Q3 2021 Truist Financial Corp Earnings Call
[music].
Please standby we're about to begin.
Greetings, ladies and gentlemen, and welcome to the choice Financial Corporation third quarter 2021 earnings call.
Currently all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
As a reminder, this event is being recorded.
It is now my pleasure to introduce your host Mr. Ankur Vyas Jewish Financial Corporation. Please go ahead Sir.
Thank you Alan Good morning, everyone welcome to Truest third quarter 2021 earnings call with US today are our CEO Bill Rogers and our CFO Daryl Bible. During this morning's call. They will discuss truest third quarter results and also share our perspectives on how we continue to activate truest.
Purpose, our progress on the merger and current business conditions.
Clarke Starnes, our chief risk officer.
Beau Cummins, our Vice chair and John Howard, Our Chief Insurance Officer are also in attendance and are available to participate in the Q&A portion of our call.
The accompanying presentation as well as our earnings release and supplemental financial information are available on the truest Investor Relations website, IR Dot truest dot com.
Our presentation today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slides two and three of the presentation regarding these statements in measures as well as the appendix for appropriate reconciliations to GAAP.
In addition, <unk> is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference. Transcripts provided by third parties. The only authorized live and archived webcast are on our website with that I'll now turn the call over to Bill.
Thanks, Oscar good morning, and thank you for joining our call I hope everyone's well and safe.
I'm very pleased by true as continued progress on our solid third quarter performance, our quarterly results reflect the diversity of our business mix, which drove strong fee income and help overcome continued softness in net interest income credit quality was outstanding resulting in another provision benefit.
Loan growth was modest excluding PPP generally in line with our expectations. We also achieved a major integration milestone this past weekend and we'll share more details on these topics during the presentation.
Although move you to slide four.
I'd like to begin with our purpose, which is to inspire and build better lives and communities. We believe our purpose driven culture is the primary factor behind our success as a company.
Our purpose defines how we do business everyday and it serves as a framework for how we make decisions are.
A recent example of this was our decision to remain open during our conversion last Saturday. So we could care for our clients and address any questions to my knowledge. That's the first for a major systems conversion such as ours.
I've said in our culture purpose performance teamwork and a client first mindset, all coexist and there's no better evidence of that in the extraordinary success. Our teammates delivered this past weekend and our most significant merger milestone to date details of which I'll cover shortly.
Slide five describes that we are living out our purpose and highlight some of the notable progress we've made during the quarter.
During the pandemic philanthropic, giving was a natural way to put our purpose into action due to the effects of the coronavirus on our clients teammates and communities. Our purpose is much broader than philanthropy. We develop this slide around major themes contained in our CSR and ESG report because they are the topics that are most important to all of our stakeholders.
<unk> and our shareholders.
I'll cover every point on the slide let me just highlight a few we continue to make.
Make strong progress against our $60 billion community benefits plan currently at 112% of target, including the ongoing impact that tourists community capital provides our communities with regards to affordable housing access to healthy food and education and investments in job creation in small business.
<unk> announced that all elementary school students nationwide will soon have access to workforce universe of digital early.
Literally program I'll talk more about this shortly but we migrated 7 million clients to the new true digital banking experience, which includes enhanced digital investment and money management capabilities personalized insights and a holistic personal financial management tool.
We committed to increase diversity in our senior leadership roles at least 15% by 2023, we're currently at almost 14% and clearly on track.
Partly long term the way we create a more diverse senior leadership organization by recruiting diverse early talent, and then developing retaining and promoting overtime and for early career program hiring in 2021, 64% of the seats are true is fulfilled by diverse candidates.
All of this progress combined with enhanced disclosures has resulted in solid improvements in our ESG scores.
Lastly in a few weeks were released our inaugural Truest Tcf Day report.
Our teammates and I are very proud of trios and all the ways, we deliver on our purpose so turning to the third quarter performance highlights on slide seven.
We earned $7.0 billion or $21.0 earnings per share for the quarter on a reported basis on an adjusted basis, we earned $10.0 billion or $43.0 a.
$43.0 per share adjusted EPS increased 46% versus the same quarter last year and is largely driven by the provision benefit sequentially.
Sequentially EPS declined 8% as we had a greater benefit from the provision last quarter and seasonally stronger revenues last quarter.
We had strong returns, including a $22 six adjusted our OTC E. Excluding the reserve release adjusted ROE TCE was still very good and north of 19% Rev.
Revenues totaled $11.0 billion fairly stable compared to last quarter on an adjusted basis year over year revenue growth was 2% as much stronger fee income offsets in almost 30 basis point decline in margin and an 8% decline in loans a reflection of this unique environment that we're all in.
The stronger adjusted fee income, which grew 12% compared to a year ago did drive slightly higher expenses than expected, but our P. PNR is broadly in line with our expectations.
Asset quality continues to be an excellent story as we outperformed our net charge off guidance with lower charge offs across C&I combined with strong recoveries.
During the quarter, we were pleased to increase the dividend, 7% when we completed the constellation acquisition, which had a very good first quarter with truest insurance.
We announced the Street's strategic acquisition of service finance.
Which will close later this year Daryl will share some additional information on service finance, but it's broadly a reflection of true of skating to where the puck is going and partnering with the leader in home improvement point of sale lending.
We also completed.
Our retail mortgage origination conversion some benefits, which Joe will also highlight later.
Last but certainly not least I'm very excited to report this past weekend, we completed a major phase of our core bank conversion.
After a lot of intense deliberate thoughtful and purposeful preparation by our team we were able to stand up the truest technology ecosystem and migrate all heritage BB&T retail wealth and business clients to it.
Event went extremely well and there are a number of notable positive impacts for clients and teammates starting this past Tuesday over 2500 heritage BB&T teammates, we're able to log onto the new tourists commercial lending ecosystem for the first time.
Because of the conversion to Salesforce client management and sales pipeline system is now directly connected to the <unk> lending origination system, which allows for better communication and workflow across the deal team and visibility of the progress at alone all in one place. These upgrades also lay the foundation for future digital innovation.
We're now able to offer <unk> products to new clients into heritage BB&T clients through our branches and digitally through truest Dot com included in our new true is ready now loan small dollar lending solution for existing clients to cover emergency financing needs between $101000 consistent consistent with our belief on the importance of.
Emergency savings.
We upgraded our ATM contact center and digital payment capabilities across a number of dimensions, including more client self service improved authentication and operational simplification.
While this was not a physical branding event the conversion places us on excellent footing for the final conversion in the first quarter of 2022 when heritage Suntrust clients will transition to the truest ecosystem in all branches will become truest.
Again, I want to congratulate our teammates on a job well done they prepared with intensity and purpose for multiple quarters, they learned and applied lessons from previous conversion work at work non stop this past weekend and delivered a seamless conversion I really could not be more proud.
Now lets go into slide eight.
We have three significant items that negatively affected earnings during the quarter first merger charges totaled $132 million after tax lower than last quarter.
Cause higher voluntary separation of retirement program cost were reflected in the second quarter.
This V. SRP program is one of the many components of our overall cost saving goal.
Approximately half of our 2000 teammates who elected to participate left on September 30th and I cannot thank them enough for their long standing efforts to build the foundation of true us by helping create two amazing companies and BB&T and Suntrust and then helping bring true as to life during our almost first two years of existence.
Incremental operating expenses related to the merger were $147 million after tax as a reminder, these are merger related expenses, but don't meet the technical definition of a merger related and restructuring charges and will not be part of our run rate in 2023 and beyond.
Also we had a onetime professional fee accrual that met our disclosure and adjustment threshold totaling $23 million. After tax. This fee was incurred to develop an ongoing program to identify prioritize and roadmap teammate generated revenue growth and expense saving opportunities as part of the merger and beyond this helps ensure.
Sure that will achieve our 2022 cost save targets. It's also fuel for creating more capacity for investments in the future. It will also improve the client experience simplify our processes and creating more engaged and energized workforce our teammates generated more than 55000 initial ideas, which we consol.
Sedated narrowed down to approximately 1000, and we're building the execution plan ultimately our goal is for this to be an ongoing way of how we do business a true us empowering our teammates to identify and execute on ideas to improve our company.
The total impact on these three items was 22 per share.
Moving to slide nine as we've noted <unk> is the first large merger in the digital age. So we're highly focused on ensuring a smooth transition for our digitally active clients.
Our new <unk> digital experience reflects two of our core digital and technology principles co creation with our clients and failing fast learn flat fast we.
We built this new platform.
Directly on clients' feedback and we're introducing it in waves learning from each release and getting better every time, we made great progress in the third quarter, inviting approximately 7 million retail wealth and small business clients to migrate to the truest digital experience through September.
But half of those clients have started and use the platform in lieu of their heritage App.
By the end of this quarter our goal is to migrate all digital clients. So the truest digital platforms.
We've received ongoing feedback from our clients and incorporated opportunities firm improvement iteratively over the course of the migration, which has resulted in improved client experience over time. This derisk our core bank conversion it makes to us the first to delink. The front end conversion from the backend a patented approach we can leverage for future.
Your back end innovation.
As you can see on slide 10, we continue to experience healthy demand for digital banking services as our clients look for more convenient and effective ways to transact and manage their finances.
The pace of digital adoption has been especially rapid and mobile active mobile users in zelle transactions are up 11% and 58% respectively year over year.
Last quarter I highlighted that we are creating a common core digital architecture and platform for retail wealth and small business clients, which creates agility and seamless client experiences at ones that are tailored and designed for the unique needs of each client segment for our wealth clients, we provide a differentiated digital client experience.
That reflects their relationship with truest and integrated platform will provide a one stop shop for their holistic financial picture, including a unified investment portfolio experience that is agnostic to whether the account as a trust or brokerage account holistic financial planning with external account aggregation and the ability to secure.
Store in exchange documents with their adviser and the same access to low cost digital and automated investing that we now offer retail clients.
Turning to slide 11.
Absolute basis loans declined $6.0 billion sequentially. However, if you exclude the impact of PPP forgiveness average loans increased $7.0 billion or two 3% annualized consistent with our outlook.
When you Peel back the onion there are some good trends, but we also have headwinds ppb declined $4 billion on average in the quarter and dealer Floorplan declined an additional billion, we expect PPP to decline an additional $2 billion or so on average in the fourth quarter dealer.
Dealer utilization is about 25% well below historical averages we've.
We've been somewhat cautious on CRE, although we're beginning to see opportunities in that space that meet our risk appetite and portfolio diversity objectives, even so that portfolio declined $3.0 billion sequentially. Excluding these items commercial loans increased $2.0 billion or <unk>, 9% sequentially.
So we're seeing some improved momentum more banking regions are experiencing core C&I growth pipelines in the commercial community Bank and CRE businesses continue to grow and our revolver exposure also grew 2% sequentially evidence of our relevance that our clients are building capacity for investments on expansion.
Picture, our corporate and commercial clients remain optimistic, but labor shortage shortages and supply chain issues are affecting their business is no different than us.
Net net we believe there is meaningful upside to the C&I growth story as the economy continues to improve pandemic related disruptions subside and the liquidity liquidity related distortions from ongoing government stimulus debate, but the timing of all this is difficult to predict.
On the consumer slide mortgage has shifted from a shrinking to a growing portfolio, reflecting increased operational capacity slower prepaid speeds and our tactical decision to balance sheet correspondent production. We're also seeing good performance with indirect auto light stream, Sheffield and credit card all of which are growing versus last.
Quarter.
So turning to slide 12, we added this slide this quarter to provide a little more color on growth and headwinds for average loans. Since there are several significant moving pieces.
Long term loan growth as an output and highly correlated to economic growth, which we believe is on firm footing, particularly in our markets.
We also continue to pursue tactics and strategies to capture more than our fair share of loan growth within our risk appetite diversification objectives, including deepening our lending relationships with our wealth clients, increasing our digital and point of sale lending capabilities and expanding our wallet share within certain corporate and commercial clients.
Turning to slide 13 average deposits increased $11.0 billion or one 6% compared to the second quarter largely due to the continuing effects of recent government stimulus more importantly, truth continues to resonate with clients. We continue to make solid progress with quality account growth year to date, our net new personal D D.
<unk> accounts grew almost 50000 significantly higher than last year.
New business DDA is up 11% year over year. In addition client attrition from closed branches continues to be very low. This performance reflects excellent execution by our retail community bank teammates.
And with that let me turn it over to Daryl to review our financial performance in greater detail.
Thank you Bill and good morning, everyone turning to slide 14, net interest income was down slightly versus prior quarter.
Consistent with our guidance and reflected two competing factors purchase accounting accretion decreased $53 million linked quarter and contributed 23 basis points to reported margin down from 28 basis points in the second quarter.
However, core noninterest income increased 41 million. This was driven by a larger investment portfolio, which resulted in strong deposit growth.
More than offset lower PPP revenue core net interest margin decreased two basis points due to higher liquidity and lower P. P. P revenue.
We expect to earn an additional $125 million in PPP revenues over the coming three quarters and for the balance to be de Minimis by mid 2022.
We continue to be asset sensitive.
We estimate that 100 basis point ramp increase would increase NII by four 1%, a 100 basis point shock would increase NII by seven 9%.
We're also well positioned to benefit from rising rates at both the short and long end of the curve two thirds of our reported asset sensitivity is from the short end and it assumes a deposit beta of approximately 50%.
In reality, we have experienced over the last few years ago deposit betas are likely to be significantly lower than our modeled assumptions when the first few rate hikes.
For every 10% decline in deposit beta or asset sensitivity increases by about 100 basis points moving to slide 15.
As Bill highlighted we had a very strong quarter from a fee income perspective.
Income excluding security gains from last year was a very strong 12% white quarter exceeding our initial expectations.
<unk> income increased 25% in total.
This was due to acquisitions and also a very strong 12% organic growth.
Investment banking had its best had its second best quarter and record M&A performance M&A results like this do not come in a vacuum they're results of years of investment and commitment to our clients capital markets revenue was up 22% year to date.
Ralph remains very strong up 10% compared to a year ago as a result of market conditions, but also positive asset flows.
CRE related income was down after its record second quarter performance, but momentum continues to be positive residential mortgage was down linked quarter due to lower refinance activity. However, it increased $62 million sequentially, primarily due to better servicing income lower prepayment speeds.
And the addition of a new servicing portfolio.
Production income also improved sequentially as we restored capacity after temporarily reducing it last quarter.
Other income of $131 million was also another high watermark largely due to valuation gains related to our spic's funds.
Our nonqualified plan continues to have positive valuation adjustments.
And we have now included the details of both the Nonqualified plan and CVA and our earnings release tables.
Turning to expenses on slide 16.
Adjusted noninterest expense increased two 4% sequentially compared to our guidance of a relatively flat drivers.
Drivers included higher than anticipated fee income, which pushed incentives a buffer above our forecast in addition to a $32 million cost from the nonqualified plan.
Excluding the effects of these items adjusted expenses were only slightly above our expectations.
On an absolute basis, adjusted noninterest expense increased primarily due to higher planned marketing costs as we continue to build our brand awareness as well as higher technology costs, which are reflected in software and equipment expense move.
Moving to asset quality on slide 17.
Asset quality remains excellent, reflecting our prudent risk culture diversified portfolio favorable economic conditions and the effects of stimulus our net charge off ratio was 19 basis points.
Pro forma post financial crisis well.
Leading indications indicators remain strong as mpls and early stage delinquencies remain low.
Or a triple our coverage ratio decreased to $1 six 5% as the economic scenarios continue to improve.
And but it still remains above our CSO day, one level, 154%. We also had a provision benefit of $324 million.
Continuing on slide 18.
Capital remained strong our CET one ratio of 10, 1% was above our near term 975% target.
We did not repurchase any shares during the third quarter due to the effects of the recent acquisition activity we have.
Approximately $1 billion to $2 billion of potential capital deployment remaining through the third quarter of 2022.
We expect to consume approximately $500 million of this capacity via share repurchases in the fourth quarter, reflecting our strong capital position reduced integration risk on the heels of very successful integration event or discussed earlier.
Turning to slide 19, we provide additional details about service finance.
We continue to be very excited about service finance and the acquisition is on track to close later this year.
Service finance is strategically attractive because it expands our scale and capabilities of our existing point of sale businesses, which is where the consumer preferences are shifting. In addition, we believe home improvement is in a secular growth phase and the professional financing market is highly fragmented.
Service Finance is the perfect partner for true us given its proven track record.
Business development and growth, it's exclusive focus on home improvement strong digital client experience and an excellent reputation in the marketplace.
From a financial perspective, we have provided a few additional details to help you model that transaction.
The vast majority of service finance revenue will come in noninterest income.
The NII as a mix of consumer interest income and discounts provided by the merchants loan yields are in the high single digits from a run rate perspective, though initially they are somewhat lower due to the impact of promotional periods on an unseasoned loan portfolio.
We expect production to grow at a fast pace over the coming years.
We expect to allocate $2.0 billion to goodwill and $700 million to intangibles. We also expect to capture approximately $250 million in value over time from a step up in tax basis on.
On a standalone basis, the acquisition is 4% GAAP dilutive in year one.
Half of this dilution is driven by the utilization of capital in lieu of share repurchases. The other half is driven by the first year GAAP net income contribution.
Earning streams take time to build as we transition from an originate to sell to an originate to hold model.
But over the long term it is extremely profitable and accretive to all of our Kpis.
We did not model any future revenue synergies, let's see many opportunities for battery leverage.
Our combined capabilities and accelerate our revenue and growth potential we have terminated third party partnerships with certain point of sale financing providers. The impact of this is $2 billion of runoff will began in early 2022.
Moving to the integration update on slide 21.
As Bill highlighted we achieved a major milestone this past weekend with successful migration of our heritage BB&T retail and commercial clients to the truest ecosystem. Another milestone in the quarter was completing the migration of our truest retail mortgage origination platform.
Turning to slide 22, we are committed to achieving $7.0 billion of net cost saves and continue to make progress in each of the five categories third party spend is down 11, 2% from the baseline levels exceeding our targeted reduction of 10%.
We closed 39 branches during the third quarter, bringing the cumulative closures to 413.
We are still on track to achieve approximately 800 total closures by the first quarter of 2022.
We are also seven eighths of the way towards our non branch facility reduction target, which will likely have more reductions to come in 2022 <unk>.
Average ftes are down 11% since the merger excluding the acquisitions.
We expect further declines in ftes in the coming quarters to that due to the V. SRP program, where the first quarter wave of departures began on September 30th.
Technology saves where materialize after redundant systems are decommissioned in 2022.
We have also noted areas, where we continue to make critical investments, including digital technology talent and acquisitions and select business lines turning to slide 23.
We still expect to incur total merger costs of approximately $4 billion through 2022, we have incurred cumulative merger costs of approximately 3 billion through the third quarter, reflecting a considerable integration work on slide 21.
We continue to expect these costs to decrease after the first quarter final bank conversion and then drop off entirely after 2022.
Continuing on slide 24.
Core noninterest expense was just over $3 billion in the third quarter as a reminder, minder. This calculation removes the effects of higher variable compensation due to fee income and corporate performance since 2019.
Asset value changes in our retirement plan and acquisition since the merger of equals.
As a result core noninterest expense is more comparable to our baseline expenses at the time of the merger closed.
Based on the trajectory of ongoing cost save initiatives, we are on track to achieve the fourth quarter core expense target.
I will now provide guidance for the fourth quarter.
Reported net interest margin is expected to decrease five to seven basis points with half attributable to lower purchase accounting accretion and the other half due to increased liquidity and less PPP revenue.
We expect reported noninterest income declined 1% sequentially entirely due to lower purchase accounting accretion.
Core net interest income is expected to be stable.
Fee income excluding the nonqualified plan is expected to be largely stable from the third quarter as strength of insurance investment banking wealth and CRE is offset by lower mortgage revenue and lower spic's valuation gains.
Adjusted noninterest expense is expected to decrease 3% to 4% from the third quarter.
The primary drivers are personnel expense driven primarily by the SRP occupancy expense and technology costs, such as software and equipment expense.
For those that leverage our core expense target for the fourth quarter to build the adjusted expenses you must add back the impact of acquisitions and higher levels of incentive compensation expense.
From the higher fees and performance relative to 2019.
We expect net charge off ratio to be 20 to 30 basis points given favorable economic conditions, Although we expect some normalization of these levels over time.
Finally, we expect further reductions in the a triple ale ratio, assuming economic conditions remain healthy.
Given all of this truly should have positive operating leverage next quarter when compared to the third.
Now I'll turn it back to bill to conclude thanks.
Thanks, Darryl on Slide 25 provides an overview of our value proposition maybe the details obviously, we've shared in the past well flipping to slide 26 that provide some performance highlights that support our value proposition with actual performance this quarter.
Our markets continue to have strong in migration the data of which can lag fee income from insurance and investment banking and wealth was up 20% year over year and up approximately $1 billion compared to 2019, our third quarter results clearly reflect the potential for profitability levels to be industry, leading as we come out of the merger.
Lastly, we continue to deploy more capital on behalf of our clients and shareholders and we'll have that capacity to do more over time as the integration risk subside and the economy stays on sound footing. So in conclusion the effects of the pandemic are moderating economies getting better.
We are one major step away from completing our integration process and are beginning to shift from a more defensive or more offensive position and from our merger focus to performance focus we fully believe that <unk> best days are ahead, so with that let me turn it back over to you in Q&A.
Bill.
Alan at this time, if you don't mind, explaining how our listeners can participate in the Q&A session. As you do that I'd like to ask the participants to please limit yourselves to one primary question one follow up so that we can accommodate as many of you as possible today.
Thank you, Sir if you'd like to ask a question. Please signal at this time by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment.
And like Mr. Viasat, please limit yourselves to one question and one follow up question.
Well first go to Betsy <unk> with Morgan Stanley.
Hi.
Good morning.
Hi, Good morning. Thanks, I had a first question just around the source finance acquisition and I just wanted to understand how you're thinking about.
Leveraging this acquisition from here both on the merchant side as well as on the customer side talking about opportunities for expansion integration into your platform and then on the customer side cross sell.
Yeah. That's a great question as Daryl mentioned, we started didn't model any of that into the into their basic models. I mean, the basic model you saw sort of service finance as a stand alone one of the really attractive parts of this integration for true as it was the fact that they've developed relationships with.
14000 contractors, you know a 180 manufacturers just sort of think about that in context 80 manufacturers think about that in context.
Many of those which are existing clients of truest. So we've got this incredible opportunity too.
Expand those relationships they are adding a lot of new clients to our base, who are single product clients, who we've got an opportunity to expand using.
Things like light stream and the capabilities that we have they're using or the <unk>.
Prowess of our CIB bankers with with the manufacturers, helping expand with the contractors. There is a whole another component to the service.
Finance, which is really interesting it's the whole ESG piece of what they're doing to create sort of more energy efficiency and the concept of just everything related to home improvement I mean, what we really like about service finance, it's a pure play on the home side. So if you think about all the things that we have related to home.
About insurance that we have related to home think about.
Home equity think about mortgage thinking about all of the prowess of product and capabilities. We have related to home. We're just starting to explore those kind of those kind of opportunities. So this is why we feel so good about this I mean this is to us is where the where the puck is going as I said versus where it is and you know to your question.
I think those are significant opportunities ahead of us.
I would add to that Betsy is that the returns on this it will be eventually over a 3% ROA business and our risk adjusted yield will be really attractive yeah. Just on the standalone, yes, exactly on a loan basis.
So follow up question here Daryl on the rate sensitivity you did give us the first hundred basis points and I.
I know the question is gonna be what about that second 100 basis points. So the first one or does that really low deposit beta at 15%. Historically I think you mentioned can you remind us what the deposit.
Deposit beta was like on that second Honda.
So if you go back to the last rate cycle that we went to it was basically when rates bottomed out the fed moved up six times 150 basis points. If you look at the deposit betas. The first probably two or three deposit betas was probably about plus or -20% and then as it continued to climb it was getting.
Most are to 30% to 40% and not sure I would ever really got to the 50% in the six moves that you saw there, but it kind of gradually went up as every couple moves.
It happened in the last rebound with the fed.
Right. So you never you never got like over 100 or anything like that on those last couple of months.
No I don't think we ever got to a 50% beta on any even move six.
Okay.
Great. Thanks, so much.
Your next question comes from the line of Ryan Nash with Goldman Sachs.
Okay.
Hey, good morning, guys.
Good morning, Ron.
Daryl maybe to start on the expenses, so you're reiterating the 294 billion and you're calling for expenses to decline, 3% to 4% can you maybe just talk high level about some of the puts and takes on the expenses as we move into 2022, clearly the core is coming down due to expense saves but.
We are hearing about input cost inflation is increasing on a handful of insurance deals in insurance finance as well as investments in the business.
You know how should we think about costs into 'twenty, two and maybe can they be down on an absolute or an adjusted basis into next year. Thanks.
Yeah. So you know we're still putting together our plan for 2022, but I'll tell you what I can tell you now.
From a cost perspective, we have our five buckets that we talk about.
Definitely we will see more branch closures in the first half of 2022 with almost 400 more branches closing.
So we will have more.
Last corporate real estate, so more reductions in that space as 2022 comes along with it.
Big cost savings and technology will happen as we finished through the conversions in the first quarter of the decommissioning, we're going to reduce about 40% of the application systems and move towards from six data centers to three data centers that will be big reductions in cost saves.
Bill talked about our.
Continuation of our V. SRP that will continue throughout 2022, and then finally, we have that team at ladder synergies program to basically get synergies on expenses and revenues and that will play out over the next couple of years that will assure us to make sure that we get our expense targets and also give us ammunition.
To make more investments in digital technology and other talent.
Got it.
Bill last quarter, you were talking about green shoots in loan growth in this quarter I think it sounded a little bit more balanced.
They are talking about core momentum can you maybe just talk about expectations for loan growth over the next few quarters on both the consumer and the commercial side.
What do you see as some of the drivers.
Could we see something like service finance.
Starting to help drive accelerating growth on the consumer side.
It will be for you Sir can I haven't finished so.
So right.
From a still 22 expenses.
Inflation is real and inflation is definitely going to be in our numbers. If you look at the last couple of years, we did not really factor in inflation in 2020 one.
Not sure exactly what that number is but it's probably give or take around 2% off the expense base and you also have to factor in acquisitions as well for 'twenty, two and the impact of that would have both revenue and expense, but at the end of the day, we're going to have good overall operating leverage probably top.
Tayo when it's all said and done.
Yeah. Thanks for that addition, Daryl, but I think that to that question rather is to focus on where there are tons of puts and takes but we're going to we're going to hit the expense targets that we committed to them and I feel very very confident about that and have a business that creates positive operating leverage and industry, leading efficiency I mean, that's the that's the shift in the target.
We're headed to.
I didn't mean to imply that they werent green shoots I still think there are definitely green shoots and I think they manifested themselves and in this quarter as we highlighted.
When I think about loan growth as you know is our output I look at production Paydowns utilization and pipeline it sounds like those for you now.
Elements on that product try to see where they're going so on the production side.
We were hitting some high points in the quarter for C&I and consumers of production is as strong.
Pay downs are staying pretty consistent so paydowns are about where they have been.
Utilization is still pretty flat you could say grinding up in certain areas, but in fairness is probably pretty pretty flat, but pipelines are strong I mean in CIB and CRE in CCP for us we're sort of at high points of the last several quarters.
And pipelines. So you know, it's it's hard to it's hard to guide.
I said, if you asked sort of medium term.
X P. P. P. I think low single digit kind of you know.
Growth is at the forefront.
But our positioning sort of longer term when liquidity comes out of this I just feel great about our great about our positioning.
Capacity to we've grown our revolver, so our utilization going up the fantastic markets. We're in the business investments that we've made in talent the consumer businesses. As you pointed out point of sale businesses things that are just adding capabilities and adding more opportunity for us too.
Capture growth as we go forward. So I. So yes, I think there are green shoots hard to predict sort of when theyre going to grow.
But I feel really really good about how we're positioned.
Great. Thanks for all the color.
Alright next question will come from the line of Gerard Cassidy with RBC.
Baird.
Okay.
I draw your line might be on mute. Please go ahead.
Thank you I was on mute I appreciate it good morning, gentlemen.
Bill can you can you share with us you've done some smaller acquisitions obviously.
Recent one is the finance company and then you know the insurance companies can you give us your picture of what you see maybe for added bolt on opportunities that could be on the horizon for truest.
Yeah.
I Wanna say first.
[laughter] core truth, I think the biggest opportunity is with truest I see the biggest opportunity.
You know the <unk>.
Actualize and optimize the opportunity that came from this fantastic merger vehicles. So let me start I'll say that as primary where we're going.
But then you know the bolt on clearly on the insurance side I mean, we've had a fantastic track record on the insurance side.
It is a really good toggle between organic and inorganic growth and managed well and I would expect that I would expect that to continue.
You know maybe other things that look around and sort of bolt ons that are better important to us strategically.
Strategically and <unk>.
Add some scale, we've been adding a lot of talent I view that as the equivalent of an acquisition. So we've been adding talent and you see the benefits of that for example in the investment in the investment banking side, but I think it would be sort of thing bolt on in the places where we've where we're.
Experienced or where we have opportunity and then primary emphasis on truest and maximizing and optimizing.
This merger.
Very good thank you and maybe this.
Question can be directed to Clark and the credit quality for you and many of your peers has been outstanding.
Particularly in the net charge offs area.
Can you guys give us some flavor.
Sustainable are these levels are very low net charge offs isn't another two or three quarters, and then maybe creeping up to normalization as we enter 'twenty three or end of 'twenty two.
It's a great question Gerard I noticed the lower longer question for the industry and I would say for us.
And the industry you know, we had significant stimulus the accommodation programs and frankly strong asset values and all of those have been <unk> and you saw for us almost really historic low wage low.
Last point for the third quarter. So we feel really good about where we are and given the current economic backdrop, we would certainly expect to continue.
To see outperformance with to your point.
A steady return overtime to normalization as we go into 'twenty, two and beyond and so.
I think it can go on longer.
Again depends on the economic scenario, but for US right now I think we would believe we would have an opportunity to outperform and you'll see that reflected in our four key guidance.
Great. Thank you.
Your next question comes from the line of Ken Houston with Jefferies.
Yeah.
Hi, guys. Good morning, Hey, Bill when you think longer term out about the points you made about operating leverage our efficiency. Maybe there is some inflation the business mix has changed how confident are you do you remain in that low fifties long term efficiency ratio and how much if at all as rates still part of that equation.
Thanks.
Yeah, I mean, I would start with industry, leading efficiency. So let me sort of start with that as a concept I think given.
Some normalization of rates I feel really confident in the in the low fifties.
But most importantly, being able to achieve positive operating leverage being able to sort of be industry leading.
You know top our top quartile efficiency I think is eminently short medium and long term achievable for trust.
Okay got it and then just on the North near term perspective can you just Daryl can you just walk us through when we take the $69.0
The slides and you kind of add back the add backs.
Approximately just this would put us as a starting point for the end of the year on a GAAP basis.
For cost.
So if you go back you have to add back in our incentive pieces.
The acquisition pieces as well as whatever nonqualified turns out to be plus or minus.
You probably get to we gave guidance on an adjusted expense number down 3% to 4% from where we are today that kind of as you're starting off point for 2022.
Okay got it.
And then we add back intangible is for the all in okay.
Correct. Thank you.
Alright next question will come from the line of Matt O'connor with Deutsche Bank.
Good morning.
So bill you pick off our Oh about a month ago, and also announced some changes to the senior leadership team.
Obviously all of these guys have been a very prominent very prominent wrong.
The deal was announced I wouldn't expect meaningful attendance, but any kind of tweaks that we can expect or kind of what was the process of.
No person, who kind of does what underneath your arguments from attained and however, you want to frame that thank you.
Yes.
The great thing, Matt is we have an incredibly strong skilled.
Experienced purposeful team.
So I'm really fortunate to be surrounded by really great great leaders.
As you as you noted I mean, we didn't want to put a lot of change in place because actually I feel really good about the momentum and where things are going so.
The leaders who are responsible for those businesses, we shifted a couple of things around but they still have the primary responsibility that they had before I'd say that the the shift was more what I talked about in my opening statements. It's more of a transition from merging the operator that doesn't have anything to do with you know.
Me or anything it just has to do with the timing of where we are in this process getting this.
Getting this merger a major conversion. This weekend was just a shot of adrenaline and for us to be fair I mean, that's that's a big significant milestone for us and just gives us more confidence to be starting to shift some of our time some of our responsibility as some of our focus to maximize.
The opportunities that are that are true. So I would say if I were to describe the transition and what it feels like maybe different now is that it's more of that and I, just think thats a function of timing and where we are and our confidence building.
And then just separately can you talk about the retention of some of the kind of front office client facing folk are really across the franchise I would imagine definitely.
There just wasn't that much movement because of Covid and I think you also had some retention agreements for key people.
But just update us on how that's been going kind of more recently things have been opening up in maybe people in general are more open to looking at elsewhere not accrue it but the work place overall.
Yeah, Let me put it maybe a global perspective on it and then try to get a little more idiosyncratic to true.
Globally.
There is more activity and more people are moving and we and we see that.
Particularly in some of the frontline areas and you know you don't you don't drive around any place in the country, where you don't see a help wanted sign and we've got several million people out of the workforce right now so we and the industry are experiencing some of that.
Going into this merger our retention numbers in the first.
Year to 18 months were actually better than they were at either company. So our retention numbers were really really good they've they've turnover spiked up a little bit, but it's still I think below where the industry is from everything that everything that we can determine as it relates to some of our most senior team and what we sort of look.
At high performer turnover is one of the things that we look at and our senior team I've been really pleased I mean, we've been we've been really solid and keeping the kind of players we want.
The retention on those have been has been has been really good at places that I worry about our frontline tell our care centers all of those things. That's just that's just a more challenging environment today than it was before and the other side of that is our ability to attract talent is fantastic I mean, we.
The.
People in the data wanted to join our company.
And want to be part of what we're doing at truest.
As exceeded any expectations that I might have had and they were really really high.
The opportunity for people that are here to grow and expand their careers and the opportunity to bring new talent in I think it's just really really good at truest, all that again with that sort of global overlay of <unk>.
What's going on in the market in the world.
Understood. Thank you.
Okay. Next question will come from the line of Mike Mayo with Wells Fargo.
Yeah.
Hi, Bill you've spoken a lot about.
That thing in technology, and digital and I think the expenses were a little elevated before you taking over the CEO reins.
And so it's good seeing that youre guiding for expenses to be 3% to 4% lower next quarter, but can you just talk about I think it was your quote saying yeah.
Whilst the herds.
And you know let's.
Fix the engine a little bit more than we could have otherwise done so where is the gainesville dividend so to speak going to come from as it relates to the truest and the extra efforts that you're putting in place so.
You can talk about the back office with the <unk>.
<unk> or the front office.
Enhanced digital banking that you maybe you didn't have before.
Yeah, Mike It's a great. It's a great question and.
Think about it in two ways one.
Digital dividend as you put it but also the avoidance of opportunity costs and that's really what's happening with this merger. So if you think about it.
Sort of a core basis, where we're creating.
A much more agile platform so the ability to move faster add too you know.
Create more opportunities for our clients our teammates on a more agile platform. So the base is really important.
In fact, we have a new state of the art commercial ecosystem, we have a new state of the art mortgage ecosystem.
Have a new state of the art digital platform all of those in my mind are opportunity costs. So those are things, we don't have to invest in disproportionately going forward.
They create the opportunity to expand and.
And add to as we as we as we go into go into the next few years. The other part of that is something we call. The digital straddle. This thing that we did to convert our clients digitally I think is actually fairly fairly unique and what that allows us to do again from an agility standpoint is to lever.
<unk> that back end platform and weekend through the use of <unk> in this travel we can do a whole lot more for our clients somebody can't could before so when the hood is up yeah. We've been looking at sort of virtually everything so the hook up and the best of both mentor.
Mentality has allowed us to not only expand and create a better ecosystem.
So look at it as a board a lot of opportunity cost in the future of having to.
Do these major major changes.
So you said, you're still you're still committed I guess, the low fifty's efficiency. It just seems like it's been a long way I mean stocks underperformed since the merger was announced despite you know our merger on paper that has the chance to be one of the best mergers ever.
And I think part of the reason for the underperformance may. It then you had the pandemic you had the low rates and there are some excuses there but.
But looking ahead are you able to commit to positive operating leverage next year, you know given given the way given all of these investments I mean, it's you're avoiding cost youre getting gains from the technology investments I think investors are kind of thinking okay. That's let's say more of that did digital data and let's see more of that pay off how much can you beat us.
You know give a little bit more hope as it relates to positive operating leverage.
Maybe I have got a little more than hope so no no I think I think it's totally reasonable to expect us to have positive operating for next year.
In the middle of this merger and that's against.
The investments we want to make that's overcoming inflation, that's overcoming all of the other things that exist rate environment and all those type things.
We're committed to having a business that has positive operating leverage and as an industry leading efficiency.
There's no I feel more confident about that today than I did the day, we announced the merger.
So.
It's sometimes hard to Peel back the clock.
Clouds in the merger cost and the one times and all of that to see that but the underlying capacity of our company to <unk>.
Deliver positive operating leverage growth on the topline and world class efficiency is absolutely there.
Alright next year positive operating leverage and yet you're committed to that and this is your first earnings.
Earnings calls.
Yeah, So did I hear that correctly.
That is absolutely what will be in our plan for next year.
Got it thank you very much.
All right next we'll go to John Mcdonald with Autonomous research.
Good morning, Daryl I just wanted to clarify the outlook for net interest income next quarter. I think you said on a reported basis down 1% on a core net interest income a flattish just clarify if that was the guide and then how does that set you up more broadly for.
Growing NII into 2022, when you think about all the puts and takes there.
Yes. So you are correct, we will have stable NII on a core basis in the fourth quarter will be down 1% just because of purchase accounting accretion.
As 22 plays out when I look at 'twenty two as we put this together the three break drivers of NII the impacts will be.
Loan growth.
Posit growth, depending on how large the balance sheet gets and how much liquidity, we invest and then interest rates.
When I look at all of that I think it's very possible that.
I'm I'm very sure that the core net interest income will grow.
I think we have a chance of having an offset overall the run off of purchase accounting.
It doesn't take a huge amount of loan growth coupled with a fed move.
And the implied right now, but even a steepening of the yield curve would add so if you just steepening yield curve by 25 basis points that would give us another $100 million and for the year next year. So I think theres a lot of variables that could play out, but we feel pretty good that the <unk>.
Trajectory of core net interest margin will.
Rise and.
22, and that our reported net interest margin should be relatively stable, if we can offset that.
Okay, and Bill just a bigger picture question in terms of the capital target and what you need to run the company you brought down the capital target CET one to 975, it seems like Youll get there with the service finance acquisition.
Soon so longer term what will be the factors as you think about lowering that capital to maybe something closer to watch here is that it looked like you target on CET one.
Yeah, and John Remember, we also announced we'll do some more share repurchases this quarter.
So to get there faster.
Said, all along I mean, we went into the merger with a little bit of a higher capital base.
Very intentionally and what we said was as you know the risk of the merger decreases and.
The song.
Solid definition of the economy increases.
We have a you know a company that has a lower than average risk profile and a higher than average P. PNR profile.
So I think we'll start thinking about capital positions that reflect that we don't want to do this on a quarter by quarter basis. I mean, this is sort of a long term strategy and philosophy.
But you know this weekend was a good milestone for us in terms of reducing the risk.
The of the merger and our confidence of where we are in the first first part of next year.
We'll get that behind Us and we'll continue to evaluate where we are from a capital standpoint, no reason to think we're going to change the profile of our company. Our diversifications our risk profile is going to stay strong and we're confident in the PPR components of the growth in our business.
Got it okay, great no not quarter to quarter, but getting through the conversions will be a big factor as you think about lowering that target over time.
Yes, I think you've got a I think we've got to be in the first part of next year to have another conversation about this but we're going to be.
Thoughtful and moving to the existing target quickly.
Got it thank you.
Alan that completes that completes our call.
So thanks, everybody for joining we appreciate it.
If you have any additional questions. Please feel free to reach out to the IR team and we hope everybody has a great day. We appreciate your interest and truest Alan you can now disconnect.
Thank you Sir and once again, everyone that does conclude today's conference. We thank you for your participation participation you may now disconnect.
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