Primoris Services Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 18, 2022

There are 12 speakers on the call.

Operator

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation's Second Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Ankur Vias, Head of Investor Relations, Truist Financial Corporation.

Speaker 1

Thank you, Jennifer, and good morning, everyone. Welcome to Truist's Q2 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 2nd quarter results and share their perspectives on our efforts to transition from the integration focus to an operating focus, current business conditions and our Sure, are also in attendance and are available to participate in the Q and 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.

Speaker 1

Truist.com. Our presentation today will include forward looking statements and certain non GAAP financial measures. Please review the disclosures on Slide 2 and 3 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.

Speaker 1

With that, I'll now turn it over to Bill.

Speaker 2

Thanks, Heiko. Good morning, everyone, and thank you for call. 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.

Speaker 2

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 reflect 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 Tru's trajectory and reaffirm our commitment to delivering positive operating leverage for the full year of 2022. I'll share some more details on those topics in a moment.

Speaker 2

So I'm going to Slide 4. As you all know, Truist is fundamentally a deep purpose led 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 4 examples that I think reflect that purpose on the next slide.

Speaker 2

1st 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 a retail and small business banking business. Purposeful growth is dependent on attracting and In addition to our industry leading benefits, we desire a compensation program that also helps teammates who need it most to blunt the impact of inflation in their daily lives. 2nd, we had a historic launch of Truist One Banking yesterday. This is our new differentiated suite of checking solutions that reimagine everyday banking, including 2 new accounts that eliminate overdraft fees and provide greater access to credit.

Speaker 2

The flagship TruistOne checking account has 0 overdraft fees and the capability to provide confidence account, which provides consumers with access to mainstream banking services and no overdraft fees. We're mindful of the impacts that Inflation and reduced stimulus may have on some of our clients and TruistONE is one of many examples for how we're advancing financial inclusion across our communities. Third Street has committed $120,000,000 to strengthen and support diverse owned small businesses. This commitment exemplifies our purpose by supporting small businesses, which are so vital to the health and vibrancy of our communities. And 4th, we released our 2021 ESG and to put our purpose into action, and that includes climate change.

Speaker 2

As we look to externalize our own net zero aspirations and further the transition to a lower carbon We recently created new advisory practices within our CIB and commercial community banks 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 $238,000,000 roughly half of what they were in the Q1. We expect merger costs to decrease merger costs correspond to a less complex narrative, improving earnings quality, more capital and ultimately industry leading returns.

Speaker 2

Lastly, we incurred a $39,000,000 pre tax gain related to the early extinguishment of $800,000,000 in FHLB debt. Turning to our Q2 performance highlights on the next slide. We earned $1,500,000,000 or $1.09 a share on a reported basis. Excluding the selected items on Slide 7, adjusted earnings totaled $1,600,000,000 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 Q1, adjusted EPS decreased 2% as higher loan loss provision offset a 10% increase in adjusted EPNR.

Speaker 2

Adjusted revenue benefited from higher short term rates alongside well controlled deposit cost, strong loan growth, Consumer seasonality and strong insurance results, partially offset by continued softness in markets and market sensitive fee businesses such as Investment Banking, Wealth and Mortgage. Adjusted ROTCE was 25%, up from 23% in the prior three quarters. Even when normalizing things like AOCI to 0 and assuming a flat ALL ratio, adjusted ROTCE 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 normalization of teammate travel and elevated operational losses.

Speaker 2

We have plans, 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 $435,000,000 year to date headwind we have from PPP And PAA revenue, despite these headwinds, we're still targeting positive operating leverage on both the GAAP and adjusted basis for the full year. Asset quality remains excellent and net charge offs decreased relative to the Q1. Capital deployment was healthy in the second quarter as we funded strong loan growth and completed $250,000,000 worth of share repurchases. Capital levels remain strong in light of our risk Overall, the Q2 begins to reflect the power of Truist post integration.

Speaker 2

Now turning to Slide 9. Digital activity increased in the 2nd 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 initial introduction of Truist Digital and Waves in 2021. In June, we announced the grand opening of our state of the art Innovation 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.

Speaker 2

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, PrizeLink 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 is rolled out in May and we recently held our last merger oversight committee meeting.

Speaker 2

As we shift to BAU, our digital and technology teams are looking forward to Accelerating our pace of innovation and client experience improvements. Yesterday, as I mentioned, we introduced TruistONE. As I referenced earlier, we'll soon expand LightStream to include a new deposit product on a real time cloud based core, Enhance the sophistication of our underwriting models through our partnership with Zest, rollout 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 investments and focus on digital and technology. Now turning to loans and leases on Slide 10.

Speaker 2

Average loan balances increased a very robust $8,100,000,000 or 2.8 percent sequentially with growth across most businesses. The pace of growth accelerated during the quarter with end of period loans of 4.7%. Growth was primarily driven by C and I where average balances increased $6,700,000,000 or 4.8 percent overall. We delivered broad based loan growth Across most CIB industry verticals, notably energy, consumer and retail, financial institutions, TMT, Due to M and A activity, the current shift to banks from the bond market, increased relevance with new and existing clients and higher revolver usage for CapEx, inventories and inflation. As in recent quarters, growth continues to be strong within our asset finance group as we continue to build out that business with more talent, product capabilities and a larger balance sheet.

Speaker 2

Commercial Community Bank C and I balances increased 2%, Excluding PPP and dealer floor plan, reflecting growth across all our geographic regions and it was the 2nd strongest end of period growth since 2019. Revolver utilization increased 300 basis points to just over 30%, the highest level since mid-twenty 20. CRE remains a headwind, reflecting both a highly competitive market and our disciplined approach. At the same time though, I continue to be optimistic about the future of our CRE business as we create a more strategic clarity internally And non bank competition rationalizes somewhat with rising rates. Wealth Lending was up $600,000,000 sequentially as our advisors and clients Excluding mortgage, consumer and card balances increased $1,000,000,000 or 1.3 percent A strong growth in Service Finance, Prime Auto, Sheffield and LightStream more than offset runoff in our partnership and student portfolios.

Speaker 2

Service Finance is performing in line with our high expectations and experiencing good business development momentum given the alignment with Truist. 2nd 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 Q4 conversion. In addition, 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.

Speaker 2

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.

Speaker 2

Average deposit balances increased $8,500,000,000 or 2% during the 2nd quarter, largely attributable to an increase in brokered deposits in mid March. Excluding brokered deposits, average deposits decreased 2 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 pay. As a result, interest bearing client deposit betas were 8%, well below our modeled assumptions.

Speaker 2

As the interest rate environment involves, 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.

Speaker 3

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.

Speaker 3

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 model deposit betas. Overall, we and that will decrease over time with the diminishing benefit associated with future rate increases and the disintermediation of funding sources. We forecasted an approximate 25% cumulative interest bearing deposit beta through the 2nd 3rd quarters. To protect against any potential downside in rates, we also added $16,000,000,000 of swaps, which are primarily forward starting.

Speaker 3

These swaps begin in 2023 2024 and will have laddered maturities that range from 3 to 5 years to minimize earnings volatility. Moving to Slide 13. Fee income increased $106,000,000 or 4.9 percent sequentially. Insurance income increased $98,000,000 due to the seasonality, strong organic growth and the full quarter of Kensington Vanguard Card and payment related fees increased $34,000,000 reflecting the prior quarter acquisition of merchant relationships and the increased activity. Residential mortgage income decreased 15,000,000 were 17% as higher interest rates pressured volumes and gain on sale margins.

Speaker 3

Servicing income was essentially flat from the prior quarter as slower 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 Trula's strong purpose and balance sheet to hire select while recorded 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.

Speaker 3

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 $20,000,000 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 $25,000,000 primarily due to a loss on a certain sale of SBIC funds to diversify our private equity investment portfolio. Turning to Slide 14. Reported expenses decreased $94,000,000 sequentially to $3,600,000,000 The lower expenses were driven by $180,000,000 or 43% reduction in merger Costs due to diminishing integration activity.

Speaker 3

Adjusted expenses increased 119,000,000 Personnel expenses increased $64,000,000 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. In addition, other expense increased $19,000,000 due to higher operational losses and ongoing normalization of teammate travel. Professional fees and outside processing costs increased $16,000,000 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 $200,000,000 annually, offset by lower turnover expense and improved execution and client experience.

Speaker 3

Moving to Slide 15. Asset quality remains excellent, reflecting our prudent risk culture, diverse portfolio and solid economic conditions. Leading credit indicators remain benign. Credit sized and classified commercial loans decreased 6% sequentially and are 37% lower to a year ago. Our NPL ratio was flat at 36 basis points and loans 30 to 89 days past due decreased 3 basis points to 69 basis points.

Speaker 3

Our net charge off ratio also decreased 3 basis points 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 weightings of our pessimistic Baseline and optimistic scenarios were unchanged from the Q1. Each scenario is moderately worse, a trend that may continue. Moving on Slide 16. Our CET1 ratio declined 20 basis points to 9.2%.

Speaker 3

Strong loan growth and a $250,000,000 share repurchase during the Q2. 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 Q3 and we'll 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 2nd lowest CET1 erosion and a loan loss reserve rate in the peer group under severely adverse scenario.

Speaker 3

Our preliminary stress test capital buffer remained flat at 2 50 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 Q1 ratio target of 9.75 percent 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.

Speaker 3

Truist has multiple sources available to fund incremental loan growth, as seen this quarter with the use of broker deposits and Federal Home Loan Bank advances and our securities portfolio. I will now provide guidance for full year 2022 and new guidance for the Q3. 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 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.

Speaker 3

Net net, this is slightly higher PP and R 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 net charge off ratio to be in the 25 to 35 basis points for the full year. Looking into the 3rd quarter, We expect adjusted PPNR to grow high single digits on the 2nd quarter level, primarily as a result of higher net interest income, partially offset by higher non interest expense. We expect mid-twenty 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.

Speaker 2

Thanks, Daryl. And moving to Slide 17. On our previous earnings call in April, I expressed my belief that the Q1 marked a strategic and financial turning point for Truist. Our Q2 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.

Speaker 2

Wealth continues to build momentum in hiring advisors who are attracted quarter for the first time in 10 quarters. With our recent entry into the Chicago market, Truist Wealth now serves 9 of the 10 largest metropolitan areas in the United States. In addition, net organic asset flows have been positive for 5 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 Q1 of 2022, momentum is also building.

Speaker 2

Loan production in the 2nd quarter was the highest it's been at Truist and up 41% compared to the Q1. Pipelines also ended the quarter the highest we've seen. Branch loan production, which is primarily home equity was up 24% relative to the 1st quarter and Hi, 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.

Speaker 2

The positive production within our commercial community bank is up 8% relative to the Q1. CCB related revenue was up 21% sequentially with increased activity across all products with significant momentum highlighting the power of our advice driven model. Financially, net interest income and margin rebounded from the Q1 low point as expected. While fee income did not improve to the extent we had hoped, our 2nd 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 and revenue synergy opportunities. In addition, merger costs are declining rapidly and we're making good progress towards realizing our remaining cost saves as we decommission data centers Systems in the back half of the year, all of which will help drive positive operating leverage for the full year of 2022.

Speaker 2

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 and 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 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.

Speaker 2

It only requires 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 or tightening the monetary policy have somewhat diminished the economic outlook as we move further into this year and into next. Truvis 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, our 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.

Speaker 1

Thanks, Bill. Jennifer, at this time, will you please explain how our listeners can participate in the Q and A session? As you do that, I'd like to ask the

Operator

Please make sure your mute function is released to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question. We'll go first to Betsy Graseck with Morgan Stanley.

Speaker 4

Hi, good morning.

Speaker 2

Good morning.

Speaker 4

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 brokers 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?

Speaker 4

Thanks.

Speaker 3

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 We're very comfortable letting that run off and have that have a positive mix change on the balance sheet. As far as broker deposits, we did add some broker 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.

Speaker 3

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 amount of capacity there. The other thing from an investment portfolio perspective, we're about $145,000,000,000 give or take and we feel comfortable we could shrink that portfolio probably $20,000,000,000 to $25,000,000,000 easily and still stay within our liquidity and LCR guidelines that we have to for regulatory purposes. As far as our strategies for pricing, we were really pleased, as Bill and Talked about across our company, our deposit betas came in much better than modeled. We modeled 25 for the first 100.

Speaker 3

If you look in the Q2, we came into 2015 and that includes brokered. When you back out the brokered, we were only at 8 1%, 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 auto expectations.

Speaker 2

That's the only thing I'd add is that it will be somewhat stable for deposits for the balance of the year. But remember, as Daryl pointed out, we had just under 2% growth in DDAs. I mean, we're adding net new clients and expanding those relationships. I think the beta really just reflects the benefits of the merger. We're sitting now with just under 20% market 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

Speaker 3

Your hedge question? Yes, yes, yes. I just we are just gradually starting to add some receivers out in the forward markets for the most part out 1 to 2 years. Since we are stingy on the way up on deposit rates, you won't have as much capacity on the way down. So we're just Decreasing as rates continue to go up.

Speaker 4

Got it. Okay. No, that's helpful. And then on your point on loan growth, yes, 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 Just a little bit of a sense and color for how we should be thinking about that?

Speaker 4

Thanks so much.

Speaker 2

Yes, 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 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 that is it is extremely broad based.

Speaker 2

So not only is it in the C and I 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.

Speaker 5

Yes.

Operator

We'll go next to Ken Usdin with Jefferies.

Speaker 6

Yes. Good morning. Sorry about that. Yes, 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.

Speaker 6

So can you just kind of help us walk through just what you're expecting On the fee income side, inside that Q3 PPNR outlook that you gave, because I think you talked mostly just about higher NII and higher expenses. So Any granularity on the fee side would be great. Thank you.

Speaker 2

Yes. Hey, Cam, let me maybe just do a walk through of the broad categories. And 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 feel really good about the momentum that Yes, there. And as we mentioned earlier, we're continuing to invest in the insurance business.

Speaker 2

So 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 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 would be a little bit down in the Q3 just sort of where markets are right now. But as I highlighted earlier, our Really solid production and asset flows and hiring net advisors. So if we get a little market tailwind that could change.

Speaker 2

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 momentum from our commercial community bank. That's probably a little bit less Market dependent, I'd sort of so 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.

Speaker 2

So We're leaning in there. And then on the service charge side, with the decisions we've made with Truist 1 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.

Speaker 6

Great. Okay. And then 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, saw you did a little buyback and just in terms of capital allocation decisions and potential for more of those insurance deals that you guys have been

Speaker 2

Capital exactly where we want to right now as we're using it with growth. So we've been funding the loan growth. As we've Talked about our capital levels were driven by merger risk, CCAR results and economic uncertainty. I think merger risk is largely behind us, very pleased with the CCAR results, our low risk profile, Better PPNR profile, economic uncertainty, it was really high during the pandemic moderated and maybe increasing a little bit. So we've got to balance all of those.

Speaker 2

But we're comfortable where we are. We've had more organic growth. We do see more opportunity in some of the non bank M and A as you noted. So we're going to allow capacity and be opportunistic there as well. And then we generate post merger, we'll generate somewhere around 25 basis points of capital a quarter organically.

Speaker 2

If you sort of say, okay, we've used about 15 basis points of that to fund the current growth that we have and anticipate, then we've got about 10 basis So I think that gives us the requisite flexibility to fund the growth that we anticipate, As you noted for potential non bank M and A, particularly in the insurance side. And so if you add all that

Speaker 7

Sure.

Operator

We'll go next to Gerard Cassidy with RBC.

Speaker 8

Good morning, Bill. Good morning, Daryl.

Speaker 2

Good morning.

Speaker 8

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 saying or what are your early indicators you're looking at to see if there will be a crack in credit maybe in 6 or 12 months?

Speaker 2

Yes. I mean, so 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 the last two markets I was in were South Florida and Nashville. And They are blowing and going in virtually every direction. But our clients continue to see good demand.

Speaker 2

I think it's appropriate to put a cautious note just because I think you have to. And if we look at sort of One of the canaries in the coal mine, so to speak, one of 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 capped out pretty significantly. Things happening in CRE. We've seen some non recourse construction loans and some things that you sort of pause a little bit 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?

Speaker 2

Now all those things that are there, we're not seeing in our Results right now, but there 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.

Speaker 8

That's very good. Thank you. And then as a follow-up, Darryl, you mentioned the deposit beta It 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.

Speaker 8

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?

Speaker 3

Yes. So Gerard, I would just tell you that I think it was a lot of great work With all our teammates 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 at other places. So I think that's really the benefit of our franchise.

Speaker 3

I do agree As interest rates go up, our deposit betas will continue to climb just because more and more people 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 2nd to 3rd 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 That cumulative beta increasing and probably if you look at from Q2 to Q4, you may be in the low 30s give or take Couple of percentage points there. So overall, if you go back to where we were during the Great Recession, much better overall performance and 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

Operator

We'll go next to Matt O'Connor with Deutsche Bank.

Speaker 4

Good morning.

Speaker 5

I just wanted to follow-up on the expense guide. Obviously, overall, the CPNR 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 would be The confidence that you can control expenses kind of next year without the benefit of these kind of merger and other merger away costs that will be done this year.

Speaker 2

Yes, Matt, this is Bill. No eye off the bottom on expenses. I can assure you that. So the See is that we've built through the merger to manage expenses, understand expenses, create Continued improvements are all still there and will be a big part of our expense story for this year and for the years going forward And a big part of our capability to deliver positive operating leverage and I think industry leading efficiency ratio. So no lack of focus on the expense side and we have lots of things underway in terms of how we would achieve those additional opportunities.

Speaker 2

But on the same side, we're going to we're investing in our business. And just like we've seen some of this momentum we've talked about particularly coming from the Q1 into this quarter, We don't want to miss those opportunities and those opportunities don't line up quarter to quarter. They I think they line up well. We have confidence in the investments we've made in talent and insurance wealth, investment banking, care centers, as an example, Improve revenue potential, improve the client experience, and we have a pretty good formula for long term paybacks on those investments. I mean we've been at this and have a pretty good understanding of that.

Speaker 2

Also the investments in our teammates from the minimum wage. So that was a that's a clear step up. I think in fairness that over time others will Be in that same position, but we just felt like, as I mentioned earlier, it was important for us to lead. This is a time when those teammates need us most. I think it will really help us long term in terms of retention and acquisition of key talent.

Speaker 2

So it also has Immediate bump up and a longer term payback, which I feel really good about. And then the one that's just trickier and a little more Quarter year end specific is just the increase in operating losses. And they are up. They're up higher than we I think they should be. We have a lot of things in place to do that.

Speaker 2

We made some decisions related to the client That I think increased some of those operating losses, but I'm confident that they'll normalize over time Given the investments we're making in that part, but that's the only part that I would say is the non investment part of the increase in the Expense side and I think we'll be more positive about that long term and normalizing those expenses.

Speaker 7

And what exactly are those operating losses?

Speaker 5

You can give an example or 2 and is any of that related to the deal conversion and there any follow-up from that to be blunt? Thank you.

Speaker 2

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 is a one time increase, but over time that normalizes just as an example.

Speaker 2

We think That's a good client experience and something again that will normalize over time is just one example.

Speaker 3

Pat, 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, 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 a 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 2, which would generate some savings once we Both combined to that, from a technology perspective, we are starting to put more applications up into the cloud, which over time will also generate 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 all part and very important to how Company runs and operates.

Speaker 3

It gives us comfort that our expenses will be contained over the next year or 2.

Speaker 7

Thank you.

Operator

We'll go next to Mike Mayo with Wells Fargo Securities.

Speaker 7

Hi. Well, Bill, you gave me the opening and you talked about the hood of the car. So I'll go with the Corvette analogy again. And, it looks like you're on the what the positive is, it looks like you're going from 1st to 2nd year, right? You said end of period loans are up 5%, that's accelerating.

Speaker 7

You're beating on deposit beta. Your NIM is up. You expect it Be up maybe in the range of 25 basis points next quarter. NII is going higher and you still have the decommissioning of the data centers and all the apps Later this year, so that should help. So next 2nd year, fantastic.

Speaker 7

But then I look at the speed that you're going, And it doesn't seem to be a lot faster. Yes, PPNR guidance is a little bit higher, but you're guiding for 50 basis points plus operating leverage for this year. If you took the narrow part of your bands and some of your peers are 200 basis points, 300 basis points. I think last quarter that difference was 100 basis points. So in a way, the operating leverage is a little bit less than I think what you were guiding In the Q1 and I hear you, you're not taking your eye off the ball on expenses, you're investing in minimum wage, You have some operating losses, but still it just seems like the power of the Corvette is still not being fully realized.

Speaker 7

So where are you in That progression of translating the power of the engine to the power of the growth and the power of the operating leverage Your efficiency ratio is not really in the zip code of the initial figures you gave when you announced the merger 3.5 years ago. Thank you.

Speaker 2

Couple of things, Mike. So, appreciate the acknowledgment of 2nd Gear at least. I don't know how many gears your Corvette But at least there's an acknowledgment of the 2nd year. And I think we are seeing that growth. And I feel really Good about the migration from the 1st to the second quarter.

Speaker 2

If loan growth is one of those indicators, Moe, I don't think it's always the indicator. But if I look at production and pipelines and just the things that we're doing and it's broad based, so it's not one thing, it's the whole Engine operating at a faster pace. But if we're going to continue to just Grind on the Corvette, you got to put gas in it. And you got to put in gas is more expensive and we want to drive it faster. And we're really confident in the things that we're investing in and the capability of the company long term.

Speaker 2

As it relates to the efficiency ratio from the first guidance, I mean, remember that was in an interest rate environment that was pretty different than where we are now. I still believe and we're delivering and prospectively we'll deliver industry leading efficiency ratio with growth, Whether it's at 55% or low 50s, I don't know, but I am confident that it will be industry leading in any different in any rate environment. I feel good about that. So and then we've got market sensitive businesses that are sitting on the Launching pad and really good capability to grow significantly if we get a little bit of tailwind. And that tailwind could come in the Q4, could come next year, but it's going to come and we're Better position than we've ever been to capitalize on those opportunities.

Speaker 7

I guess what my question is getting Perhaps some of the other questions, and I know I'm not going to get an answer, but you can give it qualitatively is looking out at 2023, when you finally have all the merger savings In your numbers and when you finally have realized some of these some of the noisy financial items such as The operating losses and you finally are done with these one off charges, which are going down. What sort of operating leverage we can expect next year? At least You can answer that qualitatively or if you want to put numbers around it, we'd love it.

Speaker 2

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.

Speaker 7

All right. Thank you.

Operator

We'll go next to Erika Najarian with UBS.

Speaker 9

Yes. Hi. Just to follow-up on the Corvette analogy. You are driving this Carr, in theory, the roads are getting worse, right? So maybe the first question I have is, In the last crisis, both companies did fairly well, relatively well, from a credit perspective.

Speaker 9

And Daryl, as you think about the different scenarios for ACL buildup in a downturn, A lot of investors are comfortable thinking about where the banking industry could be in a charge off scenario, but none of us can mimic the CECL process, right? So I guess the question is, in a mild recession scenario, how much more ACL build would do you think would be ahead of you for what the charge offs that you think your portfolio would produce?

Speaker 3

Hey, Erica, I'll start and Clark can help finish me off on this. But when we set the allowance, obviously, it's a 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 Clark.

Speaker 3

Yes, Erica, I

Speaker 10

would just say this and Bill Janine 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 recession area, more pessimistic 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 Credit. So those carry a lower relative reserve rate.

Speaker 10

So that's why you didn't see a big build this quarter. You saw 6 basis points Decline in our allowance that was because of the growth. So we believe we've accounted for some 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.

Speaker 9

Got it. Thank you for taking my question.

Speaker 1

Jennifer, we've got time for one more question.

Operator

We'll take our last question from John Peccari with Evercore ISI.

Speaker 1

Good morning.

Speaker 11

Just on the also on the credit front, if you could just talk about, are you seeing any emerging signs of stress Within the portfolio, particularly as you look at some of the lower end consumer, maybe in your regional acceptance business on the non prime side or the Sheffield Business, if you could just talk about where, if any, that you're seeing some of the cracks form? Thanks.

Speaker 10

Mark, I mean, we are monitoring that very carefully. So I think what we're seeing probably a little bit of indication would be the low to moderate Income consumer think cohorts $50,000 incomes and below. We're seeing higher delinquency early delinquency in those areas, but is not translated yet into the higher late stage delinquencies or So for example, in our subprime auto business, that we had one of our lower loss rates this quarter seasonally and We're seeing things like because of the Manheim being up, consumers, higher redemption rates even on repos. So it's not yet We've also looked at our deposit levels for our consumer borrowers and they're not coming down rapidly, Particularly for the moderate income and above. So while there's early signs we're watching, it's not translated into Any significant concerns and our outlook right now for the rest of the year does not assume any significant deterioration.

Speaker 11

Got it. Okay. Thanks, Clark. 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're seeing a bit more optimistic there How should we think about the growth in that portfolio? Is there the potential for incremental declines there?

Speaker 11

Or do you think stabilization will happen beginning Next quarter? Thanks.

Speaker 2

Yes. I'm not 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 with that. I think 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 CRE portfolio we want, the diversity that we want. So probably somewhere in the next couple of Quarter's stabilizing with the bent for growth over time.

Speaker 11

Got it. All right. Thanks, Bill.

Speaker 1

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.

Speaker 1

Jennifer, you can now disconnect the call.

Operator

Thank you. This does conclude today's conference. We thank you for your participation.

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Earnings Conference Call
Primoris Services Q2 2022
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