Truist Financial Corporation
Q4 2020 Earnings Call Transcript

Published: 21 Jan 2021

[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:]

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.

[Kelly King:]

Thank you, Ryan, and good morning, everybody. Thank you very much for joining our call. We really appreciate that. You know, I would say overall, this quarter and this year are very good given the challenging environment that we faced. We had a continued focus on our strong culture, it's activating very, very well. We're executing well on our revenue synergies. We had really effective expense focus and we made appropriate investments for the future, and importantly, supported our team mates in difficult environment, and kept our clients and communities number one. Our purpose is to inspire and build better lives and 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 would point out to you that with regard to our values, ultimately 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 they're living with 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 work hard to try to help that be possible for our teammates. If you're following along on the slides, let's go to Slide 5. I just wanted to point out that, you know it's nice to say -- pardon me, that you have a culture, it's nice to say you have an important purpose, but is more important to live it. So I just want to point out a few of the things that we have done that I'm proud of in terms of living our purpose. You know that during the course of the year, we launched our Seeds of Hope program where we helped our teammates with money to grow, do little projects, little things to help people in need. We launched our Truist One Team theme -- fund, our Home Page program. Our Truist Cares program was very effective where we invested over $50 million to meet the immediate long-term needs of our communities, our clients and our teammates.

[Bill Rogers:]

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 began experiencing an enhanced digital platform this year. And this is demonstrated on page 9. While our foundation is two leading digital experiences, we're going to accelerate the delivery of features like personalized financial insights, AI-driven chat bots, other client-centric enhancements. We're going to pilot this in both platforms in the second quarter and then we'll begin migration in waves in the third quarter and complete full migration to premier Truist experience for our digital clients by year end, sort of emphasizing Kelly's point of how much has been done this year. As you can see on page 10, we are experiencing excellent digital adoption and usage from our clients. So for the 12 months through 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. This is an area where we're already seeing the benefits from our investment and on the right side, we show some recent enhancements.

[Daryl Bible:]

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 both 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 are integral to building a best of 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 criticized and classified loans decreased 8.4%. The provision of $177 million benefited from lower charge-offs and a modest reduction in reserves. Due to the decision to exit the small ticket loan and lease portfolio, the 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 program 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 latest CCAR test. We believe this outcome reflects prudent client selection and underwriting as well as diversification from the merger. Turning to slide 18, the allowance for credit losses decreased $30 million largely due to moving the $1 billion portfolio into held for sale. Our macro assumptions include, unemployment remaining 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 the repurchase of up to $2 billion of the company's common stock starting in the first quarter. Our intention is to maintain 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 Series F and G preferred stock, and liquidity remained strong and we are prepared to meet the funding needs 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 sourceable spend 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 saved from technology are highly dependent on core bank conversions because we can’t 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 net 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 ratings, commissions on higher revenue and the non-qualified expenses which are substantially offsetting 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 less purchase accounting accretion and a change in the core margin. We expect core margin to 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:]

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:]

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

[Operator:]

We'll take our first question from John Pancari with Evercore ISI.

[John Pancari:]

Regarding the $1.8 billion in incremental operating expenses, could you just talk about that, like how that number has evolved versus your original expectation? I know it's the first time you're giving us that target. So how does that compare to where you originally expected and how has 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 can continue to see upward pressure on that amount, or are you pretty confident in the $1.8 billion in that it's going to remain at that target? Thanks.

[Daryl Bible:]

Yeah, John, thanks for that question. I would tell you when we were putting the transaction together in late '18 and we announced in early '19, we thought $2 billion was the merger and restructuring charges, and we're pretty much on target with that. As we continued to work on all the integrations and we saw the opportunity to really build the best in breed of what we could do with our F systems and technologies, we just knew that we would basically be having, I would call it a lot of technology projects on steroids all at once, and that this would be a really unusual time to have all that costs 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. But we believe it was for the right reasons and makes all the sense that it's going to help our clients and really produce good performance for our Company going forward.

[Kelly King:]

So John, a way to think about that conceptually is that, that $1.8 billion is really as I think about it like our capital allocation for future benefits in terms of client focus and better systems and better processes. So it will flow through expenses. We will continue to report it too. Also you can think about it more in terms of an investment.

[John Pancari:]

Got it. Thank you. That's helpful. And then, separately on the -- on the branch and non-branch real estate reduction. I 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 tied to the merger?

[Daryl Bible:]

Absolutely. Yes, . So when 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 and 800 branches, as 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 will tell you COVID has helped us in a number of ways in that it's emptied out the buildings, so we can move quicker in the consolidation and my guess is, as we continue to make these combinations that we may actually exceed what we had originally estimated in real corporate real estate consolidations because of COVID and just the behaviors of people working at home.

[John Pancari:]

Yeah. Right, that was exactly what I was getting at, because I am assuming some of the corporate real estate reduction opportunity got bigger. You guys saw greater opportunity as COVID set in. So I was just wondering if that could present upside to your cost saving expectations if corporate real estate reduction can be more than you thought.

[Daryl Bible:]

Yeah, so we have a plan for where we are executing now in the $4.8 billion, once we complete that plan, I'm sure Kelly and Bill and Executive Leadership will reevaluate it and see if there is opportunity to do more in the future.

[Operator:]

And we will take our next question from Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

Hi. 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:]

Well, Betsy that's a huge part of it, and I'll let Bill give you some deep color with regard to that, but this is a concept of really integrating the way we focus on the client. You know, many institutions focus on a siloed way in terms of products and different 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, over really several decades. And it's very, very effective, very efficient because everybody owns a client. Everybody is focused on meeting all the needs of the clients all the time. But we're seeing spectacular early positive feedback in terms of how it's working especially between the community bank and CIG. Bill, you may want to comment on that.

[Bill Rogers:]

Hey, Betsy. I mean, this is one of the really strong cultural alignments 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 evolves from that. And we're seeing it. I mean, and the model is working. As Kelly noted, a couple of examples and the Investment Banking outperformance this quarter, in particular, I mean there 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 numbers, you see it in the Wealth numbers. So it's all part of this structure and focus. And we have -- 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'd say this quarter was probably one of the better examples of how the engine is really firing on all cylinders.

[Betsy Graseck:]

Okay, all right, thanks. And I appreciate that. The fee -- fees really jumped out on the screen. I guess the follow-up question on the expense line here is around, you know, some of the core expense inflation outside of the cost saves, you've got merit increases, bolt-on acquisitions, investments for revenue growth, etc. 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:]

So Betsy, let me just mention in general, we have the itemized areas you've listed, but we are really focusing on expenses on a broader conceptual approach, we do in obvious. I mean, the obvious are, you know, as you got two of these, and you only need one and those kinds of things that's just going to happen. But we are heading into a period now where it's time for us to focus on optimization. It's time for us to focus on transformation or re-centralizing the business. Because so far what we basically have done is think about it as put two big banks together. Now, what we have -- and we get the -- we get less savings from that, just natural overlap. So, now we have the opportunity to re-conceptualize the business as we transform it post-COVID and all this going on with regard 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 are doing the right things in terms of investments and expense allocations to meet the client's needs first, and we believe that will throw off positive benefits in terms of expenses.

[Daryl Bible:]

Betsy, what I would say in my prepared remarks, I gave for the fourth quarter of this year the $2.940 billion, now that excludes the merger and the restructuring charges, the incremental MOE 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:]

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:]

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:]

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:]

So these as I was describing are really investments, so think about this as we're building a whole new mortgage long delivery system. You will see the benefit of that in terms of -- in some cases just more efficient systems because they're newer, and the other is the effectiveness in terms of meeting client's needs. So we can -- for example in mortgage, you can do more mortgages because you're more efficient. You get more mortgage application because you have a better client experience. So it's just like, if your car has done a rundown and run out of 200,000 miles, you buy a new car, you make an investment, you see the benefit of that in terms of driving experiences, less breakdowns etc, etc. So it is an investment, that is the best way I can describe it to you to think about.

[Operator:]

We will take our next question from Erika Najarian with Bank of America. Erika, your line is open, please check your mute button.

[Erika Najarian:]

Hi, thank you. My first question is on revenues. Kelly, you were very upbeat on the future of this Company and your peers were actually quite a bit on the future of economic growth. And I'm wondering as we think about going past the first quarter, how should we think about your base case for economic recovery relative to loan growth, which was -- well, your peers were surprisingly upbeat and also specific to you the insurance outlook?

[Kelly King:]

Yeah, Erika, we are upbeat as well. I would say, and I'll take a second why I'm upbeat regarding the economy. This economic downturn is dramatically different than what we've all experienced in the past. If you take the money correction, it was about our commercial real estate bubble, 2000 was a technology bubble, 2008 was the residential real estate bubble. There was no bubble here. There was nothing fundamentally wrong with the economy. In fact, we had ten years of robust growth, you know, have very, very low inflation, we just shut it off. That's important because we're not underlying impending issues that caused the economy to sputter. Now, if you kept it shut off for ten years, you have another issue, but given whether we ordered the vaccines, etc, we fully expect that you're most likely would see stronger snap back in the economy than most people expect. When we talked to our clients and prospects, they are really pretty upbeat. They are saying things like it's time to get on with it. We're ready to go, we're making investments and we're seeing 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, picking up steam as you head through the mid part, stimulus will have that summed, but mostly businesses and consumers feeling more confident. Look, when the vaccines are out there, I would say all, and as they become more widespread in terms of being injected, fear goes down, confidence goes up. 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:]

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 elevated catastrophe level, low interest rates , all that's really going to keep it propped up. And Kelly mentioned acquisitions, we were able to close five in the fourth quarter, and we expect more in 2021, so really bullish about insurance going forward.

[Erika Najarian:]

Got it. Thank you. That was very helpful. My second question is a two-parter on expenses. Daryl, if you can maybe briefly describe, what’s 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:]

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:]

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

[Daryl Bible:]

Yes, it's the technology projects. And so the expenses that we can carve out, 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, you know our new 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:]

Erika , keep in mind what Daryl emphasized, 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:]

That's helpful. Thank you.

[Operator:]

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

[Bill Carcache:]

Thank you. Good morning. I had a question on back 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:]

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 loan yields higher for those various reasons. That said, I would tell you the steepening of the curve, we are asset sensitive, we’re asset sensitive across the curve, 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:]

Yes, let me just add to Daryl’s point, that's also a business mix and focus issue. So what would be traditionally a different back book 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:]

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:]

You want to call that?

[Daryl Bible:]

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

[Chris Henson:]

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 all is 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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

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:]

Go ahead Daryl.

[Daryl Bible:]

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:]

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:]

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:]

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.