Q4 2020 Truist Financial Corp Earnings Call
Greetings, ladies and gentlemen, and welcome to the Truth Financial Corporation fourth quarter 2020 earnings Conference.
As a reminder, this event is being recorded and it is now my pleasure to introduce your host Mr. Ryan Richards director of Investor Relations for Truth Financial Corporation.
Thank you Abby and good morning, everyone. We appreciate you joining our call today, where our chairman and CEO, Kelly King President and COO, Bill Rogers and CFO, Daryl Bible, we'll highlight a number of strategic priorities and discuss true its fourth quarter 2020 results.
Chris Hansen head of banking and insurance and Clarke Starnes, our chief risk Officer will also participate in the Q&A portion of our call.
We're conducting our call today from different locations to help protect our executive and teammates.
The accompanying presentation as well as our earnings release and supplemental financial information are available on the truest Investor Relations website.
Our presentation today will include forward looking statements and certain non-GAAP financial measures.
Please review the disclosures on slides two and three other presentation regarding these statements in measures as well as the appendix for appropriate reconciliations to GAAP.
That I will turn it over to Kelly.
Thank you Ryan.
Good morning, everybody. Thank you very much for joining our call we really appreciate that.
We're saying overall for this quarter and this year are very good given the challenging environment every price.
How do I continue.
Continued focus on.
Strong culture, and it's like the value very very well, we're executing well on our revenue senators, we hadn't really affect other expense focus and we've made appropriate investments for the future and importantly support our attune medicine difficult environment and kept our classic mirrors number one.
For purposes to inspire and build better lives and communities.
We think the times we live in today this is more important than ever.
We focus on our mission and we focus on our values I would point out to you that with regard to our values all of them lately for Christmas.
Of our attention and all that happened is all of our teammates and the challenging environment that we face today.
People get through the challenges delivering whereas at home and at work and all other various.
Different colors that people are going through finding happiness in this environment is a very very important.
All other typing or we work hard to try to help that.
For the possible for our teammates if you're following along on the slide let's go to slide five.
Just wanted to for now.
It's nice to say pardon me that you have.
Culture is nice to say you have an important purpose.
But it's more important to deliver so I just wanted to point out a few other things that we have done that I'm proud of in terms of living our purpose.
During the course of the year, we launched our seasonal flow program, where we helped our teammates with money to go out an extra day little projects won't things to help people in need we launched our first <unk> theme.
On our homepage program.
The cares program was very effective where we invested over $50 million to make the immediate and long term needs of our communities our clients and our team for it.
Divided over $100 million inside your cohorts for far too much.
750000.
Non accommodations starting value your knowledge in PPP loans.
We funded a help for more than 80000 companies.
And created Oh.
Protector of about $3 million.
So we did 355 small to medium sized grafts and all our communities.
Very proud of our $60 billion three year community benefits program I would say to you. We are ahead of it.
<unk> schedule in terms of making those investments.
We support our guidance.
So as the other.
Representatives.
700, 780 Merrill your models remember that does include $40 million in helping us average from organization golf corner Square community.
Capital, which is focused specifically on sit here for us and the minority space.
And we're proud that we were able to invest $20 million over a three year for the for Hps for years.
And our students.
On slide six let's talk a little bit about where we are with the merger.
Great point of contact for you with regard to how we think about our merger concerns have been adjusted.
Most mergers is very different than many many mergers I've been through in my career when I was.
Just putting two big companies together here cutting expenses and trying to improve the profitability in the short term rather we are building what I call a new bank.
We're building a bank based on the best of both.
From both organizations and in some cases, yes, new systems and processes.
Like for example in our commercial lending area, we're taking a very new and very best in class Suntrust.
And their loan origination program and the BB&T.
Vacuum system in terms of our commercial loans for a combined we have the best from both sides under scale classic like day for our two plus two.
Equals five.
We certainly could have pick one it would have been cheaper air would've been faster, but it would not have been better and it would not have been client.
Sales from Vitol I can tell you about our merger charges and other merger expenses, a little lighter I just want to emphasize that as he does that remember that you have the normal marks that we called out early on in the.
And the announcement, that's normal signage and different.
Our system instead of just going away they are being drives to health net future benefit that they really are just a merger charges and then where you have these other investments, which I call investments from that all the investments in the future. They are making our organization better its client focused.
And while there will not be in our own growing long term run rate. These are investments that we make today to be sure that we have an agile very client focused organization as we go forward.
You say there are a number of accomplishments for 2020 I'll just point out a couple of days very poorly we've made great progress in our culture could not feel better about that we service our brand and visual.
Identity.
We are successfully merged first digital conversion, we believe in terms of modern day is insured securities activated integrated relationship management process, which is pivotal to our success. We did consolidate 100 for branches leveraging our blended Brian program, which is innovative remember we did divest $2 three value you're involved with.
It's about 30 branches.
And there's been a lot of corporate backroom functions that have been integrated including audit risk legal financial and others and we importantly did a huge amount of work on a per.
Brokerage job re grading for our teammates Jello comment with regard to some cost with regard to that was this was a very important process.
Making sure that our teammates for the year and knew that we were going to do the right thing in terms of looking into the new responsibilities, establishing the right kind of a job.
And appropriate compensation average has remained that retroactive for them during 2020 day because it was the right thing to day, they would do with the job, which has had not had a chance yet to properly grades of compensation and that served us very very well in terms of 'twenty. One are just a few points here.
Everybody tends to focus on the core branch conversion, which as you know is in the first half of 'twenty. Two that is very very important make a mistake, but look there's a huge amount of conversions and other activities going on mid 'twenty twice, a day really big conversion year.
We will complete our wealth brokerage conversion will have a mortgage conversion.
Sales force conversion.
We'll be closing an additional 226 branches.
And the first quarter will.
We'll be implementing our digital first migration supporting our T. Three concept in terms of meeting our clients, maybe it's not a simple spaces integrating technology and targeted yield a high level of trust.
And so there are a lot of activities that are going on during the course of the year. So I just don't want you to be thinking theres not much could be happening at first with regard to conversion for the first half of 'twenty two because frankly most of the hard work will be done by the end of this year.
And then realize for extra gear on the final branch closures.
<unk> as we get into 'twenty.
22, net kind of a few highlights with regard to our performance on slide seven.
So we're excited about our revenue.
Total taxable equivalent revenue of $5 6 billion up.
Five 5% annualized versus the fourth quarter that was really driven by stable net interest income strong fee income.
Especially in investment banking and trading income strong insurance performance, Chris will talk about that as we get questions in Q&A.
I'm very proud of the insurance acquisitions, just in the fourth quarter alone and we expect more activity as we head into 'twenty. One a very strong adjusted net income available to common share all of the $1 6 billion.
We had diluted earnings per share of $1 18.
Im delighted to return on average assets of $1 35, and a very strong adjusted return on average tangible common equity of 19, three so you can say, we're well on the way to top performance and other metrics that we projected that a deal was announced which is Gallo Morocco. As you know it's been two years as <unk> been going on but we're still tracking.
Doing really well in terms of the hidden that top performance level of.
Metrics as well as we expected that weighted that.
Daryl is going to be commenting on some capital issues other come out for you that.
Our board did approve it for $2 billion in common stock repurchases, which will start in the first quarter.
We have outstanding credit quality performance much better than expected net our common equity tier one is exactly right around 10%, which is what we projected.
A couple of years ago on slide eight I'll just point out to you the unusual items.
For the first quarter.
Quarter and you can see that we have the regular merger charges Amazon are related to our earlier other incremental operating expenses that are not in the long term run rate.
And they are quite at 228 cents drive with regard to our GAAP versus adjusted so Thats. Some credit look at the highlights let me now turn it to bill for some focus on some key items Bill great. Thank you Kelly and good morning, everybody.
As Charlie just noted tourist is the first large bank merger in the digital age.
With that in mind, we determined it was really unheard of in our clients.
A gaming experience and enhanced digital platform. This year and this was demonstrated on page nine.
Our foundation is to leading digital experiences for them to accelerate the delivery of features like personalized financial insights.
Air driven chat box other client centric enhancements, we're going to pilot test for both platforms in the second quarter and then we'll begin migration in waves in the third quarter.
A complete full migration for premier tourist experience for our digital clients by year end sort of emphasizing Kelly's point, how much has been done this year.
As you can see on page 10, we're experiencing excellent digital adoption and usage from our class. So for the 12 months through November we experienced a 26% inquiries from digital sales, 12% growth of active mobile users, 22% increase in mobile check deposits and a 5% increase.
<unk> suppression, I think all of which speak to increase digital adoption.
This is an area, where we're already seeing the benefits from our investment and on the right side. We show some recent enhancements. So for instance, the Suntrust.
Business online and mobile experience incorporate significant updates and it was built in house to give us more control over their apps functionality and performance long term.
The Heritage Award winning BB&T year platform now provides insights to help clients better manage new spending behaviors, including at the end of March cash flow analysis, and enhanced notifications just to name a few and very consistent with our whole Q3 for us.
This is a prime example of what Kelly talked about what's best for book using BB&T, you client driven from the items and a more flexible agile heritage Suntrust driven back then.
Clearly possession of those other can really well for the future.
We believe initiatives such as these underscore our commitment to improve the lives of our clients have demonstrate our investment effectiveness.
So, let's turn to page 11.
We experienced further decline in balances across most loan categories in the face of continued economic uncertainty and elevated liquidity.
Average total loans decreased $7 6 billion largely attributable to commercial loan balances and ongoing runoff from the residential mortgage portfolio.
Commercial average balances declined $5 4 billion, primarily due to large pay downs and lower utilization.
Pay down activity reflected larger class ability to obtain financing from capital markets and.
Suntrust Securities are well positioned to assist them what you'll see later.
Commercial balances were also impacted by $1 4 billion reduction in PPP loans and the transfer of a billion.
And assets to held for sale following our decision to exit a small ticket loan and lease portfolio, we experienced a rebound within our dealer floor plan clients. After a bottoming in July data OEM supply chain disruptions dealer floor plan balances up steadily improved as new car inventories for replenished. We also saw growth in mortgage.
Your house lending and government finance.
Commercial activity remains bifurcated as a whole with a greater share coming from large and medium sized companies than from smaller businesses.
And consumer average balances decreased $2 2 billion. This was largely due to seasonality and refinance activity that resulted in lower residential mortgage residential home equity and direct loan balances.
Average balances in our indirect auto portfolio increased $1 1 billion lower production was really strong as vehicle sales rebounded, especially for us in the prime segment.
Overall, we remain cautiously optimistic we are hopeful that the successful rollout of COVID-19 vaccines together with additional government stimulus will increase visibility revise confidence and support for economic recovery all of which will be essential for loan growth were extremely well positioned in businesses and markets.
But we will believe will both benefit from us.
So let's continue on page 12, and look at deposits deposit trends remained favorable during the quarter growth was robust and broad base supported by a combination of seasonal inflows and ongoing growth, resulting from pandemic related client behavior.
Average non interest bearing an interest checking balances were each up over $3 billion, while money market and savings per $1 1 billion.
Average time deposits decreased $4 3 billion, primarily due to the maturity of wholesale negotiable Cds and higher cost personal and business accounts.
Importantly, we were able to achieve a strong level of deposit growth, while maximizing the value proposition to clients outside of rate paid.
For instance, the average total deposit.
Costs decreased three basis points to seven basis points in average interest bearing deposit costs declined four basis points to 11 basis points.
So with that let me turn it over to Darryl to discuss our financial performance for the quarter.
You Bill and good morning, everyone turning to slide 13, and the fourth quarter reported net interest margin decreased two basis points to 3.08%, reflecting lower purchase accounting accretion.
Core net interest margin was unchanged at 2.72%.
Core margin benefited from higher yields on PPP payoffs recognition of deferred interest on loans.
And lower funding costs offset by excess liquidity.
Earning assets Rose 3 billion, primarily due to an increase in deposits, resulting in a modest improvement in net interest income.
We are partially hedged our exposure to rising rates by adding pay fixed swaps to offset market risks associated with our investment securities.
The chart on the bottom left shows the increase in our asset sensitivity due to core deposit growth additional pay fixed swaps and the residential mortgage runoff, which is partially offset by the growth in the investment portfolio.
Turning to slide 14.
Our integrated relationship management strategy is helping to improve fee income.
Non interest income increased $179 million.
You exclude third quarter security gains of $104 million.
We had record investment banking and trading income of $308 million.
Due to strong activity in M&A and loan syndications.
Lower counterparty reserves and improved trading profit.
We also generated record commercial real estate income of $123 million driven by structured real estate transactions.
Strong production and sales activity at Grand Bridge.
Insurance income grew 7% versus fourth COVID-19, due to strong production and premium growth as.
As well as acquisitions.
<unk> growth was two 9%.
If you exclude the truest policy placed last year organic growth was four 9%.
We completed five insurance acquisitions during the fourth quarter, which we expect will add more than $110 million in annual revenue and approximately $7 million and adjusted expense.
Turning to slide 15.
Non interest expense increased $78 million, reflecting a $99 million increased for merger costs.
Adjusted non interest expense rose $27 million due to higher professional fee for strategic technology projects and higher personnel expense.
Personnel expense increased $50 million, reflecting higher incentives related to strong revenue production and the impact of our job re grading process, which will quoted late last year.
Job re grading regarded in a fourth quarter catch up in personnel expense or.
Approximately $60 million.
It was related to prior quarters.
Through this effort, we were able to honor our commitment to establish jobs and rewards programs and harmonize our teammates.
And the combined framework.
FTE decreased 1300 during the quarter and were down 8% since the merger was announced.
We closed a 100 for branches during the quarter, bringing our full year total to 149 net occupancy decreased $26 million benefiting from aggressive closures of non branch facilities.
Turning to slide 16.
As we said we are seizing the opportunity to build best of our franchise.
This approach is harder than a typical acquisition, but we believe the benefits to our clients justify the effort.
Since the merger was announced we have incurred $1 $2 billion of merger related and restructuring.
Expenses.
These expenses.
Have no future benefit and are not part of the post conversion run rate.
We also incurred $725 million of incremental operating expenses related to the merger.
These expenses do provide future benefits and our ethical to building the best for both franchise.
The incremental operating expenses are not part of future runway angle and after the conversions in 2022.
Based on our integration plan, we expect the merger related and restructuring charges of approximately $2 1 billion and the total incremental operating expenses of approximately $1 8 billion.
This results in a combined cohort charges of approximately $4 billion.
Turning to slide seven for.
Strong credit performance was characterized by minimal increase in NPA and an excellent loss experience, resulting in lower provision expense.
We saw favorable trends in problem loan formation as the criticized and classified loans decreased eight 4%.
Our provision of 177 million benefited from lower charge offs and a modest reduction in reserves.
Due to the decision to exit the small ticket loan and lease portfolio.
The allowance coverage ratio remains strong at 715 times net charge offs.
And for three nine times non performing loans.
Active accommodations for down significantly since the second quarter our per.
97% for the commercial clients and 91% other consumer clients, who exited a combination program.
Our current on their allowance.
Our exposure to Covid sensitive industries decreased two 6% for $27 1 billion or approximately 9% of outstanding loans.
We also had the third lowest loss rate among peers in your latest CCAR test. We believe this outcome reflects prudent client selection and underwriting as well as diversification from the merger.
Turning to slide 18.
The allowance for credit losses decreased $30 million largely due to moving the $1 billion portfolio into held for sale.
For our macro assumptions include unemployment remaining fairly stable through mid 2021, and improving thereafter, and GDP recovery pre COVID-19 levels by late 2021.
We also layer in qualitative adjustments for Covid related uncertainty.
Continued improvement for the economic activity less <unk>.
R&D and stabilization of the credit criticized assets may prompt us to release reserves in the coming quarters.
Turning to slide loan flow.
Our capital ratios were relatively stable with a CET one ratio unchanged at 10%.
We declared a common dividend of 45 per share and a dividend and total payout ratios of 49, 4%.
In December the board authorized the repurchase of up to 2 billion other company's common stock starting in the first quarter.
Our intention is to remain an approximately 12% CET one ratio after taking into accounts strategic actions.
Stock repurchases and changes in risk weighted assets.
For the first quarter, we expect to repurchase approximately $500 million.
The board authorized other measures to optimize our capital position, including the redemption of the outstanding series F and G preferred stock.
And liquidity remains strong and we are prepared to meet the funding of our clients turning to slide 20.
This slide highlights our progress towards achieving the $1 6 billion and net cost savings.
Our efforts to reduce third party spend are ahead of expectations. We are now targeting 10% reduction in <unk> spend of $4 5 billion and.
In retail banking, we closed 149 branches in 2020.
On a cumulative basis, we expect to close 800 branches by the first of 2022 <unk> more than 400 branches by the end of 2021.
We also expect to reduce.
Non branch footprint by approximately $4 8 million square feet for the combination of closures and downsizing from.
Through December 31, we reduced our non branch footprint by approximately $2 4 million square feet. So we're roughly halfway through our growth remaining facilities will be rationalized during 2021.
Cost saves from technology or are highly dependent on core bank conversions, because we can decommission systems or data centers until the conversions are complete.
The bottom of the five lists where we're making significant investments. We believe these investments are critical to delivering on our purpose and providing a cash plus technology equals trust approach to clients.
Turning to slide 21.
The waterfall on the left shows how we did relative to our 2020 cost savings target.
Our objective for 2020 was to achieve annualized fourth quarter net cost savings of $640 million or 40% of the $1 6 billion target.
This equates to the fourth quarter, adjusted noninterest expense of $3 billion $40 million or less.
We adjusted noninterest expense of $3 billion 174 billion million exceeded our target included catch up in expenses related to job grading collections at higher revenue.
And the nonqualified expenses, which are substantially offset in other income.
If you exclude these items adjusted noninterest expense would come in slightly below target.
As you can see from this slide we're maintaining our medium term targets and reaffirming our cost saving targets for 2021 and 2022.
For 2021 are targeted fourth quarter adjusted expense would be 2 billion 940.
Million excluding acquisitions.
Now I will provide guidance for the first quarter expressed and changes from the prior quarter.
While the environment remains fluid, we continue to see momentum in our businesses, which may enable us to outperform the guidance for <unk>.
First quarter has fewer number of days and seasonally higher personnel costs.
We expect taxable equivalent revenue to be down 3% to 5% as a result of fewer days and purchase accounting write off rates.
We expect our reported net interest margin to be down two to four basis points based on less purchase accounting accretion and a change in the core margin.
We expect core margin to be relatively stable with the exception net increase liquidity coming from a balance sheet that could pressure the margin up to five basis points.
Non interest expense adjusted for merger costs, and amortization is expected to be down 2% to 4%.
We also anticipate net charge offs in the range of 30 to 45 basis points.
Overall, we had a strong quarter with exceptional revenue growth good margin performance and expense management and strong asset quality now, let me turn it back to Kelly for closing remarks and Q&A.
Kelly you're on mute.
Let me just close with a few comments with regard to the true value proposition.
To optimize our long term total shareholder return really through a focus on strong capital strong liquidity and diversification and intense client focus.
We believe we can do that growth, we have an exceptional franchise with the gross products services and markets.
We are the sixth largest commercial bank in the United States, we have strong market share in the most vibrant fastest growing msas from southeast and mid Atlantic area.
We are uniquely positioned to deliver best in class efficiency and returns while we continue to invest in the future.
We're very committed as Daryl said to reaching our one <unk> very well for net cost items.
We have a really great makes for a complementary businesses.
Other allows us to expand our client base.
Our yield enhancing revenue synergies.
We have a very strong capital and liquidity position as Daryl described which positions us to be resilient as we go through very challenging times that we're experiencing.
We are as I said earlier building a best in class New Bank.
<unk>.
Designed to be client focused purpose, driven and resolutely committed to inspiring and building better lives and communities.
We believe our best days are ahead for tourists and the United States of America, I'll turn it back over to Ryan.
Thank you Kelly Abbvie at this time will you. Please explain how our listeners can participate in the Q&A session.
Thank you.
You would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. We ask that you. Please limit yourself to one question and one follow up question.
Again, it is star one to ask a question.
And we'll pause for a moment to allow everyone an opportunity to signal for questions.
We will take our first question from John Pam Kearney with Evercore ISI.
Good morning.
Good morning.
Good morning.
Regarding the $1 8 billion in incremental operating expenses.
Could you just talk about that like how that number has evolved versus your original expectation I know, it's the first time, you're giving us that target. So how does that compare to where you originally expected.
And how that's evolved over time, and then can you give us a little bit more of your thought process behind it in terms of if we could continue to see upward pressure on that amount or are you pretty confident in the $1 8 billion and that it's a it's going to remain at that target.
Yeah, John Thanks for that question I would tell you when we were putting the transact sending them together.
Late 18.
Now it's been early banking that we thought for 2 billion was the merger and restructuring charges and we're pretty much on target with that.
As we continue to work on all of the integrations and we saw the opportunity to really build the best in breed of what we could do with our <unk> systems and technologies.
We just knew that we would basically be having I would call. It a lot of technology projects on steroids all at once and that this would be a really unusual time to have all that cost running through our our expense structure. So that's really what we came up with and we've been tracking it to date, so far and we feel pretty good about the forecast that we have.
We're almost at $2 billion in total when you combine both charges that both the merger and restructuring of the incremental so we have about $2 billion to go over the next year and a half book.
We believe it was for the right reasons and makes all the sense, it's going to help our clients.
Really produce for good performance for our company going forward.
So John the way to think about that conceptually is that that that one eight.
As I think about it like a capital allocation for future benefits in terms of client focus.
And better systems and processes.
It will flow through expenses will continue to reported to you out. So you can think about it more in terms of an investment.
Got it. Thank you that's helpful and then separately on the.
On the branch and non branch real estate reduction.
I just wanted to confirm that those reductions that you're targeting.
And the savings that come from net debt is <unk>.
<unk> in your targeted cost savings tied to the merger.
Absolutely.
Yeah, Okay. So the way we came up with a five buckets.
You are talking about two other buckets I mean, the retail branches. We said originally it would be between 700 800 branches you can see we're at the high end of that original estimate that will be done by the first quarter of 'twenty two.
In our corporate real estate, even before Covid. When you put these two companies together, we have huge duplication all throughout the mid Atlantic and southeast.
So just going through and rationalizing that space I would tell you Covid has helped us in a number of ways and that has emptied out the buildings. So we can move quicker in the consolidation and my guess is is as we continue to make these combinations that we may actually exceed what we originally estimated and.
Real corporate real estate consolidations because of Covid and just yeah acreage that people working at home.
Right, Yeah that was exactly what I was getting at because I'm, assuming some of the corporate real estate reduction opportunity got bigger got you got you saw greater opportunity as Covid set in so I was just wondering if that could present upside to your cost saving expectations. It's corporate real estate reductions can be more than you thought.
Yes, so we have a plan for where we are executing now in the $4 8 billion. Once we complete that plan I'm sure Kelly and Bill and executive leadership will reevaluate it.
See if there is opportunity to do more in the future.
We will take our next question from Betsy graphic with Morgan Stanley.
Okay.
With me here you go.
Etsy or year on year.
Hello.
Can you hear me now.
Can you hear me.
Alright, sorry about that.
Yes, so I had a couple of questions. One just on the integrated relationship management strategy I'm wondering how that's progressing you know the revenues are strongest quarter, particularly in season. So I just wanted to understand how much was the Iran. Helping to drive that result this quarter.
But that said as I said.
Huge part of it and I'll, let bill give you some good day.
Color with regard to that.
This is a concept of really.
Integrating the way we focus on the client.
Many institutions focus from a siloed way in terms of products.
For services, we don't do that we focus on the whole nasal for client and so we've developed this is.
<unk> process, we call it integrated relationship manager.
Several decades.
And it's very very effective very Fisher for cost everybody owns the client.
Everybody is focused on making all of the major other clients all the time.
Seeing spectacular early.
Positive feedback in terms of how it's working especially between the community bank.
Bill you might want to comment on that.
Hey, Betsy.
I mean this is one of our really strong cultural alignment Kelly and I talked about wafer starts are about this merger for his commitment to put the client first and create a culture in a structure that evolves from that.
And we're seeing it.
The model is working as Kelly noted a couple of examples in the investment banking.
Our performance this quarter, particularly I mean, there was related just great contribution from our commercial community bank and from our CRA from our private wealth business has so that that model of integrated relationship management is working interest been great adoption, great participation really good cultural.
Alignment, you'll see other than the insurance numbers, you'll see that in the wealth number. So it's all part of us.
The structure and focus.
We have lots of.
Disciplined around it but the key is the cultural side.
Our people committed to wanting to work together and work together towards a common goal to meet client needs.
I'd say this quarter was probably probably one of the better examples of cloud.
Other engines are really firing on all cylinders.
Alright, Thanks, and I appreciate the extra fee fees really jumped out.
The screen I guess the follow up question on the expense line here is around.
So the core expense inflation outside of the cost saves you've got merit increases bolt on acquisitions investments for revenue growth et cetera, I'm just wondering how investors should think about where the total expense dollars will likely land post spin net cost saves what what kind of.
You know guidance can you help us with there.
So betsy.
Let me just mentioned in general.
We have the itemized areas.
Listed.
But we are really focusing on your own expenses on a broader.
Conceptual approach.
We're doing the obvious I mean, the obvious or you know you got two others. One in those kinds of things are just kind of happening, but we're heading into a period now where it is time for us to focus on optimization for the time for his focus on transformation and reach centralize them for business because so far what we basically have done is to think about it but two big banks together.
Yeah.
Now what we have there and we're getting.
Our savings from vouchers natural overlap for now we have the opportunity to Reconceptualize the business as we transform it post COVID-19 and all of this going on with regard to the new digital world.
And there are enormous opportunities for us as regard through 'twenty. One so 'twenty one is going to be an intense year of focus.
One on expenses from the perspective of transforming our structures.
So that we are doing the right things in terms of investments and there's been some allocations to meet its cons makes for us and we believe that will throw off a positive benefits in terms of expenses.
That's what I would say in my prepared remarks.
I gave for the fourth quarter of this year for $2 $940 million now that excludes the merger and restructuring charges for incremental.
<unk> expenses.
Expenses amortization, and then I gave a call out on the expenses for the insurance acquisitions of about $70 million adjusted expenses. So all of that will get carved out of that base, but when you look at like the job re grading where people aren't.
Considering that part of the investment that's something that we are covering with our net sales.
Yeah.
And we will take our next question from Matt O'connor with Deutsche Bank.
Good morning.
Can you talk about the timing of liquidity deployment. This past quarter, obviously, if the tariffs went up a lot. It sounds like you had some of that but what made you decide kind of now for the right time.
Have you seen the tanger move up but actually mortgage rates and.
I think rates on the types of for carriers that you would've bought you know, we're probably stable or down.
And most people I think are expecting higher rates later this year or so for what kind of drove you to COVID-19.
For what seems like most of your back half liquidity this past quarter.
So Matt.
Ideally, we would like to take this.
Excess liquidity that we have and deploy it allows for.
What we're seeing is that we just have a fair amount of payoffs in the PPP, but as the business has really come back and.
We have a lot of momentum and start growing as we get into the middle or later half of 'twenty, one we really want to deploy that excess liquidity in lending.
I would say that we decided to put.
Some of that liquidity into the investment portfolio, we did that throughout the third quarter.
We did partial heads up our hedges on them basically to help with a mark to market on that so when we added about $25 billion to $30 billion to the investment portfolio. We did have hedges on there are about $20 billion that we put on to help with the market risk that we have.
So net net we feel good with what we've done.
They're real uncertainty on a go forward basis with all of these new stimulus packages is we could potentially add another 10 or $20 billion more liquidity into the balance sheet I think we need to evaluate what we do with that excess liquidity, whether we keep it at the fed.
Or invest it or ideally blend it out which is the main primary objective.
Okay. That's helpful.
And then just circling back on the incremental costs related to deal you know obviously you've been incurring these already.
And size that I think for first time, which you know is getting a lot of attention but.
How will we see things on the other side right. So like you didn't increase the net cost saves.
Haven't really five for having us hedging is even though.
It seems like there will be from.
How are we think the payback of that incremental $1 8 billion.
If you can break that out from health.
So Matt.
I was describing are rarely investments so as I think about this as we are building a whole new commercial loan delivers us from a whole new mortgage loan delivery system.
You will see the benefit of that in terms of in some cases is more efficient systems those are newer.
And the other is the effectiveness in terms of meeting clients needs. So we can.
Gatland mortgage if you can just do more mortgages, because you're more efficient you get more mortgage applications, because you have a better client experience service.
Just like.
You call accounts run down and run our two on 1000 oncology value call or you make an investment.
You see the benefit of that in terms of driving experiences.
Less breakdowns etcetera etcetera. So it is an investment that is the best way I can describe it for you to think about.
We will take our next question from Erika Najarian with Bank of America.
Yes.
Okay.
Erika Your line is open please check your mute button.
Hi, Thank you.
My first question is on revenues Kelly you were very upbeat.
No feature of this cash.
Company.
Your peer is for actually quite upbeat.
Future of economic growth and I'm wondering as we think about going cash the first quarter. How should we think about your base case for as long as recovery relative to loan growth which was.
For your peers from surprisingly upbeat and also specific to the <unk>.
<unk> outlook.
Yes, Erika we are we are a bigger as well I'll say I'll now turn psychosexual iron my favorite regarded economy.
This economic downturn is dramatically different than what we all experienced in the past if.
If you take the money correction enables about our commercial real estate bubble in 2000.
Technology above for 2008 was the residential real estate bubble. There was no bubbles here, who is nothing fundamentally wrong with the economy. In fact, we have 10 years of robust growth.
They're very low inflation, we just shut it off.
For it because we're not underlying pending issues that caused the economy just sputter now as you've kept it shut off for 10 years you'd have another issue, but given where we are with the vaccines et cetera, we fully expect that.
You are most likely to see a strong growth snap back into the economy than most people expect when we talk to our clients and prospects they are really pretty upbeat.
Things like it's time to get on with it we're ready to guidance, we're making investments.
And we're seeing that in terms of our robust pipeline.
For gross activity and so we are upbeat with regard to the economy.
We think it'll be slower in the first part picking up steam as you get through mid stimulus will have that sun, but mostly businesses and consumers seeing more confidence when the vaccine are out there I would say all and as they become more widespread in terms of being injected.
Share goes down when confidence goes up people are ready to live again people ready to invest a record run their businesses. So I fully expect by the time, we head towards the hall at the end of the year.
You're going to be with us a promise in terms of how robust is the economy.
That will show up in terms of.
Our commercial loan activity.
Right.
You'll likely see more residential loan growth.
Then we would have expected in a slower economy.
And certainly you will see that in terms of insurance.
Activity as well and let me just turn quickly to Kris Simpson and let him give you some color with regard to insurance growth was very important.
Thanks, Kelly and Erik and thank you for the question so maybe.
Maybe just to sort of fourth quarter and maybe just the outlook for your point.
One of the best quarters that we have had in some time.
The all of the drivers of organic growth are really kind of hitting hitting on all cylinders client retention.
Our stabilized and in retail at north of 90% for the last eight months wholesale really strong at 85 for really.
And because of the factors in the market.
Standard carriers are pushing risks to the wholesale market and we're benefiting from that.
Pricing and other element of organic growth as strong as we are in the hardest market we've seen in two decades.
Rates are up in the industry.
North of 7% and its anticipated that we will continue to see some some hardening in acceleration into 'twenty, one are new business.
New business in.
In two.
2019 was up in the 12% to 13% that was as good as we've seen and then we hit Covid, we were kind of negative 4% to six didn't know where the.
Yeah, It was going to shake out, but this quarter, our new business was up 19, 5% up 8% year to date some of the best numbers I have ever seen.
So that all led to an organic growth number that we reported two 9% to a light quarter for for 3% year to date, but.
Just to key in on one point Darrell made I think is really important the two 9% growth number was really negatively impacted by one time MLB related.
Piece of insurance that was booked for our MLB deal in Q4 19, So if you exclude that noise.
Organic growth really would've been on a core basis for 9%.
In terms of the outlook, we expect first quarter commissions to be up to 10% range. We're moving from our third best quarter of the year to our second best and first.
Obviously uncertainties in total the impact the economy.
But the outlets really strong given the accelerated pricing exposure units in the business are holding.
We will grow in excess and surplus lines because of the shift that I mentioned in the standard carriers that support retail pushing it to E&S.
We're really benefit from that diversification.
And the pricing momentum do you think about.
The markets Digest, the Covid impacts cat losses, we had 30 storms this year the most in history.
Any given year.
<unk>.
Three of the largest for years in history of Cat losses occurred in the last for years. So it's got upward pressure in the lower interest rates, which puts pressure on investment income for underwriters.
So pricing up 7%, you're seeing examples of things like yes.
Umbrella excess up 12, 5% D&O up 11, and a half property, which we have a lot of up 9%.
Up in all classes all accounts, so looking forward what we're expecting is.
First quarter is somewhere around the 5% kind of organic growth rate number.
And we think that's elevated catastrophe level low interest rates all of that is really going to want to keep it propped up and Kelly mentioned acquisitions, we were able to close five in the fourth quarter and we expect more in 2021, so really bullish about insurance going forward.
Got it. Thank you that's very helpful.
Thank you for your question is a two parter on expenses.
If you could maybe briefly describe what it.
In <unk>, one 8 billion number.
Would you share your Investor should you get doesn't linger and be a run rate I think everybody gets scared when you see personal Moro.
Descriptor.
Going back to slide 21 as of other follow up questions for Bob will follow up question to <unk> question.
What do we do with that 337 number that annualized up from $12. One shakes as we think about your 2020 spring run rate is that a base for the run rate that include the savings plus the growth rate just help us.
Think about how to think about that number for 2000 Twenty's day.
Okay.
So I'll start on.
The latter question first so it's pretty simple.
<unk> gave you the guidance for fourth quarter of 'twenty, one which was the $2.940 billion.
In there that excludes the restructuring MLD amortization from acquisitions.
That's it so that's the number we are targeting to get for a fourth quarter of 'twenty, one that's pretty simple and that will continue on in 'twenty two when we get all the cost savings or the net $1 6 billion.
Your other question.
On.
'twenty one.
What was your question again on the first part.
Yes.
You could describe the types of expenses, you're incurring in that one.
Yeah, Yeah, yeah yeah.
Technology projects.
They currently expected the week, we'll carve out a onetime costs like when we decommission something or something is put out of use from that perspective has a future benefit that's in the original <unk>.
<unk> and the restructuring charges.
But when you have developers go anywhere that we need to have people go in and with systems and you have architects building out.
For our new Zebu line, they're basically building a whole new truest environmental technology. All of those are real costs. We're doing all of these technology costs all at once.
All of that has future benefit we would typically not carved that out of the merger and restructuring. It's basically just the combination of doing a lot of technology projects all at once.
We just thought it was fair to call out because you would never really think of doing this all at once if it wasn't for the merger but.
As Kelly said at the end of the day, we're going to have a much better client experience, we're going to have much better performance overall and you should see the benefits of all of these systems integrated by dealing with the best between each of the system that I think you have a lot of revenue and other.
Other synergies going forward.
Eric for keeping in mind.
When you're doing those projects should bring all those consultants in but you also get them out. So we would have gone and consultants we have been narrowed from door and is very big backdoor and I'm going to back door.
That's helpful. Thank you.
And we will take our next question from Bill <unk> with Wolfe Research.
Thank you and good morning, I had a question on back book repricing dynamics.
How to think about that from here for legacy BB&T and other banks more broadly we saw downward pressure on loan yields persist throughout the last cycle, despite having a steeper curve can.
Can you discuss whether that downward pressure on yields as a dynamic you'd expect to persist throughout the remainder of this cycle as well.
So I would say in a normal balance sheet structure that would make for a fair amount of sense.
What we have going on at our balance sheet remember we have some purchase accounting you have PPP and all that we actually saw our yields you can see that on our tables you can see that we actually had loan yields higher for those various reasons.
That said I would tell you the steepening of the curve, we are asset sensitive we're asset sensitive across the curve.
More short and the longer end.
But as far as the yield curve shifts we will benefit.
From that 25 basis point Steepening of the curve will basically give us two to three basis points from core margin.
No.
That is a phenomenon if you look at how things are going on and off on a pure basis actually it looked at credit spreads going on for our commercial.
Credit spreads are going on maybe at three or four basis points.
Higher than what they were coming off and so I think all of that is in a relatively good.
In that perspective.
Yes.
Daryl point, that's also a business mix and focus issue, so what would sort of be traditionally what different back book look.
On a reported basis as Gerald noted I mean, we're seeing an improvement in margin that has to do with focused type of relationships.
Value that we're adding all those type things that he noted you'll see that particularly in the commercial side.
Understood that's very helpful.
Quick follow up on that same question to the extent that PPP 1.0, and then two point or we're going to be sort of contributing to the NIM. In this sort of cycle can you just can you discuss how long you'd expect those.
Those tailwind to persist through 'twenty, one and then and then not 22 or would they carry the 'twenty two as well.
So you might want to call that one.
And for Chris you want to start this one and I'll finish off okay.
Sure.
Yes, we do.
Obviously, you plan to participate in round two probably in the neighborhood of $3 billion or so.
We see most of the round one.
Playing out through 'twenty one.
Now on to probably coming in.
First half of the year and then rolling out the back half of the year really hard to call exactly when.
What quarter exactly that that all is going to flow out but.
To answer your question no I would say 90 plus percent of it should be gone by the end of 'twenty one.
The thing I would just add to that though is that it has a huge impact obviously on core margin depending on enrollment forgiveness happens.
It could be anywhere from three to five basis points, depending on the amount that actually happens in a given quarter one.
One thing to note round two is really focused on more smaller loans. So it does actually drive higher fees like our average fee on round one was about two seven.
Our estimate net.
It just didn't estimate because it's just now starting to roll out we might be north of 5% fees on round two that will have less volume, but it will also have a huge impact when those actually are forgiven as well.
Just to give you a sense, we've invited 100% of round one to apply for forgiveness, but they submit the information at different times, we receive them proposed on the SBA about 40% of that to this point. So some of the timing is really determined by the timing of the client provides the information.
Yeah.
And we will take our next question from Ken Houston with Jefferies.
Hey, good morning, guys.
I was wondering if Daryl you could price a little more color on that commentary you gave about the first quarter revenue outlook I believe you said down three to five FTE.
Can you help us understand just what Chris gave some color on insurance, but kind of a bifurcation between what you expect out of NII and fees and what the drivers would be especially in those other fee areas and in addition to insurance. Thanks.
Yes, I'll be happy to get to do that so when you look at margin because we have the difference between our reported margin and core margin.
We are going to have less overtime accretable yield going into our margin now that's volatile I would say that that could be down anywhere from two to four basis points of less accretable yield that impacts reported margin.
Quarterly basis, so that trends down.
How much is down is kind of goes back and forth from that.
From a core margin perspective, our core margin is actually holding up really well.
We've done really well the last couple of quarters with that.
The uncertainty we have is that how much more liquidity or are we going to get into the balance sheet and liquidity in our balance sheet pressures core margin if.
If we decide to invest for liquidity while securities It gives us.
A little bit more NII, if you leave it at the Fab are you basically just tread water in NII. So we have to make those decisions as we go forward.
Depending on how much liquidity, we get in with these stimulus packages.
Oregon, It could be a little bit volatile I think you have removed shift to net interest income and focus on net interest income from what the impacts are until that noise.
It's out of there.
On the fee side.
I would just tell you that the business has had a lot of momentum insurance always is very strong.
In the first quarter, it's either a strongest quarter, but if you look at those area in investment banking and trading from a huge pipeline they had kind of filled in the fourth quarter.
Kelly's right with the economy, he could have a great quarter, and Joe's world and while they have a lot of momentum there adding more accounts.
In our retail area they have traction.
Our community Bank commercial actually is growing commercial loans. When you look at the detail I don't know, if bill or Chris want to comment on the momentum we've got.
On a revenue on those businesses.
Interest at a barrel I mean, if we look at things like pipelines going forward in production in the fourth quarter. We have a reason to be optimistic that's against a headwind or PTC paydowns utilization being that sort of.
Actually uniquely low low level. So I think for things that we can control production and pipelines are doing well and then I think we'll see the benefit of that over time, whether that manifests itself for the first quarter second third or for will be dependent upon all of the things Kelly talked about right.
Confidence in.
Market acceptance of where we are.
Yes.
I might just add opportunities, we're seeing really for growth.
<unk> is very strong right now we were up about $1 billion in average balances, we see that continuing into the into the first part of the year.
He is a warehouse lending because of the <unk>.
Those are the environment also there very strong.
Got it great and just one more follow up on that 2940 number Darryl so that's.
It.
It seems like to be a real landing point that youre targeting before the $70 million quarterly $70 million quarterly version of the $70 million of insurance adds just to get to the base would that 2009 for do you also be inclusive.
Incentive comp or a core underlying cost inflation, it's an absolute goal that you're trying to get around that number before we add the acquisitions and other.
Other stuff.
Our hope to be honest with you is that our fee income is so strong and all of that then I'm going to have to tell you, it's meaningful and have to carve it out like we did this past quarter that would be actually a great story to Italia.
So we will continue to try to carve out when we think it makes sense.
Carve out that variable comp obviously, we are a dynamic company and things are more but just just to be sure everybody understands we are not changing our commandment. We're back on away from the $1 6 billion that we made in February and.
We're going to get those cost savings.
Understood Alright, thanks Dara.
And we will take our final question from Mike Mayo with Wells Fargo Securities.
Hi, just back on the merger savings one 6 billion Youre reiterating that net number that's pretty clear.
I mean, you have 40 per cent of the savings already and only 12% of the branch closures do you expect to exceed on the non branch footprint part.
So why not increase that asking what would it take for you to increase that at that.
One 6 billion net or have you already increased the gross merger savings number what you haven't given to us and reinvesting some of the proceeds from that that all add up to positive operating leverage in 2021 or not you Didnt quite guide for the year. Thanks.
So Mike.
Youre right I mean, they admitted parts move into this in.
We'd rather just trying to anchor on the minimum of the one six.
We're not trying to hold out what we think is possible in terms of.
Leading that but some of the things I've talked about in terms of I mean, we can have more branch closures.
Anticipated not for.
<unk> got the right at this moment, but that's certainly a possibility.
Certainly aren't going to be intensely focused on their expense optimization.
And there are huge opportunities for duplication across the enterprise.
Areas that region technological invest in them.
Ongoing expense run rate so the $1 six related to basically putting the two companies together and the other things we do more in terms of transformation.
And additional opportunities when we find weathers.
Non branch office space with maybe we see that target, maybe we get a few more branches.
We certainly are very optimistic in terms of <unk>.
Expect to focus on doing that but just want to be clear about what we've said we can do.
And then how about the opportunities that we can probably for you bet.
Okay.
Okay.
Without using up my second question in terms of a gross number.
I know that you are investing a lot back.
And for your gross number going higher as part of that net.
Go ahead Jeremy.
So I will tell you.
We are investing more than what we originally thought Mike.
What we think these are the right investments that we're making in our people technology that you know.
All in for the right reasons.
So we are making more investments than what we originally thought we don't haven't communicated that number publicly.
But just know that we're going to get our net savings.
Maybe we'll exceed it at some point, but let's say, let us get the one six first.
Right now we are making a lot of investments in the company as they are moving forward and youre seeing it in our results. We will look at our revenues look at our account growth that we're getting and we're doing really really well in the midst of a lot of conversion, which could really distract a lot of the businesses. We are performing at a very high level.
And then the second question a lot of talk about a lot of talk about insurance.
I'm, bringing in the big guidance. It's my my peer colleague, Mike from firms insurance analyst Elyse, Greenspan, and Ashish spoken with the insurance man.
Andrew.
Before you leave.
If you wanted to ask the question on my behalf go ahead.
Yes. Thanks.
The one question I had on.
Hey, you guys posted a 5% adjusted organic growth in the fourth quarter, which seems like a pretty impressive number relative to some of the other companies I cover and then also given kind of the impact that we've seen from COVID-19 on the industry interest.
So I think about 2021 for something other comments it seems like growth would continue on an organic basis right kind of share.
She had come in above that 5% is a check maybe expand there and then also could you give us a sense you guys a little bit different than other it's obviously have.
Good tells us wholesale and retail in your insurance business.
Organic from both of those businesses as.
One been outperforming on price and the other or are they kind of consistent.
Thanks for the question this is Chris.
You're right, we did finish around around 5% and based on what I see now I think around 5% would be certainly a good number for call. It. The first half of next year. We will we will tell the last half when we get you know a quarter in or so.
So feel very good about it but I, but I must tell you if pricing holds and I believe that it will.
And if.
If the economy does begin to turn via vaccinations getting pushed out too.
For the country and we're able to see then better new business growth as a result from some <unk>.
Sample of what we saw this fourth quarter.
Could it be better I think it's I think as possible other good.
So I think the opportunity really kind of all of the cylinders have opportunity to move I do think the growth is going to be dependent upon.
What happens with Covid and the economy, and we kind of get all of that going.
Moving.
We do get vaccinated out mid year stimulus first half of the year I think it bodes well for organic growth in that business for sure and your question about is.
Is the margin better than one than the other.
Strategically as a bank. The reason we want exposure to those if we wanted to bank it probably wouldn't matter as much but what we're really interested in is for this business to provide good downside protection when when credit markets are challenging and you can see that this year.
This past year for 3% organic growth for the year I think is pretty solid given the backdrop and the reason we do that is because our wholesale or retail are going to operate in different to each other so you go into depending on whether you're in hard or soft market. One is going to help balance the other out weren't interested.
And the combination of the other.
So certainly a little bit better contribution from wholesale to day than retail, but theyre, both making a nice contribution.
And ladies and gentlemen that is all the time, we have for questions I would like to turn the conference back to Mr. Ryan Richards for any additional or closing remarks.
Okay that completes the Q&A portion of our call. Thank you Abbie and thank you everyone for joining us today I apologize to those with questions that we didn't have time to get to we will reach out to you later today and we wish you all the best Goodbye.
Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now disconnect.
Okay.
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