Truist Financial Corporation

Please stand by. We're about to begin. Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Second Quarter 2020 Earnings Conference. Currently, all participants are on 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, sir.

Thank you, Alan, and good morning, everyone. We appreciate you joining us today. On today's call, our chairman and chief executive officer, Kelly King, and our chief financial officer, Darrell Bible, will review our second quarter results and provide some thoughts for the third 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. We are conducting our call today from different locations to help protect our executives and teammates. We will reference the slide 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 to express management's intentions, beliefs, or expectations. These statements are subject to inherent risks and uncertainty. Ensure that the 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 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.

Thanks, Ryan. Good morning, everybody. Thank you very much for joining our call. I hope you and your family are safe and well. You know, given the challenges that we face, I think this was a really strong quarter, primarily because we lived our purpose. And I'll say I'm really, really proud of our team. You know, our purpose is to inspire and build better lives and communities, and that is really, really important in the challenging environment that we are experiencing today. You know, we focused intensely on taking care of our clients. I've been really, really involved with our teammates, creating an inclusive and energizing environment, really focusing on trying to empower teammates to learn and grow and have meaningful careers. And I think we've done a good job across the board with regard to all of our stakeholders in optimizing their long-term returns. We do all that consistent with our values of trustworthy, caring, one team, success, and ultimately trying to provide a sense of happiness for our teammates and all of the people that we have a chance to inspire and encourage. and support. If you're following the presentation on Table 5, I just want to point out some of the things that we've done, because I think in today's world, this is as important, if not more important, than the actual numbers, because our communities need a lot of help. We've been really focused on living our purpose. You've heard about our Truist Cares philanthropic initiative, where we pledge $50 million to rebuild communities. Some of the things we're doing are really, really exciting. For example, we're doing technological support in areas that are unserved or underserved with regard to Internet and Wi-Fi capabilities. We're using that to support automated reading capabilities in these areas because these kids are sheltered in a place at home and don't have access easily to learning. We're supporting our communities, doing a lot of work with CDFIs in terms of supporting small businesses, minority-owned businesses, women-owned businesses. Feel good about that. Just to give you a perspective, over the last few years on our own up movement, we provided about 6 million people with tools to provide their financial confidence. Since 2009, we've done over 12,000 community projects. We've touched over 18 million people through our financial foundations program, which is focused on financial literacy. In high schools, we've reached more than 1 million high school students. And since the merger of equals, in a very short period of time, we've provided $440 million in financing to support 2,200 affordable housing units, creating 1,400 new jobs across our footprint. We've been really focused on addressing racial and social inequity. We are expanding our efforts to advance equity, economic empowerment and education for our clients, our communities, and our teammates. I'm very proud to say we observed Juneteenth holiday by giving our people time off. We had a virtual town hall with over 3,000 of our teammates that I was able to co-host along with Ben Crump, and it was a really, really good dialogue, good discussion. We've had over 200 days of understanding where we bring together teammates and give them an opportunity to just dialogue and talk about what's going on, the challenges that they face. Those have been really, really great sessions. I participated in some and found them to be very, very informative and helpful. We're in the process of doing even more town halls. We've conducted unconscious bias training. So we're doing a lot to try to help our communities and our teammates weather through the storm and get better through the storm. And I feel really good about that. I'll show you how that's playing out with regard to our second quarter highlights on slide six. We're very pleased that we had taxable equivalent revenue of $5.9 billion. It was up 7%, but as you know, that was merger timing affected. We did have adjusted net income of $1.1 billion. Felt good about that. Our diluted earnings per share on a GAAP basis were 67, but our adjusted basis earnings were 82, which was very, very strong relative to the environment. Our return on average common equity on an adjusted basis was 7.26. Return on average tangible common adjusted was 14.17. And I was very pleased that our adjusted efficiency ratio was 55.8, which is very strong in this environment. Our asset quality in terms of actual metrics, which you can get more detail on from Clark, were actually fantastic. But as we all know, That was substantially impacted by a lot of the CARES Act decisions around forbearances, et cetera. So we know that we'll get worse, and that's why we're prepared well in terms of our reserving for our future allowances. We felt good about our fee income, robust capital markets activity. Residential mortgage was fantastic. Our insurance brokerage operation, which really, really is important in times like these, had a record quarter. We continue to have very good expense discipline on a core basis. And our common equity tier one increased by 0.4 to 9.7, so we felt very, very good about that. If you look on page seven, I just want to hit a few of these material special items that affected the quarter. We did have securities gains. So these were non-agency mortgage securities that we'd had for a while. They had special gains and some risk of downside loss of those gains. And so it was a good opportunity for us to take those. That did provide $300 million in pre-tax gain or $0.17 diluted share. Now, we used most of that to extinguish debt. We took a loss on that of $235 million before tax. That improves forward run rate. which Daryl can give you detail on, but that was very good. That was a negative $0.13. We did have substantial merger-related restructuring charges of $209 million. That was $0.12 negative. And then, as we've explained to you, we do have incremental operating expenses that are related to the merger that are technically merger-related that we call out in a category, but they're not a part of our run rate going forward. So we consider those to be unusual expenses. And that's $0.07. So when you net through all that, it would be a positive impact of about 15 pennies. If you look at slide 8, just a few comments with regard to loans. It was a very interesting quarter for loans. I mean, at the beginning of the quarter, loans were booming. You know, we were having line draws like everybody else that were substantial. We were engaged in PPP, where we were the third largest lender PPP producer producing about $13 billion in those loans. We were happy to do that, although it was very hard in terms of supporting our small business clients. There was not much normal loan activity in the quarter, so it was just kind of an unusual quarter. Our average balances were $322 billion versus a $315 billion in the period, so you can see what happened with We advanced up all the lines, and then they started paying down. So now 80% of the COVID-related line advances have already been paid. So that activity was kind of a roller coaster. It's settled down now, and we feel good about where we are. Consumer loans decreased slightly in this stressed environment just because people, broadly speaking, are spending less. We did see a decrease in residential mortgages. on the loans that we hold, but our mortgage business in general is booming. We had mortgage applications of 21.3 billion second quarter and we originated 14.6 in the quarter. So we were really, really active in that and frankly moving resources into the mortgage area because that's a very, very important area for us. We did have substantial activity increasing loans in indirect which was primarily due to huge demand for loans to finance recreational and power sports. So we are seeing some robust activity in some categories, some temporary robust activity in others. The underlying normal activity is, I'd say, relatively stable, not going down, not going up. It's just not much going on right now for reasons you would understand. So we feel overall good about our loan book and loan activity. And we think we're well positioned as we go forward when confidence returns to be able to meet the needs of our clients. Just a couple of comments with regard to deposits on slide nine. Deposits are booming. Our non-interest-bearing deposits were $113 billion, up $20.7 billion on a linked quarter basis. Total deposits were up $36 billion on the same linked quarter basis. I would tell you that the majority of that is poor, but there are surge balances related to land draws, PPP loans, and government stimulus. We believe there continues to be a flight to quality, and we're the beneficiary of that. Business accounts drove about 80% of the growth in DDA, so that was what you would expect, businesses drawing down lines, investing into deposit accounts, etc., Our deposit mix for the second quarter consisted of 34.7 non-interest-bearing deposits, which is very strong, 26% on interest-bearing, 34% on money market, and savings were 8.9%. Our cost of average deposits and average interest-bearing deposits decreased 29 basis points and 38 basis points respectively, down to 22 and 32 respectively. So it's a very, very strong story for deposits. I will say that we have a real opportunity in terms of our interest-bearing deposits at 32 basis points. We didn't move them down as aggressively in the second quarter as maybe some did. We wanted our clients to have time to adjust. But we see there's a real opportunity for us as we move into third quarter, and we're already taking very bold and decisive action with regard to that. So let me turn it now to Darrell for some more detail.

Thank you, Kelly, and good morning, everyone. Today I want to cover key points from the second quarter. discuss current business conditions, and provide an update on cost savings. Turning to slide 10, net interest margin was 3.13%, down 45 basis points. Purchase accounting contributed 46 basis points to reported net interest margin versus 52 basis points last quarter. Core net interest margin was 2.67%, down 39 basis points, impacted by lower benchmark interest rates higher Fed balances, and COVID-related deferred interest. The yield on loans and leases held for investment decreased 81 basis points due to lower interest rates, lower purchase accounting accretion, and deferred interest on loans with forbearance. The yield on the securities portfolio decreased 25 basis points, primarily due to higher premium amortization. Asset sensitivity moderated as a result of higher fixed rate assets, lower fixed rate federal home loan bank advances, and lower benchmark interest rates mitigating down rate scenarios. We're projecting loan yields. We are protecting loan yields with rate floors on new commercial obligations and modifications and will continue to manage down deposit costs. We expect to report net interest margin to be flat for the remainder of the year Turning to slide 11, non-interest income includes $300 million in security gains related to the sale of non-agency MVS. Excluding these gains, core non-interest income was up $160 million. Investment banking and trading income increased $156 million on strong core trading activity and elevated counterparty reserves in the prior quarter. Residential mortgage income was up $96 million on strong volumes and improved margins, partially offset by lower servicing due to higher prepayments. REFI was 65% of originations and gain on sale was 319 basis points, reflecting very favorable conditions in mortgage. Insurance income increased $32 million, up 5.8% to record levels, primarily due to seasonality and pricing. Organic revenue grew 2.1% versus like quarter. Service charges on deposits decreased 103 million, mostly due to reduced incident rates. Card and payment related fees were affected by lower transaction volumes due to lower consumer spend. Wealth income decreased 43 million as market devaluation impacted wealth fees. Turning to slide 12. Non-interest expense increased 447 million. mostly due to a $235 million loss on debt extinguishment, $102 million increase in merger and restructuring charges, and $55 million increase in incremental operating expenses related to the merger. Higher merger related expenses reflected professional services associated with integration and increased severance charges. We remain highly disciplined around core expenses, excluding the above mentioned items Adjusted non-interest expense increased $55 million. This was mostly due to higher COVID-related operating costs and performance-based incentives, partially offset by lower marketing and client development expense. We anticipate COVID-related operating expenses will decrease as we continue to take measures to protect teammates, clients, and communities. We identified areas where cost savings can be accelerated. including personnel expense, corporate real estate, and third-party spend. We now believe we can accomplish 40 percent of the $1.6 billion in net cost stays by the fourth quarter of this year, up from 30 percent we previously shared. Our FTEs declined 735. We expect further reductions throughout this year. We also closed 42 branches in non-overlapping markets. Turning to slide 13. Asset quality remained relatively stable, reflecting moderate deterioration in certain asset quality ratios and improvement in others. Our MPA and MPR ratios increased two and three basis points respectively to 25 and 35 basis points. Most of the MPL increase was in CRE, commercial construction, and leasing portfolios. Net charge-offs increased three basis points to 39 basis points, on average loans and leases. The provision for credit losses totaled $844 million, reflecting stress, environment, and the allowance bill to $522 million. For the second quarter in a row, this allowance bill was essentially self-funded by purchase accounting accretion. The allowance was 1.81% of loans and leases, up from 1.63%. Our coverage ratios remain strong at 4.49 times net charge-offs and 5.24 times MPLs. A combination of our allowance and unamortized fair value mark is very robust at 2.76% of total loans. Our asset quality ratios were tempered by relief from the CARES Act. Our teammates have been very responsive to our clients, helping them navigate the pandemic. As of June 30, client accommodations totaled $13.8 billion in consumer loans, $21.2 billion in commercial loans, and $211 million in credit card balances. This represented an 11.2% increase in the loan portfolio. About a quarter of the clients who received an accommodation continue to make payments on their loans. We expect third quarter asset quality metrics to deteriorate in response to COVID stress across the loan portfolios. Turning to slide 14. As you can see on the table on the left, our exposure to vulnerable industries remains low and reflects diversification we achieved from the merger of equals. Outstanding loans to sensitive industries totaled $30.1 billion versus $28.4 billion. However, $1.1 billion was an increase due to PPP loans. Excluding PPP loans, sensitive industry outstandings increased only 200 million, or about 1 percent. Energy-related balances were essentially flat, and our oil and gas portfolio continues to be weighted towards lower risk sectors. Hotel, resort, and cruise line outstandings increased to 2.4 percent of loans held for investment from 2.1 percent last quarter. This reflects the inclusion of hotel REITs and real estate secured by hotels which were not previously included. Outstanding balances to restaurants increased modestly to 1 percent of loans held for investment from 0.8 percent at the end of March. Outstanding balances on leveraged loans totaled $9.5 billion, down 10 percent from last quarter. We are actively managing our sensitive industry portfolios. This includes deep segment reviews and reflecting credit adjustments in our risk rates. Turning to slide 15. The allowance increase of $522 million to reflect the consideration of increased economic stress, the sensitivity to affected industries, and the proactive grading changes to reflect the current environment. process incorporates multiple economic scenarios, including assumed likelihood of worsening conditions. Our assumptions include double-digit employment followed by sustained high single-digit unemployment as we extend extended GDP recovery throughout two-year forecast period. We also consider the effect of government relief packages and payment accommodations on expected losses. and made adjustments as needed to address model limitations. Taking into account the ACL amount of $6.1 billion and dividing it by the Truist and two heritage companies' net charge-offs for the past 12 months, we come up with a 5.7 times coverage ratio, which we believe is strong. Turning to slide 16. Truist is very well positioned relative to peers in a strained credit environment. The table on the left utilizes DFAS 2020 results. This shows our estimated loan loss rate of 5.1% ranked third best among peers and at 60 basis points better than the peer average. We also have significant loss-absorbing capacity of $9.2 billion due to the combination of the ACL and the unamortized loan marks. Our loss-absorbing capacity represented 2.9% of end-of-period loans and 60 percent of 15.3 billion 2020 DFAT stress losses. This slide shows how the merger of equals enhanced the risk profile of both companies and produced a resilient and more diversified balance sheet. Turning to slide 13, our capital ratios improved nicely across all ratios and remained strong. The reported CET1 ratio improved in 9.7 percent from 9.3 percent the first quarter. CET1 ratio benefited from current earnings, lower risk weighted assets, and purchase accounting accretion. We issued $2.6 billion of preferred stock during the second quarter to further improve our capital position. Our second quarter dividend and payout ratios were 67%. The truest board will vote on a resolution to approve the third quarter common dividend of $0.45 at the July meeting. turning this line 18. We continue to see strong liquidity and we are prepared to meet the funding needs of our clients through this challenging environment. Second quarter average LCR was 116 and our liquid asset buffer was 17.8%. Our access to secured funding sources remains robust with over $200 billion in cash securities and secured borrowing capacity. Holding company cash is sufficient to cover 21 months of contractual and expected outflows with no inflows. Turning to slide 19, we continue to be encouraged by the acceleration we've seen across the digital platform. Digital commerce grew 11 percent during the year-to-date period through May. We also saw a 10 percent increase in the number of active mobile app users over the past year. Digital transactions also increased nicely. Mobile check deposits were up 23% from last May to this May. The acceleration in the digital has resulted in increased paperless adoption as statement suppressions are up 5%. One of the motivations of the merger was to combine technology with touch to generate trust with our clients and to be able to meet their needs. That is why we are really pleased that the legacy BB&T mobile app, You, earned the number one J.D. Power ranking in the 2020 U.S. Banking Mobile App Satisfaction Study. In addition, Lightstream, Legacy SunTrust National Online Lending Division, won the number one ranking in J.D. Power 2020 U.S. Consumer Lending Satisfaction Study among personal loan lenders. These are great examples of the best of both capabilities as Truist advances its diverse digital and online capabilities. As it relates to guidance, we withdrew our 2020 annual guidance due to the uncertainty going forward. For the third quarter, we are providing limited guidance based on the third quarter link quarter changes versus second quarter. We expect taxable equivalent revenue to be down 3 to 5 percent after excluding one-time security gains from the sale of non-agency MBS. Factors impacting revenue include a reduction in earning assets, mostly due to the line draw repayments, seasonally lower insurance income, and lower residential mortgage spreads and servicing income. In addition, investment banking and trading faces a robust second quarter crop. We expect the reported net interest margin to be flat and core net interest margin to increase modestly. non-interest expense, adjusted for merger costs, and the amortization is expected to be down 1% to 3%. We also anticipate net charge-offs to be between 45 and 65 basis points. Now let me turn it back to Kelly for an update on the merger closing group thoughts and Q&A. Thanks, Errol.

So if you'll follow along on slide 20, I just want to mention a few things about how we're doing. The good news is our cultural development is fantastic. In fact, I would say that it is accelerating because of the challenges, because people are facing some extremely difficult challenges day to day, and that really kind of pulls groups together. The sense of team play in the organization today is phenomenal, far better than I could have ever hoped for. So we feel great about how we're doing in terms of the organizations coming together. Had some really good recent developments. We branded Truist Insurance and Truist Foundation. We introduced Advisor Desktop to Heritage BB&T Financial Advisors, and we were able to consolidate social media platform leveraging Truist.com. Our conversions are, in many cases, right on schedule. For example, our institutional broker-dealer mortgage origination and wealth are right on schedule for the second half of this year and the first half of next year. We did tell you last quarter and throughout the quarter that we were reassessing the core bank conversion because of all of the challenging circumstances that we've all faced. Those include, amongst others, a strategic reallocation of resources for the COVID response. You know, when all of this hit, we had to focus on what was the most important at the moment. For example, we spent a lot of our IT and other support resources in the PPP program. and developing portals for our clients to do automatic deferrals and developing automatic portals for automatic scheduling so people could schedule appointments with our people remotely. We had work from home transitions for Truist and our offshore vendors as we got all of the computers into everybody's homes. That just takes a little bit of time. And we did experience some critical vendor disruptions that hampered our conversion activities. So we want to take all that into account. We want to make sure we do it right, do it well. That's most important. And so we now anticipate the core bank conversion will be in the first half of 22 versus the second half of 21. It's not a dramatic change, but it is one we wanted to report out to you, and we think it's the best way to continue to provide the highest quality service for our clients. Still, we are committed to our $1.6 billion of net cost savings as Darrell described, and we're very pleased that we're able to pull forward expense savings around facilities, vendor spend, personnel cost, so that we now expect 40% of the 1.6 on an annualized basis to be available to us this year by the fourth quarter. And then we stay on track with 65% for the fourth quarter of 21, and then the full 100% of fourth quarter 22. So it's just a little bit of pulling forward in 20 versus a little bit less than 21. So we feel good about all of that and think that will go very, very well. Wrapping up on slide 21, just a couple of comments with regard to the value proposition we offer. You've heard me say before, and I still continue to believe, this is a fantastic organization. The combination is excellent. It is fantastic for our shareholders. And the reason is this. It is an exceptional franchise with diverse product services and markets. It's the sixth largest commercial bank in the United States. We have strong markets here and vibrant, fast-growing MSA markets. None of that has changed. We have a comprehensive business mix with distinctive capabilities in traditional banking, capital markets, and insurance. And clearly, coming together, we've already experienced what we thought would happen which is that together we get the best to breed, best talent, best technology, best strategies, best processes. And we really saw that this quarter with a strong performance in investment banking and insurance. One from SunTrust, one from BB&T came together beautifully just like we thought it was. We have a unique positioning to deliver best-in-class efficiency and returns. We feel very strong about the cost savings, as we said, and the projected Efficiency ratios, you know, that we talked about, we still feel very confident about. Medium-term targets of ROTCE in the low 20s, adjusted efficiency in the low 50s, a common equity tier one ratio of 10. We're closing in on that right now. So this is going to be a best-in-class, efficient, highly profitable organization. And largely that's because we have strong capital and strong liquidity, and we have a very resilient risk profile, very strong, prudent, experienced risk management team, conservative risk culture, diversified benefits from the merger. We stress very well, which you just saw. And so we have a very defensive balance sheet, which is insulated by purchase accounting marks combined with CECL credit reserves. So all of that. We knew it would be true. We didn't know it would be tested as much as it is being in this environment, but it really is proven to be the kind of underlying or girding support that we need to be a very resilient organization in this environment. And this is a very challenging environment. I will say to you that as difficult as it is, as difficult as it is to predict what's going to happen in the future, I believe the economy is resilient. I believe ultimately we will be okay. You know, I believe the American people will do the right thing to create an equitable society with hope and opportunity for everyone. Everyone wins when we have an opportunity for everybody to have an equitable future, and that's what we're working very, very hard to. Personally, I believe we'll be a lot better off if we can get a lot more emphasis on love and caring for each other, and that will create a bright future for America and everyone. Let me turn it back now to Ryan.

Thank you, Kelly. Alan, at this time, will you please explain how our listeners can participate in the Q&A session?

Yes, sir. If you'd like to ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please make sure that 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, and please do state your name before posing your question. Once again, that is star 1 if you'd like to ask a question at this time. We'll pause for just a moment to allow everybody the opportunity to signal. All right, and we'll take our first question from Betsy Gracek with Morgan Stanley.

Hi.

Hi, good morning.

Good morning.

Kelly, I just wanted to dig in a little bit on the expense side. You mentioned that you're pulling forward. the cost saves over the next couple of quarters. And maybe you can remind us how far along on that 640 you are already as of 2Q. And then give us some sense in the discussions you had to accelerate that in 2020. What else you found that maybe you could add to the profitability opportunities here in 2021 as well? I know you kept the 65% flat, but Knowing you, I'm sure you unearthed a few other potential items of cost saves.

Yeah, Betsy, as you would expect, we're doing a deep dive in all of those areas to be sure that we can continue to provide high-performance profitability metrics, even as we orchestrate through this difficult environment. The pulling forward is just, frankly, getting more aggressive than we had even originally planned with regard to you know, vendor renegotiations. We've got a ton of buildings, as you might expect, duplicative buildings, some small, some large. We've got a major task force working on that, and we've decided to be very aggressive in terms of consolidating and eliminating a lot of those buildings, and that's pretty immediate cost reductions when you do that. We have a very aggressive... personnel rationalization plan in process. And a good bit of that is already underway in 2Q, as you alluded to. It will begin to slow down to the bottom line more in 3Q and 4Q as we get executing on that. The plans are well-developed, and now it's just a matter of executing on the plans. Now, keep in mind that while we're not calling this out, as we head into the remainder of this year and 21, we also have some really good opportunities in terms of revenue. Our integrated relationship management program is going extremely well, and we are redoubling our efforts with regard to that because this is the time when our clients need us more than ever. And so we are, across the organization, focusing on generating opportunities to help our clients. And of course, in so doing, we generate additional revenue for us. So we've got all of these expense initiatives but the huge revenue initiatives as well, which gives us great confidence. We're focusing on the expense with you. From day one, we didn't add in revenue opportunities as a part of projecting, but I can just tell you that the development along the way in terms of realizing those revenue synergies is going far better than I would have ever expected, including all of the COVID difficulties related to that.

The only thing I want to add to that, Betsy, is that You know, in the first or second quarter, we had some COVID-related expenses. You know, we talk about them, but we don't carve them out. We believe that those COVID expenses will moderate over the next quarter or so. So you'll be able to really see the cost saves as they moderate it. But we're probably in the 15% to 20% range right now. And with the cost savings that Kelly said that we are actively working on, you know, by fourth quarter, you know, we'll have 40% of it, we believe. in a fold.

Yeah, and also to mention too, Betsy, in addition to those items Daryl mentioned, we had COVID-related reductions in income, including money back on credit card purchases, you know, the other types of incomes, NSF reductions, waivers, which is a pretty big number. We haven't been trying to call that out because I think most people are trying to kind of do the same thing, but it is material.

Right. So maybe you could just, as a follow-up to the question, just talk a little bit about how you're anticipating the forbearance programs that you have in place fading from here. I'm not sure. Are you going to be retaining people in forbearance until further notice? Do they roll off at a specific point in time? And maybe speak to both the loan side as well as the fee waivers that you just mentioned.

Yeah, Betsy, this is Clark. I'll take the credit accommodations. I know Daryl and Kelly gave you the statistics there. I would tell you this. We are seeing substantially lower new incidents of client accommodation requests. I think much like others, the big wave was early on. And so our focus now is actually on the expiration of the initial forbearance that we've granted and and whether they're going to need additional relief or not. So what we have been doing on both the wholesale and the consumer side, we've marshaled substantial resources. We're actually reaching out to these borrowers, whether they're individuals or whether they're businesses, and trying to anticipate what they think their needs are, what their current financial situation and outlook is, so that we can get a sense of what lies ahead. And I can just tell you, It depends on the individual situations we're seeing anywhere from 0% that think they'll need another accommodation to some asset classes that might be 50%. So we're trying to take all that into consideration, be compliant with the CARES Act, but we're going to be much more thoughtful about this second wave to make sure that we're not kicking the can down the road. And so as we're doing these reviews, we're also effectively Where it's appropriate deferring the interest accrual and Darryl talked about that. We're actually got a reserve there if we think there's higher probability of re-default. And then we're also through this regrading, that's definitely included in our modeling in our loan loss reserves.

Okay, thanks. And on the fee waiver side, is that something that will sunset at some point?

Yes, so basically on the fee waivers, we think it's about time to kind of eliminate those. To be honest, we had a lot of discussion about it, but we've concluded that we've got to let our clients ease back into normal life planning and financial planning, and so we've terminated that.

Yeah, Betsy, this is Chris. I would add, you know, under Truist Cares, we did things like 5% cash back for grocery and pharmacy, ATM fees for waivers for clients and non-clients. We did, for the EIP, you know, a 30-day relief credit for those who did not have balances. And so all those things to the point I think Kelly and Daryl make and will come back to us. We also had, you know, some service charts, bank card, check card challenges, which will come back, at least certainly a large portion of that will come back in 21 as well.

Okay, so this should be over, you know, starting in 3Q into 4Q and really full run rate by 1Q21 type of concept. Is that what I'm hearing?

It's certainly not full run rate at 20, yeah.

Okay. All right, thank you very much.

Thanks, Betsy. We'll go next to Jonathan Carey with Evercore ISI.

Good morning. Good morning. On the core NIM, I know, Darrell, you mentioned that the core NIM should be up modestly in the third quarter. Can you discuss what the drivers of that would be and if you would expect similar moderate expansion quarterly thereafter on the core side? Thanks.

Yeah, so, John, we're doing several things around that. Obviously, you saw us exit $20 billion of advances from the home loan bank. They had rates north of 1%. We eliminated the negative carry that we had at the Fed at earning 10 basis points. So that was an immediate lift to run rate. That's happening as we speak now. Kelly touched on earlier, we are continuing. We have opportunity to continue to cut our core deposit rates. We think that will come down substantially over the next two quarters. So we feel good about that. If you look at on the commercial area, You know, 75% of all new originations and modifications got floors embedded into their loans. We think that will protect some of the yield from that perspective. You know, and the other things we're looking at right now, it's kind of tricky on what assets you can grow, you know, at this time that helps run rate and capital. But there are strategies like the Ginnie Mae Buyout Program where we are adding to that. We're looking at maybe adding back our jumbo correspondent production that will add more earning assets there, 90% LTV, so you still have favorable risk weights. The student lending that's government guaranteed. So all those that are capital-friendly that help run rate will be positive. We're also looking at moving some of the mix out of the Fed balance into the investment portfolio to some extent. So all those, I think, will increase our core margin. which will help offset the slowdown as you have your reported margin. You have less fair value accounting coming through every quarter. We're trying to offset that with all these actions that we're taking so we can keep our margin flat.

Okay, good. All right, that's helpful. And then on the, I guess I'd say on the expense side, I mean, first, I know you indicated that you pushed back the core systems conversion, and you cited some vendor disruptions. Have you chosen a vendor for the core systems, and will you be announcing that? And then separately on the efficiency side, on the medium-term targets of the low 50s, just wanted to see, like, how much higher do rates need to be to make that a reality and what type of timeframe, I guess?

So on the conversion, we have a full plan developed We have timelines developed. We have all the parties lined up in terms of executing. And as I said, we're executing literally as we speak in terms of the non-core bank conversions. But for the core bank, all of that is lined up and moving forward. You know, it's a big deal, so it's challenging. But we're very confident in terms of moving forward in the timeline we've talked about. A delicate comment, but with regard to the efficiency ratio, you know, you've heard me say over the years, that's just a tough ratio, you know, because you've got a numerator and a denominator. But look, we're at 55.8 adjusted in this environment without getting the benefits of the expense cuts from the conversion materially and the revenue enhancements. So that's why we feel very, very confident getting into low 50s. from where we are today, you know, the adjusted efficiency ratio will watch out to the normal efficiency ratio because all the merger unusual costs and all will go away. And so we feel very confident about that. So even if rates stay relatively low, I'm optimistic we can get down to that final level. Obviously, if rates go up, then that really helps.

Yeah, I mean, the only thing I would add to that, John, is that, you know, no matter what environment we're in, with putting the two companies together and the scale and efficiency we have, we believe we'll be a top-tier provider in efficiency in any market condition that you have there. So if rates are higher, we'll have lower efficiency numbers. If rates stay lower, maybe they won't be quite as low as what we're saying, but we still should be in the top couple of our peer group from that perspective. So we feel very good about that.

Hey, John, this is Bill. Maybe just a little, John, Bill, just a little clarification maybe on the provider is the vendor disruptions that we've had really are on the support and tech side. You know, so our core providers that we've selected for, you know, all the conversions that we've talked about, trust and brokerage and deposits and all those, those are all in great shape and we're proceeding well. And so the challenge has really just been in the tech support.

Got it. That's helpful. Thanks, Bill.

Okay.

All right, your next question comes from the line of Michael Rose with Raymond James.

Hey, good morning. Thanks for taking my questions. I just wanted to dig into some of the fee income businesses. Obviously, insurance was very strong. I think last quarter, you got about a 3% year-on-year. Can you give some color there and Just maybe if you'd expect any momentum to continue on the high banking trading side. Thanks. Sure.

Happy to, Mike. This is Chris. Yeah, really excited about the quarter. It was a record quarter, as Kelly alluded to earlier. And, you know, the three drivers of organic growth, really pricing, retention, and new business. And so prior to COVID, they were all kind of hitting all cylinders. And what you have now is new businesses driven by GDP, and uncertainty to COVID are tailing down a bit, but pricing is really robust. So what we had in the quarter was pricing last quarter was up, you know, in the 4.5% range, closer to 5% this quarter. And it's anticipated we'll continue to see acceleration for the major this year and into 21. I'll touch on why in just a minute. Client retention was in retail 90.3, 84.1, and wholesale also very strong. But what you're seeing there is a bit of a shift. With the COVID uncertainties, you're beginning to see some of the standard carriers that support retail to really sort of pull back and refer to wholesale, which gets underwritten in the ENS market that supports the wholesale. So over a period of a year, you've seen a little bit of, you know, maybe a couple percent down in retail but up about 4% in wholesale. And that really underscores sort of the power of our diversified model because we play in both channels. In fact, in wholesale, you might even get just a touch more margin in today's world. So we actually benefit in that situation. New business production, where we were up maybe double digits last quarter, we're down 4%. But what I would say there is while, and that's really driven by GDP, what's going on in the economy, uncertainties of COVID. But I would tell you that our overall outlook is much more positive because of the price firming that I just talked about. And we also saw in the quarter more stable exposure units than we'd expect. We just did not see the business failures. It was just a limited number of business failures. And also the growing excess and surplus lines volume, the shift from retail to wholesale that I had commented on in just a minute. So in the quarter, what all that gave us was organic growth in the 2.1% range. And I think what I had said was sort of flat to two. And we were, you know, we were right on the upper end of that range. So I felt very, very good about it in a market that I think some might would have expected, you know, flat to slightly down range. Just another touch on pricing, you really are seeing upward momentum and I think we're gonna continue to see it. All coverage types were up except workers comp, all sizes were up at least in the sort of four and a half, five and a half percent range. You saw things like D&O up 9.3%, liability, professional liability up six, seven, business interruption up six percent. I mean those are big numbers so what we would expect, In the third quarter, because of what Darrell had said earlier, we're coming out of the second quarter, which is our strongest quarter of the year, to our weakest quarter of the year in the third quarter, which is purely seasonal. So you'll see something down in the 13%, 14% range. But for the year, we're still forecasting organic growth. while it would be soft in third and fourth quarter, we're still seeing it in low single digits for the remainder of 2020, with really prices sort of leading the way. So I feel really strong, really good about it.

On this, Bill, I'll take the investment banking and trading side. You know, we had a good quarter in investment banking. things that we want to see, equity origination, investment grade, we're all really strong. I think as Kelly noted, it really is highlighting the value of the franchise, and I feel really good about the relationships with the commercial community bank and the pipelines that we're building and the dialogues that we're having with clients. All that being said, it's hard to predict quarter to quarter, you know, just because there's just more volatility and there's some market dependency, but the Overall momentum in that business, I think, is just a real strength of the Truist merger. On the trading side, we just have a lower risk, client-driven trading business that just has lower betas than these other businesses. So our core trading business was good in the areas that we wanted to be good. And derivatives market trading, again, value the franchise, value the relationships. Taxable fixed income sales and trading. And the real difference was the CBA recognition was just much lower in this quarter than it was last quarter. And presuming a rate environment, a credit environment that's stable, that could continue. So just really good long-term momentum, quarter to quarter, a little harder to predict.

Mike, as Chris, again, I might just comment on mortgage. We had, as Kelly alluded to, just an exceptional mortgage quarter this quarter in Darrell. said that we might expect it to tail down a touch. I would tell you production we think is going to be just as strong, maybe even a little stronger. It's just that as the industry brings on more capacity, the margin is going to tail down a touch. So, I mean, we're in a 319 kind of range this quarter, and that combines retail at 450 and, you know, correspondent at a touch lower. But you're still going to probably have, you know, in the mid to upper twos kind of margin. And you've got additional servicing costs, as Darrell pointed out, but still going to be a very strong year. I mean, the kind of year that would have been, frankly, I mean, the kind of quarter that would have been a year to the OBV&T. So very substantial kind of numbers overall.

Very, very helpful. Just one follow-up question. If I exclude the items that you called out for non-interest expense on a core basis, it looks like expenses were 3.3%. Bill, and given the pull for some of the cost savings and lower incentive comp, is it safe to assume that expenses would be down in the third quarter? Thanks.

Yeah, so in my prepared remarks, Mike, I said that we'd be down 1% to 3% linked quarter on excluding out those items that I mentioned there. So we definitely believe it's going to have a trajectory down third quarter and probably pretty good in the fourth quarter as well.

Sorry, I missed that. Thanks for taking my questions.

All right, your next question comes from Dave Rochester with Compass Point.

Hey, good morning, guys.

Morning, morning.

On your, just back on the margin, appreciated your comments on the drivers going forward. I was just wondering what your assumptions were for the curve and premium amortization there, and then on your opportunity to lower deposit costs. if you were assuming you can sort of hit that pre-cycle low for the cost, or if you're thinking you could actually take those even lower given all the liquidity you have, which would seem like a fairly reasonable assumption.

Yeah, so what I would tell you is that we're at 32 basis points right now. If you looked at what our average in June was, we were at 25. So we will probably be You know, in the low 20s, maybe pierce through 20% or 20 basis points in the third quarter. You know, probably by fourth quarter we'll be in the teens. On Heritage BB&T side, the lowest we got in the last crisis was 20 basis points. I don't have with me what Heritage SunTrust was handy. But, you know, we're clearly headed lower. I think we're going to be lower than before. You know, our assumptions on the margin outlook, we basically used the forward curve. forward curve basically has no rate movements for the next couple of years, you know, pretty flat curve. So we are not anticipating any increase. We're just trying to take actions that we think are prudent that we can take in this stressed environment to help improve core margin, which would help alleviate some of the offset of the fair value accounting accretion runoff.

And any help on reduced securities premium, ma'am, going forward, or should that stay elevated?

You know, we always tend to buy securities with a 2% premium or less. We've done that for many, many years because we don't like to have a lot of volatility. But you're seeing CPRs in the marketplace now of 30%. So they're prepaying pretty fast. If you look at our investment portfolio, we're in the mid to high $70 billion range. Our cash flows coming off are about $4.5 to $5 billion a quarter right now. So you are getting some of that amortization that we're seeing there. So we're reloading and trying to add to it. But it's hard to find securities that don't have big premiums. So we're being as selective as we can from that perspective.

Are you seeing other opportunities to move the needle with more FHLV paydowns?

You know, we are almost... all out of federal home loan bank pay downs. I think we have a billion left or whatever that's going to roll off, I think, later this year. So if we were to do anything right now, you know, I'm not saying we would, but the only thing left you can really do from a liability perspective is tender any outstanding debt. We have not made a decision to do any of that, but that's the only thing left. And then, you know, as we aggressively push down deposit rates, we will be good to our clients. But non-clients, you know, we're going to push them down really, really low. And if they leave, that's okay because we have huge balances at the Fed.

Great. And then maybe just one switch into credit. You have some acceleration of a pandemic in your markets. Did you guys make any overlays in your CECL process for that and what that can mean for the reserving next quarter if you see that accelerate or are you already assuming that in your base case that you'll get further accelerations?

Hey, Dave, this is Clark. We did consider that. And as we've gone through, I mentioned these deep dive reviews by estimates that would include geographies as well and even things like individual property levels in some markets. So we have considered that and tried to take that into consideration in our estimates, which obviously did assume further deterioration.

Great. And then just maybe as a last follow-up to that, what are you guys hearing from business customers on the ground on how they're feeling about the pandemic in the background? And is there any outside caution there? Is it going to be more deposit growth and less loan growth going forward? Just any thoughts there would be great.

Dave. Dave?

Yeah.

Let's see here. So from what we're hearing from clients, you know, I would say pandemic-wise, our clients, you know, for the most part, our small business clients are probably the ones most impacted right now, you know, because they just have the same reserves that larger companies do. So larger companies, depending on what scenarios you're in, some are under stress, some are actually doing really well. It's a really broad spectrum there from that perspective. You know, from a Clark's perspective and his team, they've been actively grading down the more stress credits. So you're seeing that reflected and that's showing up in our allowance numbers from that. But from a deposit, you know, we have huge deposit growth. The DDA growth that we got, the $20 billion that Kelly mentioned, 80% of that was coming from businesses. You know, that will probably moderate over time. And if you look at the growth that we've gotten from our interest checking and MMDA, most of that is coming from personal businesses. And I think that will also get spent and moderate over time. It all depends on the government comes out with more stimulus checks, you know, then that might add back to the balances there.

Yeah, you know, one of the interesting things we're finding that I must admit I was a little bit positively surprised about is the resiliency of our clients. When we talk to our regional presidents and our people that are dealing directly with clients, In many, many cases, they're saying, well, the clients feel pretty good given the environment. And the reason is because they learned their lesson 10 years ago in the Great Recession. And when this hit, they acted fast. They sold their expenses. They tried to be creative in terms of generating other revenues. And they're hanging on much, much better than I might have expected. Now, they're some of the tiniest micro small businesses are having the hardest time. They don't have any rainy day funds. They live kind of day to day. But for most of our small business clients, they have some resiliency, but mostly they respond very fast. Now if it hangs on a long time, it's just going to be hard. But if this recovers reasonably quickly, I think we may be pleasantly surprised at how well our business community actually performs.

And as Chris, Kelly, just to reinforce your point, over half our 24 regions are actually on goal for the lending business, you know, to date. And what's really good to see is two of the top regions are, you know, like West Virginia, Virginia West, some of our core, core regions. And so I absolutely agree with what you're saying.

All right, your next question comes to the line of Ken Houston with Jefferies.

Hey guys, this is Amanda Larson on for Ken. You mentioned that the COVID-19 related deferred interest reduced NIM by five basis points. Was that just accounting or was that a choice that you guys made for prudence to not accrue interest on customers that are experiencing duress?

Yeah, so, you know, just based on our prior experience, Amanda, in the last crisis, We know that some of the people that are on payment deferral are going to end up in charge-off, and we don't want to have any surprises. So we're using a lot of metrics, depending portfolio-specific, on which percentages people will carry through and might not be able to make their payments. And it varies by each portfolio, but this quarter was around $50 million for us. And that's what we backed out of our net interest income from an accrual basis. So we did a little bit in the first quarter. We're continuing to manage and monitor that, but we think it's prudent accounting just to basically make sure that we are going to accrue what we think we're going to get paid back on.

Okay, great. And then separate question. Can you provide updated thoughts on the capital stack? You guys issued $2.5 billion of preferred, bringing your preferred to ROAs up to like 185. Do you expect to continue to run with this bucket kind of oversized relative to 1.5% sort of optimization level? Like what's your thought process here and how does it tie in with the strategy of the overall funding base?

Yeah, so Amanda, you know, we are just taking it, you know, day by day and, you know, as we know certain things. So right now we're still in a stress period. So we're going to keep our capital stack pretty strong. We do have the ability to call some of the preferred out over the next year or two. If things were to lighten up, that would be about a billion and a half or so. But right now, I think we want to keep our capital really strong. We continue to evaluate and make sure that we have enough. We're managing the capital for stress and what could come our way from that perspective. But we have a lot of flexibility and We will make prudent decisions and we'll let you know when we make those decisions right now. But right now, we're happy with the capital that we have.

Okay, great. Thanks for taking my questions. Yeah.

All right. Next question comes from Erica Najarian with Bank of America.

Hi, good morning. Just one follow-up question, if I may. As we think about you know, $5.7 billion in terms of your loan loss reserve. Is the majority, is reserve building behind you?

Yeah. Hey, Erica, this is Clark. Obviously, I'm sure you've heard this from others. We follow our process. We look at our models, our economic scenario assumptions, our client behaviors. and the deep dives around these specific industries. And we do everything we can in the CECL process to estimate what we think those lifetime losses are. So obviously, if those scenarios play out differently, our clients perform differently than we had forecasted, then that would adjust what we would need to do in the future. So for now, we think we've done the very best estimate we can with the information that we've been able to evaluate.

Got it. Thank you.

All right. Next question will be from Gerard Cassidy with RBC.

Good morning, Kelly. Good morning, Darrell.

Morning. Hi, Gerard.

Clark, can you share with us, when you look at the portfolio today, and I know this is going to take some guesswork, 18 months from now when we're finally through this crisis, do you think the greater credit losses may show up in the consumer side of the house or the commercial side? And when I think of commercial, where in the commercial side of the house is the greatest stress? Is it commercial real estate?

That's a great question, Gerard, and we debate that every day, certainly. For us right now, while we're concerned about the consumer, we're watching it very closely with all the stimulus support and the savings and different things. It's holding up relatively well, even if you take out the forbearance benefit that we've provided. I think our concern right now is more on the commercial side. If you look at our reserve allocation, even again for this quarter, it was 80% plus on the wholesale side. I think that's what we're looking at things like, you know, how does the hospitality or some of the sensitive areas, are there structural changes in, you know, office or other property types. So I think the wholesale side based on various certain industry segments and CRE types are where we're putting most of our focus right now.

Very good. Daryl, when we looked at the DFAS results, it seemed like your results weren't as strong as they should have been in PPNR and even some of the credit losses. Is there any way of addressing that with the Fed, or you just really have to just take what they give you and just work your way through it?

Gerard, you know, we did do a press release recently, earlier that week after the numbers came out on Thursday. You know, we said that we thought potentially that our numbers on provision, we thought, you know, should have been a little bit lower. It's hard to know, you know, when you're doing incurred method, you have to really know when the loans come off and when they stay on the books and to know when it has to, you know, get reloaded with the new originations. And if you don't have that data, I think it's hard to actually forecast that. I think in their model methodology, they say they try to account for it, but you really need to have good instruments and forecasting to know what loans are coming on and off. Then on fair value accounting, if you have PPNR models that are based upon historical results, this is probably the worst time you could model PPNR because the company just came together in December. had maybe three weeks of purchase accounting, so you really didn't have anything. You did have one year of non-interest expense, and that appropriately got loaded into our run rate, and we're going to have that for the next year or two, and that will fade away. But fair value accounting is real. It's alive. I mean, we had over almost a billion dollars in the first two quarters of this year that we basically were able to use that from an earnings perspective, and we kind of think of it that it kind of helped fund you know, our allowance bill. You know, it wasn't exact, but it was like 90 plus percent what the amount was. It just happened that way, but didn't really have any earnings impact off of our core earnings because of that. So, you know, we feel over time that our history will be loaded with fair value accounting and that will get done appropriately. We are actively meeting with the Fed. They're here, as you know, constantly and we're giving them all the information, sharing everything that we have and You know, we hope, you know, down the road that we will get, you know, better results. And, you know, we still think long-term our MOE, we should be top-tier performing, not just on the loss rate, but also on the PPNR and on the capital resiliency. It might take two or three years to get the expenses out of our run rate, but hopefully by year three from now, we're going to be in the top quartile, if not the best, in our peer group.

Thank you. All right, next question comes from Brian Clark with Keith, Bria, and Woods.

Hey, good morning, gentlemen. Good morning. Hey, and thanks for going over the hour and taking my question. Just a real quick credit follow-up for Clark. I guess, can you talk about the reserve bill for the second quarter and kind of how much of that could be related to either the downgrades that you mentioned earlier? And maybe you can talk about the the change in criticized assets quarter over quarter to please.

It's a great question. You'll see our CNC assets when we file the queue, but I mentioned this deep dive and regrading process we went through. So effectively on the wholesale side, We've actually, in sensitive industry areas, we've done deep dives. As an example, in the hospitality area, we covered 90% of our total exposure there on a borrower-by-borrower basis and re-underwrote every one of those and done that for a similar process for the other sensitive industries. And then for any client that's had an accommodation. And so we've marshaled a ton of people to do that. And so we're getting real-time information. That has certainly improved. impacted our grading, and so we proactively downgraded a good number of credits. The biggest stress we've seen in the downgrades has been in hospitality and things like CRE retail. So all of that is baked into our second quarter estimate, and as I mentioned, about 80% plus of the additional increase is related to wholesale and particularly to those sensitive industry areas.

That's great, Collar. Thanks for your time, guys.

Thanks.

All right. We'll next go to Christopher Maranek with Jenny Montgomery Scott.

Thanks. Just a quick one for Darrell on the PPP forgiveness. Is that something that you can kind of have any certainty about in terms of how it might impact the year end and first part next year?

I can tell you our assumptions, Chris. This is obviously a new product, and we'll see how it all plays out. But if you look at the fees, obviously we set them up on the loan system, and they get amortized to go over a two-year time period. But if they get the forgiveness and then get paid back, all that left accretion to that loan would actually come into earnings in that time period. So our assumptions are that we believe 75% of our production in PPP will get forgiveness. We believe that, and this is the timing that we put in our models, in the fourth quarter, 30% of the 75% will get forgiven, 65% of the 70% will get forgiven in the first quarter of 21, and in the remaining 5% of the 75% in quarter two of 21. The other 25% we think will go all the way to term and from that perspective. That's our estimate. It's our best guess. You know, they did modify it, so we pushed down a little bit. PPB is very fluid. It tends to change a lot, so we'll see how things react, but this is our best estimate right now.

Got it. And that'll impact the margin when it happens, but I imagine you'll break that out, so it'll just be a one-time event in each of those quarters.

Yeah, we'll mention that. I mean, it's in our run right now a little bit because you're still amortizing, you know, basically, the fee over that two-year time period. So, like for this quarter, it was worth about $49 million of our net interest income for the second quarter.

Okay. Great, Darrell. That's helpful. Thank you very much, guys.

Thank you. Have a great day.

And it looks like we have no further time for questions, so I'd like to turn it back over to Ryan for any additional or closing remarks.

Thank you, Alan, and thank everyone for joining us today. I apologize to those with questions we didn't have time to get to. We will certainly reach out to you later today, and we wish you all the best. Goodbye.

That does conclude today's conference. We thank everyone again for their participation.