Truist Financial Corporation (TFC) — Q2 2022 Earnings Call Transcript

Thank you, Jennifer, and good morning, everyone. Welcome to Truist's second quarter 2022 earnings call. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Daryl Bible. During this morning's call, they will discuss Truist's second quarter results and share their perspective on our efforts to transition from an integration focus to an operating focus, current business conditions and our continued activation of Truist's purpose. Clarke Starnes, our Chief Risk Officer; Beau Cummins, our Vice Chair; and John Howard, our Chief Insurance Officer, are also in attendance and are available to participate in the Q&A portion of the call. The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 and three of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. In addition, Truist is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcast are located on our website. With that, I'll now turn it over to Bill.

Thanks, Ankur. Good morning, everyone, and thank you for joining our call this morning. Truist delivered a good second quarter, reflecting our improving momentum after the integration and the resiliency of our diverse business mix in a volatile market environment. Our financial results modestly exceeded the guidance we provided in April with several puts and takes. Loan growth was strong and broad-based. Net interest margin expanded significantly due to higher interest rates and our strong deposit franchise. Credit quality remains excellent and we are pleased by our relative and absolute performance in the recent stress test. In light of these results, our Board will consider a resolution to increase the common dividend by 8% at its July meeting. This quarter's performance, combined with improving client experience trends and dramatically lower merger costs, reflects the initial benefits of our shift from integrating to operating. While there's still work to do, such as stemming elevated operational losses, closing out residual integration issues, and completing our decommissioning process, I am very confident in Truist's trajectory and reaffirm our commitment to delivering positive operating leverage for the full year of 2022. I'm going to share some more details on those topics in a moment. Then going to Slide 4. As you all know, Truist is fundamentally a deep, purpose-led company dedicated to inspire and build better lives and communities. We know that our purpose-driven culture is the foundation for our success as a company. Our purpose drives performance and defines how we do business every day. It very intentionally begins with the word Inspire, and to be inspirational, it's often necessary to be bold and to be first. I'll highlight four examples that I think reflect that purpose on the next slide. First and foremost, we recently announced that we're making a significant investment in our teammates by raising our minimum wage to $22 an hour effective October 1. This increase will benefit approximately 14,000 teammates, about 80% of whom will have client-facing roles in retail and small business banking. Purposeful growth is dependent on attracting and retaining the best talent. In addition to our industry-leading benefits, we designed a compensation program that also helps teammates who need it most with the impact of inflation in their daily lives. Second, we had a historic launch of Truist One Banking yesterday. This is our new differentiated suite of checking solutions that reimagine everyday banking, including two new accounts that eliminate overdraft fees and provide greater access to credit. The flagship Truist One checking account has zero overdraft fees and the capability to provide qualifying clients the liquidity they need through a simple $100 negative balance buffer. We also introduced the Truist Confidence Account, which provides consumers with access to mainstream banking services and no overdraft fees. We're mindful of the impact that inflation and reduced stimulus may have on some of our clients, and Truist One is one of many examples of how we're advancing financial inclusion across our communities. Third, Truist committed $120 million to strengthen and support diverse and small businesses. This commitment exemplifies our purpose by supporting small businesses, which are so vital to the health and vibrancy of our communities. And fourth, we released our 2021 ESG and CSR report in early June. At Truist, we view all the elements of ESG as an opportunity to improve our company and to put our purpose into action, and that includes climate change. As we look to externalize our own net-zero aspirations and further the transition to a lower carbon economy, we recently created new advisory practices within our Commercial Investment Banking and commercial community bank to help our clients make their own transition. We're pleased with how our clients have welcomed and embraced our advice and expertise around ESG, as it underscores the possibilities in viewing ESG as an opportunity for growth. Now turning to Slide 7. Consistent with our previous guidance, merger-related costs totaled $238 million, roughly half of what they were in the first quarter. We expect merger costs to decrease significantly in the back half of 2022 before going away entirely in 2023. This trajectory should be welcome news to shareholders as diminishing merger costs correspond to a less complex narrative, improving earnings quality, more capital, and, ultimately, industry-leading returns. Lastly, we incurred a $39 million pre-tax gain related to the early extinguishment of $800 million in Federal Home Loan Bank debt. Turning to our second quarter performance highlights on the next slide. We earned $1.5 billion or $1.09 a share on a reported basis. Excluding the selected items on Slide 7, adjusted earnings totaled $1.6 billion or $1.20 a share, down 23% compared to a year ago, primarily due to a sizable reserve release in the prior quarter. Relative to the first quarter, adjusted EPS decreased 2% as higher loan loss provision offset a 10% increase in adjusted pre-provision net revenue. Adjusted revenue benefited from higher short-term rates alongside well-controlled deposit costs, strong loan growth, consumer seasonality, and strong insurance results, partially offset by continued softness in market-sensitive fee businesses such as investment banking, wealth, and mortgage. Adjusted return on tangible common equity was 25%, up from 23% in the prior three quarters, even when normalizing things like accumulated other comprehensive income to zero and assuming a flat allowance for loan losses ratio, adjusted return on tangible common equity was a strong 17%. Adjusted expenses increased 3.8%, reflecting higher insurance-related incentive compensation and intentional investments in talent and technology to support our shift from integrating to operating. Other expenses also increased due to the normalization of teammate travel and elevated operational losses. We have planned products, processes, and technology enhancements underway to reduce these losses and enhance the overall client experience, including the launch of innovative authentication approaches later this quarter. While operating leverage was a negative 200 basis points year-to-date, this primarily reflects the $435 million year-to-date headwind we have from Paycheck Protection Program and Purchase Accounting Accretion revenue. Despite these headwinds, we're still targeting positive operating leverage on both a GAAP and adjusted basis for the full year. Asset quality remains excellent and net charge-offs decreased relative to the first quarter. Capital deployment was healthy in the second quarter as we funded strong loan growth and completed $150 million worth of share repurchases. Capital levels remain strong in light of our risk and profitability profile, demonstrated by our continued strong performance in the 2022 Comprehensive Capital Analysis and Review process. Overall, the second quarter begins to reflect the power of Truist post-integration. Now turning to Slide 9. Digital activity increased in the second quarter, attributable to seasonality and nearly 200 enhancements we implemented across the platform, representing a significantly higher pace of value delivery for our clients. Our ability to rapidly incorporate client feedback reflects the capabilities of a more modern and agile digital platform and has resulted in improved client satisfaction scores, which have risen consistently since our initial introduction of Truist Digital in waves in 2021. In June, we announced the grand opening of our state-of-the-art Innovation and Technology Center located within our headquarters. The ITC provides an environment conducive to reimagining the client experience such as by facilitating new ways of working with Agile teams to better collaborate with clients to co-create dynamic and marketable cross-channel services. The new space features client journey rooms, a maker space for building, testing and refining new products and services; a reality lab, where we can utilize virtual and augmented reality technology; and a contact center incubator where we can collect and respond to real-time feedback directly from our clients. I'm personally excited about our improved ability to aid our teammates as they reimagine how we serve clients. We also acquired San Francisco-based Long Game, the award-winning gamification app that utilizes behavioral economics, prize-linked savings, and mobile gaming to motivate positive financial behaviors and drive new account growth and client retention. By leveraging Long Game's innovative technology, Truist can empower our clients to build long-term financial wellness. I'm also pleased to report that our merger integration activities are now complete. Our final merger release was rolled out in May and we recently held our last merger Oversight Committee meeting. As we shift to business as usual, our digital and technology teams are looking forward to accelerating our pace of innovation and client experience improvements. Yesterday, as I mentioned, we introduced Truist One. And as I referenced earlier, we will soon expand LightStream to include a new deposit product on a real-time, cloud-based core, enhance the sophistication of our underwriting models through a partnership with Zest, and roll out Truist Assist, our virtual assistant to millions of clients, just to name a few examples. Overall, we're increasingly optimistic about the performance and the potential of our increased investment and focus on digital and technology. Now turning to loans and leases on Slide 10. Average loan balances increased a very robust $8.1 billion or 2.8% sequentially with growth across most businesses. The pace of growth accelerated during the quarter with end-of-period loans up 4.7%. Growth was primarily driven by Commercial and Industrial, where average balances increased $6.7 billion or 4.8% overall. We delivered broad-based loan growth across most Commercial Investment Banking industry verticals, notably energy, consumer and retail, financial institutions, technology, media, and telecommunications. Due to mergers and acquisitions activity, the current shift to banks from the bond market increased relevance with new and existing clients and higher revolver usage for capital expenditures, inventories, and inflation. As in recent quarters, growth continues to be strong within our Asset Finance group as we build out that business with more talent, product capabilities, and a larger balance sheet. Commercial Community Bank Commercial and Industrial balances increased 2%, excluding Paycheck Protection Program and dealer floor plan, reflecting growth across all our geographic regions and was the second strongest end-of-period growth since 2019. Revolver utilization increased 300 basis points to just over 30%, the highest level since mid-2020. Commercial real estate remains a headwind, reflecting both the highly competitive market and our disciplined approach. At the same time, though, I continue to be optimistic about the future of our commercial real estate business as we create more strategic clarity internally and non-bank competition rationalizes somewhat with rising rates. Wealth lending was up $600 million sequentially as our advisers and clients continue to benefit from the combined capabilities of both heritage firms. Residential mortgage increased 2.6%, reflecting ongoing correspondent purchases and slower prepayment fees. Excluding mortgage, consumer and card balances increased $1 billion or 1.3% as strong growth in Service Finance, Prime Auto, Sheffield, and LightStream more than offset runoff in our partnership and student portfolios. Service Finance is performing in line with our high expectations and experiencing good business development momentum given the alignment with Truist. Second quarter production by Service Finance was about double the volume loss and double the profitability from our terminated partnerships. Our prime auto business is also back on its front foot after regaining some momentum it lost following its own fourth quarter conversion. Additionally, our consumer finance businesses continue to advance their automated decision capabilities which ultimately improves consistency, efficiency, and creates better client experiences. Overall, clients are generally positive on current economic conditions and demand in their businesses. At the same time, concerns about labor shortages and margin pressure, given rising rates and higher input costs, are growing, creating the potential for more defensive postures. Truist is well positioned to advise clients across a range of scenarios given our broad capabilities and talented teammates. Given all of this, we remain generally positive about our prospects for continued loan growth, particularly taking into account our post-integration momentum. At the same time, we have to acknowledge the increased uncertainty associated with the softening economic environment, which may cause loan growth to deviate from this outlook. Turning to deposits on Slide 11. Average deposit balances increased $8.5 billion or 2% during the second quarter, largely attributable to an increase in brokered deposits in mid-March. Excluding brokered deposits, average deposits decreased $2.9 billion or 0.7%. Deposit costs were very well controlled, reflecting Truist's strong retail and commercial-oriented franchise and our enviable market share position. In addition, our lines of business and corporate treasury teams delivered excellent execution against a thoughtful strategy to be attentive to client needs and client relationships while maximizing value outside of rate paid. As a result, interest-bearing client deposit betas were 8%, well below our modeled assumptions. As the interest rate environment evolves, we'll continue to take a balanced approach to managing deposit growth and rate paid, particularly given our broad access to other forms of funding. And now let me turn it over to Daryl to review our financial performance in greater detail.

Good morning, everyone. Turning to Slide 12. Net interest income increased 7% sequentially, driven by higher short-term interest rates alongside limited deposit betas in addition to strong loan growth. We also saw a positive asset mix shift with the investment portfolio shrinking and funding strong loan growth. As Bill indicated, the strong quality of our deposit franchise also limited deposit rate repricing. Reported net interest margin increased 13 basis points, and core net interest margin increased 15 basis points. Net interest margin and net interest income increased for similar reasons and exceeded the high end of our April guidance, primarily due to our teammates delivering lower than modeled deposit betas. Overall, we continue to take a balanced approach to managing interest rate risk. We continue to be asset-sensitive and that will decrease over time with the diminishing benefit associated with future rate increases and the disintermediation of funding sources. We forecast an approximate 25% cumulative interest-bearing deposit beta through the second and third quarters. To protect against any potential downside in rates, we also added $16 billion of swaps, which are primarily forward-starting. These swaps begin in 2023 and 2024 and will have laddered maturities that range from three to five years to minimize earnings volatility. Moving to Slide 13. Fee income increased $106 million or 4.9% sequentially. Insurance income increased $98 million due to seasonality, strong organic growth, and the full quarter of Kensington Vanguard acquisition. Car and payment-related fees increased $34 million, reflecting the prior quarter acquisition of merchant relationships and the increased activity. Residential mortgage income decreased $15 million or 17% as higher interest rates pressured volumes and gain-on-sale margins. Servicing income was essentially flat from the prior quarter as lower prepays were offset by increasing hedging costs. While this is a very challenging environment for mortgage, our mortgage team is playing some offense by leveraging Truist's strong purpose and balance sheet to hire select, well-regarded loan officers as well as acquire certain servicing portfolios. Investment banking and trading income was relatively flat sequentially and declined 37% year-over-year as market volatility continues to negatively impact most products. Investment banking pipelines remain full across all products, but the realization of these pipelines will continue to remain subject to more stable market conditions. Service charges on deposits were relatively flat sequentially as favorable seasonal trends were offset by the elimination of certain overdraft fees in April, resulting in client savings of approximately $20 million during the quarter. We included a table at the bottom of Slide 13 to make other income trends more clear. Other income, excluding changes in our non-qualified plan and last quarter's merchant gain, decreased $25 million, primarily due to a loss on a certain sale of Small Business Investment Company funds to diversify our private equity investment portfolio. Turning to Slide 14. Reported expenses decreased $94 million sequentially to $3.6 billion. The lower expenses were driven by a $180 million or 43% reduction in merger costs due to diminishing integration activity. Adjusted expenses increased $119 million. Personnel expenses increased $64 million due to seasonally higher insurance-related incentive compensation, the full impact of normal first-quarter compensation increases, and ongoing investments in talent across our lines of business and technology teams. Additionally, other expenses increased $19 million due to higher operational losses and ongoing normalization of teammate travel. Professional fees and outside processing costs increased $16 million, primarily due to the increase in call center staffing. As Bill mentioned, our minimum wage will increase to $22 per hour effective October 1. This represents a significant investment in our teammates and is expected to increase our personnel expense by $200 million annually, offset by lower turnover expense and improved execution and client experience.

Moving to Slide 15. Asset quality remains excellent, reflecting our prudent risk culture, diverse portfolio, and solid economic conditions. Leading credit indicators remain benign. Criticized and classified commercial loans decreased 6% sequentially and are 37% lower to a year ago. Our non-performing loan ratio was flat at 36 basis points and loans 30 to 89 days past due decreased 3 basis points to 69 basis points. Our net charge-off ratio also decreased 3 basis points to 22 basis points. We experienced a slight build in the allowance due to loan growth. Although the allowance coverage ratio decreased 6 basis points to 138 basis points, given our strong portfolio performance, tempered somewhat by our moderately slower economic outlook. While the weighting of our pessimistic baseline and optimistic scenarios were unchanged from the first quarter, each scenario is moderately worse, a trend that may continue. Moving on Slide 16. Our CET1 ratio declined 20 basis points to 9.2%, driven by strong loan growth and a $250 million share repurchase during the second quarter. As previously announced, our Board will consider an 8% increase in the quarterly common dividend at its July meeting. If approved, the increase will take effect in the third quarter and will continue to position Truist as one of the dividend leaders in our peer group. We were also pleased with the performance during the 2022 stress test. Truist had the second-lowest CET1 erosion and a loan loss reserve rate in the peer group under a severely adverse scenario. Our preliminary stress test capital buffer remained flat at 250 basis points. We believe these results demonstrate our strong capital relative to the risk and profitability profile, the latter of which should improve over time. We are now more comfortable operating below our previously announced CET1 ratio target of 9.75% given our continued strong stress test results and significantly reduced integration risk. Overall, the economic outlook will influence how much we operate below the prior target. From a funding perspective, end-of-period loan growth exceeded deposit growth. Truist has multiple sources available to fund incremental loan growth, as seen this quarter with the use of brokered deposits, Federal Home Loan Bank advances, and our securities portfolio. I will now provide guidance for the full year 2022 and new guidance for the third quarter. In 2022, we now expect adjusted revenue to grow 3.5% to 4.5% from 2021. The mixture of revenue continues to tilt more towards net interest income given the outlook for higher short-term interest rates, partially offset by lower fees, primarily in market-sensitive businesses such as investment banking, mortgage, and wealth. We now expect adjusted non-interest expense to increase 2% to 3% from 2021. This increase in expense outlook largely reflects higher operating losses and intentional investments to support our shift from integrating to operating, including increasing our minimum wage, hiring teammates to support client experience and growth, and ongoing investments in technology. Net-net, this is slightly higher pre-provision net revenue outlook versus our previously full-year guide. In light of our performance during the first half of the year and the benign credit environment, we expect the net charge-off ratio to be in the 25 to 35 basis points for the full year. Looking into the third quarter, we expect adjusted pre-provision net revenue to grow high single-digits from the second quarter level, primarily as a result of higher net interest income, partially offset by higher non-interest expense. We expect a mid-20 basis point increase in our core net interest margin due to the benefits from recent rate hikes and a projected 75 basis point hike in July. We also expect low 20 basis point increase in GAAP net interest margin as a result of core net interest margin expansion, offset by continued declines in purchase accounting accretion. Now, I'll turn it back to Bill to conclude. Thanks Daryl. And moving to Slide 17. On our previous earnings call in April, I expressed my belief that the first quarter marked a strategic and financial turning point for Truist. Our second quarter results are bearing out this thesis, and we're beginning to deliver on the potential of Truist. For businesses that finished conversions in 2021, the increased momentum is palpable. Wealth continues to build momentum in hiring advisers who are attracted to Truist's purpose and broad set of capabilities, both within wealth and across the company through Investment and Relationship Management. Wealth net adviser count grew in the second quarter for the first time in 10 quarters. With our recent entry into the Chicago market, Truist Wealth now serves nine of the 10 largest metropolitan areas in the United States. In addition, net organic asset flows have been positive for five straight quarters. In our mortgage business, client satisfaction scores for origination have improved every month since their conversion in August of 2021. The percentage of retail client applications completed digitally is now 97%. For the rest of the company where core bank conversions were completed in the first quarter of 2022, momentum is also building. Loan production in the second quarter was the highest it's been at Truist and up 41% compared to the first quarter. Pipelines also ended the quarter at the highest we've seen. Branch loan production, which is primarily home equity, was up 24% relative to the first quarter and the highest it's been at Truist. Consumer deposit production, both in the branches and within digital, was up 29% sequentially and 20% year-over-year. Retail Banking Net Promoter and client satisfaction scores have rebounded nicely from their March lows and still have more opportunity to improve. Deposit production within our commercial community bank is up 8% relative to the first quarter. Investment and Relationship Management revenue was up 21% sequentially with increased activity across all products highlighting the power of our advice-driven model. Financially, net interest income and margin rebounded from the first quarter low point, as expected. While fee income did not improve to the extent we had hoped, our second quarter results underscore the importance of our diverse business mix, and we believe fees will improve as market conditions normalize and we capitalize on our significant Investment and Relationship Management revenue and revenue synergy opportunities. In addition, merger costs are declining rapidly, and we're making good progress towards realizing our remaining cost savings as we decommission data centers and systems in the back half of the year, all of which will help drive positive operating leverage for the full year 2022. So to conclude on Slide 18, Truist is on the right path, and I'm highly optimistic about our potential, all of which is clearly summarized in our investment thesis. Strategically, our focus has clearly shifted to executional excellence, transformation, and growth. We're shifting millions of hours of integration-related activity to improving our client experience through investments in digital and technology, simplification of our processes and operations and, of course, by continuing to activate our purpose each and every day. We're also focused on capturing the significant Investment and Relationship Management revenue and revenue synergy potential we have, as this is squarely in the center of building better lives for our clients. These shifts and activities do not require incremental risk appetite or capital; they only require execution and focus. At the same time, while we believe the economy is currently healthy, the effects of ongoing geopolitical uncertainty, coupled with still too high inflation and an aggressive forecast for tightening monetary policy, have somewhat diminished the economic outlook as we move further into this year and into next. Truist is, nevertheless, well positioned across a broad range of economic outcomes given our advice-oriented model for clients, strong absolute and relative markets, conservative credit culture, diverse business mix, a strong capital position relative to our risk profile and, most importantly, our power shift from a focus on integration to executional excellence and growth. And with that, let me turn it back over to you, Ankur.

Thanks, Bill. Jennifer, at this time, will you please explain how our listeners can participate in the Q&A session? As you do that, I'd like to ask the participants to please limit yourself to one primary question and one follow-up, so that we can accommodate as many of you as possible today.

Hi. Good morning.

Good morning.

Good morning.

A couple of questions just on how you're thinking about the funding mix. I know you had several comments in your prepared remarks around accessing some of the pools you have. Could you talk a little bit about what you're doing with deposit pricing for your core deposits, how you're thinking about utilizing brokered from here? And then if you could speak a little bit about the hedge that you put on for protecting earnings against future volatility and where we should expect that to show up in the NIM and how that's going to factor into your outlook for your rate sensitivity? Thanks.

Yes, Betsy. So I would first start with, we were really excited to have really strong broad-based loan growth this quarter, and we expect that to continue, as Bill said in his prepared remarks. To fund that, we're going to start with the runoff of our investment portfolio. We built the investment portfolio when we had all that excess liquidity. We're very comfortable letting that run off and have a positive mix change on the balance sheet. As far as brokered deposits, we did add some brokered deposits over the last several months. I would say, we're probably at where we want to be from that perspective, knowing that we still have a lot of capacity and other funding sources available in the marketplace. You look at Federal Home Loan Bank advances and negotiable CDs and other amounts, we paid all that off during COVID in 2020 and we have much capacity there. The other thing from an investment portfolio perspective, we're about $145 billion, give or take. And we feel comfortable we could shrink that portfolio probably $20 billion to $25 billion easily and still stay within our liquidity and Liquidity Coverage Ratio guidelines that we have to for regulatory purposes. Though, as far as our strategies for pricing, we were really pleased, as Bill talked about, across our company, our deposit betas came in much better than modeled. We modeled 25 for the first 100. And if you look in the second quarter, we came at 15, and that includes brokered. When you back out the brokered, we were only at 8%, which is really, really low. I would say, we will continue to use that strategy. We're going to make sure that we take care of our clients and use the ability to do exception pricing. But I think overall, I think we will continue to hopefully continue to outperform our model expectations.

Betsy, one thing I'd add is that, I think, we'll be somewhat stable for deposits for the balance of the year. But remember, as Daryl pointed out, we had just under 2% growth in DDA. So, I mean we're adding net new clients and expanding those relationships. And I think the beta really just reflects the benefits of the merger. We're sitting now with just under 20% market share in most of our markets. We've got a business that's highly diversified. Somewhere around 40-plus percent of our deposits are less than $250,000. So we've got a unique franchise here which I think, on the DDA side, continues to benefit and overall stable deposits for the balance of the year.

And the loan growth…

Oh, yeah, yeah. I just – we are just gradually starting to add some receivers out in the forward markets for the most part out one to two years. Since we are steady on the way up on deposit rates, you won't have as much capacity on the way down. So we're just putting in these forward hedges and protect managed income as rates might potentially fall overall. But we still are asset sensitive though decreasing as rates continue to go up.

Got it. Okay. No, that's helpful. And then on your point on loan growth, yeah, loan growth was very strong. And I guess the follow-up question here is, what are you hearing from the field with regard to the pace of that loan growth? Is it poised to accelerate, continue at this pace for the foreseeable future? Just a little bit of sensing color for how we should be thinking about that? Thanks so much.

Yeah, Betsy, and that's the question of long-term sustainability. But on the short-term basis and through the balance of this year, if we sort of look on a year-over-year basis, we were sort of in the mid-single figures. I think, we'll be in the higher end of the single figures in terms of loan growth. Our teams are excited. Our production numbers, which I highlighted, are up significantly. Our pipelines are up. So we're – I think we're seeing a little bit of maybe idiosyncratic to us, and our shift to integration in terms of prowess on the loan side. And the great news is that, it is extremely broad-based. So not only is it in the Commercial and Industrial side, but our core branch network, I mean, their applications are up, personal loans are up, HELOCs are up. So similarly, they're starting to execute at a much higher level.

Yes. Good morning. Sorry about that. Yeah, as a follow-up on the fee side, you had great insurance revenue this quarter, up 13%. We heard your comments about some of the challenges looking out on some of the other lines. So can you just kind of help us walk through just what you're expecting on the fee income side, inside that third quarter pre-provision net revenue outlook that you gave, because I think you talked mostly just about higher net interest income and higher expenses. So any granularity on the fee side would be great? Thank you.

Yeah. Hey, Ken. Let me – let me maybe just do a walk-through of the broad categories. I think sort of overall, I'd say, fee income stable relative to the first half, and maybe let me give you some puts and takes against that. Insurance, as you noted, solid organic growth that will offset some of that seasonality. So I feel really good about the momentum that we have there. And as we mentioned earlier, we're continuing to invest in the insurance business. So we feel good about the growth there. Mortgage, some puts and takes. Origination probably a little bit offset by servicing. Gain of sales probably a little bit of a wildcard there in terms of whether we see some rebound on that side as some of the capacity comes out, but mortgage probably a little flat second half of the year to the first half of the year. Wealth probably be a little bit down in the third quarter, just sort of where markets are right now. But as I highlighted earlier, our – really solid production and asset flows and hiring net advisers, so if we get a little market tailwind that could change. Investment banking, I think we expect the second half to be better than the first. Pipelines continue to be really solid. And then we've got a bit of things that are unique to us. We've got this really good Investment and Relationship Management momentum from our commercial community bank, that's probably a little bit less market dependent. I'd sort of call that more sort of bread and butter kind of investment banking business. And then we've added bankers there also and we're continuing to invest. So we're leaning in there. And then on the service charge side, with the decisions we've made with Truist One and overdraft decisions that will be down. So sort of net-net, that's, I think, a good walk-through on the fee income side.

Great, okay. And then the second question just on, you had talked about operating lower CET1 than your 9.75%. We saw a 9.2% this quarter. And just what you're thinking, you saw you did a little buyback, just in terms of capital allocation decisions and potential for more of those insurance deals that you guys have been biased towards over time? Thanks Bill.

We are currently utilizing our capital strategically for growth, focusing on funding loan expansion. Our capital levels have been influenced by merger risk, the outcomes of our Comprehensive Capital Analysis and Review, and economic uncertainty. I believe merger risk is mostly behind us, and I am pleased with our Comprehensive Capital Analysis and Review results, reflecting our low-risk profile and improved pre-provision net revenue. While economic uncertainty was significant during the pandemic, it has moderated and is possibly on the rise again, so we must balance these factors. We feel comfortable with our position and have experienced more organic growth. There are additional opportunities in non-bank mergers and acquisitions, and we plan to remain flexible in that space. After the merger, we expect to generate around 25 basis points of capital each quarter organically. If we allocate approximately 15 basis points for current and anticipated growth, we will retain about 10 basis points. This provides us with the flexibility we need for future growth and potential non-bank acquisitions, especially in the insurance sector. Consequently, share repurchase is not our primary focus at the moment.

Thanks for all that, Bill.

All right. Sure.

Good morning, Bill. Good morning, Daryl.

Good morning.

Good morning.

Bill, can you share with us, you obviously put together a very good quarter this quarter and you put some very strong numbers in your comments at the very end of the prepared remarks about growth. But then you've cautioned it, of course, with what's going on at the macro scene, with monetary policy and such. Can you share with us what you're seeing from your customers because there seems to be a disconnect. A lot of investors are very concerned about credit deterioration. You certainly don't see it, nor do your peers. But is there something on the horizon other than the macro that you guys are seeing, or what are your early indicators you're looking at to see if there will be a crack in credit maybe in six or 12 months?

Yeah. I mean, sort of, going down the categories of that question, our clients still see a lot of good demand. I may be a little bit clouded by the fact that the last two markets I was in were South Florida and Nashville and you know, they're blowing and going in virtually every direction. But our clients continue to see good demand. I think it's appropriate to put a cautious note just because I think you have to. And if we look at sort of what are the canaries in the coal mine, so to speak, what are the things that we're trying to look at, and while we don't see a deterioration, I think the things you look at are things like what's happening in the broadly syndicated sponsor-backed leveraged deals. So we sort of look at that market, spreads gapped out pretty significantly. Things happening in Commercial Real Estate. We've seen some non-recourse construction loans and some things that you sort of pause a little bit on. Some potential FICO drift and willingness to repay given some of the stimulus. Will things happen in mortgage as some of the Care Act relief comes off? Now all those things that are there, we're not seeing in our results right now, but they are things that we're looking at and that we're stressing and trying to pay attention to. So I think just we're bankers, so we should be conservative. That's the world we live in, and we try to manage for all outcomes. But sitting here today, looking at the hood of the car, demand looks pretty good and our business looks pretty good and our clients are extremely healthy.

No, that's very good. Thank you. And then as a follow-up, Daryl, you mentioned the deposit beta, which came in better than expected. I think you said without the brokered deposits, it came in around 8 basis points. I think you guys were modeling for something closer to 25. Can you share with us what drove the better-than-expected number? And second, as the Fed goes another 75, assuming they do in July, and then obviously further rate increases later this year, could the modeling work against you? Meaning could the betas actually go faster later in the year because rates are moving up so quickly?

Yes. So Gerard, I would just tell you that I think it was a lot of great work with our teammates. We're working with clients and giving what we thought was appropriate. Most of our clients aren't there just for rate, because we have other products and services. They really like to bank with us for those reasons. So they aren't as rate-sensitive as other clients might be in other places. So I think that's really the benefit of our franchise. I do agree with you though, as interest rates go up, our deposit betas will continue to climb just because more and more people will get a little bit more asset-sensitive. In the prepared remarks, I did say that our cumulative beta would move from 15% to 25% in the second to third quarter on a cumulative basis. We would still expect it to go on if the Fed continues to raise interest rates that you continue to see Fed cumulative beta increasing. And probably if you look at from second quarter to fourth quarter, we may be in the low 30s, give or take a couple of percentage points there. So overall, if you go back to where we were during the Great Recession, much better overall performance than what we had a few of our banks were combined back then. So I think right now, I think we feel very good. And I think that you're going to see really positive growth in our net interest income because of that.

Thank you, gentlemen. Appreciate it.

Good morning. I just want to follow up on the expense guide. Obviously, overall, the pre-provision net revenue guide is higher, but the expenses have been an area of focus, I think, for the company since the merger. And I did just want to kind of follow up on what's driving the tweak up by roughly 1% on expenses, especially since the fees are coming in a little bit weaker and net interest income tends not to have a lot of fees or a lot of expenses related to it. And then just as we think about the follow-up with the confidence that you can control expenses next year without the benefit of this kind of merger and other merger-related costs that will be done this year?

Yes, this is Bill. I can assure you that we're focused on expenses. The competencies we've developed through the merger for managing expenses and fostering improvements are still in place and will play a significant role in our expense management this year and beyond. This will contribute to our ability to achieve positive operating leverage and maintain an industry-leading efficiency ratio. We're actively pursuing additional opportunities while also investing in our business. The momentum we've noted, especially from the first quarter into this quarter, presents opportunities that don’t always align perfectly each quarter. We are confident in our investments in talent and areas such as insurance, wealth management, investment banking, and customer service centers, which should enhance revenue potential and improve client experiences. We have a solid understanding of the long-term returns on these investments. Additionally, our commitment to raising the minimum wage for our team members is a significant step forward. It's important for us to set the standard during this time when our teammates need support most. This will aid in retaining and attracting key talent, providing both immediate benefits and long-term returns. However, we are also facing an increase in operating losses, which are higher than expected. We have measures in place to address this, and while some decisions related to client experience have contributed to these losses, I am confident they will stabilize over time due to our investments in that area. The increase in expenses is mostly related to that aspect, and I believe we will have a more positive outlook as we work towards normalizing those expenses.

And what exactly are those operating losses? Maybe you can give an example or two? And is any of that related to the deal conversion and any follow-up from that, to be blunt? Thank you.

Yes. I mean there are decisions we made relative to client experience. I'll give you an example of. On the fraud side is, giving the client the benefit of the doubt upfront. So, if a client has an experience, we're going to get the money back from another bank and what we're doing is go ahead and funding that client now. That has a one-time increase. But over time, that normalizes, just as an example. And we think that's a good client experience and something, again, that will normalize over time. It's just one example.

You also asked for containment of expenses on a go-forward basis. As we look to rationalize and get back to business as usual, I think there's still opportunities in our corporate real estate portfolio. I think as we continue to rationalize our branch network on closure of some branches over time just as behaviors change with our clients. I think we've talked about this before, but we still have a lot of initiatives that our teammates came up with that would help us from both the cost savings as well as revenue and client experience perspective, and we're in the midst of implementing those over the next 12 to 18 months. We also are moving towards a new card platform over the next year or two, which would generate some savings once we both combine to that. From a technology perspective, we are starting to put more applications up into the cloud, which, over time, we're also generating some savings. And last thing I just want to mention is, as you look at our operations, both front and back office, the digitization and artificial intelligence projects that are rolling out are all part and very important to how the company runs and operates. It gives us comfort that our expenses will be contained over the next year or two.

Thank you.

Hi, Bill. You mentioned the hood of the car, so I'll use the Corvette analogy again. On a positive note, it seems like you're shifting from first to second gear. You noted that end-of-period loans are up 5%, which indicates acceleration. You're outperforming on deposit beta, your net interest margin is up, and you're expecting it to increase by about 25 basis points next quarter. Net interest income is also on the rise. Additionally, the decommissioning of data centers and applications later this year should contribute positively. So, looking ahead, things seem promising. However, when I consider the pace of progress, it doesn't appear to be significantly faster. While your pre-provision net revenue guidance has increased slightly, you're now projecting an operating leverage of over 50 basis points for this year, which is lower compared to some peers who are seeing 200 to 400 basis points. Last quarter, the difference was 100 basis points. This suggests that the operating leverage might not meet the guidance you provided earlier this year. I acknowledge that you’re focused on managing expenses, investing in minimum wage, and facing some operational losses. However, it still feels like the full potential of the Corvette is not being realized. So, where do you stand in harnessing the engine's power for growth and operating leverage, considering that your efficiency ratio is not aligning with the initial targets set when the merger was announced three and a half years ago? Thank you.

Yes, I appreciate the recognition of our progress. We are indeed experiencing growth, especially as we move from the first to the second quarter. Loan growth is one of the indicators, but it's not the only one. When I examine production, pipelines, and our overall efforts, it's clear that we are broadening our operations rather than relying on a single factor. To continue this momentum, we need to invest, and with rising costs, it's essential that we strategize effectively. I am confident in our investments and the company's long-term potential. Regarding our efficiency ratio, it's important to consider that we are in a different interest rate environment now compared to when we first provided guidance. I believe we will achieve an industry-leading efficiency ratio with growth, whether it reaches the low 50s or 55. I'm optimistic about our positioning as we have market-sensitive businesses ready to expand significantly with the right support. This growth could happen in the fourth quarter or next year, but we're better prepared than ever to seize those opportunities.

My question is related to some of the others, and while I know I may not receive a concrete answer, I would appreciate a qualitative response. Looking ahead to 2023, once all the merger savings are reflected in your figures and once you've dealt with items like operating losses and one-off charges that are decreasing, what kind of operating leverage can we anticipate for next year? A qualitative answer would be great, but if you can include some numbers, that would be even better.

Yes. Qualitatively, it's got to be qualitatively, we just don't know what the rate environment is going to be. So qualitatively, it will be positive. That's the angle that we're gaining towards and committed to. But similarly, and I think, again, you're seeing it this quarter, with revenue growth that reflects the power of this franchise and an efficient expense model that supports that.

All right. Thank you.

Hi, I just want to follow up on the corvette analogy. You're driving this car and theoretically, the roads are getting worse, right? My first question is that in the last crisis, both companies managed to perform relatively well from a credit standpoint. Daryl, when you consider various scenarios for the buildup of Allowance for Credit Losses during a downturn, many investors feel confident about where the banking industry stands in terms of charge-offs, but none of us can restrict the Current Expected Credit Loss process. So my question is, in a mild recession scenario, how much more do you anticipate the Allowance for Credit Losses will need to increase based on the charge-offs you expect your portfolio to generate?

Hey, Erika, I'll start and Clarke can help finish me off on this. But when we set the amounts, obviously, it's scenario-based. It's always forward-looking from that perspective. In the prepared remarks, we did say that there is potential that the scenarios can continue to deteriorate. If that is the case, then you would expect us to continue to add to our allowance. And that would add to our provision costs as that moves up from that perspective. But right now, we aren't seeing a whole lot. And there could be some deterioration from that perspective, but let me kick it back over to Clarke.

Yes, Erika, I would just say this, and Bill mentioned it and Daryl earlier, as we came through the quarter, we refreshed all of our scenarios. So our baseline, which is 40% of our estimate, is a more pessimistic outlook, slower economy. And then, we have a 30% weight on a recessionary, a more pessimistic scenario. So we feel like we've been pretty conservative in our estimate this quarter. And also this quarter, we had really good loan growth and very highly rated credits. So those carry a lower relative reserve rate. So that's why you didn't see a big build this quarter. You saw a 6 basis points decline in our allowance. That was because of the growth. So we believe we've accounted for some of the recessionary risk right now. And so, as we look forward, the main driver of changing the allowance would be growth. Unless the scenarios get more severe, and then obviously, our reserve rate would have to change.

Got it. Thank you for taking my question.

Good morning. On the credit front, can you discuss whether you're observing any signs of stress within the portfolio, particularly concerning some of the lower-end consumers, perhaps in your regional acceptance business on the non-prime side or the Sheffield business? Please share if you're noticing any emerging issues. Thanks.

We are closely monitoring the situation. Currently, we are observing some signs among low to moderate income consumers, particularly those earning $50,000 or less, where we are seeing increased early delinquency rates. However, this has not yet led to higher rates of late-stage delinquencies or losses. For instance, in our subprime auto business, we experienced one of our lowest loss rates this quarter, which is seasonal, and we are noting some improvements due to increased consumer redemption rates, even on repossessions. There have been no significant losses thus far. Additionally, we have reviewed our deposit levels and consumer borrowers, which are not decreasing rapidly, especially among moderate income and higher groups. While we are monitoring early signs, there are no substantial concerns at this time. Our outlook for the remainder of the year does not anticipate any significant decline.

Got it. Okay. And then just separately on the loan growth side, I know you indicated that you did see some pressure there this quarter on commercial real estate, but you seem a bit more optimistic there in stabilization. How should we think about the growth in that portfolio? Is there the potential for incremental declines there, or do you think stabilization will happen beginning next quarter? Thanks.

Yes. I'm sure it's quarter-to-quarter, but I think we're stabilizing, is the way I would say it, and into more of a growth mode. And by the way, we feel really comfortable about it. We've made decisions through the cycle that create a really good portfolio. We've done a lot of things internally strategically to get really, really strong alignment around the type of commercial real estate portfolio we want, the diversity that we want. So probably somewhere in the next couple of quarters, stabilizing with the bent for growth over time.

Got it. All right. Thanks, Bill.

Thanks, John, and thanks, everybody. That completes our earnings call. If you have any additional questions, please feel free to reach out to the IR team. Thank you for your interest in Truist. We hope you have a great day. Jennifer, you can now disconnect the call.