Q2 2021 Truist Financial Corp Earnings Call

Please standby.

Greetings, ladies and gentlemen, and welcome to the <unk> Corporation second quarter 2021 earnings Conference call. Currently all participants are in a listen only mode of <unk>.

Question and answer session will follow the formal presentation. As a reminder of the spin event is being recorded it is now my pleasure to introduce your host Mr. Ankur Vyas Truest Financial Corporation.

Thank you Shannon.

And good morning, everyone welcome to true as second quarter 2021 earnings call with US today are our chairman and CEO, Kelly King President and C. O O Bill Rogers and our CFO Daryl Bible. During this mornings call ill discuss true of second quarter results and also share perspective.

On how we continue to activate the upon our purpose our progress on our merger and current business conditions Chris.

Chris Hudson head of banking and insurance and Clarke Starnes, our chief risk Officer are also in attendance and will participate in the Q&A portion of our call.

The accompanying presentation as well as our earnings release and supplemental financial information information are available on the truest Investor Relations website, IR Dot truest Dot com are.

Our present presentation. Today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slides 2 and 3 of the presentation regarding these statements in measures as well as the appendix for appropriate reconciliations to GAAP and.

In addition, truest is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference. Transcripts provided by third parties. The only authorized the live and archived Webcasts are located on our website with that I'll now turn it over to Kelly.

Thanks, Ankur and thanks to all of you for joining US we really really appreciate your support so it's a really strong quarter some of them, which reflects our diverse business mix of concern.

The risk management, we did have a negative provision and importantly, I would point out investments we have made in insurance investment banking wealth and digital capabilities and excellent progress in our conversion.

You've heard of say before we believe culture continues to be the primary driver of our success I would point out that today in these times are of purpose really resonates for teammates on others as our purpose of inspiring and building about a lot of junk communities, there's motivational and satisfying to our teammates being involved in helping make the world of better place.

We're now focused so you might be interested in knowing and helping each of our teammates are aligned with our culture on a personal basis all of them.

We would find that engagement really sales when people are aligned with the personal purpose and the culture of purpose.

Oh team is highly focused on cultural lennar integration on activation and there was the primary focus for all of us.

Following the slides if you look on slide 5 I just wanted to point out that for US purpose is not just the banner is the way we lay of its truly trying to inspire and build better lives and communities.

We focused a lot of attention, especially now and increasing on the hour.

Pulling out some of the major investments, we're making on our communities.

For example, this quarter, we contributed a combined $200 million of true its foundation and the true as charitable fund to support on Port work of our organizations across our diverse markets on communities and very excited that we were able to invest $22 million in Atlanta's most of the care.

It was a fantastic federally qualified health care for homeless program.

We expanded our partnership with operations hope was of $20 million investment the Hell provide more education and science and tools to help more people build better lives.

And we invest of $2.5 million on a grant to the National Institute for student success to improve the financial education on graduation rates of underserved students. This is a fantastic program, but it's not just about Atlanta.

The way we live around here every day.

I'm very proud of and we released our inaugural supplier diversity of impact report, which outlined a $1 billion total economic impact through supply of diverse set of relationships in 2020.

We're out of 114% prorated on on a go or a 3 year of $60 billion community benefits plan, which is really helping our communities.

And through the second quarter 'twenty, 1 we've originated about $17 billion of PPP loans, which really have supported our business class from employees and our communities.

Active and increasing our engagement with regard to ESG very focused on energy I'm sustainable related financing where in the second quarter.

January from 2020.

We've invested $2.4 billion on clean energy on sustainable related financing look forward soon in the next few weeks for the second true of CSR and ESG report, which I think you will enjoy it.

So now if you will flip whether it's the slide 7 I just want to point out some of the key performance highlights.

The very strong quarter, we had taxable equivalent revenue of $5.6 billion.

Which was up a strong 4% sequentially from first quarter.

We had $5.6 billion in tax rule.

Equivalent of Tom.

Revenue, we had the revenue and net income was $2.1 billion, which was the 30%.

Linked.

Very proud of our $1.55 of diluted EPS, which was up 31% sequentially and a strong 89% over last year.

Return on the average tangible common equity adjusted.

It was the very strong 24, 7 but even if you take out of the reserve release is still a really really strong 29% of which is driven by a strong performance of insurance investment banking wealth card on payment fees and <unk>.

On a commercial real estate related income.

We had strong performance.

In terms of revenue as I said, it did drive a 2% increase in adjusted non interest expenses due to incentives, but frankly this is exactly the kind of expansion of increase we liked the house when you put that together revenue unexpected as we had a solid adjusted operating leverage of 2% and our adjusted P. P. On our was too.

The $5 billion of 6% compared to last quarter.

Our asset quality is great.

We performed well in CCAR, which allowed us to be on a position to propose a 7% increase on our dividend to a record 48 cents.

On a per quarter on merger integration is going very very well.

And top performance and improved economic conditions give us confidence to reduce our CET 1 target of $9.75 per cent and Daryl will talk more about.

How about that.

So our.

Our total performance for the for the quarter, we think was very very strong and very comprehensive.

We feel very very good about if you'll flip with us to slide 8.

I just want to point out a few of the selected items that impacted adjusted income.

First we had merger related and restructuring charges of <unk>.

297 million $2.28 at the attacks, which rose the diluted impact of 17 cents.

Incremental operating expenses related to the merger I'll point out again on these are merger related expenses, but don't meet the town of a definition of merger related and restructuring charges, but theyre not on a run rate going forward.

The 190 million on 146, we're gonna have to tax on the 11th diluted negative impact.

As I mentioned, we did have a 200 million all of our contribution to our true as foundation through of charitable fund, which had on <unk> 11 impact.

The impact.

I would point out and the merger related and restructuring charges.

Included in that is a $111 million after tax accrual related to our voluntary separation on retirement program, which was the program that were offered in June.

We had approximately 2000 teammates that elected to participate.

These were totally voluntary decisions on their part.

And I want to really think on appreciate those teammates for their commitment and support to help US build the foundation of truth. This program does help us reduce cost and create capacity.

To invest in needed services for our clients.

It's really part of our overall intense focus on re conceptualizing our businesses to.

To thrive in today's world requires a deep commitment to continuously reevaluating yesterday's activities and the expenses associated with that so that we can afford to invest in new activities for today's demands.

Let me turn it to be able to talk about some or all the trade are key trends.

Thank you Kelly and good morning, everybody.

You can see on slide 9 we continued to experience robust demand for digital banking services as our clients look for more convenient and more effective ways to transact and manage their finances.

The pace of digital adoption has been especially rapid on mobile.

Since the second quarter of 2020, our active user base has increased by 9% over $4.1 million active clients.

The digital growth stories, it's a lot more than that as of just 1 dimensional in addition to growing active users we're deepening our relationships as we accompany clients along their digital journey.

By providing the premier digital experience, we build trust with our clients.

They then and trust us to facilitate a broader range of transactions.

Example of this is on mobile payments, where zelle transactions were up 60% compared to a year ago.

We're also excited about the rollout of our new digital experience.

At the beginning now ahead of our physical conversion after completing the successful internal pilot, we're beginning to migrate the truest digital offering to a small number of clients rollout will happen on a series of waves throughout the back half of the year, we anticipate that up to half of million clients could be on the digital platform by the end of the smart with more of.

To be added in each successive wave.

On the right you can see just 1 example of how we're using digital meat.

That's where they are in the small business space the.

The single sign on focus for clients with personal and business accounts is a significant benefit, allowing our small business clients to toggle back and forth seamlessly between their business and personal finances. Our clients also be able to customize their dashboard of notifications. So they can focus on what matters to them.

In addition, our fraud detection technology will help small business clients with from fraudulent transactions for a more secure banking experience.

The attractiveness of our overall approach is that we've created a common platform for retail wealth on small business, which creates agility of the seamless client experiences, but the experiences of our tailored and designed for the unique needs of each client segment.

Now, let me move to slide 10.

Forget low growth remains challenging in the second quarter, given the strong liquidity levels in the marketplace and amongst our clients supply chain disruptions of low levels of rates, which are driving the high levels of refinance activity average loans decreased $6.1 billion compared to the first quarter driven by a $3.3 billion day.

Klein in commercial loans and of $2.2 billion decline in residential mortgages.

Average C&I balances decreased $2.4 billion, reflecting of 1.3 billion impact from PPP forgiveness, and $1.2 billion from lower dealer Floorplan Outstandings.

Nevertheless, we're encouraged about potential green shoots in C&I, excluding the impacts of PPP and dealer Floorplan C&I loans grew modestly due to an increase in production and stable utilization late in the quarter.

Several of our markets on specialties saw growth, particularly middle market.

June production and corporate institutional group was the highest it's been since the merger.

The June production on the commercial community Bank was the highest it's been in 18 months. If you exclude April 2020, which was obviously.

Unusual due to elevated line draws.

Our revolver exposure continues to grow by month.

Evidence of our relevance and that our clients are building capacity for investments or expansion.

Average consumer loans decreased $2.7 billion as a result of ongoing refinance activity in our residential mortgage and home equity of direct portfolios.

Residential mortgages held for investment decreased $2.2 billion as prepayment speeds remained elevated despite some moderation from first quarter levels.

We're expanding our corresponding capacity and transferring some correspondent production to held for investment to support future growth.

We also believe prepayment speeds will continue to moderate.

Indirect remains a bright spot due to growth on our prime marine RV portfolios and light strength.

Overall loan growth remained elusive in the second quarter, both for the industry of per truest.

As I indicated earlier, the we're seeing evidence of things beginning to turn and our execution is improving at true us with a keen focus on balance sheet diversity of prudent risk management.

Long term low growth of an output and are highly correlated to economic growth and we firmly believe the economy, particularly in our key markets is on a very solid footing and are on the expansion trajectory.

I'll, maybe turn to you on slide 11.

Okay.

Average deposits increased 3.4% compared to the first quarter.

Largely due to the continuing the effects of recent government stimulus.

We experienced strong deposit inflows, while maximizing our value proposition to clients outside of rate paid is the average total deposit cost decreased 1 basis point sequentially to 4 basis points.

More importantly, <unk> continues to resonate with clients.

During the second quarter, we had a record personal checking account production and added more than 51000, net new accounts, which attests to the strength of our franchise.

We're also doing an excellent job retaining clients is attrition rates from recently closed branches continued to be significantly more favorable than play out.

We believe these favorable client dynamics reflect a robust markets strong digital commerce production and solid execution by our teammates on the retail community Bank.

And with that Darrell, let me turn it over to you for our financial performance.

And good morning, everyone continuing on slide 12, net interest income decreased $40 million largely due to 32 million of lower purchase accounting accretion.

Net interest and net interest margin decreased 13 basis points lower purchase accounting accretion was 4 basis points headwind.

Core net interest margin decreased 9 basis points due to the continued build of excess liquidity, which was approximately $18 billion this quarter as well as the impact of a persistent low rate environment.

Asset sensitivity increased modestly due to the increase in DDA and the favorable deposit mix changes, partially offset by the increase in the investment portfolio.

I would also note almost 60% of our asset sensitivity is from the short end of the curve given the solid upside when short term rates begin to rise.

On slide 13.

Our diverse business mix is a key strength and continues to provide revenue momentum in a low rate environment. Adjusted noninterest income grew 11% sequentially and 13% year over year driven by record results in multiple fee businesses.

Insurance income was a record $690 million driven by strong organic growth and new business excellent retention rates and a firm pricing market organic revenue grew 15% versus the COVID-19 impacted by quarter and we continue to forecast very healthy organic growth.

Given the various uncertainties that exist in the marketplace. This is clearly a good time to be in a business that helps clients manage risk.

Fee income from investment banking reflected strong results in syndicated finance and M&A, where our trading income was offset by 60 million swing in the CVA.

We have been consistently investing and building on our corporate and investment banking business for over 15 years and this quarter's results are a reflection of that.

Record CRE income was driven by strong structured real estate transaction activity or strong performance is also a testament to the CRE teams experience and deep client relationships.

Other income benefited from valuation gains on our longstanding partnerships related to our SBA funds and also investments we've made through our truest ventures unit.

When small businesses when our communities win so we are thrilled with the success. We have had over many years with our SBA program continuing on slide 14.

Interest expense increased $401 million from the prior quarter drivers included a 200 million charitable contribution to the true as foundation and Truest charitable fund to support our purpose to inspire and build better lives and communities.

In addition merger related and restructuring charges and incremental operating expenses increased $171 million.

Due to the voluntary separation and retirement program and Kelly mentioned earlier.

Adjusted noninterest expense increased 2.1% modestly due to higher variable compensation related to the stronger performance of our fee businesses and overall strong corporate performance.

Adjusted Noninterest expense was also favorable relative to adjusted revenue growth driving sequential positive operating leverage this quarter turning to slide 15.

Asset quality remains excellent, reflecting our prudent risk culture and diverse portfolio as well as a stronger economy nonperforming assets decreased 2 basis points net charge offs decreased 13 basis points to 20 basis points of pro forma post financial crisis low.

Lower charge offs reflect improvements in our indirect auto and C&I portfolios as.

As well as an uptick in recoveries.

Or a triple al remains strong at 179% with excellent coverage ratios.

Due to the improved economic outlook, our provision was a negative $434 million and we released 560 <unk>.

Millions of reserves continuing on slide 16 cash.

Capital remains strong our CET ratio increased to 10, 2%. Our total payout ratio was 78% and included $610 million of share repurchases, we continue to optimize our capital stack by redeeming our series H preferred stock.

Our latest CCAR results reflect our prudent risk management and resiliency under stress.

<unk> had the second lowest loss rate in our peer group as well as above average stress P PNR relative to peers.

Our preliminary stress capital buffer, which reduced the 2.5% from 2.7%.

Our strong CCAR results, improving economy and merger progress provide additional capital flexibility on.

Our board will consider a proposal to increase the dividend by 7% to 48 per share in its July meeting.

We also intend to manage to approximately 975% CET 1 ratio over the near term, which would reflect approximately 4 to 5 billion of potential capital deployment.

Either through repurchases or acquisitions over the next 5 quarters turning to slide 18.

We are making steady progress in our integration plan and our risk profile improves with each conversion.

The second quarter, we successfully converted our wealth trust platform. We are very proud of our wealth digital and technology teammates for their hard work in completing this conversion and brokerage platform conversion in February.

More impressively our advisors continue to produce positive net organic asset flows, which combined with strong market conditions produced excellent results in wealth management fee income.

We also performed extensive testing to prepare for the upcoming core bank conversions.

After each milestone we reflect on what we've learned apply those learnings to the future integration activities. This reduces the risk and helps us ensure we get better with each step of the integration.

As we look to the third quarter much of our focus will be on the final preparations for the conversion of our heritage BB&T clients to the truest ecosystem later this year.

Followed by Heritage Suntrust.

Version in the first quarter of 2022, continuing on slide 19.

We are committed to achieving $1.6 billion of net cost saves and continue to make progress across those 5 categories.

Third party spend is down 10, 3% versus the baseline and now exceeds our revised target of 10%.

In retail banking, we remain at 374 of cumulative branch closures and are on track to achieve approximately 800 total closures.

By the first quarter of 2022, including 39 closures, we are expecting in July.

Non branch facility space is down $3.8 million square feet and we're closing in on our target of $4.8 million.

We appreciate all the hard work our teammates have done to keep us on track to achieve these goals.

Average ftes decreased 11% since the merger announcement and with the client even further given the V SRP program.

Acknowledge the savings will materialize after redundant systems are decommissioned in 2022.

We are also making critical investments in digital and technology since the merger closed we have doubled our digital agile teams and tripled our total agile teams, which makes us nimbler and improves our speed to market enhancing our client experience turning to slide 20.

We still expect to incur of total merger costs of approximately $4 billion through 2022, we have incurred cumulative of merger cost of $2.7 billion through the second quarter, reflecting considerable integration work on slide 18.

Looking ahead, we expect these costs to decrease significantly after our first quarter core bank conversion and then drop off entirely after 2022.

Continuing on slide 21.

Our core noninterest expense was $2.95 2 billion in the second quarter. This calculation removes the effects from asset value changes for our retirement plans, our insurance acquisitions and higher variable compensation due to fee income on corporate performance. This makes it much more comparable.

To the baseline expenses at the time of the merger close.

Based on the trajectory of our ongoing cost save initiatives. We are on track to achieve our fourth quarter core expense target of $2.94 billion.

We are fully committed to this target and we were confident in our ability to meet it.

Now I'll provide guidance for the third quarter, we expect total non interest income to be relatively stable versus linked quarter as 1 additional day combined with moderate loan growth, excluding PPP offsets declines in purchase accounting accretion and P. P. P revenue.

Core net interest margin is expected to be relatively stable. However reported net interest margin will continue to decline as a result of diminishing purchase accounting accretion.

These should remain healthy given the investments we've made in our businesses robust market conditions and continued economic recovery.

They will not be as strong as second quarter performance. This is partially due to insurance seasonality, but we would expect solid growth compared to third quarter of last year.

Adjusted expenses should be relatively flat linked quarter, but we would acquire in fourth quarter as lower personnel costs of realized from the V. S. ERP program.

We expect the net charge off ratio to be 25 to 35 basis points given the continued strength of the economy.

Also as a strong credit quality performance continues we would expect further reductions in our loan loss allowance ratio.

Overall, we had excellent operating quarter of strong fee income more than offset modest lower spread income and outpaced expenses to drive 2% sequential operating leverage now let me hand, it over to Kelly to discuss our value proposition.

Just a couple.

Couple of comments with regard the value proposition this quarter focusing on on markets on capital.

We are really very very pleased that 70% of on net new accounts are opened by the new households.

We think this shows market share of gains in migration in our markets and our digital advantage of about half of our new accounts are opened online.

All of this interestingly is happening in the face of large number of branch closures that Daryl described.

We're of client retention is a very strong.

98, plus percent, which is really fantastic on any type of merger as.

As mentioned on our CCAR performance lowered risk in the economy reduced risk in our conversion process I would say all of those girls gives us great confidence to proposal of meaningful increase on our dividend to a record 48 cents and reduce our targets. The EG 1 to $9.75, just wanted to emphasize that again to make sure you get that because that's important.

We also are very confident of achieving as Daryl said are once they expire and the level of net cost.

All of size.

Just on a number of initiatives that are driving the re conceptualization of our business our expense reductions and on.

Industry, leading profitability.

We believe that the combination of that will support our investments in future strategies and leading technology investments.

And finally, if you just flip the slide 23, just 1 of the micro couple of points that are the how the metrics of numbers support that value proposition as we've said before we have a really exceptional franchise.

We have the highest of projected population growth compared to our peers on our marketplaces.

Really good fee income diversity with our investments in insurance investment banking and wealth.

We're really uniquely positioned from a profitability perspective our.

With our adjusted diluted EPS at $1.55 of 89 cents adjusted return on average tangible common equity of the strong 24.7.

And we have strong capital as Daryl described us as well. So if you look at the quarter overall it was a strong quarter based on our strong culture.

Markets Awesome team you know there are plenty of challenges out there of the pandemic is getting better the economy is getting better and overall at true as we fully believe our best days are ahead of growth.

Turn it back to you.

Thank you Kelly before we move to Q&A, though I'd like to quickly turn it to bill I'd like to share a few concluding thoughts.

So might make you feel a little uncomfortable, but sort of bear with me. So given this is kellys last in 50 of earnings call as CEO.

I just wanted to spend a few minutes highlighting his leg of legacy just incredible positive impact on BB&T true us the banking industry and our communities to earn us the 49 year career in banking.

I could take hours to do this but I won't given that we only have a few minutes, but I thought this group of analysts and investors would appreciate who followed his career.

Kelly joined the BB&T of $19.72, and I thought it was great irony that earlier. This week he spoke to our leadership development program individuals' and teammates of joined just the same way you did Kelly.

When he speaks about the benefits of a growth mindset positive thinking choosing to be happy and seeing the opportunities and change just like he just did.

He speaks from his personal experience and his heart.

Kelly's humble roots give him a genuine appreciation for all people.

They've driven as seeds of hope initiative.

The key role on our value of caring, which says everyone and every moment matters.

So the driving force.

With our happiness value.

Positive energy changes lives and he exhibits the daily for our teammates and for our clients.

Kelly became CEO in 2009 of them the depths of the global financial crisis.

<unk> was 1 of the few banks to remain profitable through through every quarter through that crisis.

When he began at BB&T. It was a small bank in eastern North Carolina with about $250 million in assets. When he became CEO of the bank out of 152 billion of assets and today true as it has 520 billion of assets market cap is 4 times during his tenure.

Always a forward thinker Kelly as a purpose driven leader, who steered BB&T through tremendous change not just to survive, but thrive through the great recession, multiple economic downturns and now through a global pandemic on our merger of equals.

In addition to the traversing tumultuous business headwinds RMR. He's never lost sight of his personal purpose, which is to make a positive meaningful difference on the lives of as many people as possible as empathy compassion and leadership.

The tremendous impact on just the name and fairness of few financial education for more than a million of high school students of the tourists.

<unk> foundations childhood literacy, which is of passion of his or her new reading App called work force.

Which is just getting started community service through the lighthouse project positively impacting the lives of more than 20 million people since its inception in 2000 on.

Kelly has always had an interest in it of commitment to leadership development. It's the foundation for the Truest leadership Institute in Greensboro. Many of you have been there has been renamed the Kelly is King center in his honor.

And not only trains executives to become better and more self aware of leaders, but it also all the customized offers customized training at no cost per principles and of certified <unk>.

Many many students at no cost through our emerging leaders curriculum, which is provided in partnership with over 80 colleges and universities.

Kelly is known for saying Theres no facet of society of that cannot be improve the or better leadership.

Before merger on New Kelly well I also listened to these calls Kelly of many of your 50 calls a.

We joined forces with the concept that we can truly build a purposeful company that stood for something better and outpour outperformed with consistency over the longer term Kelly you of the perfect leader to start us on that journey.

Inspirational leadership was a positive catalyst for all of you so with a.

Heartfelt. Thank you for your leadership your contributions to true up to our industry and personally for our friendship.

I look forward, our continued partnership and collaboration with you going forward as you transition to the role of executive Chair for our board of directors. So now we can turn it over to Q&A Kelly. Thank you and I may just 1 quick comment.

There is still a job [laughter].

On.

1 of note that this is also Daryl <unk>.

The conference calls congratulations of Dell, but thank you bill for that I, just wanted to say to all of our audio set of supported us over all of these years it.

It has been on our on the blessing to have worked with thousands of true as to amaze over all of these years to serve our communities and I really really cherish that that opportunity I'll also just say to all of us of banking as the honorable profession.

Serves to help build better lives and communities every single day.

I am humbled and proud to have been a part of it.

Thank you for your of sport, we appreciate it and as I've said, many times I truly believe our best those all of it.

Thank you Kelly Thank you Bill.

Shannon at this time, we're now ready to start Q&A. So if you'll explain to our listeners how they can participate in the Q&A session I'd like to ask the participants to limit yourselves to 1 primary and 1 follow up so the we can accommodate as many of you as possible today.

Thank you, ladies and gentlemen, if you'd like to signal for a question. Please press star 1 on your telephone keypad. If you are using a speaker phone. Please make sure that you're on mute function is turned off to allow your signal to reach our equipment. Once again, we do ask that you. Please limit yourself to 1 question and 1 follow up question again, Please press star 1.

On just signal for a question.

Our first question comes from Gerard Cassidy with RBC.

Good morning, Kelly Good morning, Bill.

The Jordan.

I.

To start off on behalf of many on this call Kelly I would also reiterate bill's a fabulous comments about your career and congratulate you on being an outstanding community spiritual and commercial bank leader and I think you'll be missed by many so congratulations.

On the questions, maybe starting with you Bill can you give us some further color or elaborate on the green shoots that you guys are seeing in the loan growth area for possibly the second half of the year, Daryl touched on as well and where youre seeing some of this of potential growth coming from.

Yeah sure.

As I've mentioned.

Production in June and <unk> on CCP was sort of hitting hitting some high points. So we've started to see a little bit of a little bit of an inflection point.

And <unk> a lot of that came from industrials health care Tech that probably doesn't surprise you on mantech as we think about the.

You know infrastructure. That's that's ahead of US I think energy has the potential for the future of up with that a little bit of the question Mark is probably the light green of a of a green shoot.

And the C C b.

Really good progress in our middle market a lot of on our verticals.

Senior care.

That's really coming back strong.

Our dealer network. So we despite the outstandings are exposure.

The exposure to dealer is going up.

And then just sort of our government services again I don't think those are surprises those are part of the core parts of the parts of our parts of our economy.

Overall couple of revolver commitments were up so as I said earlier I think the capacity of our clients to to to invest.

The the when the sole come I think that's you know that's sort of the question I don't think I think it's a I don't think it's of F. I feel like we're on a we're in a good position whether that manifest itself. So much in the second quarter remember, we still have some of some headwinds with P. P. P.

But our tailwind I think the dealer part will rebound I mean, you'll see the supply chain start to normalize whether that happens at the end of this year of first of next year I don't know, but that will rebound of.

The economy, particularly in our markets are the utilization and just as Kelly mentioned, our just core execution just gets better every day. So I think those are are those of tailwind.

The drawing goodness.

Building on all of those have been on.

The original visits virtually so far this this year and we've talked I guess build of hundreds of your business clients on the feedback and I think that's a really big deal universally has been extremely confident on positive they're all talking about projects that they're working on.

It is as Bill described beginning to show up in the Green shoots I personally think of it really began to show up as we head into the third and fourth quarter on certainly undergo the strong 22, but the confidence level is very very hot Gerard It's Chris I might just add that we had 16 of our 22 regions that were actually positive in C&I growth less dealer.

Score.

Very good and maybe shifting over to the Daryl you talked.

A little bit Daryl about the possibility of bringing the loan loss reserve down you mentioned that in the DFAST test of the second best in terms of on the on the credit losses I see if I recall your day, 1 reserves back in January of 'twenty, 'twenty, 1 and 6.1% can you give us maybe.

Some color on and maybe Clark as well about the outlook that could that reserve level fall below the day, 1 now that the outlook might be even stronger today than it was in January of 2020 you know excluding the pandemic situation.

Yeah. Thanks for the question Gerard what I would tell you is is that when we established our CSO day, 1 number we weighted our pessimistic scenario of 40% I mean, if you look at the economy now in the growth that we're seeing in the outlook.

All of our weighting is much less than that so as the economy plays out throughout this year. There is a chance that we could pierce through and maybe go over or go under our receipts of day..1 number that we started with in January of 2020 of from that perspective, I think you have to take it quarter by quarter and see see how it's performing but right now of the economy.

To be going on really strong and gaining momentum.

Great. Thank you.

And our next question will come from Mike Mayo of Wells Fargo.

Hi.

You don't have revenue synergies built on your final numbers, but it seems like you might have some revenue synergies here, so specifically I'm asking.

The record and insurance and of the record in investment banking now how much of those revenues are driven by cross selling.

The <unk> versus just the core organic growth and I have my.

Insurance the analyst colleague at Wells Fargo Securities to ask on that second part of the lease.

Yeah Yeah.

Oh go ahead.

The go ahead.

I was just kind of build them on Mike.

Question, Oh, I'm, sorry on site.

Yeah.

Okay.

Hopefully yes.

Okay.

Well, let's see here I think.

So the 15% the corner.

Yeah.

Okay.

Yeah.

I will be happy to do that maybe maybe a bill on I'll take the the earn question first and then I'll jump back in.

And answer your question Elyse.

On the arm perspective, all of I will tell you. It is it is going really well, where we have been for the past 18 months of the behavior of building kind of phase.

When I look at this quarter I see very strong contributions from the commercial community Bank you know.

2 our strategic side, which is the C O G free capital market services I see a very strong.

The up 20 per cent and of growth perspective us of any mortgage up you know in the.

Mid thirties.

The C O G, which is back to insurance and to a few other areas of well over 100% in terms of in terms of the growth.

In fairness, we have some other areas that have some opportunity.

But I would I like what I see and I think what we're building really is the is the right Foundation for you know of behavioral jumping all phone across across the company is something that bill and I have been personally monitoring and working with each 1 of the business lines of where we're in kind of still of of.

Build out process from the term from terms of understanding of sort of what's possible.

And we're really trying to push a lot of business leaders to think bigger because we think the opportunity is is a very substantial below on listen anything you want to add to the yeah, I think Chris out of it exactly right and remember Mike in the news cut across a lot of different parts on.

We like to we like the thinking about the term of integrated relationship management, you know sort of that it cuts across clients and we're meeting clients' needs and working backwards, but just you know just of like give you. An example of sort of in the converse of commercial community Bank.

We doubled the number of transactions that we did in the quarter versus last quarter on these might be where we were left lead this might be where we were in an M&A transaction.

And the pipeline is also about double where it was before so as a percent of the growth.

As a percent of the total its a smaller percent as a percent of the incremental growth. It's a larger per cent and I think that's kind of continuing to grow the.

Momentum of the cultural alignment the all the parts that we built as part of 1 true us I just feel I feel great about it and that's why I think by the momentum will continue on and you'll see it in just you know the way I think you'll see it is versus the revenue synergies specifically, what youll see it as an incremental growth relative to others.

So coming back of.

At least of your question.

For emphasis with the comments that.

To sort of a white sheet of paper to this business back in early 18.

Brought into the consultant and really begin to break the business down and look at all of the the opportunities to put the pieces back together and I think what you're seeing here is.

A 3 year.

And of the 3 year period of where we have really taken a lot of steps to build back of business in the most effective way possible in a really good operating environment. So I would have to say this is fundamentally the best quarter I have seen in this business.

In my career and I've been working on this business a long time.

And we.

We are by the way cranking off as we conclude the first of.

3 year period, where we're kicking off another 3 year period, because we think theres more of that we can do and will do to improve this business, but to get to your question.

You know, what's really driving organic growth as you know pricing in the industry I think probably peaked in the.

Fourth or first quarter of of fourth quarter of 20th first quarter of this year. It was sort of on the up 7 per cent range, where we're now if you read all of the industry information kind of in the up call. It 6% of kind of range, but we really believe while rates have moderated little we believe that it's still going to be a very positive throughout the balance of 'twenty.

The 1 you might have potential for a little slight moderation, but we still think its very strong in the up category you know in the up.

You know mid 5% to 6% kind of category and we just entered hurricane season by the way in the fall as wildfire season. So you never know it could just you know hold or even increase from there depending on what happens our client retention and retails at 91.8 per cent and that's up a percent over the last year.

And then the hard market environment favors wholesale more of that is of that is very much of a positive on.

Wholesale business of 86, 1%, it's up 2% also very strong, but we are continuing to see risk shift from the standard market. The supports retail you know the.

Wholesale probably the most notable driver of organic growth was.

Just on new business production and that is driven just by core of GDP growth and so we're in the up portion of the V. Right now from the economic perspective, and so 24.5 per cent business of new business growth is double the best I've seen historically year to date were up 19, so we get our organic growth.

Right you know the total growth rate of 18 point, hey, but when you strip out acquisitions organic of of 14.14 8 that we.

We are including in this quarter 29 million of revenue from prior acquisitions that does not include constellation, which we just closed on July 1 but it includes if you've looked at annual run rates about 130 million of prior acquisitions, we did through a number of 7 or 8 through the back half of last year and the first part of this year.

So that's the sort of the organic growth question, but to get to your your outlook question.

Remember, we were going from our seasonally strongest quarter of the year to our seasonally weakest quarter from second to third so we expect commissions to be down about 8% you know going from second to third.

And there's still certainly uncertainties, but we just think of the environment. Looking forward is still very favorable when you think of improving the economy was the GDP and improving employment, which really drives our a b of business increasing pricing as we just said in the sort of 6 per cent range and then we benefit from the shift to the to the.

N S market the of our very strong wholesale business, because while we operate of diversified model quite frankly.

We think pricing is going to continue to be strong.

You usually in the sort of the drivers in the industry. This quarter umbrella and excess is up 11.6, D&O was up 11 commercial property, which we have a disproportionate exposure to is up 9.6, that's really good for us.

So we expect you know for the third quarter high single digit organic growth.

In our weakest score that that would be the highest growth that I've seen historically period, but we're seeing we're expecting high single digit growth in our weakest quarter, which are which I think is fantastic for the business.

And just remember we did close of constellation July 1st and that adds of $160 million in revenue and really helps us form 1 of the largest programs. The divisions at wholesale units of any of any wholesale provider going forward.

Great well, thank you very much.

Sure.

And our next question will come from Betsy <unk> with Morgan Stanley.

Hey, good morning.

Okay.

Hi.

Chris just a quick follow up on that $160 million is additives side of your 8% QQ.

Is not including that acquisition just wanted to I just want to clarify that.

I know it it is it is in our forecast so what what you would typically saying I mean last year you have the same second or third we would drop maybe 75 million. This year you would've seen the 90 million drop but with the addition of this number you you'd see something like of a 50, because you've got 160 annually.

Got it Okay and then on just the expenses associated with constellation that we should be thinking about anything there too.

No no no.

Now there's there's the expense synergies. So so this business actually the margin is accretive to our overall margin. So I think there are expenses, but the the synergies over the coming out.

I think the operating ratio initially is like 70%.

For constellation if you went ahead and the expenses with the transaction here in the room day.

And generally right Betsy.

Generally it's about a 12 month integration.

Yep Yep now you've done a great job of it.

Moving the operating efficiency of that business over the past several years. So congratulations to you on that I did have a couple of other questions first off on imitation is often the best form of flattery and there's a plenty of people entertaining you on your specialty finance lending focus that has been a hallmark of T. S. C for many.

Decades could you give us a sense as to how you were thinking about that business and where you wanna be leaning in to 2 growth.

That's absolutely Betsy.

Thank you for saying that that is of that has been a focus of ours. The you know, we really think of it in terms of on.

Point of sale and when we talk about you know insurance and wealth of C. O G. We probably should add.

Sort of the point of sale focus there are of course, Sheffield and you also have live stream now we have a group of partnerships that are a little bit more indirect.

Because of clearly changed by the consumers they no longer come to their bank to purchase there there are items I buy on the spot and they want it just that way and now they want it.

The digitally just that way as well so we're.

We're working on all of the above and I think we have opportunities within our current.

Business to expand verticals like you know hearing AIDS and do more in the way of trailers and that kind of thing. So there are opportunities there, but I think we're also looking at other opportunities to expand you know like you know in the home improvement of space would be a good a good place there's a lot a lot going on there so.

It's it's a it's an area, we're really focused on and something that we're really excited about and it's the industry that has you know in the north of 20 per cent kind of growth rate. So.

We're very excited about the opportunity.

Okay. Thanks, and then Carol just a couple for you Juan Ticky-tacky..1 is just on the fees. You mentioned you know down sequentially, we talked about the insurance seasonality, but up year on year could you just remind US you know what kind of base level of fees Youre looking at year on year, because I thought there were some 1 timers in it last range so to make sure I'm on the rate base.

You know if if you look at vs. Prior year will probably be up anywhere from 5% to 10 per cent range in that neighborhood.

We did have some some other income in there from our venture capital portfolio was there, but the honest with you. We continue to invest in that net continues part of run rate as we move forward. So it's gonna be lumpy back and forth, but it is going to be continuing to grow over time from that.

Okay, Alright, that's helpful and then just on.

On the NCO ratio guide of the 25 to 35 I think you came in this quarter around 20 or so in credit looks great. So is the you being conservative with the 25.35 or is there something in the book that you would suggest you're expecting a little bit of a deterioration of Q2 on the ratio.

Betsy. This is Clarke is primarily seasonality in the second half of the year, we always have some seasonality uptick in some of the consumer portfolio. So we're assuming we will have some of that normal trend and I would just also say this was an outstanding quarter. We did have all time lows and are things like our auto business, we had really low.

C&I on higher recovery. So we had some really strong tailwind this quarter, but all of that being said, we still feel like we're going to have very strong loss performance as we move forward given what we see today.

Got it okay. Thanks, so much and Kelly it's Ben.

So now I'm on working with you over the past several decades so.

Very much appreciate the time that you spent with us and bill looking forward to working with him more closely going forward. Thanks.

Okay, you bet cent per share them.

And our next question will come from Matt O'connor with Deutsche Bank.

Hi, Good morning, I, just wanted to circle back on the expense target for 4 Q are the 294, I guess first a clarification does.

Does that include the impact of the insurance deals or I would say, we got the pop it up for the 1 that closed in the Delaware town.

Yeah.

Yeah, Matt in our deck, we have that waterfall slide where we actually.

Take our adjusted numbers and we basically back out 3 things are nonqualified numbers, we kind of back that out the back out the insurance acquisitions and run rates, because they're trying to compare back to what they look like in and on.

19, and then with a huge growth that we've seen in our.

C G area in our wealth area and our insurance area I'm, just organic growth that's great to have those revenues, but those revenues do have expenses, but those are good expenses, but we're adjusting for those as well. So that's what we're adjusting to to try to get back to what we looked like when we put the merger together of 19.

Yeah, Yeah that 5 of 21 of our pay Taiwan is very helpful. But when we when we see the 14th of 'twenty, 1 adjusted expenses well.

Will it be the 2.94 or we have to add that 20 million for insurance plus the 1 that you've got the debt.

Yeah, it's gonna be that the the number the 2.94 will be the number on the right at the end of the waterfall. That's at the core expense, it's not a run rate number of run rate number is the adjusted number which basically backs out your merger and restructuring charges and your incremental M O.

That will tend to basically come down dramatically. After the first quarter of next year, when we finish our core bank conversions and go away totally by the end of 'twenty 2.

Ah Okay, I'm sorry, just the.

Just to clarify that like when we see the <unk> cost base.

We will take out the merger charges will take out the incremental cost.

And should we still focus where we see the core number or the adjusted number.

The adjusted number is the run rate number on a go forward basis. All core of does is basically try to back out because we're a dynamic company that is constantly changing and growing and doing things we have to back out our expense bases that basically of benefited over the last 2 years.

Ours of coming together. So we're trying to show you that we're getting the 1.6 off of that original expense base by not penalizes us for the additional fee revenue growth that we received over the last couple of years in acquisitions that we've done.

Okay, all right that makes sense sorry to make you go through all of that and then as we kind of think through next year do we take that.

You know the <unk> level annualize it and obviously, you've got some more cost saves coming maybe a little seasonality in <unk>, but.

Can you run rate that 40 level and then the lower than that for next year full year.

Moving to get into the $1.6 billion cost saves so we'll get that by the end of 'twenty 'twenty 2.

We have a lot of things going on in the company right now besides of those 5 bucket of savings, which we're making tremendous progress and Kelly talked about the voluntary separation on retirement program that we announced.

That basically we have some teammates that volunteered to go away. They basically the first wave of that will happen on 930. So you see the impact of that in the fourth quarter that will continue to come down over the next couple of quarters of the way, it's probably or 3 or 4 ways overall to get everybody that.

Volunteer to go to exit the company and then Kelly and Bill talked about you know basic.

Basically going through all of our processes.

Adjustments that we're making debt have come together and get more efficiencies and scale. When we came together and 19, we knew what we knew then we know a lot more now and we're continuing to make our company much more efficient and improve and we'll have the savings from that.

All through 'twenty, 2 but to be honest with you, we're creating fuel that basically we're not only flow to the bottom line, but we're also continuing to make a lot more investments in our businesses and wealth insurance <unk> and other areas and we're also investing in technology and digital with this kind of savings that we're getting.

Okay. Thank you.

And we'll now hear from John Mcdonald of Autonomous research.

Yeah, Hi, I wanted to follow up on the new capital target Daryl said creates 4 of 5 billion of.

The incremental excess capital I just was wondering bill of Kelly how are you thinking about that between M&A opportunities and share repurchases any thoughts you could share on that.

So John our our waterfall of priorities has not changed in all of these years.

And that's why you know we would think of good stable long term investors would appreciate the number 1 is always the organic growth. That's the highest payback for you shareholders of the succor gives a good stable long term increasing dividend payout.

Third is M&A.

And we have good opportunities there and that's been very very encouraging.

And fourth as buyback and be willing to do that aggressively when it's appropriate.

Okay.

Hey, John just to emphasize on until he said it I mean and you see in our results from in our organic opportunities are significant.

So what we see with our markets, where we see our ability to invest all of it.

And so that's that's going to be priority, 1 and it continues to enhance.

Okay, and then just the follow up on that is the target. We should think about kind of for the next year or so is that how youre thinking about it like kind of maybe moving down over the next year to that 97.5.

Yeah, I think John the you know what we've said consistently is as the risk of the merger comes down and our confidence on the economy goes up.

We evaluate that we'll evaluate that target. So I think we're gonna be on that trajectory and.

I mean, it would be logical that our confidence is going to improve on the merger and improves every day Daryl outlined a pretty good chart of the things that we've been doing and then we'll all look and see how the economy is doing so we don't we don't want to ever time bound that decision, it's really time bound by what's happening in the in our company on what's happening in the in the general economy.

Okay fair enough. Thanks.

Shannon I think we've done the next question.

<unk>.

Our next question.

Yeah.

Thank you our final question will come from Jonathan <unk> of Evercore ISI.

Good morning.

Just on that on the M&A front I know I just didn't get it that the art and see some good opportunities there.

Could you just give us your updated thoughts on.

On that from what type of M&A are you most interested in and then separately I am curious to get your thoughts on president by the executive order, which seems to be implying greater scrutiny around larger bank deals wanted to see if that makes you think of any differently about future deals. Thanks.

Yeah, John on the on the M&A side, I think it will be consistent with the things that we've that we've seen I mean, obviously in the insurance side, we've had really good.

Experience, there and I would expect that to continue.

We talked to and you know of Betsy's question about some of the enterprise payment some of the opportunities wherever there are some of the point of sale I mean things that have been important to us strategically digital perhaps but things have been important to of strategically.

It will be consistent I mean, it would be we won't go sort of off track from our from our core of core consistency and as it relates to you know.

The President bottoms thing you know the.

As it relates to our business I mean, let's say maybe you can take the large bank M&A off the table, we've already done 1 of those.

So we feel we feel really good about that but as it relates to our business. I mean, this really plays well to our sort of core middle market business. I mean, if you think about the place where we offer advice them or we see activity in the future. We think we're actually really really well positioned.

Great. That's helpful. Bill and then separately just on your systems conversion could you just give us the status update on where you stand on your core deposit convergence system I'm just I want to confirm are you definitely moving to a new system and not on legacy Cisco when it comes of the core.

The deposit banking system, and then where are you on that progress in that actual that part of the tech migration.

Yeah, Yeah, Daryl outlined in that and the 1 chart sort of all the different components that we're doing as it relates to the core conversion you know where all.

A lot of them there on the fall will will convert the heritage BB&T clients on the first quarter, we will convert.

Convert the of the core S T. Our clients and that's on a much more agile platform that exists today. So we're going to have a lot more flexibility on the things that we can do in the movements, we can make and the.

Assimilation of acquisitions, the ability to leverage a P eyes and do more things with that platform and we are we're absolutely on track and they were as you can imagine we are monitoring this on a on a daily hourly type basis.

We're in just about in the dress rehearsal part for the fall, where well end of the U T and C. S E testing.

Feel good about where we are.

Great. Thanks, Bill and Kelly I wish you all of the best it's been a great ride and you should be proud of.

Thank you John I appreciate it very much sort of sport.

Alright.

Conference Fortunately.

That concludes our call. Thank you Shannon and thanks, everybody for joining if you of any additional questions.

Please feel free to reach out to the Investor Relations team. Thank you for your interest in Truest. We hope you have a great day Shannon you can now disconnect the call.

Thank you once again, ladies and gentlemen that does conclude today's teleconference. Thank you all for your participation.

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