right. You can kind of think in terms of expenses being bifurcated. There are expenses that are independent of COVID, like we'll take some of our vendor contracts that are independent of COVID. And we've seen substantial reductions in run rate vendor contracts already and more to come. With regard to the teammates, you know, there's – There's a one-time big charge we had with regard to the $1,200 bonus. But the ongoing, from this point forward, teammate charges are not marginal or incremental. And in terms of the impact on the conversion, it really depends. But today, our people are functioning very well working off-site. And keep in mind, in the technology area, we've got thousands of people working off-site forever. So this is not a new idea. It's just more people doing it. And so as long as they're able to continue to do their scoping and their mapping and their programming remotely, which now we see that they can, it's not self-evident that there will be a dramatic change with regard to our integration and conversion scheduling.

Yeah. For the second quarter, Erica, we are paying a premium to our – right now that are on the front lines. So you're going to see an elevated charge in personnel with that. Depending on how quickly we basically can adjust from work at home, that will fade away. We also are actively getting more laptops in so more people in the call centers can do more of their work at home. So that will subside as we get more of that equipment in as well that we've accelerated from that perspective. As far as like the implementation of third party and facilities, you know, as they execute and play out, that's when you get the savings. So you may not see as much early on this year, but as it goes out throughout the year and as we continue to move, it will start to build such that the fourth quarter will have a higher annualized impact than what you would see at this point. from that perspective. So a lot of good things. Although some of the third-party savings is tied to conversions. Just to be transparent, there's some big card conversions coming up, some big conversions coming up in the wealth and broker-dealer areas. So I think right now in Joe's world, he's planning to still stay on track with an earlier conversion in his broker-dealer. I think that's going to be in the first part of 21. If that stays on track, That might miss a little bit at the end of 20, but he wasn't supposed to be there at the end of 20. He's scheduled more for early 21. But if that plays out, then some of those figures will come in at that point in time.

Thank you.

We will now take our next question from Stephen Scooten of Piper Sandler.

Please go ahead. Your line is open. Good morning, guys. Thank you. First, I want to say thank you guys for the way you all are leading in community impact, being in one of your affected communities.

I think leadership is appreciated and important, so thank you guys for that. I wanted to ask you, as it pertains to your capital and how you've talked about longer term, you need to get back to 10% to resume buybacks. I know this environment is probably a far ways out, but I'm just curious, how are you thinking about that number, the 9.3% CET1 versus kind of the I think it was 8.7 if you had fully faith in the seasonal impact and kind of how that pertains to that 10% target and where you think about buybacks way down the line.

So nobody's thinking about buybacks today. You know, we are in a very strong capital position and are still accreting capital. I mean, we still made a billion dollars even for adjustments this year, this quarter. So we will be steadily moving up unless there are dramatic increases in loan losses, which we would not project at this time. Again, if it's a long year, that makes a difference. We all understand that. So, you know, we had said that our intermediate term target was 10%. We said we did that because of the uncertainties that we knew about with regard to the merger. We said we were doing that because of uncertainties we didn't know about. We didn't know about COVID, of course. But thank goodness we did prepare for that, and we're in a really good position. Now, as those uncertainties subside in terms of the merger integration, and surely the health crisis will go away, and surely the economy will improve, then we have said, and I would reaffirm, we have capital opportunities as we go forward below that 10% level. It will depend on the then existing circumstances, but there are opportunities available for our shareholders.

The other minor point is remember that PPP loans we're putting on the books have a 0% risk weight. So we put $10 billion on from the first round. That's not going to cost us any risk-weighted capital. And then from a leverage number, even though we're going to fund it ourselves, it's not going to really cost us because we're basically just trading out at 10 basis point balance at the Fed to 100 basis point earning assets from PPP. So from a capital perspective, those should be fine. Great. And then one other thing, I'm curious, you know, we've seen some others in the industry kind of tighten underwriting standards around revenue mortgage, heat off, other categories. Have you guys and you've always been fairly conservative on lending, but have you further tightened any of your underwriting standards? And kind of within that, what are you seeing with the forbearance request in terms of industry concentrations? Thank you, guys. Hey, this is Clark. I would say yes to that question. Across all our asset classes, we've done pretty extensive reviews, and we have made underwriting and risk acceptance changes as appropriate as you would expect us to do. So I think we would be were on the conservative end, and they are in place today. We've also worked hard to be very careful about what we call any non-essential lending right now, given the uncertainty. So as far as the modification requests, I'd say from the commercial side, we've had a lot in the stressed industries that we laid out, things like hospitality to et cetera. And then on the consumer side, it's been predominantly on the mortgage and all those sides right now.

And if you recall, I thought we had made some adjustments with regard to underwriting standards even pre-COVID. That's right. We had already been anticipating a potential slowdown. We've made adjustments already. Thank you, guys, very much.

We will take our next question from Christopher Maranac of Johnny Montgomery Scott. Please go ahead. Your line is open.

Thanks. Good morning. Daryl, is there an average life on the PPP loans that we should expect? So, Chris, we don't really have a good estimate on how much forgiveness is going to be out there. If I gave you a number, it would be a pure guess right now. I don't really know whether it goes out, you know, My guess is, you know, everybody's making the loans now, so you've got a big tsunami. Remember, the SBA has to process all these forgivenesses, you know, in 60 days. It probably will take some time to process all that. So my guess is it might linger on into three, four, five months at all before all the forgivenesses are happening. We'll see how quickly they do that. But then there will be some and portions of some loans that will stay the full two years. You know, we will create the earnings. We're booking them at a discount. The last time I looked at our average discount that we'll put on the books is about 2.7% discount, and that will accrete in, and then when it pays off for forgiveness, we'll take all that in at that point in time. It plays out to two years, and you just earn it over that time period.

Got it. That makes sense. Thanks very much, guys, for all the information today.

And we will take our final question from John McDonald. of autonomous research. Please go ahead. Your line is open.

Hey, guys. Two quick follow-ups. I'm wondering if you could give any color on how the reserve is allocated between consumer and commercial buckets as of today.

Yeah, John, I would just say, and one noteworthy thing, for the increase for Q1, about 70% of that that provision increase was related to commercial and about 30% was consumer. As far as off the look and see on the split between, I guess we can get back to you on that, John. On the split in the actual allowance itself, we can get you that. Okay.

And then just kind of wondering, this comes up, with questions frequently. Is there a dumbed-down example you guys could give us of how the marks absorb credit and how that helps? Is it just the idea that if you have a write-off on a marked loan, you're marking it down from a smaller amount, so if it's a $100 loan, you're writing it down from $95 as opposed to $100, so it's a smaller charge-off? That's kind of the question. How does that mechanic work of helping absorb losses, the marks?

Yeah, that's exactly right. So basically your book value is lower, so you apply your reserve against a lower balance. So it helps you a little bit. But I think of it as it's earnings that are coming in. Those earnings can be used to provide for other provisions or could follow the bottom line from an earnings perspective.

Meaning the PAA?

Yeah, exactly. Okay. I think to your first question, you got it. Yeah, John, back to your first question. The wholesale reserves for Q1 are about $2,270,000, and the consumer is $2,941,000.

Okay, Darrell, when you think about it, the loss absorbency, it comes in the form of PAA. So you've got an extra cushion. That's how you kind of think of it, absorbing losses. You have more cushion on the PAA side?

Yeah, we definitely have more absorption, more cushion from that perspective. But also, I think when you just cut the bank coming together and the diversification of how we came together, I mean, we really don't have any really significant exposures in any of our portfolios because as we came together, we were much more diversified. And that should play out when the new stress tests come out from the Fed later this quarter. You know, our hope is... We're going to have a really strong PPNR, a really strong loss number, and a very resilient capital ratio. We should hopefully be well under the 250 basis point stress capital buffer.

And remember that in all of our portfolios, essentially the exposure was reduced in half because of the doubling of the denominator. So there's an automatic diversification of material in this kind of environment.

Okay. Thanks, Jeff. We have no further questions. Okay. Thanks very much, and thank everyone for joining us today. Hope everybody has a good day, and please stay well. This concludes today's call. Thank you for your participation. You may now disconnect.