Truist Financial Corp

NYSE:TFC

Earnings Call Transcript 2020-Q4

[Operator]

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Fourth Quarter 2020 Earnings Conference. As a reminder, this event is being recorded and it is now my pleasure to introduce your host, Mr. Ryan Richards, Director of Investor Relations for Truist Financial Corporation.

[Ryan Richards, Director, IR]

Thank you, Abby, and good morning, everyone. We appreciate you joining our call today where our Chairman and CEO, Kelly King; President and COO, Bill Rogers and CFO, Daryl Bible will highlight a number of strategic priorities and discuss Truist fourth quarter 2020 results. Chris Henson, Head of Banking and Insurance and Clarke Starnes, our Chief Risk Officer, will also participate in the Q&A portion of our call.

We are conducting our call today from different locations to help protect our executives and teammates. The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slides two and three of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP

With that, I will turn it over to Kelly.

[Kelly King, Chairman and CEO]

Thanks, Ryan and good morning, everybody. Thank you very much for joining our call. We really appreciate that and I'd say overall this quarter and this year are very good given the challenging environment that we faced. We had a continued focus on strong culture and [indiscernible] very, very well. We're executing well on our revenue synergies. We had really effectively spend focus and we made appropriate investments for the future and then support our two medicines in difficult environment and kept our clients and communities number one.

Our purpose is to inspire and give better lives in communities and we think in the times we live in today, this is more important than ever. We focus on our mission. We focus on our values. I will point out to you that regarding our values, we focus most of our attention on the happiness of our teammates. In the challenging environment that we face today, helping people get through the challenges at home and at work and all of the various difficulties that people are going through, finding happiness in this environment is a very, very important undertaking and we were hard to talk about that be possible for our team mates.

If you're following along on the slides, let's go to slide five. I just wanted to point out that it's nice to say ordinary value have in our culture it's nice to say you have an important purpose that is more important to deliver. So I just want to point out a few of the things that we have done that I am proud of in terms of living our purpose. During the course of the year, we lost our Single [ph] Home program where we have to have teammates with money to do little projects, little things that help people in need.

We launched our Truist One team theme, found our home page program. Truist Cares program was very effective where we invested over $50 million to make immediate longer term need of our communities, our clients and our team mates. We provided about $100 million in special COVID for our team mates and 750,000 client accommodation for 13 billion in PPP loans. We funded help for more than 80,000 companies and created also are protective about three million jobs and we do 355 small medium type grants in our communities.

I am very proud of our 60 billion three year community benefits program. I'd say to you we are ahead of the time schedule in terms of making those investments. We supported our representatives on our $780 million commitment and then it included 40 million in helping our from organization help [indiscernible] for our community, our capital reaches focus specifically on CFRs in the minority space and we're proud that we were able to invest $20 million over three years to support HBCUs and their peers.

On Slide six, let's talk a little bit about where we are with the merger. I want to make a point of context for you with regard to how we think about our merger because it's a bit different than most of our deals, very different than the many, many mergers I've been through in my career.

We're not just pretty tune big companies here together cutting expenses and trying to improve profitability in the short term. Rather we're building what I call a new bank. We're building a bank based on the best of both -- four both organizations and it's just new systems and processes. Like for example, in our commercial lending area, we've taken a very new and very best in class SunTrust and single loan origination program and BB&T back in system in terms of commercial loans.

So combined, we have the advantage from both sides and it's basically the case where two plus two equals five. We saw the [indiscernible] one would have been cheaper and would have been faster but it would not have been better and would not have been client focused. Daryl is going to be talking to you about our merger charges, North American expenses a little later but this will emphasize that, remember that you have normal that we called out early on in the announcement that's normal sign in different systems that are just going away that have been drive future benefit, they really are just a merger short. And then we have investments which I call investments and investments in the future that make our organization better, it's client focused and while they will not be in our own going long-term run rate, these are investments that we make today to be sure that we have our agile very client focused organization as we go forward.

You see there are a number of accomplishments for 2020. I'll just point out a couple of those. Very important we've made great progress in our culture, cannot feel better about that. We've assessed about brand visual identity. We've successfully merged first digital conversion, we believe in terms of modern days and total securities in better relationship management process we just rolled our success.

We did consolidate 104 branches leveraging our lender branch program which is unabated. Remember we did the best 2.3 billion loans in deposits about 30 branches and there have been a lot of corporate bad run functions that have been integrated including audit, risk, legal, finance and others. And we importantly did a huge amount of work on appropriate job re-grading for our teammates, comment we rewarded some costs, we rewarded that. But this was a very important process, in terms of making sure that our teammates through the year knew that we were going to do the right thing in terms of looking into the new responsibilities, establishing the right talent, job, and appropriate compensation.

And we chose to make that retroactive for them during 2020 because that was the right thing to do. They were doing the job, we just had not had a chance yet to appropriately raise your compensation and service very, very well.

In terms of ’21, just a few points here, everybody tends to focus on the core branch conversion, which is in the first half of ’22, that is very, very important, make no mistake, but look there a huge amount of conversions and other activities going on in ’20, ’20 is a really big conversion year. We’ll complete our wealth brokerage conversion, we'll have our mortgage conversion, sales force conversion, we’ll be closing an additional 226 branches in the first quarter, we'll be implementing digital first migration, supporting our key three concepts in terms of meeting our client's needs on the seamless spaces, integrating technology and touch to yield a high level of trust.

And so there are a lot of activities that are going on during the course of the year. But just I want you to be thinking is not much happening [indiscernible] conversion for the first half of ’22 because frankly, most of the hard work will be done by the end of this year. And then we'll actually execute on the final branch closures and convergence as we head into ‘22. Looking to few highlights with regard to our performance on Slide 7, I’m very excited about our revenues, total taxable equivalent revenue of $5.6 billion, up 5.5% annualized versus the fourth quarter, that was really driven by stable net interest income, strong fee income especially in investment banking, and trading income, strong insurance performance.

Chris will talk about that if we get to questions in Q&A. I'm very proud of five insurance acquisitions just in the fourth quarter alone. And we expect more activities as we head into ‘21, very strong adjusted net income available to common shareholders of $1.6 billion, we had diluted earnings per share of $1.18, diluted return on average assets of 135 and a very strong adjusted return on average tangible common equity of 19.03.

So you could see, we're well on the way to top performance and all the measures that we projected when we deal with amount which is kind of miraculous, it's been two years as long been going on. But we're still tracking and doing really well in terms of hitting that top performance level of metrics as we expected that, that we would. Daryl is going to be commenting on some capital issues put out to you that, board did approve up to $2 billion in common stock repurchases, which we saw in the first quarter.

We have outstanding credit quality performance, much better than expected. And our common equity Tier 1 is exactly right on 10%, which is what we projected a couple of years ago. On Slide 8, I'll just point out to you the unusual items for this quarter and you can see that we have two regular merger charges and is related to earlier incremental operating expenses are not in the long-term run rate. And they equated to $0.28 drag with regard to GAAP versus adjusted. So just some quick look at the early highlights. Let me now turn to Bill for some focus on some key rates. Bill?

[Bill Rogers, President and COO]

Great, thank you, Kelly and good morning, everybody. As Kelly just noted, Truist is the first large bank merger in the digital age and with that in mind, we determined it was really imperative that our clients begin experiencing enhanced digital platform this year and this is demonstrated on Page 9. While our foundation is two leading digital experiences, we’ve accelerated the delivery of features like personalized financial insights, AI driven chatbots, other client centric enhancements.

We're going to pilot this in both platforms in the second quarter and then we'll begin migration and ways in the third quarter, a complete full migration to premiere Truist experience for our digital clients by year-end. So emphasizing Kelly's point, how much is being done this year. As you can see on Page 10, we're experiencing excellent digital adoption and usage from our clients.

So for the 12 months, in November we experienced a 26% increase in digital sales, 12% growth in active mobile users, 22% increase in mobile check deposits and a 5% increase in statement suppression. I think all would speak to increased digital adoption. Now this is an area where we're already seeing the benefits from our investment. And on the right side, we show some recent enhancements.

So for instance, the SunTrust business online and mobile experience incorporates significant updates, and it was built in-house to give us more control over the app's functionality and performance long-term. The Heritage Award winning BB&T U platform now provides insights to help clients better manage new spending and behaviors, including an end of month cash flow analysis and enhanced notifications, just to name a few and very consistent with our whole Q3 process.

This is a prime example of what Kelly talks about [indiscernible] using BB&T U driven front-end and a more flexible, agile Heritage SunTrust driven back-end has clearly positioned us I think really well for the future. We believe in initiatives such as these underscore our commitment to improve the lives of our clients and demonstrate our investment effectiveness.

So turn to Page 11, we experienced further decline in balances across most loan categories in the phase of continued economic uncertainty and elevated liquidity. Average total loans decreased $7.6 billion largely attributable to commercial loan balances and ongoing run-off in the residential mortgage portfolio. In commercial average balances declined $5.4 billion primarily due to live paydowns and lower utilization. Paydown activity reflected larger clients ability to obtain financing from capital markets and SunTrust Securities are well positioned to assist them which we'll see later.

Commercial balances were also impacted by a $1.4 billion reduction in PPP loans and the transfer of $1 billion in assets held for sale following our decision to exit a small ticket loan or lease portfolio. We experienced a rebound within our dealer floor plan clients after bottoming in July due to OEM supply chain disruptions. Dealer floor plan balances have steadily improved as new card inventories were replenished. We also saw growth in mortgage warehouse lending and government finance. Commercial activity remains bifurcated as a whole with a greater share coming from large and medium sized companies than from smaller businesses. In consumer average balances decreased $2.2 billion, this was largely due to seasonality and refinance activity that resulted in lower residential mortgage, residential home equity and direct loan balances.

Average balances in our indirect auto portfolio increased $1.1 billion, loan production was really strong as vehicle sales rebounded, especially for us in the Prime segment. Overall, we remain cautiously optimistic. We're hopeful that the successful rollout of COVID-19 vaccine together with additional government stimulus will increase visibility, revive confidence and support the economic recovery, all of which will be essential for loan growth. We're extremely well positioned in businesses and markets that we will believe will most benefit from this.

So let's continue on Page 12 and look at deposits. Deposit trends remain favorable during the quarter. Growth was robust and broad based supported by a combination of seasonal inflows and ongoing growth resulting from pandemic related client behavior. Average non-interest bearing and interest checking balances were each up over $3 billion, while money market and savings were $1.1 billion. Average time deposits decreased $4.3 billion primarily due to the maturity of wholesale negotiable CDs, and higher costs personal and business accounts.

Importantly, we're able to achieve a strong level of deposit growth while maximizing the value proposition to clients outside of repaying. For instance, the average total deposit costs decreased three basis points to seven basis points and average interest bearing deposit costs declined four basis points to 11 basis points.

So with that, let me turn it over to Daryl to discuss our financial performance for the quarter.

[Daryl Bible, CFO]

Thank you, Bill and good morning everybody. Turning to Slide 13, in the fourth quarter, reported net interest margin decreased two basis points to 3.08% reflecting lower purchase accounting accretion. Core net interest margin was unchanged at 2.72%. Core margin benefited from higher yields on PPP payoffs, recognition of deferred interest on loans and lower funding costs offset by excess liquidity. Earning assets rose $3 billion primarily due to an increase in deposits, resulting in a modest improvement in net interest income, we partially hedged our exposure to rising rates by pay-fixed swaps to offset market risk associated with our investment security.

The chart on the bottom left shows the increase in our asset sensitivity due to quarter positive growth, additional pay fix loss and the residential mortgage run off, which was partially offset by the growth in the investment portfolio.

Turning to Slide 14, our integrated relationship management strategy is helping to improve fee income. The noninterest income increased $179 million through third quarter security gains of $104 million. We had record investment banking and trading income of $308 million due to strong activity in M&A and loan syndications, lower counterparty refers and improved trading profits.

We also generated record commercial real estate income of $123 million driven by structured real estate transactions and strong production and sales activity at Grandbridge. Insurance grew 7% versus fourth quarter of '19 due to strong production and premium growth as well as acquisitions. Organic growth was 2.9%. If you exclude the Truist policy last year, organic growth was 4.9%. We completed five insurance acquisitions during the fourth quarter, which we expect will add more than $110 million in annual revenue and approximately $7 million in adjusted expense.

Turning to Slide 15, noninterest expense increased $78 million reflecting a $99 million increase in merger cost. Adjusted noninterest expense rose $27 million due to higher professional fees for strategic technology projects and higher personnel expense. Personnel expense increased $50 million reflecting higher incentives related to strong revenue production and the impact of our job re-grading process which concluded late last year.

Job regrading regarding in the fourth quarter catch up in personnel expense. Approximately $50 million of this was related to prior quarters. Through the effort, we were able to honor our commitment to establish jobs and rewards program and harmonizing all teammates in the combined framework. FTEs decreased 1300 during the quarter and were down 8% since the merger was announced. We closed 104 branches during the quarter, bringing the full year total to 149, net occupancy decreased $26 million benefitting from aggressive closures of non-branch facilities.

Turning to Slide 16, as we said we are seeking the opportunity to build best of growth franchise. This approach is harder than a typical acquisition, but we believe the benefit to our clients justify the effort. Since the merger was announced, we have incurred $1.2 billion of merger-related and restructuring expenses. These expenses have no future benefit and are not part of the post conversion run rate. We also incurred $725 million of incremental operating expenses related to the merger. These expenses do provide future benefit and our integral stability in invested both franchise.

The incremental operating expenses are not part of future run rate and will end after the conversions in 2022. Based on our integration plan, we expect the merger related and restructuring charges of approximately $2.1 billion and total incremental operating expenses of approximately $1.8 billion. This resulted in a combined total charges of approximately $4 billion.

Turning to Slide 17, strong credit performance was characterized by minimal increase in NPAs and an excellent loss experience resulting in lower provision expense. We saw favorable trends in problem loan formation as the credit size and classified loans decreased 8.4%. The provision of $177 million benefited from lower charge-offs and a modest reduction in reserves. The decision to exit a small ticket loan and lease portfolio, the allowed coverage ratio remained strong at 7.15 times net charge-offs and 4.39 times nonperforming loans.

Active accommodations were down significantly since the second quarter. Approximately, 97% of the commercial clients and 91% of the consumer clients who exited the accommodation programs are current on their loans. Our exposure to COVID sensitive industry decreased 2.6% to $27.1 billion or approximately 9% of outstanding loans. We also had the third lowest loss rate among peers in the rate of CCAR test. We believe this outcome reflects prudent client selection and underwriting as well as diversification from the merger.

Turning to slide 18, the allowance for credit losses decreased $30 million largely due to moving the $1 billion portfolio held for sale. Our macro assumptions include unemployment remained fairly stable through mid 2021 and improving thereafter and GDP recovery in pre-COVID levels by late 2021. We also layer in qualitative adjustments for COVID related uncertainty. Continued improvement in the economic activity, less uncertainty, and stabilization of a criticized asset may process to release reserves in the coming quarters.

Turning to Slide 19. Our capital ratios were relatively stable with the CET1 ratio unchanged at 10%. We declared a common dividend of $0.45 per share and a dividend and total payout ratios of 49.4%. In December the board authorized a repurchase of up to $2 billion of the company's common stock starting in the first quarter. Our intention is to remain an approximate 10% CET1 ratio after taking into account strategic actions, stock repurchases and changes in risk-weighted assets.

For the first quarter, we expect to repurchase approximately $500 million. The board authorized other measures to optimize our capital position including the redemption of the outstanding Theory F and G preferred stock and liquidity remained strong and we are prepared to meet the funding of our clients.

Turning to Slide 20, this slide highlights our progress towards achieving the $1.6 billion in net cost saves. Our efforts to reduce third-party spend are ahead of expectations. We're now targeting 10% reduction in spent of $4.5 billion. In retail banking we closed 149 branches in 2020. On a cumulative basis, we expect to close 800 branches by the 1st of 2022 including more than 400 branches by the end of 2021. We also expect to reduce our nonbranch footprint by approximately $4.8 million square feet through the combination of closures and downsizings.

Through December 31, we reduced our nonbranch footprint by approximately 2.4 million square feet. So we're roughly halfway through our goal. The remaining facilities will be rationalized during 2021. Cost based on technology are highly dependent on closing conversions because we can decommission systems or data centers until the conversions are completed. The bottom of the slide less where we are making significant investments, we believe these investments are critical to delivering on our purpose and providing our catch-plus technology equals Truist approach to clients.

Turning to Slide 21, the waterfall on the left shows how we did relative to our 2020 cost savings target. Our objective for 2020 was to achieve annualized fourth quarter and cost saves of $640 million or 40% of the $1.6 billion target. This equates to the fourth quarter adjusted noninterest expense of $3.40 billion or less. We adjusted noninterest expense of $3.174 billion and exceeded our target including catch up and expenses related to job rating, emissions on higher revenue and a non-qualified expenses which are substantially offset in other income. If you exclude these items, adjusted noninterest expense would come in slightly below target. As you can see from this slide, we're maintaining our medium-term targets and reaffirming our cost saving targets for 2021 and 2022. For 2021, our targeted fourth quarter adjusted expense would be $2.940 billion excluding acquisitions.

Now I will provide guidance for the first quarter expressed in changes from the prior quarter. While the environment remains fluid, we continue to see momentum in our businesses, which may enable us to outperform the guidance. The first quarter had fewer number of days and seasonally higher personnel cost. We expect taxable equivalent revenue to be down 3% to 5% as a result of fewer days and purchase accounting loss. We expect our reported net interest margin to be down two to four basis points based on a less purchase accounting accretion and a change in the core margin.

We expect core margin be relatively stable with the exception of increased liquidity coming from the balance sheet, that could pressure the margin up to five basis points. Non-interest expense adjusted for merger cost and amortization is expected to be down 2% to 4%. We also anticipate net charge-offs in the range of 30 to 45 basis points. Overall, we had a strong quarter with exceptional revenue growth, good margin performance and expense management and strong asset quality.

Now let me turn it back to Kelly for closing remarks and Q&A. Kelly, you're on mute.

[Kelly King, Chairman and CEO]

Just to close, we have very few comments with regard to the Truist value proposition, which is to optimize our long-term total shareholder return really through a focus on strong capital, strong liquidity and diversification and intense client focus. We believe we have an exceptional franchise with diverse products, services and markets. We are the sixth largest commercial bank in the United States. We have strong market share is five fast-growing MSAs throughout the Southeast and the Mid Atlantic area.

We are uniquely positioned to deliver best in class efficiency and returns while we continue to invest in the future. We're very committed as Daryl said to reaching our $1.6 billion of net cost savings. We have a really great mix of complementary businesses that allows us to expand our client base through our year old enhancement in revenue synergies.

We have a very strong capital and liquidity position in sales, which positions us to be resilient as we go through very challenging times that we are experiencing. We are as I said earlier building a best-in-class new bank designed to be client purpose driven and resolutely committed to inspiring and building better lives and communities. We believe our best days are here for tourists in these States of America. I'll turn it back over to Ryan.

[Ryan Richards, Director, IR]

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

[Operator]

[Operator instructions] We'll take our first question from John Pancari with Evercore ISI.

[John Pancari, Evercore ISI]

Regarding the $1.8 billion in incremental operating expenses, can you just talk about that like how that number has evolved versus your original expectation? I know it's the first time you're giving us that target. So how does that compare to what you originally expected and how it evolved over time? And then can you give us a little bit more of your thought process behind it in terms of if we could continue to see upward pressure on that amount, are you pretty confident in the $1.8 billion and that's it's going to remain at that target, thanks?

[Kelly King, Chairman and CEO]

I would tell you when we were putting the transacting together in late '18 and announcement in early '19, we though $2 billion was merger and restructuring charges and we are pretty much on target with that. As we continue to work on all the integration and we saw the opportunity to really build the best in breed of what we could do with our technologies, we just knew that we would basically, I would call it a lot of technology projects on steroids all at once and that this would be a really unusual time to have all that cost running through our expense structure.

So that's really what we came up with and we've been tracking it to date so far and we feel pretty good about the forecast that we have. We're almost at $2 billion in total when you combine both charges of both the merger and restructuring and the incremental. So we have about $2 billion to go over the next year and a half. We believe it was for the right reasons and makes all the sense. And it's going to help our clients really produce good performance for our company going forward.

[Bill Rogers, President and COO]

So John, the way to think about that conceptually, is that that, that $1.8 billion is really, I think about it like a capital allocation for future benefits in terms of client focus and systems and processes. It will flow through expenses, we’ll continue to afford it to house, so you can think about it more in terms of an investment.

[John Pancari, Evercore ISI]

Got it. Thank you. That's helpful. And then separately on the branch and non-branch real estate reduction. Just want to confirm that those reductions that you’re targeting and the savings that come from that, that is included in your targeted cost savings, target merger?

[Daryl Bible, CFO]

Absolutely yes. Well, we came up with the five buckets, you're talking about two of the buckets, I mean, the retail branches we said originally would be between 700, 800 branches, you can see we're at the high-end of that original estimate, that will be done by the first quarter of ‘22. And then on corporate real estate, even before COVID when you put these two companies together, we have huge duplication all throughout the Mid-Atlantic and Southeast.

So just going through and rationalizing that space, I’ll tell you COVID has helped us in a number of ways and that it emptied out the buildings, so we can move quicker in a consolidation. And my guess is as we continue to make these combinations that we may actually exceed what we originally estimated in real corporate, real estate consolidations, because of COVID and just a bunch of people working at home.

[John Pancari, Evercore ISI]

Right, that was exactly what I was getting out because I'm assuming some of the corporate real estate reduction opportunity got bigger, you got installed greater opportunity as COVID set in. So just want to get back to the upside your calls hitting expectations, if corporate real estate reductions can be more than you thought?

[Daryl Bible, CFO]

Yes, so we have plan for where we're executing now on the $4.8 billion once we complete that plan, I'm sure Kelly and Bill and Executive Leadership will re-evaluate it and see if there's opportunity to do more in the future.

[Operator]

We'll take our next question from Betsy Graseck with Morgan Stanley.

[Kelly King, Chairman and CEO]

Betsy, we can’t hear you. Betsy, are you on mute?

[Betsy Graseck, Morgan Stanley]

Hello. Hi, it’s Betsy, can you hear me now? Can you hear me?

[Kelly King, Chairman and CEO]

Yes.

[Betsy Graseck, Morgan Stanley]

All right, sorry about that. Yes, so I had a couple of questions. One, just on the integrated relationship management strategy, I'm wondering how that's progressing. The revenues are strong this quarter, particularly in fees. And so I just wanted to understand how much was the IRM helping to drive that result this quarter?

[Kelly King, Chairman and CEO]

Betsy, that's a huge part of it. And I’ll let Bill give you some color with regard to that. But, this is the concept of really integrating the way we focus on the client, many institutions focus on the solid way in terms of products and deferred services, we don't do that, we focus on the whole needs of the client. And so we've developed this as IRM process, we call it Integrated Relationship Management, really, several decades.

And it's very, very effective, very efficient, because everybody owns the client. Everybody's focused on meeting all the needs of the client all the time. But we're seeing spectacular early, positive feedback in terms of how it is working, between the Community Bank and CIG. Bill, you may want to comment on that?

[Bill Rogers, President and COO]

Hey, Betsy, I mean this is one of the really strong cultural alignment that Kelly and I talked about when we first started talking about this merger is this commitment to put the client first and create a culture and a structure that that evolves from that. And, we're seeing it I mean and the model is working. As Kelly noted, a couple of examples in the investment banking outperformance this quarter particular I mean, it was really just great contribution from our Commercial Community Bank and from our CRE and from our private wealth businesses. So that model of integrated relationship management is working, it's just been great adoption, great participation, really good cultural alignment.

You see it in the insurance number, you see it in the wealth number. So it's all part of this structure and focus. And, we have lots of discipline around it. But the key is the cultural side, there are people committed to wanting to work together and work together towards a common goal to meet client needs, and I say this quarter was probably one of the better examples of how the engines are really firing on all cylinders.

[Betsy Graseck, Morgan Stanley]

Okay, all right. Thanks. I appreciate, fees really jumped out on the screen. I guess the follow-up question on the expense line here is around, some of the core expense inflation outside of the cost saves, you've got many increases bolt-on acquisitions, investments for revenue growth, et cetera. I'm just wondering how investors should think about where the total expense dollars will likely land post the net cost saves? What kind of guidance, can you help us with there? Thanks.

[Kelly King, Chairman and CEO]

So Betsy, let me just mention in general, we have itemized areas you you've listed.

We’re really focusing on expenses in a broader conceptual approach. We do in the obvious, I mean, the obvious, you got two of have these and they've won and those kinds of things that just kind of happen. But we're heading into a period now where it's time for us to focus on optimization, it’s time for us to focus on transformation and centralizing the business.

So far, what we've basically done is think about it as the two big banks together. Now, what we have and we get the big, get lots of savings from them natural overlap. And now we have the opportunity to re-conceptualize the business as we transform it, post-COVID and all this going on when you go to the new digital world. And there are enormous opportunities for us as we go through ‘21. So ‘21 is going to be an intense year of focus on expenses, from the perspective of transforming our structures, so that we’re doing the right things in terms of investments and expense allocations. It’s time to think for us. And we believe that will throw-off our positive benefits in terms of expenses.

[Daryl Bible, CFO]

Okay, Betsy what I would say in my prepared remarks. No, I gave for the fourth quarter of this year, the $2.940 billion. Now that excludes the merger and restructuring charges, incremental MOEs, expenses, amortization, and then I gave a call-out on the expenses for the Insurance acquisitions of about $70 million adjusted expenses. So all of that will get carved out of that base. But when you look at like the job re-grading marketing considering that part of the investment, that's something that we’re covering with our net saves.

[Operator]

And we’ll take our next question from Matt O'Connor with Deutsche Bank.

[Matt O'Connor, Deutsche Bank]

Good morning. Let me talk about the timing of liquidity deployment this past quarter, obviously, securities went up a lot. It sounds like you had some of that. But what made you decide kinds now's the right time. We've seen the 10-year move up, but actually mortgage rates and I think rates on the types of securities that you would have bought were probably stable or down. And most people I think are expecting higher rates later this year. So what kind of drove you to deploy what seems like most of your excess liquidity this past quarter?

[Daryl Bible, CFO]

So Matt, ideally, we would like to take this excess liquidity that we have and deploy it in loans, what we're seeing is that we just have a fair amount of payoffs in the PPP. But as businesses really come back and have a lot of momentum and start growing, as we get into the middle of latter half of ’21, we really want to deploy that excess liquidity in lending. I would say that we decided to put some of that liquidity into the investment portfolio. We did that throughout the third quarter. We did partial heads up our hedges on them, basically to help with a mark-to-market on that. So when we added about $25 billion, $30 billion to the investment portfolio, we did have hedges on there about $20 million that we put on to help with the market risks that we have.

So net-net, we feel good with what we've done. The real uncertainty on a go forward basis with all these new stimulus packages is, we could get potentially another $10 billion or $20 billion more liquidity into the balance sheet. I think we need to evaluate what we do with that excess liquidity whether we keep it at the Fed or invest it or ideally lend it out, which is the main primary objective.

[Matt O'Connor, Deutsche Bank]

Okay. That's helpful. And then circling back on the incremental cost related to deal, obviously you’ve been incurring these already and I think the first time which is getting a lot of attention, but how we see these on the other side right, so like you did increase the net cost saves and right size having the synergies even though it really seems like it will become, how will we see the payback of that incremental $1.8 billion if you can break that how somehow?

[Kelly King, Chairman and CEO]

So these as I was describing are really investments, so think about this as we're building a whole new commercial loan deliveries. There are some whole new mortgage loan delivery system. You will see the benefit of that in terms of incentives as just more efficient systems of the newer and the other is the effectiveness in terms making client meet. So we can mortgage, there has been more mortgages because they're more efficient. You get more mortgage applications because you have a better client experience. So it's just like if you recall rundown and run out worth $200,000 miles, you make an investment, you say the benefit of that in terms of experiences less breakdowns etcetera, etcetera. So is it an investment that is the best way I can describe you to think about.

[Operator]

We'll take our next question from Erika Najarian with Bank of America.

[Erika Najarian, Bank of America]

My first question is on revenues. Kelly you were very upbeat on the future of this company and you appear to have actually quite upbeat on the future of economic growth and I am wondering if you think about going past the first quarter, how should we think about your best case for economic recovery relative to loan growth, which was where your peers were surprisingly upbeat and also specific to you the insurance outlook?

[Kelly King, Chairman and CEO]

Erika, we are upbeat as well. I'd say and I am upbeat with regard to the economy. This economic downturn is dramatically different from what we've all experienced in the past. If you take the money correction it was about our commercial real estate level, 2000 was a technology bubble, 2008 on the residential real estate bubble. There wasn’t [ph] there was nothing fundamentally wrong with the economy. In fact had 10 years of robust growth in my very, very low inflation.

We just show it all. That's important because we're not underlying the pending issues that call us the economy to spur. Now if you kept it and shut off 10 years, it has innovation, but given where we are etcetera we fully expect that you are most likely to see a stronger snap back in the economy than most people expect. When we talk to our clients and prospects, they are really pretty upbeat and they spend things like the time to get on with it.

We're ready to go. We're making investments and we've seen that in terms of our robust pipeline of loan reversal activity and so we are upbeat with regard to the economy. We think it will be slower in the first part, you’ve seen the midpoint stimulus will have that sign, but mostly this is and consumers are seeing more confidence.

Look when the vaccines are out there, would say all and as that becomes more widespread in terms of the objective, fear goes down, confidence grows us. People are ready to live again, people are ready to invest, are ready to run their businesses. So I fully expect by the time we head towards the fall and end of the year, you're going to be really surprised in terms of how robust this economy is. That will show up in terms of our commercial loan activity in a very big way. You're likely to see more residential loan growth than we would have expected in the slower economy and certainly you'll see in terms of our insurance activity as well.

Let me just turn quick to Chris Henson and let him give you some color with regard to insurance that is very important.

[Chris Henson, Head, Banking and Insurance]

Thanks Kelly and Erika thank you for the question. So maybe just to sort of fourth quarter and maybe just the outlook to your point, one of the best quarters that we have had in some time and with all the drivers of organic growth are really kind of hitting, hitting on all cylinders, client retention has stabilized in and retail at north of 90% for the last eight months wholesale, really strong at 85%, we're really seeing the cause of the factors in the market. Standard carriers are pushing risk to the wholesale market, and we're benefiting from that. Pricing another element organic growth as strong as we're in the hardest market we've seen in two decades, rates are up in the industry, north of 7%.

And it's anticipated that we'll continue to see some hardening and acceleration into ‘21. Our new business, new business in 2019 was up in the 12% to 13%. That was as good as we've seen and we hit COVID. We were kind of negative 4% to 6%, didn't know where the year was going to shake out. But this quarter, our new business was up 19.5% up 8% year-to-date, some of the best numbers I have ever seen. So that all led to an organic growth number that we reported 2.9% to like quarter, 4.3% year-to-date. But just to key in on one point Daryl made, I think it's really important.

The 2.9% growth number was really negatively impacted by one-time MOE related piece of insurance that was booked for our MOE deal in Q4 ‘19. So if you exclude that noise, organic growth really would have been on a core basis 4.9%. In terms of output, we expect first quarter commissions to be up in the 10% range, we're moving from our third best quarter of the year to our second best and first, obviously uncertainties in COVID that impact the economy. But the outlet is really strong given accelerator pricing, exposure units in the business are holding. We're growing excess and surplus lines because of the shift that I mentioned in the standard cares of support retail pushing it to E&S.

And we're really benefiting from that diversification. And the pricing momentum, you think about the markets digest and the COVID impacts, CAT losses. We had 30 storms this year, the most in history in any given year. And three of the largest years in history of CAT losses occurred in the last four years. So it's got upward pressure and then lower interest rates, which puts pressure on investment income for underwriters. So pricing up 7%, you're seeing examples of things like in excess of 12.5%, D&O up 11.5%, property was we had a lot of up 9%, up in all classes all accounts.

So looking forward, what we're expecting is in first quarter is somewhere around the 5% kind of organic growth rate number. And, we think that elevator catastrophe level low interface, all that's really going to go and keep it propped up. And Kelly mentioned acquisitions, we were able to close five in the fourth quarter, and we expect more in 2021, so really bullish about insurance going forward.

[Erika Najarian, Bank of America]

Got it. Thank you. That was really helpful. My second question is a two-partner on expenses. Daryl, if you can maybe briefly describe, what was in that $1.8 billion number, that would assure your investors and it just doesn't linger in the run rate? I think everybody gets scared when they see personnel as a descriptor. And going back to Slide 21 as a follow-up question to that and a follow-up question to Betsy's question. What do we do with that 3.037 number that annualizes to 12.16 as we think about your 2023 run rate? Is that a base for the run rates that includes the savings plus the growth rate just help us think about how to think about that number for 2023?

[Daryl Bible, CFO]

So I'll start on the latter question first. So it's pretty simple. We basically gave you the guidance for fourth quarter of ‘21, which was a $2. 940 billion, in there that excludes the restructuring, MOE, amortization and acquisitions. That said, so that's the number we're targeting to get for fourth quarter of ‘21. That's pretty simple. And then that will continue on in ‘22 when we get all the cost saves into the net $1.6 billion. Your other question on ’21, what was the question again the first part?

[Erika Najarian, Bank of America]

Yes, if you can describe the types of expenses you're incurring in that $1.8 billion, yes, yes.

[Daryl Bible, CFO]

Yes, it's the technology projects. And so the expenses that we can carve out a one-time cost like when we decommission something or something is put out of use, from that perspective has no future benefit. That's in the original merger and restructuring charges. But when you have developers going in and you have people going in with systems, and you have architects building out are new and they're basically building a whole new Truist environment and technology. All those are real costs, we're doing all these technology costs all at once.

All that has future benefit, we would typically not carve that out as merger and restructuring. It's basically just the combination of doing a lot of technology projects all at once. We just thought it was fair to call out because you would never really think of doing this all at once if it wasn't for the merger. But as Kelly said, at the end of the day, we're going to have a much better client experience, we're going to have much better performance overall. And you should see the benefits of all these systems integrated by doing the best between each of the systems that I think you're having a lot of revenue and other synergies going forward.

[Kelly King, Chairman and CEO]

So keep in mind when you're doing this project, you bring all those consultants in, but you also get them out. So with regard to consultants, we have a narrow front door and a very big back door. I'm going in the back door.

[Erika Najarian, Bank of America]

That's helpful. Thank you.

[Operator]

We'll take our next question from Bill Carcache with Wolfe Research.

[Bill Carcache, Wolfe Research]

Thank you. Good morning. I had a question on bad book repricing dynamics, and how to think about that from here, for Legacy BB&T and other banks more broadly, we saw downward pressure on loan yields persists throughout the last SERP cycle despite having a steeper curve. Can you discuss whether that downward pressure on yields is a dynamic, you'd expect to persist throughout the remainder of this SERP cycle as well?

[Daryl Bible, CFO]

Bill, I would say in a normal balance sheet structure that would make a fair amount of sense, what we have going on our balance sheet, remember, we have some purchase accounting, we have PPP, and all that, we actually saw our yields, you can see that on our tables, you can see that we actually had one yields higher for those various reasons. That said, I would tell you the steepening of the curve, we are asset sensitive, we’re asset sensitive across the curve, little bit more short in the longer-end.

But as the yield curve shifts, we will benefit from that, 25 basis point steepening of a curve will basically give us two to three basis points in core margin. So it is a phenomenon, if you look at how things are going on and off on a pure basis actually look at credit spreads going on, our commercial credit spreads are going on maybe three or four basis points higher than what they’re coming off. And so I think all that is relatively good from that perspective.

[Kelly King, Chairman and CEO]

Yes, let me just add to Daryl’s point, that's also a business mix and focus issue. What we’re currently traditionally a different backward look, on a forward basis as Daryl noted, I mean we’re seeing improvement in margin that has to do with focus type of relationships, value that we're adding all those type things, and as he noted, you see that particularly in the commercial side.

[Bill Carcache, Wolfe Research]

Understood, that's really helpful. And just as a quick follow-up on that same question, to the extent that PPP 1.0, and then 2.0 are going to be sort of contributing to the NIM in this SERP cycle, can you discuss how long you'd expect those tailwinds to persist through ’21 and then not ’22 or would they carry into ‘22 as well?

[Kelly King, Chairman and CEO]

You want to call that?

[Daryl Bible, CFO]

Yes, Chris, you want to start this one? And I'll finish off?

[Chris Henson, Head, Banking and Insurance]

Sure. Yes, we do obviously plan to participate in Round 2, probably in the neighborhood of $3 billion or so. We see most in Round 1 playing out through ’21 and Round 2 probably coming in, the first half of the year and then rolling out the back half of the year. Really hard to call exactly when what quarter exactly that that was going to flow out. But to answer your question that I would say 90 plus percent of it should be gone by the end of ‘21.

[Daryl Bible, CFO]

The thing I would just add to that Bill is that it has a huge impact obviously on core margin depending on when the forgiveness happens and it could be anywhere from three to five basis points depending on the amount that actually happens in any given quarter. One thing to note, round two is really focused on more smaller loans. So those actually drive higher fees, but our average fee on round one was about 2.7. Our estimate -- this is just an estimate because it's just now starting to roll out, you might see north of 5% fees on round two. We'll have less volume, but it will also have a huge impact on those as well.

[Kelly King, Chairman and CEO]

And just to give you a sense, we've invited 100% of round one through the path of forgiveness, but they submit information at different times. We've received and proposed on the SBA about 40% of that to this point. So some of the timing is really determined by the timing of the client provide the information.

[Operator]

And we'll take our next question from Ken Usdin with Jefferies.

[Ken Usdin, Jefferies]

I was wondering Daryl, you could provide us a little more color on that commentary you gave about the first quarter revenue outlook, I believe you said down 3% to 5% FTE. Can you help us understand just what, Chris gave some color on insurance but kind of bifurcation between what you expect out of NII and fees and what the drivers would be especially in those other fee areas in addition to insurance, thanks?

[Daryl Bible, CFO]

Yeah, I'll be happy to do that. So when you look at margin because we have the difference between our reported margin and core margin, we are going to have less over time accretive yield going into our margin. Now that's volatile, I would say that that could be down anywhere from two to four basis points unless accretive yield that impacts reported margin on a quarterly basis. So that trends down, it's just how much is down kind of goes back and forth from that.

From a core margin perspective, our core margin is actually holding up really well. We've done really well in the past couple of quarters with that. The uncertainty we have is that how much more liquidity when you get into the balance sheet and liquidity and the balance sheet pressure to core margin. If we decide to invest in equity and securities, it gives us a little bit more NII, we view it fairly basically just trend a lot of NII. So we estimate those decisions as we go forward, but depending on how much liquidity we gain with the packages, core margin, it could be a little bit volatile. I think you have to move -- shift to net interest income and focus on net interest income and what the impacts are until that in front of there.

On the fee side, I would just tell you that the business has had a lot of momentum. Insurance always is very strong in the first quarter achieving the strong quarter, but if you look at those areas in investment banking and trading, huge pipelines they had build in the fourth quarter. Kelly is right with the economy. He could have a great quarter in Joe's world and whilst they have a lot of momentum, they're adding more accounts in our retail area add traction, our community bank commercial actually is growing commercial loans and you look at the detail, I don’t know if Bill or Chris want to comment on the momentum we got on the revenue on those businesses.

[Chris Henson, Head, Banking and Insurance]

If we look at things like pipelines going forward and production in the fourth quarter, we have a reason to be optimistic that's against a headwind though of PPP paydowns and utilizations being at uniquely low level. So I think the things that we can control production pipelines are doing well and then I think we'll see the benefit of that over time whether that manifest itself in first quarter, second, third or fourth will be dependent upon all the things that will build confidence and market acceptance of where we are.

[Bill Rogers, President and COO]

I might just add opportunities we're seeing really for growth, auto is very strong right now. We were up about a $1 billion in average balances. We see that continue into the first part of the year and warehouse lending because of the environment is also very, very strong.

[Ken Usdin, Jefferies]

And just one more follow-up on that 29.40 number Darrell, so is that -- it seems like to be a real landing point that you're targeting before the $70 million quarterly version of the $70 million of insurance ads just to get to the base. Without that 2940 also be inclusive of incentive comp or core underlying cost inflation. It's an absolute goal that you're trying to get around that number before we have the acquisitions and other stuff?

[Daryl Bible, CFO]

Our fee income is still strong and all that and I have to tell you it's meaningful and have to carve it out like we did this past quarter that would be actually great story to tell you. So we will continue to try to carve out when we think it makes sense to carve out that variable comp. Obviously, we're a dynamic company and things remain, but just to be sure we're doing, but everybody understands, we're not changing our commitment. We're back on our way from the $1.6 billion that we made in February '19. We're going to get those cost savings,

[Operator]

And we'll take our final question from Mike Mayo with Wells Fargo Securities.

[Mike Mayo, Wells Fargo]

Just back on the merger savings $1.6 billion year-over-year reiterating that net number that's pretty clear, you have 40% of the savings already and only 12% of the branch closures you expect to exceed on the non-branch footprint part. So why not increase that, actually what would it take to increase that estimated $1.6 billion net or have you already increased the growth merger saving number what you haven’t given to us and reinvesting some of the proceeds and does that all add up to part of the operating leverage in 2021 or not, you didn’t quite guide for the year, thanks.

[Kelly King, Chairman and CEO]

So Mike you're really right, the immediate parts, we're just trying to anchor on the $1.6 billion. We're not trying to hold out what we think is possible in terms of beating that but some of the things I talked about in terms of and we can have more branch closures than we've anticipated. We're not predicting that at this moment, but that's certainly a possibility. We certainly are going to be intensely focused on expense optimization and there are immediate opportunities for duplication across the enterprise areas that we can tend to invest in and reduce ongoing expense run rate.

So the $1.6 billion related to basically putting the two companies together. The other things we do more in terms of transformation and additional opportunities we find whether non-branch office space, we see that target, maybe we get a few more branches. We certainly are very optimistic in terms of -- and expect to focus on doing that. We just want to be clear about what we've said we can do and then hold out we can probably beat that.

[Mike Mayo, Wells Fargo]

With that using up my second question, in terms of the gross number, I know that you're investing a lot of that, is your growth number going higher as part of that net?

[Kelly King, Chairman and CEO]

Go ahead Daryl.

[Daryl Bible, CFO]

So I won't tell you we are investing more than what we originally sight, but we think these are the right investments that we're making in our people, technology, digital are all for the right reasons. So we are making more investments than what we originally thought. We haven't communicated that number publicly, but just now that we are going to get our net savings maybe more clear at some point but let us get the $1.6 first and right now we are making a lot of investments in the company as we're moving forward and you're seeing it in the results.

Look at our revenues, look at our account growth that we're getting and we're doing really, really well in the midst of a lot of conversion, which would really distract a lot of businesses. We are performing at a very high level.

[Mike Mayo, Wells Fargo]

And then second question, a lot of talk about the -- lot of talk about insurance, and bringing in the big guns with my peer colleague my firm insurance count spoken with the insurance managers, I want to ask the question on my behalf, go ahead.

[Unidentified Analyst]

So the one question I had, you guys posted 5% adjusted organic growth in the fourth quarter which seems like a pretty impressive number relative to some of the other companies that cover and then also given the impacts that we see from COVID on the industry, as you guide about 2021 and some of your other comments, it seems like growth will continue on an organic basis right to kind of should come in above that 5%. It is really just mainly expand there.

And then also could you give us a sense of you guys a little bit different others obviously have good feel of wholesale and retail in your insurance business and the organic front both of those businesses as once they've been outperforming versus the other or are they consistent?

[Chris Henson, Head, Banking and Insurance]

Thanks for the question, this is Chris. You're right, we did finish around 5% and based on what I see now, I think around 5% would be certainly a good number for call it the first half of next year. We call it the last half when we give the quarter in or so. So we feel very, very good about it but I must tell you if pricing holds and I believe that it will and if the economy does begin to turn via vaccinations getting pushed out to the country and we're able to see then better new business growth as a result, some example of what we saw in the fourth quarter, could it be better, I think it's possible that it could.

So I think the opportunity really kind all the cylinders have opportunity to move. I do think that growth is going to be dependent upon what happens with COVID and the economy and kind of get all that going, but certainly we do get vaccinated out stimulus first half of the year, I think it bodes well for organic growth in that business for sure and your question about is the margin better than one than the other, strategically as a bank, the reason we want exposure to both, if we want to bank, it probably wouldn’t matter as much, but what we're really interested in is for this business to provide good downside protection when credit markets are challenging and you can see it this year this past year, 4.3% organic growth for the year I think is pretty solid given the backdrop.

And the reason we do that is because the wholesale and retail is going to operate in difference to each other. So you're going to depending on whether you're in hard in soft market, one it is going to help balance the other that we're interested in the combination of the growth there. So certainly a little bit better contribution from wholesale today than retail, but they're making nice contribution.

[Operator]

And ladies and gentlemen, that is all the time we have for questions. I'd like to turn the conference back to Mr. Ryan Richards for any additional or closing remarks.

[Ryan Richards, Director, IR]

Okay. That complete the Q&A portion of our call. Thank you, Abby and thank you everyone for joining us today. I apologize to those with questions that we didn't have time to get to. We will reach out to you later today and we wish you all the best. Goodbye.

[Operator]

Ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.