Truist Financial Corporation (TFC) — Q3 2019 Earnings Call Transcript

Thank you, John and good morning everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer; Chris Henson, our President and Chief Operating Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter and provide some thoughts for the fourth quarter of 2019. We also have Clark Starnes, our Chief Risk Officer, participating in the Q&A session. We will be referencing a slide presentation during the call. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Before we begin, let me remind you BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this presentation that express management's intentions, beliefs or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. In addition, in connection with the proposed merger with SunTrust, BB&T has filed with the SEC a registration statement on Form S-4 to register the shares of BB&T's capital stock to be issued in connection with the merger, which contains a joint proxy statement prospectus that has been sent to the shareholders of BB&T and SunTrust. Please refer to the cautionary statements on Page 2 regarding forward-looking information in our presentation, our SEC filings, and the legends on Page 3 that relate to additional information and participants in the solicitation. Please also note that our presentation includes certain non-GAAP disclosures. Please refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP. And now, I'll turn it over to Kelly.

Thank you, Rich. Good morning everybody and thanks for joining our call. This is really a very strong quarter for BB&T, especially when you look at the amount of work and effort that is going into preparing for our merger of equals with SunTrust which is going very well and I'll talk about in a bit. It was another quarter that was driven strongly by our non-interest income. Loan growth is very strong, excluding the $4.3 billion on a mortgage sale, which we'll talk about a little bit later. We made excellent progress on our merger of equals with SunTrust and I'll talk more about that in a bit. Just looking at some of the numbers, our adjusted net income was $832 million, up 3.7% versus the same quarter last year. Diluted EPS on an adjusted basis was $1.07, up 3.9% compared to the same quarter last year and very respectable returns on an adjusted basis ROA, ROCE, and ROTCE respectively were 1.5%, 11.36%, and 18.07%. Our taxable equivalent revenue was at $3 billion, up 2.5% versus third quarter last year. Our fee income was very good, at $1.3 billion, up $64 million or 5.2%, which is significantly better than our earlier guidance. It was driven by mortgage banking which was up 42%. Insurance is really outperforming, up organically 8.7% versus third quarter of 2018, Chris is going to give you more color on that in a bit. Our investment banking and brokerage were up 12% on a like quarter basis. So loans held for investments were actually down 4.8%, but again, if you exclude this $4.3 billion on a mortgage sale, we're up 6.5%, which was over our guidance. Daryl can give you more detail if you have questions, but the $4.3 billion mortgage sale was simply purchase loans that we have purchased at a premium, they were paying off at an accelerated rate, it makes sense for us to effectively redeem those or sell those and it improved our rate positioning going forward. Our reported net interest margin decreased five basis points to 3.37%; core net interest margin decreased also five basis points. But if you exclude the loan sale, reported and core net interest margin only decreased two basis points. Again, Daryl is going to give you a lot of color with regard to that. Our adjusted efficiency ratio was 57.1%, down slightly from 57.3% from the same quarter last year. Expenses reflect high incentives and commissions versus the third quarter of 2018 due to the improved performance in insurance, mortgage banking, and investment banking and brokerage. Credit quality was really strong. We'll answer questions about that, but across the board, credit quality continues to be very, very strong. We did have some strategic activity during the quarter. We redeemed $1.7 billion of preferred stock and replaced it with a like amount at lower cost which is just an economic transaction. We did sell the $4.3 billion, I just talked about. We did increase our dividend 11.1% at the July meeting, which is a very very healthy three-plus percent dividend yield. We also did receive shareholder approval, nearly unanimous, from BB&T and SunTrust on the merger and on the name. We've talked about and have named 75% of our Truist leaders. I'm going to give a bit more detail in just a minute about the overall really positive progress that we've made with regard to the upcoming merger. If you follow along on Page 5, on the selected items, just a call out. As I said, we had preferred stock redemption where we were covering the expense of the capitalized insurance issuance cost that was $46 million pre and after-tax, a negative hit of $0.06 a share. Incremental operating expenses related to the merger was $40 million after-tax, which was a $0.05 negative hit. Merger-related and restructuring charges of $26 million after, which is $0.03. We did have a gain on the impact of the mortgage sale; that was the positive $0.02. So, when you net that out, we had a negative impact on EPS of $0.12 for the quarter. If you want to take a look at the next slide, Slide 6 on loan growth, I feel really good about loan growth. If you look at the underlying performance, again excluding the mortgage sale, we had 6.5% annualized, which is very strong, I think, relative to what's going on in the marketplace, what's happening with a lot of our competitors. Very pleased with C&I, which was up 7.6% third quarter to second quarter annualized. We did have very low performance in commercial real estate, very much by design, as we discussed with you in the last couple of quarters, we've been dialing back because we've seen some softness in some of the commercial real estate categories, and so we're being careful about that. If you look on the table on Page 6, you will see that the C&I performance was really broad based across eight or ten different categories. It's not just a one-off type of loan category performance. It's really, really broad-based and that's very, very good. Our mortgage loan, by the way, did very well; they were up 7.4% versus the second quarter once you exclude the sale. So just talking about what's going on in the marketplace. As all of you, I'm sure know, it's difficult to figure out what's going on with all the conversation, much of the rhetoric, but what I tried to do is just talk to our people, talk to clients and see what's going on. The fact is today, as I just indicated, our clients are still borrowing. They still feel basically confident. Our production and our pipelines are very strong. But I will tell you, there is more conversation going on today about concerns regarding the trade wars; it's beginning to create a level of uncertainty. Even though the economy is still strong today, over time uncertainty will begin to integrate in terms of negative impacts in the economy. We saw some negative retail sales yesterday. Is that a one-off? We just don't know. I personally think it's challenging for all of us to be calm right now and not try to draw huge conclusions from individual anecdotes that pop up every day or sometimes multiple times during the day. It's better, in my view, to back away and take a long view. The truth is the long view of the U.S. economy today is very strong. We do have some clouds around the globe in terms of Brexit, although there was some potential positive good news out of that this morning, I personally think we'll have a reasonable trade deal with China by the end of the year. I personally think we'll have the new NAFTA approved and we will head into 2020 with a substantially better sense of confidence than we have today. But I could be wrong and that's why we've been very cautious in terms of everything we do, regarding capital liquidity and diversification because we simply are in an environment where placing a high bet on any one scenario, up or down, is not a smart bet. So, we've been cautious. We're basically guiding to neutral, with a slight psychological attempt towards the upside which we think will serve us well. If you look at Page 7, on deposits, I was very pleased with deposits. Obviously, this is kind of the big story today. How we all react to the substantial decline in the long and the potentially inverted yield curve back and forth, it's very challenging for everybody. We are doing very well. Our total deposits third to second are up 5.2%. We are managing the categories, like for example, our non-interest bearing deposits are down 1.4%. That’s the normal kind of disintermediation that's going on across the industry today. The 1.4% is really pretty low in that environment. Our money market and savings were up 9.6%. So that's looking very good. We've seen some movement in the categories, but when you get through that, 5.2% is very, very strong. We see a little movement in our mix, but our non-interest-bearing deposits are holding strong. Our client deposits relative to national market funding actually increased 3.6% annualized versus the second quarter of 2019. Our cost of interest-bearing deposits was 0.99%, down three basis points versus the second quarter. The cost of total deposits was 0.67%, down one basis point. So, really good management there by Daryl and Donna and all of our people in Treasury. I feel very, very good about that. It’ll be problematic as we go forward if we have some substantial spike down or up; we are not expecting that. We're planning to be relatively neutral going forward, but with a psychological little bit up. And with that, let me pass it over to Daryl.

Thank you, Kelly, and good morning everyone. Today, I'm going to talk about our excellent asset quality, margin dynamics, solid fee income, and expenses, and provide guidance for the fourth quarter. Turning to slide 8. Asset quality remains excellent. Net charge-offs were $153 million, up three basis points as a percentage of average loans. This was largely due to indirect loan seasonality and the resolution of a commercial credit. Our non-performing asset ratio was 22 basis points and is better than the previous we've seen in 2006. Continuing on slide 9. Our allowance coverage ratios remain strong. The allowance ratio was primarily impacted by the sale of $4.3 billion of residential mortgage loans and the resolution of a commercial credit, which lowered the reserve for unfunded commitments. Including these one-time items, the allowance to loan ratio remained at 1.05%. The provision was $117 million, below net charge-offs of $153 million. Turning to slide 10. Reported net interest margin decreased two basis points after adjusting for the sale of residential mortgage loans and related reinvestments. You might recall that the timing differences between the settlement of the mortgage sale and the securities reinvestment temporarily increased earning assets by about $2 billion and impacted the margin by three basis points. Excluding these items, core margin was also decreased two basis points. Net interest margin was impacted by lower rates, which reduced annualized yields by seven basis points on the loan portfolio and two basis points on the securities portfolio. The cost of interest-bearing deposits decreased three basis points, which partially offset the drop in asset yields. We pre-invested $5 billion in securities late in the third quarter to build liquidity for the merger; that reduced our asset sensitivity. This also creates negative pressure on our standalone margins in the fourth quarter. In addition, we are evaluating opportunities to restructure our balance sheet as we wait for the merger close. Continuing on slide 11. Non-interest income was $1.3 billion, up 5.2% versus the same quarter last year. Our fee income ratio was 43.4%, down seasonally from 44.4%. Insurance income was down $79 million due to seasonality but increased 8.7% from a year ago on firming market pricing and organic growth. Mortgage banking income was stable; higher production and servicing-related revenues of $24 million were offset by a decline of $25 million in net MSR valuation. Investment banking and brokerage commissions were relatively flat but up 12% versus last year. This was primarily due to higher managed fee accounts; service charges on deposits increased $7 million, partly reflecting more days in the quarter. Other income increased $35 million, primarily due to a $23 million increase in income related to assets for certain post-employment benefits—$17 million from client derivatives. Turning to slide 12. Non-interest expense was $1.8 billion, an increase of $89 million. The increase was largely driven by merger and MOE expenses, which are up a combined $54 million. Merger-related expenses totaled $34 million, which included relocation expenses, legal fees, project management costs and professional services. MOE expenses were $52 million, which included $39 million for personnel and $12 million for professional services. You can see the details on page 16 in our quarterly performance summary. Core expenses were up $35 million, including a $9 million increase for professional services, a $6 million increase in personnel expense, which includes a $23 million increase for certain post-employment benefit expense that was offset by a decrease in incentives and equity-based compensation. A $19 million increase in other expense was due to higher advertising and marketing costs and other items. Expenses increased 1.7% or $30 million from last year, excluding merger-related and MOE expenses. Year-over-year increase in adjusted non-interest expense was primarily driven by an $18 million increase in personnel expense due to higher incentives, a $34 million increase in expense reflecting higher non-service related pension expenses, higher operating charge-offs, higher advertising and marketing costs, which was partially offset by a $17 million decrease in regulatory charges. FTEs were essentially flat versus the second quarter but down approximately $1,500 from last year. Turning to slide 13. Capital and liquidity remain strong. The CET ratio was 10.6%, up 20 basis points due to strong earnings in the mortgage loan sale. The dividend payout and total payout ratios were 46.9%. We issued $1.7 billion of preferred stock and redeemed the similar amount of higher-cost issuances, which will save $4 million per quarter and have an earn-back of 2.8 years. Our modified average LCR ratio was 139%. To build liquidity for the merger, we pre-invested high-quality liquid assets at the end of the third quarter to facilitate compliance with the LCR ratio for Truist. In addition, we issued debt to build parent company cash which now exceeds $10 billion. These actions will provide negative pressure to BB&T's net interest margin, but it's prudent for Truist starting out with very strong liquidity. Now let's turn to slide 14 to review the segment. Community Bank Retail and Consumer Finance net income increased slightly to $446 million. Fee income decreased $15 million, primarily due to the decline in the net MSR valuation, partially offset by increased production revenue. Average loans and leases decreased $2.5 billion, reflecting the mortgage loan sale. Loan yields increased 12 basis points, while interest-bearing deposit costs were down four basis points. Non-interest-bearing deposits were about flat. Residential mortgage originations were up 11% from the second quarter; the production mix was 68% purchase and 32% refinance. Excluding the mortgage loan sale, a gain on sale margins declined 28 basis points due to a mix change to higher corresponding production. Continuing on slide 15. Community Bank Commercial net income increased $19 million to $338 million. Loan production increased 22% as higher C&I and CRE production offset lower dealer floor plan production. Loan yields were down 17 basis points versus interest-bearing cost down only one basis point. Non-interest-bearing deposits were essentially flat. Turning to slide 16. Financial Services and Commercial Finance net income was $185 million, an increase of $16 million. Total revenue increased $26 million, primarily due to higher Grandbridge income, capital markets and client derivative revenue. Average loan balances grew 7.6% annualized, helped by equipment financing and corporate banking. Loan yields were down 15 basis points and interest-bearing deposit costs were down 13 basis points. Non-interest-bearing deposits were flat from last quarter. Additionally, invested assets increased $2.7 billion versus the linked quarter and $5.3 billion versus last year. Turning to slide 17. Insurance Holdings net income decreased $50 million to $61 million, primarily due to seasonality. Now I’ll turn it over to Chris to provide more perspective on our performance this quarter.

Thanks, Daryl. So if you turn to page 18, purposely two slides really to reinforce our transformation plan that we call IHOP, which stands for Insurance Holdings Operating Plan, that continues to gain momentum. This is the plan John Howard shared with you last fall at Investor Day and it's built around 32 initiatives that we're working to execute over the next three years. As I said, we're about a year in. It includes implementation of new operating models, both in retail and wholesale, and a myriad of other revenue growth and expense synergy initiatives. If you look at the upper left hand chart there on page 18, you can see revenue for the segments up 9.3% or $44 million compared to the same quarter last year. As I've pointed out over time in the past, there are really three drivers of the strong organic growth. First is good client retention; retail was up about 91%, wholesale about 76%. New business volume, not renewals, totally new business volume was up 17% compared to the same quarter last year; that's the best number that I ever remember seeing. What’s more impressive is it has built each quarter throughout the year. The third driver really is pricing. And on the heels of the two largest insurable loss years in 2017 and 2018, we're continuing to see price lifts because of the tightening capacity in the market. For example, second quarter it was up about 3.5% this quarter, up about 4%. So retention, new business, and pricing are really driving the results you see in the lower left hand corner of organic growth. Organic growth is up 200 basis points to 8.7% in the quarter, which is about double what we would expect to see in the industry. We expect probably mid-fours in the industry. We believe the backdrop allows for additional tightening of capacity and continued lift in pricing as we go through 2019. If we flip over to page 19, I would say that our IHOP was really designed to help us drive a laser focus on enhancing the margin and then using the dollars of EBITDA production to reinvest in the business. If you look at the upper left chart, you will see absolute EBITDA is up $24 million compared to the same quarter last year to 27.6%. The strong organic growth that I shared with you on the prior page, combined with good solid cost control, is the third leg of the performance. You will remember we acquired Regions in July of last year; we're now 15 months into that, and we have exceeded all of our expense and revenue synergies. The combination of those three things has really helped us drive the results in the lower left chart on page 19, which is the EBITDA margin. You can see our margin compared to the same quarter last year is up 310 basis points to 21.4%. Now this is the lowest quarter of the year for us, so if you look at what our year-to-date margin would be, it would be in the 25% range. A lot of improvement has been made in margin enhancement. Lastly, I'd just leave you with a lot of focus on the use of data and analytics to really help our underwriters better understand the true risk in the client, which helps them long-term keep their rates down, and I'll say that's especially true in wholesale. In summary, I'm just very pleased with the progress that we have made in Insurance. I'll turn it back to Daryl.

Thank you, Chris. Continuing on slide 20, you will see our outlook. The following guidance is based on BB&T standalone. However, we continue to expect the merger of equals with SunTrust will close in the fourth quarter. We expect total loans held for investment to be flat versus the third quarter, mainly due to seasonality. Excluding this, loans would be up 1% to 3% versus the linked quarter. We expect net charge-offs to be in the range of 35 basis points to 45 basis points and the provision is expected to match net charge-offs plus loan growth. We also expect GAAP and core net interest margins to be down 7 basis points to 9 basis points. As we discussed earlier, we are building liquidity for the merger for the LCR, our liquid asset buffer and parent company cash. This will negatively impact net interest margin by approximately three to five basis points in the fourth quarter. Adjusted for the liquidity build, we expect net interest margin to decrease three to five basis points. We anticipate fee income to be up 2% to 4% versus the linked quarter, driven by insurance and mortgage banking. We expect expenses, excluding merger related expenses, to be flat versus the linked quarter. We expect one-time expenses for the merger of equals to be about $60 million to $80 million in the fourth quarter, mainly driven by personnel and professional costs. We anticipate an effective tax rate of 20% to 21%. Finally, BB&T's full-year guidance remains intact. In a challenging rate environment, we will continue to grow our revenues faster than expenses, driving positive operating leverage. This will be more pronounced once we close the merger of equals. In summary, the quality of our core earnings this quarter was excellent, resulting in strong loan growth, solid fee income versus last year, and excellent asset quality. Now let me turn it back to Kelly for an update on the merger of equals and closing Q&A.

Thanks, Daryl. It was truly a great quarter. I want to highlight the excellent work done in the loan, expense, and insurance areas. Regarding the merger update, everything is progressing very well. Our executive management team continues to meet weekly and is working effectively together. I couldn’t be more pleased. If you witnessed our meetings, you would think we’ve been collaborating for years. Bill and I are collaborating exceptionally well, and the entire team is focused on our goal of establishing this as the best financial institution. We have made significant progress in naming key leadership positions, with 8,000 roles filled, which is about 75% of the leadership positions. By the legal day one of the merger close, nearly all roles will be filled, and everyone will be prepared. We’ve successfully met our diversity objectives, a primary focus for us. We’ve done well in selecting benefits programs for Truist. One advantage of a merger like this is the opportunity to evaluate both companies and adopt the best practices from each, which we've achieved with our benefits program. We're confident that our clients, communities, and shareholders drive our efforts to create a worthwhile environment for our teammates and associates. On July 30th, SunTrust and BB&T shareholders almost unanimously approved the merger and the new name. The North Carolina Commissioner of Banks has approved the regulatory process, which is crucial. The next step is the Department of Justice’s approval of our divestiture plan, and we anticipate that the remaining regulatory approvals will follow. We feel good about our standing with the regulators, who are diligently reviewing the size and significance of this deal, as we are too. We believe we are still on track to close in the fourth quarter, though we can't guarantee it. In the last few months, we’ve made significant progress in merging the technology of both companies. In September, we finalized most of the technology ecosystems, choosing the best systems from each company. As a result, we will have top-notch systems across the board. We also recently conducted a dress rehearsal for the legal day one close, successfully testing around 100 merger-related work streams. We're prepared for the legal day one close. Importantly, we've had two offsite meetings to plan the development of the Truist culture. This process has been about integrating the best elements from BB&T and SunTrust. I'm thrilled with how this is progressing. Our culture encompasses our purpose, mission, values, and how we conduct our work. We've agreed on our purpose, mission, and values, and Bill and I are passionate about this aspect, considering it essential to our journey. The team is aligned, and discussions have been constructive, focusing on how we present this to the world. Our teams will be fully aligned, and as we roll out our purpose, mission, and values, they will be engaging and exciting. Following the legal day one, we will need to affirm various committees, policies, and practices for board review, which is currently in progress. Shortly after that, we will share our purpose, mission, and values with all teammates. Our primary goal is to engage with teams across the enterprise about our culture. We’re working with our marketing department on our branding plan and making good progress. There will be heightened excitement as we move forward. We remain confident in achieving our $1.6 billion in net cost savings. So far, we have not incorporated any revenue opportunities into our projections, but we're exploring them. Bill and Chris are leading efforts on around 20 revenue enhancement work streams, focusing on readily available opportunities. We want to exercise caution in our projections. I can assure you there are tremendous opportunities from merging the two companies due to their minimal overlap. We are eager about this potential. Since announcing the deal in February, my excitement has only increased, along with my confidence. The deal remains stable, the synergies are strong, and the economic benefits are favorable. As we progress, I feel even better about our executive team's depth, strength, and commitment and our teammates' enthusiasm. They recognize our collective alignment and the opportunities available. We sincerely believe we can empower our clients with a brighter financial future and create a fulfilling workplace for our teammates. Our communities need support, especially in this rapidly changing world and the rising economic inequality. We want to make a positive impact. On legal day one, Truist will be prepared to lead in finding solutions for a better life. Through these efforts, we aim to optimize long-term returns for our shareholders, and we are very confident about this. I thank Bill, the SunTrust team, and all BB&T associates for their hard work. Soon, we will be one team, and we are ready to proceed. Back to you, Rich.

Thank you, Kelly. John, at this time if you would come back on the line and explain how our listeners can participate in the Q&A session.

Hi. Good morning. I wanted to ask, Daryl, just a question on the fourth quarter outlook. When we kind of combined the outlook for loans to be relatively flat and NIM to be down, if we add in then, I guess, the average securities are probably up, given the liquidity build. How does the dollars of NII look, how should we think about that for the fourth quarter?

I would say, John, that if you look at our linked quarter, it will probably be down a touch, just because of the drop that we have in margin and flat earnings assets for the most part of linked quarter. A lot of that is just due to seasonality on the loan side, like I said in the prepared remarks. The margin decline, core margin is really down 3 to 5 basis points. The rest of it is just due to building up excess liquidity for a combination with SunTrust, so that we can have strong liquidity, our LCR ratios, and just strong overall cash on hand as we run our company.

Got it. That's great. And then, just a bigger picture question in terms of Truist MOE. The environment's changed since February, and you've also had a chance to fine tune your assumptions with the third-party review. Do you have any updates on kind of the financial targets that you set out for the 51% cash efficiency and ROTCE of 22? Obviously, there are a lot of changes in the further out, but any updates on that?

John, this is Kelly. The market is substantially different than it was back in February. The most difficult thing to point out is our efficiency ratio because the denominator is under a lot of pressure. We believe regarding our efficiency ratio, whether we hit 51% or not, we believe we will be top in class in terms of our efficiency ratio. I feel more confident in the 22% return on tangible common equity. So regardless of whether the numbers are exactly what we've said nine months ago, because the world has changed, we think there will be a top performer. But, Daryl, any comment on that?

Yes. I would say, John, we still have 100% clarity between both companies. So we have high-level estimates. I would say once we close this quarter, if we give it a little bit of time, a month or so, we will come out with more clear guidance on a go-forward basis on the timing of our cost savings and how we’re going to get those cost savings. We know you guys need that information, and we will provide it for you, but we got to get the deal closed, and we have to make sure we understand where all the savings dollars are coming from first.

Totally understand. Thanks very much, guys.

Sorry about that. Yes, just back to the deal close discussion. I know, Kelly, you mentioned that you're confident in the fourth quarter close of the deal, but you also indicated you can't guarantee it. Is there anything that's leading you to believe that it could be after 4Q, any change in your thinking as you're going through the process where you're thinking it could be into next year?

Well, as I said, John, we're focusing on the fourth quarter. Obviously, we are aware that it possibly could slip through the first quarter and we’re giving some thought to that, but most of our focus is on the fourth quarter. We are not aware of any reason to expect it to go into the first quarter. I only say that because today this is beyond our control. This is in the regulatory framework. And they move it at their own pace. All we can do is give you our best information based on what we know. Based on what I now know, I still expect a fourth quarter close.

Okay. All right. Got it. Thank you. And then separately, Daryl, I know you mentioned that in your remarks you're evaluating additional opportunities for the restructuring of the balance sheet. I know you've already prefunded the merger, as well as sold some of the residential mortgage portfolio, but just want to get if you can elaborate possibly on what incremental actions you could evaluate for the balance sheet? Thanks?

So, John, both companies are looking at their balance sheets very thoroughly right now. Kelly said earlier, one of the things we want to do when we combine is, we want to make sure that our interest rate sensitivity is relatively neutral to slightly biased up a little bit. We want to try to get it to be more neutral, so we don't have a huge impact on NII as rates continue to change. Also, we want to have strong liquidity. From a credit perspective, if there are certain portfolios or loans that can be sold that Clarke and Ellen Koebler want to shed from the balance sheet, you know we will take advantage and do that as well. Lastly, we will look at assets that are not necessarily poor performing ones from our balance sheet perspective, but we might see some higher returns for capital performance. That will all come together. We'll have more color on that later in the quarter as we close.

Okay, great. Thanks, Daryl.

Hi. It's another question on the merger. So you say, 75%, the leadership roles named when do you get to 100%? You say you have most of the tech ecosystems identified; what do you have left there? Most importantly, I know you've been asked twice already, but can you put more meat on the bones on the technology-related savings? I mean, that was the number one reason for merger so that you can make more tech investment, can get more added tech and so what have you learned over these last nine months? Thanks.

Yeah. So regarding the staffing, I fully expect virtually 100% of all the staffing to be agreed to by around 1st of November, and we're very close. There won't be many left hanging out there by 1st of November. In terms of the ecosystems, we've covered all of them. That was 100 net volumes, so we're going through that thoroughly. We feel really good. That's the first step in the whole conversion process. You have to decide on which ecosystems and then all the various systems within those ecosystems. All of that is going along really, really well. We are completely on track with regard to that. As for the technology savings, you know it has multiple facets. The first thing is, you have redundant hardware, which, of course, goes away. You also have redundant programmers, which regard to stepping up regarding redundant hardware systems and tuning for software systems. When you pick one system over another, that necessarily frees up expenses. Then, of course, you are thinking in terms of reinvesting for the technology of the future. You’re right, when we announced this deal, we said this was really about putting together two companies that would become economically sound, but really leaning into the future by investing in technology that would allow us to meet our clients' needs. That’s a process that’s tricky because connecting the existing systems, to be honest, it isn’t very difficult, it’s actually quite easy. We have to look at what is available today out there that we don't have. And to be honest, it’s not a lot out there today that we don’t have. We’re in really good shape. If you look at our digital platform, we've been constantly rated as number one, two, and three in the entire system including all the big banks, despite what some people say and we are extremely well positioned regarding this. But the world is changing really fast and we need to invest a lot to stay at the top. We are already beginning to do work on what’s the next step, what is the new frontier, what is the next investment that would substantially improve the lives of our clients. This is what the entire innovation center is about. It is creating a group of teams. We have 20 to 40 agile teams focusing on improving the existing products and services and approaches but creating new products and services across boards. We are canvassing the world in terms of what's out there. We don't believe in recreating the wheel; if there is something out there globally that we could bring to our clients, we want to do that. We also recognize that this world is changing so fast that there is opportunity for us to create our own wheel. Innovation is about all this whole process. The mechanics of all that is very complicated but it's really a bifurcated process of connecting existing systems and then thinking about what new technology we can layer on top to make our operations efficient from day one.

And then just one follow-up. So November 1st you have all the leadership identified; that would be good. But culturally, you gave a presentation recently talking about the cultural similarities and you provided some data. I didn't really understand that data. Many people on the outside who have policy for a decade or two say, you know what, you guys really aren't similar, BB&T and SunTrust. I guess, where is the disconnect and the perceptions about the difference in cultures and what you're fighting against? When there are differences, how are those resolved?

Well, I'm not sure which meeting you're referring to, but I don’t generally believe in that, but I’ll try to be straightforward and honest about everything. So, what I was referring to is that we've had a number of statistically valid feedback sessions from over 20,000 SunTrust and BB&T associates that have validated what I said. Early on, when we were doing the name research, we had over 20,000 responses—10,000 from each side—and we gave down a list of 16 words to describe the companies, and all groups on both sides picked the exact same four words, which is pretty incredible. We did a more sophisticated study in terms of the behavioral aspects of culture, and it was statistically driven; it showed BB&T associate responses and SunTrust associate responses that showed a complete overlap—meaning whatever you asked them, they gave you the same response. I guess that anecdotally, when I'm traveling around and talking to our people and when I run into SunTrust people, I just ask how is it going, and they say it's going great. We work together; we had lunch together, non-competitively, and I think they know each other, and I talk about each other positively and affirmatively. When you put all that together, I’m quite certain there are no material deficits. It’s always understood that when you have big companies, I’m sure you’d find some differences between the companies. But where there are, you know what I call manual differences, they will fade as we come together as Truist and operate under our new purpose, mission, and values. They will just fade away. If we were to encounter anything material—and we have not—we would deal with it straight up. Given the commitment between Bill and I, if we do have any issues, we deal with them promptly. I can tell you, we have covered a lot of war fronts, and the teams are working great as I've said. We have not discovered any material issues that I can say presented a real culture gap. Bill and I have this working arrangement together where we communicate openly, and we’ve committed to each other that if we see any light between us, we get on the phone immediately and discuss it. We haven’t found any light yet; I’m not saying we won’t, but I don’t think we will. We have the mechanism of commitment and trust between Bill and I and the entire teams that if we do have issues, we deal with them promptly.

Thank you.

Hey, good morning.

Good morning.

A couple of questions. First just a clarification, Daryl, on kind of the LCR in the commentary you gave around HQLA and retooling the balance sheet a little bit for post-merger. On Page 10, when we look at the change in NII scenarios and you've got this negative sensitivity both down 100 and down, and up 200. I just want to get how you're thinking about what that looks like post-merger, because I don't think you would set yourself up like this on a standalone basis. Just want to understand where this is going and whether or not you had to get ready for LCR, even if the tailoring rule didn't go through. In other words, are you carrying a little bit too much HQLA at this stage, post-tailoring rule or not? Just if you could speak to that a little bit.

So we are still working on our numbers, at the 85% number. Both companies operated at 70%. So, we will have to have one form or another of higher-quality assets on our balance sheet. We will take some form. We started to build that at the end of this past quarter. From an interest rate sensitivity standpoint, by us purchasing those securities, we also did unwind some pay fixed swaps and put on some receive fixed swaps. It did create us, so that again we improved our sensitivities on the downside, but it hurt on the upside. Ideally, when we close this quarter, we want it to be somewhat symmetrical. We would lose a little on the downside, but benefit on the upside as we work on that. Donna and her team are working together and they are coming up with strategies post-legal day one to get us into that position. You’re right. We were kind of cut in the middle of what we're trying to do right now, but we will work towards that, and we'll see how that all comes together. I feel confident we’ll get into a position where we need to be post-close.

And that's because STI is a little more asset sensitive than you, I’m guessing that’s part of that answer?

Yeah. That’s true. That is true. That will help some exactly and I think there will be some other adjustments we might make as well.

And then just separately, Daryl, could you speak and Kelly could you speak a little bit too about how you're thinking about the buybacks as you get to close and then beyond close? I think last time we spoke, there was an expectation that the CET1 might be closer to 10%, but then there was some mid-quarter release that talked about maybe being a little bit below 10% at close. So, if you tell us where the parts are moving there and how it impacts your outlook for the buyback?

So, Betsy, just at a general level, you'll recall that we said we want to target 10% CET1 at close, and we really are not going to consider buybacks until after we hit that level. Now, I recognize that many investors have already asked me why do you need such a hefty CET1 level, because that's got a lot of cushion, and it does. The reason is that we're going through a significant merger, which brings a lot of uncertainty—the economic environment has uncertainty, geopolitical events have uncertainty. So for all those reasons, we are conservative in targeting 10% CET1. Daryl, can give you a little color on that.

Right now, we're probably just below 10%. As Kelly mentioned, we don't have a specific date for closing or when interest rates will be impacted. We're still collaborating with Deloitte on the actual valuation for SunTrust, and everything is progressing well. I expect we'll be close to 10%, though it might not be exactly 10% at this moment. It also depends on the assets we choose to share or the remaining RWA. So, we can't predict exactly where we'll land. However, I’m confident that we have significant flexibility and are focused on optimizing and maximizing our balance sheet.

Okay, good. All right. And Kelly, your point is that 10% is a high number anyway?

Right, it does.

All right, thank you.

Thanks guys. Good morning everyone. A follow-up on just things that are potentially going to slip on time depending on the close date. But Daryl, any understanding at least on the BB&T side of what the expected seasonal day one looks like and then just any considerations in terms of any changes with regards to how you think the credit mark looks and potential breakdown of that credit mark? Thanks.

Yeah. For BB&T, our CECL reserves are going to be higher than where we currently are operating, and we’re probably up in the neighborhood of 30% to 50% in that range. All of that could be a moot point when we close this quarter, in the fourth quarter. So Clarke and Ellen Koebler and our teams are working on the combined choice number. We are at a point now where we can disclose that number. We have to still work on it, but the teams are working together and just coming up with it. As for the purchase accounting marks, I would say when we announced this transaction in February, we were saying the credit mark would be 2%. We believe the marks are coming in close to that level, but that's not final yet. It could be a little give or take, plus or minus on that, but I think we’re in the ballpark. The other marks on the liquidity and interest rate marks right now are at a slight discount, but that's also volatile to what happens in the market.

Yeah, thank you. And I’ll follow up just on the insurance side. You talked a lot about how the current business trends are going from a growth perspective. Can you talk about how insurance is expected to grow within the outlook you had given for total fees, just in terms of a ballpark of the type of growth rate that you think it could be sustained in the insurance business? Thank you.

Sure. For the fourth quarter, this is our lowest quarter of the year seasonally. The fourth quarter would be our second lowest. We would expect from here commissions to step up in the 3% range. So we’re looking out further in the fourth and maybe the first half of 2020. Post the two years of large years of insurable loss in 2017 and 2018, as I mentioned earlier, you have tightening of capacity in the market, such that there’s still upward pressure on pricing. It is hard to say exactly how long that lasts but in the fourth quarter, we expect it to hold and perhaps even push up a bit depending on how the reinsurance renewals go in January. I think you could also see some further commitment to that pressure. So when we look at the balance of the years, we’re expecting full-year organic growth to come in at least in the 6% to 7% range. We’re year-to-date at 9.1% right now, possibly we could beat those numbers. The industry is expecting probably in the mid-4s. We think the backdrop allows for additional tightening of capacity and continued lift in pricing as we go through 2019.

Thank you.

Good morning.

Good morning.

Good morning.

First, I just wanted to follow up on the capital discussion. I can appreciate you want to keep a little more capital as integrations going on. But as you think kind of post-integration or once you're confident in the execution of the integration, we see the 10% CET1 is really kind of well above where some of your direct peers are pointing to. You might have seen yesterday a very similar bank to you in size talked about bringing it down to 9%, another one is in the 8.5% to 9% range. So, I'm just wondering if you can give some thoughts on kind of medium-term post some of the deal integration. What do you think that ongoing CET1 target might be?

So I think predicting what your capital level needs to be out in the future is a bit of a guessing game because you really can't predetermine where you're going to be with capital unless you predetermine what the circumstances are going to be. So it always has to be a hedge. The best way to think about us is relative to the environment. If the environment is relatively risky, you will see us being more conservative in terms of capital, liquidity, and we will always have strong diversification. Capital and liquidity vary depending on the environment that we see at the time and the forecast we make. As I said earlier, today we are from a conservative point of view, you just have to recognize that doing a large deal has lots of issues while we feel extraordinarily confident about the conversion, but still think that I can't guarantee. My prediction is by the end of the year we will have carried over reconciliation and a NAFTA approval, new NAFTA approval, etc., but I can't guarantee that. So when you throw all that, that anchors you back to the 10%. To your point, many people moving to 9% or so, I certainly don't think. When we get to a more tranquil or predictable environment, I don't think 9% is going to be inappropriate at all. I think it's cushioned down to 8.5%, which still gives you 150 basis points over the minimum of 7%. But remember 7% is really hard. You don’t want to be close to 7% because some pretty bad stuff can happen when you get there. So the debate is really between 8.5% and 9% in a more stable environment. As things stabilize, I will be recommending to the Board we consider a lower target capital level and based on the work that Daryl and his team do, we'll come up with whatever that number looks like. We are not going to be rushed and I want to be fair to our shareholders, there is opportunity here, but we’re going to be conservative.

That's helpful. And then just separately, any early signs of, call it, either client attrition or clients taking a wait-and-see approach from doing business with you. I know you can't talk about SunTrust, but is there any kind of wait-and-see; or on the flip side, are there discussions with clients saying, Hey, now that you’re going to be a lot bigger, can you do more for us, whether it's taking bigger positions in lending or you’ve got a broader product set? Talk about those kind of puts and takes if you’re seeing any so far. Thank you.

Yes, it’s a very good question, and you're right. We have limited insight into that because we’ve been very, very clear to our people. We are direct competitors today; we’ve been since day one. Therefore, we have very limited information. We do pick up little bits of anecdotal feedback. Certainly, there are clients that are out there talking about, hey, it’s going to be great when you all get together; you’ll have more expanded lending capacity; you’ll have more products and services, both BB&T and SunTrust Advisory would both say the same thing, which is true. So I think everybody recognizes the opportunity out there by us combining. In terms of any attrition materially, I’ve heard when you go to BB&T side, there has not been. Notice there’s been a lot of conversation out in the market about everybody saying they’re taking all of our business; that’s not true! You just saw our growth numbers; we grew loans 6.5% and our deposits grew 5%. So, I don’t know how to be clearer than that; there’s not any material attrition. Our turnover rate is about the same or lower than it has been. To put it plainly, this is extraordinarily successful so far. There’s no indication of any decay, rather than expectation for a positive opportunity as we come together.

Hey, John, could you take our next caller please?

Hey, thanks for taking my questions. Just going back to the merger, I think when you guys announced this you talked about $2 billion in one-time charges. Just wanted to see if there are any adjustments to that and any adjustments to the timeline. I think you talked about a conversion somewhere 12 to 18 months after close. Should we expect the majority of the one-time cost to come around that timeframe? Thanks.

So, Michael, it's Daryl. The numbers are still coming together. Year-to-date, we are between BB&T and SunTrust, if you look at our charges today, we’re about $250 million between marks and MOE-related expenses. We’ve got some more information on the IT conversion that’s getting finalized, that’s going to be a very large number. I don’t have all the numbers yet, but I’m pretty sure we are going to utilize the bulk of the $2 billion. We will give you more color as we close, because we still don’t have all the information we need between ourselves until we close the transaction. I would say it’s going to be the bulk of the $2 billion based on what we’re seeing right now; it’s a very complicated integration, as Kelly talked about. Hooking these computers together is going to take some significant outside assistance to help with that. I would say we are going to see the majority of the expenses occur in that timeframe, so as we get more clarity, we will provide it to the market.

Okay, that's great color. And maybe just as a follow-up, now you've had some time to dig into their side, can you just explain where you think the greatest opportunities could be for revenue synergies and what areas you're working on as you prepare for the close? Thanks.

Yes. Mike, this is Chris. Bill and I have been working together, as Kelly alluded to earlier, on a number of fronts. I would just maybe hit the highlights; certainly, they have a much more built-out capital markets business to bring strategic advice down segment, if you will. We have a very strong Community Bank that services companies down to $25 million that need these types of services, many of which we did not offer prior. We see a great opportunity to bring strategic value to those commercial clients on many, many fronts from a paid perspective to really help them build their overall needs and plan for their future. The flip of that would be that we have a substantial insurance business; we actually have one of the best-in-class insurance businesses. There is really not much we don’t offer that we can take to their entire commercial business, top to bottom, for small business and all the way up to the largest corporate clients they serve. We also have the largest life insurance distributor in the country with Crump Life, so we will extend that to SunTrust on the commercial and the individual side. As you think about the wealth connectivity and the broker-dealer and the strong wealth business they have, the state planning need can fund their sales plans; we have a tremendous opportunity to offer this to the wealth business and key man insurance on the commercial side. So the opportunities go on, and that’s just the first few, but there are basically 20 such items that have come together; we are very excited about this.

That's great color. Thanks for taking my questions.

Sure.

Hey, good morning everyone.

Good morning.

I was curious how you guys are thinking about the move to Charlotte and kind of protecting the legacy brands in the standings that you guys haven’t with Winston-Salem for BB&T and obviously, Atlanta for SunTrust and particularly as that pertains to Atlanta and continues to grow and look like kind of capital. The Southeast and how you think about protecting that as you moved the headquarters to Charlotte and not letting somebody else take that position over time.

So, Stephen, we are very excited about the move for all three markets, Charlotte, Atlanta, and Winston-Salem. Charlotte is a super dynamic market. It is growing extremely fast, and it’s attracting young professionals and technology companies. When this merger is done, Charlotte will become the second largest financial district in the country. So it will be a mega place for us to do business. But Atlanta is fantastic as well; it’s clearly the dominant city in the Southeast, and we love Atlanta. We will continue to love Atlanta. We’re not moving out of Atlanta. We will have a superstar leader in Atlanta from SunTrust, who is one of the most accomplished bankers in the country today, and she is extremely plugged in. We won’t miss a beat in Atlanta. Our commitment will be increased in terms of our community support and our commitment in marketing and execution. We would expect our execution in business attraction in Atlanta to be greater going forward than it has been in the past, and keep in mind that you know our commitment is that we will domicile our headquarters for capital markets, investment banking, and wealth management in Atlanta. Likewise, Winston-Salem will be the headquarters for our Retail Community Bank. Neither market loses; it’s just that we’re lucky to have three fantastic markets that are now the foundational anchor locations of Truist. So don’t think about it as Truist being solely anchored to Charlotte; think of it as Truist being anchored to three locations. We still have a presence in markets that we generated from in Wilson, North Carolina, and Orlando. We are a community bank, and we don’t think in terms of one market driving everything. We think of it as a coalition of community banks coming together under the advantages of a holding company structure. So nobody loses; everybody wins.

Perfect. Helpful. And then maybe just one follow-up; you spoke to kind of seeing long-term strength in the economy, and obviously your growth remains solid, excluding the mortgage sale, but we’ve seen some mixed economic numbers manufacturing, etc. Can you talk a little bit about what you’re seeing from your customer base in terms of incremental investment in overall market demand? Thanks.

Yes, I’ll make a comment, then I’ll let Clarke step in. The feedback that I get, primarily from our Regional Presidents but also when I’m talking directly to clients when I’m traveling around, is that for 10 years, Main Street America really kind of suffered as the biggest companies were doing more robust international business and Main Street was still recovering from the recession. Main Street has recovered from the recession, and after 10 years now at investing, they're learning to invest, and they are investing. So Main Street is seeing broad-based business activity that we see across many of our business lines. Of course, we don’t participate as much in larger global international businesses. So as they are seeing more of the impact of the trade war, it’s not impacting us as much as some of the larger banks. Earlier, I was told that we are beginning to hear some conversation from our local Main Street clients about uncertainties; it’s true. But right now, it is not having a material impact today. Clarke, any color on that?

Yes, I would echo what Kelly is saying that while there is more conversation about the headline news and you might see a more cautious tone in some conversations, our opportunities continue to be very robust across the board. We have good pipelines. I think one of the benefits that Kelly brought out earlier is just the diversification in the various platforms we have. So while there is more conversation, I'd say it’s more on the higher end than it is at this point on Main Street or the retail side, but people are conscious and thinking about it, and we're trying to respond appropriately. However, we still think there are plenty of opportunities available with all the different levers that we have to pull.

Great, thank you guys so much.

Thank you, John. Thank you everyone for joining us. I apologize to those that we didn’t have time to get through today and we will call you later. I hope everyone has a good day. Thank you very much.