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Truist Financial Corp (NYSE:TFC)
Q1 2021 Earnings Call
Apr 15, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation First Quarter 2021 Earnings Conference. As a reminder, this event is being recorded.

It is now my pleasure to introduce your host, Alan Greer of Investor Relations.

Alan Greer -- Investor Relations Officer

Thank you, Katie, and good morning, everyone. We appreciate you joining our call today. We have our Chairman and Chief Executive Officer, Kelly King; President and COO, Bill Rogers; and CFO, Daryl Bible, who will highlight a number of strategic priorities and discuss Truist's first quarter '21 results. Chris Henson, Head of Banking and Insurance; and Clarke Starnes, our Chief Risk Officer, will also participate in the Q&A portion of our call.

The accompanying presentation, as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website.

Our presentation today does include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slides 2 and 3 of the presentation regarding these statements and measures, as well as the appendix for appropriate reconciliations to GAAP.

We also want to note that Ryan Richards, the former Head of Investor Relations has left Truist to pursue an opportunity outside of the Company. If you have questions following today's call, please contact me or Aaron Reeves of Investor Relations. Our contact information is on the cover of the earnings release.

And with that, I'll turn it over to Kelly.

Kelly S. King -- Chairman and Chief Executive Officer

Thanks, Alan, and good morning, everybody. Thank you very much for joining our call. We had overall I consider a strong quarter with strong earnings and returns, very good expense control and strong fee income, especially in insurance and investment banking, excellent asset quality, which Clarke will talk about, really good progress on merger integration and excellent internal recognitions, including an outstanding CRA rating for our community development efforts.

If you're following along on Slide 4, we always like to focus on the most important, which is our culture. As you've heard us say many times, we continue to reiterate culture is the primary determinant of our long-term success. Our purpose really connects with our teammates. We've been really excited about this. Our teammates are driven to really help our clients. We really enjoy serving our communities and our shareholders. Even with COVID, we've made great progress in activating our culture, created a cultural council, which works every day with our EL team causing our culture to really come alive. So we've made excellent progress in terms of culture, which is ultimately the driver.

On Slide 5, just a couple of points and some things that I think are good with regard to how we are serving our communities. We were very excited to be the first issuer of a social bond of the US regional banks, a $1.25 billion bond that was well, well-received 120 investors, very favorable pricing. We're very excited about that in terms of our ability to focus on affordable housing and other community needs. We became the lead investor for Greenwood, which is very excited in innovative digital banking platform designed for Black and Latinx consumers and business owners.

We signed the Hispanic Promise, a first-of-its-kind national pledge to prepare, hire, promote, retain, and celebrate Hispanics in the workplace. And we received 100% score on Human Rights Campaign's Corporate Equality Index, and we were named the Best Place to Work in '21.

We also continue to make great progress in terms of executing on our $60 billion Community Benefits agreement and we are already at 114% of our annual target. We were very proudly recognized once again by Fortune as one of the world's most admired companies.

On Slide 6, just a few indicators for you about how well the merger is going. I just want to point out to you that the risk of executing our merger has already been reduced substantially and is going down daily as we do conversion and we're getting a lot of the actual merger work done. A huge amount of work has already been done on the core bank conversion. And you will see in the bubble chart there that a number of conversion has already been done. For example, Truist Securities conversion, wealth brokerage conversion. We did huge amount of work in terms of grading all of the Truist jobs. And that is all being executed. We already in the process of testing protocols for our core bank conversion, our wealth trust conversion is well along -- occurring in just a few weeks. So you can see that we are making tremendous progress and I just want to emphasize the point that for those who think that the risk is going to remain high and won't subside until we do the final branch conversion that is not a good way to look at it. The risk is being mitigated daily as we do these various conversions and make progress in terms of preparing for the final conversion.

We did close 226 branches in the first quarter, which was part of our strategy. We have been very, very happy with our teammates reaction to that. They're very, very engaged. Recall that we promised all of our client-facing performing teammates that they would not lose their jobs. And so, it's going very, very well. And our clients are very supportive because remember, most of these branches are very, very close to each other. And so, it's no inconvenience to our clients. We are very focused on meeting our expense targets, which Daryl will talk about and we believe we will be able to accomplish that.

Just a few performance highlights on 7A. I think it was a very, very good quarter. We had strong adjusted net income of $1.6 billion, or $1.18 per share adjusted, both up 42% versus the first quarter of '20. We had adjusted ROTCE of 19.36%. Recall that we said our mid-term target was in the low-20s. So we are well on the way to achieving that already and we have huge cost saves yet to come.

We recorded investment banking and trading income at a record level along with insurance. It was offset some by decreases in residential mortgage income and commercial real estate-related income. Strong expense discipline, as our adjusted non-interest expense decreased $57 million sequentially, and our merger-related and restructuring charges decreased $167 million.

We significantly had lower provision for credit losses of $48 million versus $177 million in the fourth quarter. So we had a reserve release of $190 million. Clarke will talk about that more if we have questions.

NPAs decreased $88 million, or 6.3%, which we were very happy about. We completed $506 million of the share repurchases. So we had a total payout for the quarter of about 83%. We did redeemed $950 million of preferred stock during the quarter at an after-tax cost of $26 million, or $0.02 per share, which was not excluded in terms of our adjustment to net income.

So overall, if you look at Slide 8, you will see how the adjustments worked with the merger-related charges having a diluting impact of $0.08, incremental operating expenses related to the merger that are not in our ongoing recurring charges going forward was $0.10 and an acceleration for cash flow hedge unwind expense of $0.02. So overall, it was a very strong quarter across the wide array of performance areas. Importantly, we continue to execute on our T3 concept, which is the concept of seamlessly integrating technology and touch so that we yield a high level of trust, creasing a very high value proposition, which is providing excellent client focus, which is ultimately the most important factor in terms of judging our current and our future performance.

Now, let me turn it to Bill for some additional detail. Bill?

William H. Rogers -- President and Chief Operating Officer

Great, Kelly. Thank you, and good morning, everyone. If you can see from Page 9, our clients continue to adopt digital at a rapid pace. Since last March, the population of active mobile app users has increased 11% to more than 4 million users, and that marks an important milestone along our digital journey of the Company. We're absolutely committed to meeting our clients where they are. And increasingly these interactions are happening in the digital space. Our digital commerce data bear this out as digital client needs have met -- digital client needs met have improved 44% since the first quarter of 2020 and represent more than one-third of total bank production of core bank products. This percentage is even higher when you include LightStream and Mortgage.

As we accompany clients along their digital journey we also interact with them across multiple digital products and services, mobile check deposits and Zelle are two examples, both of which were up significantly from a year ago and this just creates additional opportunities to deepen those relationships. Importantly, the increase of digital transaction activity allows our teammates to spend less time on manual execution and more time assessing the meeting client needs enabled by our Integrated Relationship Management.

We're also excited about the new Truist digital experience that's rolling out our clients later this year. In order to complete the digital migration ahead of the core bank conversion, we're utilizing an innovative proprietary approach known as the Digital Straddle. The Digital Straddle allows us to migrate clients to the new digital experience in waves, reducing migration risk, as Kelly discussed earlier, and avoiding a one-time migration early next year. We recently launched a successful internal pilot of our new digital experience and expect to migrate our clients on a series of waves during the third and fourth quarter.

So let me now turn to Slide 10 to talk about loans. First quarter balance sheet dynamics reflected a combination of mild loan demand, ongoing government stimulus and elevated liquidity. Average loans decreased $8.2 billion, compared to the fourth quarter, primarily due to a $4.5 billion reduction in commercial balances and $3 billion of residential mortgage run off. The decrease in commercial loan balance was primarily attributable to lower revolver utilization and continued pay down of PPP loans, which outpaced new loan commitments. Approximately $3.3 billion of PPP loans were repaid during the quarter, impacting average commercial balances by $1.8 billion. Revolver utilization remained low as clients continue to hold elevated liquidity and access the capital markets.

In addition, the dealer floor plan portfolio continues to experience headwinds related to supply chain disruptions. Average consumer loans decreased $3.6 billion as ongoing refinance activity impacted residential mortgage, home equity and direct loan balances. These declines though partially offset by higher indirect order balances, which benefited from strong production, especially in the prime segment. We made a conscious decision in support of our purpose to lean in on PPP loans and we've been the largest lender in many of our markets. And while revolver utilization is at all-time lows, our commitments are static, also acknowledge that our prime mortgage portfolio is more susceptible to higher prepayments. We recognize these are headwinds, but we're also optimistic that given vaccination rates, government stimulus and our own view of productivity and pipelines, all supported economic recovery and corresponding core loan growth.

Let me switch to the next page and talk about deposits. Average deposits increased $7.9 billion sequentially and are up more than $28 billion from the first quarter of 2020, reflecting government stimulus and pandemic-related client behaviors. Average balances increased across all deposit categories except time deposits. While the largest increases were in interest checking and money market and savings, the deposit mix remains favorable, as non-interest-bearing accounts represent one-third of total deposits. Truist continues to experience strong deposit growth while maximizing our value proposition to clients outside of rate paid as we continue to experience net new household growth. During the first quarter, average total deposits cost decreased 2 basis points to 5 basis points and average interest-bearing deposit cost declined 4 basis points to 7 basis points. Due to new stimulus, we are up double digits in total deposits since the quarter end.

And with that, let me turn it over to Daryl to discuss the overall financial performance.

Daryl N. Bible -- Chief Financial Officer

Thank you, Bill, and good morning, everybody. Continuing on Slide 12. Net interest income decreased $81 million linked quarter due to fewer days, lower purchase accounting accretion and lower earning asset yields. Reported net interest margin was down 7 basis points, reflecting a 4 basis point impact from lower purchase accounting accretion. Core net interest margin decreased 3 basis points as deposit inflows resulted in higher combined Fed balances and securities. Interest sensitivity decreased slightly as the investment portfolio grew in response to the elevated liquidity.

Turning to Slide 13. Non-interest income decreased $88 million despite record income from insurance and investment banking and trading. Insurance income increased $81 million linked quarter, reflecting seasonality, $28 million from recent acquisitions, and $19 million due to a timing change related to certain employee benefit accounts. Organic revenue grew 6.4% due to strong new business, stable retention and higher property and casualty rates. Investment banking and trading rose $32 million, benefiting from strength in high-yield, investment-grade and equity originations, as well as a recovery in CVA.

Residential mortgage income decreased $93 million due to lower production margins and volumes. Commercial real estate income decreased $80 million due to seasonality and strong fourth quarter transaction activity. Other income was down $18 million as lower partnership income was partially offset by gains from a divestiture.

Continuing on Slide 14. Expense discipline remained strong in the first quarter. Non-interest expense was down $223 million linked quarter, reflecting a $167 million decrease in merger-related and restructuring charges. Adjusted non-interest expense decreased $57 million, primarily due to lower professional fees and non-service-related pension costs offset by personnel expense. Personnel expense increased $34 million, reflecting higher equity-based compensation, higher incentive compensation and payroll tax resets, partially offset by lower salaries and wages.

Turning to Slide 15. We are taking full advantage of our unique opportunity to grow the best of both franchise. The best of both is harder to execute in a typical acquisition. But we are convinced that the client benefits and internal efficiencies justify the effort and expense. As we said in January, we continue to expect total combined merger costs of approximately $4 billion. This consists of merger-related and restructuring charges of approximately $2.1 billion and incremental operating expenses related to the merger of approximately $1.8 billion. These costs are not in the future run rate and will come out in 2022 after we complete the core bank conversion and decommission redundant systems. Since the merger was announced, we have incurred $1.3 billion of merger-related and restructuring charges and $900 million incremental operating expenses related to the merger.

Continuing on Slide 16. Strong asset quality metrics remained relatively stable, reflecting diversification benefits from the merger and effective problem asset resolution. Non-performing assets were down $88 million, or 2 basis points as a percentage of total loans, largely driven by decreases in the commercial and industrial portfolio.

Net charge-offs came in 33 basis points, which was at the lower end of the guidance range. Linked quarter increase was mostly driven by seasonality and indirect auto.

The provision for credit losses was $48 million, including a reserve release of $190 million due to lower loan balances and improved economic outlook. The allowance for credit losses was relatively stable at 2.06% of loans and leases. Our exposure of COVID sensitive industries was essentially flat at $27 billion.

Turning to Slide 17. Truist has strong capital and ended the first quarter with a CET1 ratio of 10.1%. With respect to capital return, we paid a common dividend of $0.45 per share and had $506 million of share buybacks. We also redeemed $950 million of preferred stock, resulting in an after-tax charge of $26 million, or $0.02 per share that was not excluded from the adjusted results. We have $1.5 billion in repurchase authorization remaining under the share repurchase program the Board approved in December. We intend to maintain approximate 10% CET1 ratio after taking into account strategic actions, stock repurchases and changes in risk-weighted assets. As a result, we anticipate second quarter repurchases of about $600 million. We continue to have strong liquidity and are ready to meet the needs of our clients and communities.

Continuing on Slide 18. This slide shows excellent progress toward the net cost saves of $1.6 billion. Through fourth quarter, we reduced sourceable spend 9.3% and are closing in on our 10% target.

In terms of retail banking, we closed 226 branches in the first quarter, bringing the cumulative closures to 374. We are on track to close approximately 800 branches by the first quarter of '22. We've reduced our non-branch facilities by approximately 3.5 million square feet and are making progress toward the overall target of approximately 5 million square feet. Average FTEs are down 9% since the merger announcement. We expect technology savings of $425 million by the end of 2022 compared to 2019. We continue to look at these expense buckets and are broadening to look at other across the board. We are highly committed to our $1.6 billion cost savings target.

Continuing to Slide 19. The waterfall on the left shows that we measure core expenses and cost savings. Beginning with adjusted non-interest expense and then adjusting for the non-qualified plan and the insurance acquisition expenses, we arrive at a core expense of $3.65 billion. If you adjust for seasonality of high payroll taxes, equity compensation and variable commissions, core expenses would approach fourth quarter target of $2.94 billion.

Our adjusted return on tangible common equity was 19.36% for the first quarter. We maintained our medium-term performance and cost saving targets for 2021 and 2022. Further moderation of the merger and economic risks may enable us to revisit our target CET1 ratio.

Now, I will provide guidance for the second quarter, expressed in linked quarter changes. We expect taxable equivalent revenue excluding security gains to be relatively flat. We expect reported net interest margin to be down high-single-digit, driven by a mid-single-digit decrease in core margin and 3 basis points to 4 basis points of purchase accounting accretion run off.

Net interest income should be relatively flat due to the growth of the balance sheet. Non-interest expense adjusted for merger costs and amortization expected to be relatively flat. We anticipate net charge-offs in the range of 30 basis points to 45 basis points and a tax rate between 19% to 20%.

As you look out into 2021, our prudent economic conditions may allow for further reserve releases. Overall, we had a strong quarter, including excellent expense management and strong asset quality.

Now, let me hand it back to Bill for an update on IRM.

William H. Rogers -- President and Chief Operating Officer

Thanks, Daryl. And I'm going to take us to Page 20. I'm going to take this opportunity to share our progress on Integrated Relationship Management and share two examples of what we call natural fit businesses working together to benefit our clients. When Truist was formed, we said, we create value by combining our distinctive client-focused banking experiences with greater investment in technology and a stronger mix of financial services offerings. As Kelly noted earlier, we call this approach T3, touch integrated with technology equals trust. We're confident in this strategy because it really builds on Truist strengths. Those strengths include industry-leading client service and loyalty, an advice-based business model, differentiated offerings included Truist Securities, Truist Insurance Holdings and the Truist Leadership Institute and leading technology like our mobile banking app.

Integrated Relationship Management is a framework for putting T3 into practice across Truist through all of our lines of businesses and most importantly, for all of our clients. We start with the client, understand their needs and engage our business partners through a common technology-based referral and accountability process. As mentioned, we have natural synergies such as the relationship between Commercial Community Bank and Truist Securities. This business is by nature a little lumpy and episodic-driven by client needs, but we're very pleased with our momentum. Referrals are up by a factor of three- and one-year and have more than doubled since last quarter. We continue to train bankers and are increasing both the number and quality of referrals. As we share client wins, teammates gain confidence and motivation to fully leverage all the tools that we have for the benefit of their like clients.

Moving to Slide 21, we'll discuss the effort of Truist Securities and Truist Insurance Holdings and the relationship with heritage SunTrust clients, in particular. Referrals to insurance have increased more than 2.3 times compared to the first quarter of 2020 and more than 50% sequentially. We've aligned systems and trained around the similar practice groups, which allows us to double down on industry expertise for our clients. I can really speak from experience if this was a real area of excitement from heritage SunTrust and this is really just in the early stages of growth. So Integrated Relationship Management is working. It's been embraced fully by our teammates. It's in support of our clients and a distinguishable benefit for our shareholders. Keep in mind, this is a long game, but you do see the beginning of this incremental opportunity in the overall insurance and investment banking results even in this quarter.

So, Kelly, let me turn that back over to you.

Kelly S. King -- Chairman and Chief Executive Officer

Thank you, Bill. I appreciate that. So, on Slide 22, I just want to point out and reemphasize our value proposition. We believe it is a very strong value proposition, driven by our purpose to inspire and build better lives and communities. We have an exceptional franchise with diverse products, services and markets, some of the best in the world. We are uniquely positioned to deliver best-in-class efficiency and returns while investing in the future and you're seeing that happening already. We've very strong capital and liquidity vision with very strong resilience in terms of our risk profile enhanced by the merger. So we have a growing earnings stream with less volatility relative to many of our peers over the long-term.

So if you think about the quarter in all and overall and wrapping up, I'll just say, again, I think it was a very strong quarter in a very interesting and challenging times. But look, things are getting better. COVID is getting better. It's too soon to declare this over, but hospitalization rates are down and infection rates are down and vaccines are getting out really, really fast. So we're encouraged by that. The economy is clearly improving. We've said before and I'll reemphasize, we believe as we head into the second half, we will have a snap back economy. This economy was not wounded before we headed into this. We simply shut it down for appropriate reasons. Now we're beginning to see the opportunities that we believe could happen, which is turning it back on as easy than it might have been on the other types of economic crisis that we've seen.

So Truist is positioned really, really well. We have a great culture. We have great markets. We have a great team. We have a great purpose to inspire and build better lives and communities and it's creating really engaged teammates. We have real benefits from the merger that are being realized every single day. You've heard some of those. A very strong performance in T3 and IRM as Bill described, and that's really powerful. The merger integration is on track. We are reducing risk every single day. It's all going really, really well. We believe we had the opportunity to accelerate and to what I consider to be a very positive snap back economy. We fully believe our best days are ahead.

Alan?

Alan Greer -- Investor Relations Officer

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] We go first to Gerard Cassidy with RBC.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, Kelly, Bill. How are you?

Kelly S. King -- Chairman and Chief Executive Officer

Hey, Gerard.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Can you kind of share with us -- if you look at the credit outlook for your Company in the industry, we've seen an incredible reduction in the credit cycle because of the policies pursued by the Federal Reserve and the US government last year. Can you guys give us your thoughts on how you see credit cycles going forward? Are they permanently potentially flattened because of what we saw last year? Or is this just such an aberration that we shouldn't read into what we're seeing with this lowered flatter credit cycle?

Kelly S. King -- Chairman and Chief Executive Officer

I would say and Clarke can add some detail along that, Gerard. I don't believe this eliminates ongoing long-term credit cycles. I mean, I think to believe that you would have to believe that we have somehow fixed the economy and fixed the nature of humans making decisions and humans getting greedy and humans indulging in excesses. I do not believe that has gone away, nor will it go away. Once we flush through these massive amounts of stimulus into the economy, we will undoubtedly see some excesses. It will likely lead to some corrections down the road that nobody is projecting now, and I don't project it in the next two, three years, but there will be some excesses created out of all those excessive money into the system.

So, we have had a -- heading into the pandemic, we had about a 10-year kind of steady economy. Most people would say and including my staff [Phonetic], that we were probably heading into a correction. Now we've had what will be two, three years of COVID experience, we haven't had a correction because of these excesses. That will flow in two, three years. So we'll end up with about a 15- or 16-year protracted period relatively stable ex-out the blip from COVID. But then we'll go back to fairly normal kind of economic variations in my view.

Clarke, what do you think?

Clarke R. Starnes -- Chief Risk Officer

I agree. The credit stress was resulting from the shutdown of the economy not underlying of credit considerations that you would normally see. So, we've been around a long time, credit cycles will come and go. We've been involved inherent risk is going to have a credit cycle in the future. So that's why you always have to stick to your long-term underwriting principles. And you can't predict there will be another credit cycle. So I agree Kelly.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you. And [Speech Overlap]. Go ahead, Bill.

William H. Rogers -- President and Chief Operating Officer

Gerard, maybe just add to that is, keeping our diversified balance sheet is the key to that. So, we're not going to lose our discipline and boy [Phonetic], because of this cycle we want to anticipate a highly diversified business and a strong capital base to fulfill our value proposition.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. And then as a follow-up, your franchise obviously is located in some of the stronger economies in the US, particularly economies that are more opened than some of the coastal economies in the North. Can you share with us the outlook for -- if you look beyond the current quarter and look out into the second half of the year about loan growth and loan demand, I know there is excess of liquidity you touched on that Kelly. What do you guys see the turning points where you could see an acceleration of loan growth possibly in the third or fourth quarters of this year?

William H. Rogers -- President and Chief Operating Officer

Yeah, Gerard, I'll take that. I think, first of all, what you noted is exactly right about our franchise. I mean, I think whatever happens and whenever it happens, I think will be disproportionately positively benefited. So, I think we'll sort of be the first in that cycle. And we see that, not only in case of markets being more open, but just the migration. I mean, the migration of companies and migration of individuals, don't think that's quite showing up in the data yet, but that's going to show up because we absolutely feel that.

That being said, if we start sort of say in the second quarter is the starting period for loan growth, I think it's reasonable to think that's on a core loan growth, let's exclude PPP from that because we're a little over-weighted in PPP, so we got paydowns related to that. If we look at core loan growth, I think we have reason to be positive for the latter part of the year in virtually all of our businesses. So, maybe CRE being -- their loan stand -- example on the opposite side. But core C&I and then the growth in mortgage and then businesses like LightStream and indirect auto and others that are more positive main clients. I think your general promise is right. And I think we're well positioned. And I think that's a latter half of the year phenomenon.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you.

Operator

Thank you. We'll take our next question from Mike Mayo with Wells Fargo Securities.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. The specific question is, can you give an update on the annualized cost savings as a percentage of the ultimate target? It was $640 million annualized in the fourth quarter versus target of $1.6 billion. And along with that, you're still sticking to $29 billion of expenses by the fourth quarter, that's down despite an increase in volume-based expenses, such as for insurance and capital markets and why is that? And if that's the case, why wouldn't you be updating your ultimate merger expense saving target?

Daryl N. Bible -- Chief Financial Officer

Yeah, Mike, that's a great question. If you take our -- on the slide that we had in the deck and look at what our core expenses are, the $3.65 billion, and if you back out the seasonality that we had in the first quarter to the payroll tax resets and the equity, it's about $50 million there. We're probably at $3.15 billion, give or take a little bit there. We did have higher incentives. Higher incentives this quarter were really driven by our performance in revenues and just overall great performance throughout the Company. So, I kind of carve that out.

But from a core perspective, I think we can make good progress. We are totally committed to getting to that $2,940 million that we talked about last quarter. We're on track to get there. You noticed in our comments, we said, we're looking at these five buckets but we're also broadening out and looking at other areas as well. And we are going to hit our targets for sure. And if we exceed those targets, we will continue to make good investments in the Company to continue to compete and win in the industry.

Mike Mayo -- Wells Fargo Securities -- Analyst

Okay. Before I use up my second question. So the $640 million annualized, have you updated that for the first quarter or no?

Daryl N. Bible -- Chief Financial Officer

We say updated. Its -- we really just gave targets for the fourth quarter. It's going to be lumpy. It's hard to project a trajectory down every quarter just because of you have a real business that's dynamic and moving. But we made good progress in fourth quarter to first quarter and we will get our target by the fourth quarter this year.

Mike Mayo -- Wells Fargo Securities -- Analyst

Okay. And the second question since insurance is such a standout and I had our firm's insurance analyst, Elyse Greenspan, to ask the follow-up?

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Yeah. Thanks, Mike. So, I was hoping to get some color within insurance on the organic growth, it is up to 6.4% in the quarter. On the last quarter's call, you guys had pointed to 5% for the first half of the year. So, I guess, what's coming in better than you had expected? And how do you see the rest of the year progressing from here?

Christopher L. Henson -- Head of Banking and Insurance

Sure, Elyse. This is Chris Henson. We did have a very exciting organic growth number. The elements of it would be pricing retention and new business. I would say, pricing was not a, what I'd call a continued surprise. The balance increased around 7%. We think rates generally gone up. We anticipated continued increasing throughout '21. Retention, we did level off in retail, so we're just under 91%. We were having the little drift down. As you know, we're in the kind of the market where a lot of that risk is shifted to the wholesale segment. Wholesale was actually up 84.6%. So retention actually continue to perform, maybe a touch better. And we do continue to see that shift to wholesale.

New business would be an area I would point to that might have been a brighter spot than we would have seen a quarter ago. New business production was up 12.8%, which is very solid. And what we saw in the quarter was, every month that got better. February was better than January. March was better than February, etc. And that's kind of what drove the 6.4% organic.

And I would also piggyback on the comment Bill made earlier, IRM is actually -- is real. It's having an impact. And when we say that they're linked pretty heavily to the Commercial Community Bank, CIG, Wealth, the Retail Community Bank, we're actually spending time talking about that and making sure we have a long expectations in place and that's having a marginal impact as well.

In terms of outlook, the second quarter, we'd expect commissions to be up about 3%. We're moving out of first quarter, which is our second highest quarter of the year into our seasonally strongest, which is Q2. And certainly, while there's still uncertainty, the COVID impact is going to have on the economy, etc., we think that outlook is still very positive in this business because we think we're going to continue to see increased pricing. We haven't seen a lot of failures in business, so we think we're going to continue to see stable exposure units. E&S volumes are still strong. So -- and given that we are diversified in both wholesale and retail, it really helps us in this type of market.

So we think pricing momentum will be a -- continue to guide us for all the reasons we talked about: COVID, CAT losses, etc. And in this quarter pricing being up in the 7% range, it was flat with Q4. We did see an umbrella in excess of 14%, DNO over 11.5% for example, professional liability up 11%. But another area where we benefit disproportionally is commercial property. Commercial property was up 8.5%. We have a lot of that, that's very helpful to us. And, of course, there's all the coverage classes, about half of the coverage classes were up and all account sizes were up in the 6.5% to 8.5% kind of range.

So, I would say, for next quarter, our outlook would be mid-single-digit organic growth. Even given the uncertainties are there, we feel very solid about that as we kind of move through. And we think there's upside in terms of the economy, continued to benefit to drive even stronger new business. And I think we continue to mature, as Bill pointed out, with respect to our IRM process and that gives us a good positive growth as well.

We did close one small acquisition in the quarter and we certainly expect to be open to do more of those throughout the balance of the year as well. So on balance, we're really good about the prospects for the balance of '21.

Operator

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

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning.

William H. Rogers -- President and Chief Operating Officer

Hey, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

Just the first question. I just wanted to make sure I understood the expense guide for 2Q, because I think you mentioned, Daryl, relatively flat Q-on-Q. I wanted to understand if that was right and maybe some of the things that you're thinking about that keep it flat instead of maybe coming down a little bit?

Daryl N. Bible -- Chief Financial Officer

Yeah, Betsy. In my prepared remarks, we did say we thought expenses and then [Phonetic] the adjusted basis backing up the merger and restructuring, incremental MOE, would come in relatively flat. I think we continue to make good progress in the buckets that we're showing and we are starting to broaden out in other areas. We will have higher revenue and fees in certain areas just because of seasonal strength in the second quarter. But net-net, we feel pretty good on how the quarter is going to come in and from an expense perspective, I think we're on a good trajectory and we're going to hit our targets.

Betsy Graseck -- Morgan Stanley -- Analyst

And so -- from what I'm hearing from the prior conversation, too, is that, the expense improvement acceleration is picking up as you move through the year?

Daryl N. Bible -- Chief Financial Officer

That would be the anticipation.

Betsy Graseck -- Morgan Stanley -- Analyst

And then just separately on the revenue side. I know you haven't baked in the revenue synergies, but I just wanted to get a sense as to whether or not you could speak to what you're seeing so far in terms of picking up new accounts or expanding the product set of the accounts that you're with relative to what maybe your budgets or goals have been so far? I know COVID kind of put a wrench in that, but maybe you could speak to how you're migrating at this stage?

William H. Rogers -- President and Chief Operating Officer

Yeah, Betsy. This is Bill. I think, as I said earlier, you see that in the core results. I mean, sort of the penetration that we're experiencing, the referral volume that we're experiencing, you probably see it most acutely in the results and investment banking and in insurance. But it's really sort of -- if you look at sort of the overall revenue line, it's really everywhere. I mean, so we've been careful about pointing out one specific revenue synergy against one specific thing, because that's not the goal. The goal is to expand all of our relationships. The goal is to listen to our clients put a integrated system together, have it be highly technology supported one platform with really good accountability and strong teammate by [Phonetic]. And that's the value proposition.

So, I think the real answer is, you just see it in the overall results. Again, I pointed out too that we're more acutely obvious, but literally in all of our business as you see the advantages of what we're implementing as part of the Truist value proposition.

Clarke R. Starnes -- Chief Risk Officer

Betsy, I'll tag on to that. Sorry, Betsy, I was just going to tag on just saying, in the Commercial Community Bank, for example, we saw referral activity up 15% this past quarter, which is a really good number and household growth in all of commercial segment. So, I think it's a function of what Bill was saying, we're just beginning to see movements sort of across the board.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. That was kind of my question in particular post. As we've been reopening, do you feel like that has been picking up? And then hearing your answer, it seems like the answer is yes.

William H. Rogers -- President and Chief Operating Officer

Yeah, absolutely. Yeah. That's the other part of your question, yeah, that's I think we're again experiencing that a little bit proportionally we're probably leading the country in terms of reopening and reactivating and we feel that in virtually all of our businesses.

Christopher L. Henson -- Head of Banking and Insurance

We came into the first quarter of last year with a lot of excitement. And then second quarter with COVID, we all just sort of hit a wall. But the excitement sort of perseveres through the balance of the year. And we just seeing, I think, to a degree just consistent improvement sort of month by month.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. All right. Thank you.

Operator

Thank you. We'll take our next question from Matt O'Connor with Deutsche Bank.

Matthew O'Connor -- Deutsche Bank -- Analyst

Hi. Can you guys talk a bit about your strategy of deploying liquidity in the securities? Last quarter, you purchased a lot of securities, a little bit less so this quarter, what's kind of just the philosophy and capacity as we look forward?

Daryl N. Bible -- Chief Financial Officer

Right now, Matt, what we are doing is, we are investing our excess liquidity that we've gotten in from our deposits. So, we're averaging about $20 billion at the Fed, which we think is a comfortable cushion to basically handle any volatility we might get there. The investments we're making is a combination of mortgage-backed securities and US treasuries. We are averaging up a little bit on the yields that we have on the portfolio that we have out there today from that perspective.

I think the way we think about it is, we're going to have liquidity for a fair amount of time. We're going to have cash flows and kind of dovetailing into what Bill said earlier, the best thing that could happen to us is loan growth starts to pickup second quarter into the second half of the year when we basically run off some securities that are in the mid-1% ranges and we reinvest them into loans in the 2% to 4% or 5% or 6% range and basically keep the balance sheet about the same size and just improve our revenue and earnings overall. So I think that would be the strategy for us to do that.

If for whatever reason that the Fed starts to shrink their balance sheet and liquidity comes out, you got to remember, we have $8 billion to $10 billion of cash flows coming off this portfolio every quarter that we can absorb anything. So I think we're taking good balance risk. Our target right now is to keep net interest income even with the run off of purchase accounting flat for the next several quarters, and hopefully that will pick up toward the end of the year as we get a meaningful loan growth.

Matthew O'Connor -- Deutsche Bank -- Analyst

Okay. Thanks. And then I just want to follow-up on the last question, say, the question is regarding revenue synergies. I understand kind of pushing it all the businesses and not trying to necessarily kind of track it separately. But as we think longer term and the opportunities become little more apparent, and I guess I'm thinking loan growth picks up and there is some loans that legacy BBT offered that SunTrust didn't and vice versa. It would seem like the numbers could start being a little more material. And I think what I see is over time you might provide more details on the magnitude of the synergies. So far you talked about kind of capital market pricing some of that in the fourth quarter, but bringing it all together over time, is that something you would consider?

Kelly S. King -- Chairman and Chief Executive Officer

Matt, I think we will definitely do that. We're trying to provide timely information on those marginal imported issues. But as Bill and Chris illustrated, we really have a broad-based opportunities, not just loan deposits, all types of fee income. We are really just scratching the surface. The reason we keep emphasizing this IRM concept is because that is the most powerful concept. We think we have an edge on that because our focus is on all of the clients meet all of the time. We build a culture where everybody works together. We built systems to allow information to be integrated across organizational boundaries. And so, yes, you're right I think you can be positive in terms of expected revenue enhances as we go forward as we begin to penetrate more of our clients' needs.

Matthew O'Connor -- Deutsche Bank -- Analyst

Okay. Thank you.

Operator

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

Erika Najarian -- Bank of America -- Analyst

Hi. Good morning.

Kelly S. King -- Chairman and Chief Executive Officer

Good morning.

Erika Najarian -- Bank of America -- Analyst

My first question is, as we think about the prospects for loan growth bouncing back for the rest of the year, could you remind us how many of your clients are either non-investment-grade or don't have a debt rating? I guess, the big struggle investors have is the capital markets are wide open, private equity firms continue to be aggressive in private credit. And so, I'm just wondering what that universe is of your clients that potentially would need a bank balance sheet in order to expand?

William H. Rogers -- President and Chief Operating Officer

Yeah, Erika. This is Bill. The key is to have a really balanced portfolio. So, there we have a good number of clients who won't access the capital markets. That's sort of that core strength of that middle market community banking model. And they'll use bank loans as their primary avenue for growth.

Then you see the other side of that, I don't think that's the only equation. If rates go up, certainly on the long end, you could see large corporates going back to bank loans. They are the most efficient way of borrowing. We've got a lot of revolvers out. Just a little bit of revolver utilization increases it pretty significant loan driver for us. So, I don't think we necessarily think about it as the non-investment-grade and investment-grade in terms of a separation. We think about it in terms of the balanced portfolio. And we drive it from the client needs or if the client wants capital markets and that's the most efficient way, we have great access and great capability and great products for those that want to have a bank product. We've got a great portfolio of those type middle market clients and are able to serve them. So, I think our optimism is really predicated on just this concept of a balanced portfolio versus one -- one versus the other.

Does that make sense?

Erika Najarian -- Bank of America -- Analyst

Yeah. It does. And I think, Bill, that's a great point on long rates rising and revolvers becoming more attractive. I think that has -- that point hasn't been made as locally. So thank you for that. And the follow-up question is, clearly, consumers and corporates are awash with cash. Do you expect that those cash balances have to be drawn before corporates, especially relever? Or are your clients telling you that they're going to keep a little bit more cash on hand given what they went through during the pandemic?

Kelly S. King -- Chairman and Chief Executive Officer

Erika, I think everybody is trying to figure out the answer to that question. You've got consumer and business, I'll comment on business and Chris can comment on consumer. I think what you're going to see is that, businesses are going to end up maintaining more liquidity than you would expect as they begin to weigh in on new credit facilities, whether it's capital markets or whether it's bank balance sheets. And the reason is because I think you're going to see leaders of businesses that were very unnerved with the Great Recession and then just a few years later got very unnerved with the COVID experience. The end result of that is going to be psychologically a very reserved view. And that argues for maintaining liquidity even as you're borrowing. So, I personally expect that you're going to see borrowing increase faster than most people expect as we head into the latter part of this year and still maintain liquidity.

Erika Najarian -- Bank of America -- Analyst

Thank you.

Christopher L. Henson -- Head of Banking and Insurance

Erika, for consumer, what we're seeing right now is checking balances are about 30% higher and savings balances were up 140%, obviously, a lot of that's driven by stimulus. But for lending to occur, there's got to be demand. And I think we are seeing spending now on non-discretionary-type things, which -- I mean, discretionary-type things, excuse me. And I think when cash deflates, there will be more lending, but it is tough today for home equity-type products as a result of all the stimulus.

Erika Najarian -- Bank of America -- Analyst

Got it. Thank you, all.

Operator

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

Kenneth Usdin -- Jefferies -- Analyst

Thanks. Good morning, everyone. Just wanted to follow-up on the fee income side, I think embedded within your kind of flat revenues and flattish NII kind of flattish fees. And Chris had talked about the plus 3%-ish outlook for insurance. So just wanted to understand given that there was a gain in there too this quarter. Just what are some of the other moving parts of fees as you look out? Or Daryl, you had sounded very optimistic at the beginning of the year about the outlook for fees? And just wondering what you think continues to be the other positives and then some things that might be settling back out off of recent strength. Thank you.

Daryl N. Bible -- Chief Financial Officer

Yeah, Ken, from a fee perspective, I think, insurance, as Chris said, will have its largest quarter of the year in the second quarter. So that will be strong. Second quarter activity is usually strong in the payments area and activity, so I think all those will be relatively strong. I think we're calling for tighter margins in our mortgage area. So I think even though we'll have higher volumes, we might have lower revenues there potentially.

And then if you look into the investment banking and trading areas, we did have CVA adjustment this past quarter. For that to continue, we have to have rates continue growing up. We don't really have a good projection on freights are going to go up or not, export or not. So we're just kind of saying that's relatively flat. They do have strong pipeline so in the M&A area and other pieces. So net-net, I think they're still be strong but that CVA was a benefit for us this past quarter. But I think overall -- and we feel pretty good about fees. And they are right now, we're saying relatively flat and we'll just see how the quarter unveils and hopefully, we can beat that performance.

Kenneth Usdin -- Jefferies -- Analyst

Got it. Great. And secondly, you've teased out before this potential to relook at that 10% CET1, and obviously getting through the rest of the pandemic would probably be priority one. But what are the other factors that you need to continue to evaluate that? And could it be a big delta or are you talking about just modest changes as you continue to tighten up on what this Company looks like over the long-term? Thanks.

Kelly S. King -- Chairman and Chief Executive Officer

Yeah. So, Ken, you've heard us say that the relationship between capital and risk is what drives our capital decisions. Going into the merger and up to the current moment, we've judged that the risk externally were substantial. We judged that the risk are making sure we do the merger right or material. And so, as we look forward what we see is that, the risk externally are mitigating, COVID is mitigating, economic risks are mitigating. So certainly some huge substantial event that we don't anticipate.

The external factors are mitigating meaningfully. Internally, as I discussed earlier, the risk are reducing daily. And so, it does set forward the opportunity for us to have some capital actions that they can be attractive to our shareholders. It's hard to judge right now the materiality of that because you literally have to take a little time. One thing we sure have all learned is the projecting out in this kind of environment six months or nine months now is just not rationale. And so, you have to kind of take it more carefully. But as we do -- as we see risk began to continue to materially mitigate, we do have meaningful opportunity in terms of capital deployment.

Kenneth Usdin -- Jefferies -- Analyst

Got it. Thank you, Kelly.

Operator

Thank you. We'll take our next question from John Pancari with Evercore ISI.

John Pancari -- Evercore ISI -- Analyst

Good morning.

Kelly S. King -- Chairman and Chief Executive Officer

Good morning.

William H. Rogers -- President and Chief Operating Officer

Good morning.

John Pancari -- Evercore ISI -- Analyst

On the margin front, I know you guided to some incremental compression in the second quarter and then the fourth quarter saw some -- a bit greater pressure than you expected, I think. How should we think about a bottoming of the margin? When do you think that could materialize? Should we expect that in the third quarter and maybe give us some thoughts around what could drive that? Thank you.

Daryl N. Bible -- Chief Financial Officer

Yeah, John. So if you look at margin, I'll start off with our core margin. The core margin was 2.69%. We're guiding that to be down mid-single digits. So, I think we'll stay in the 2.60s. Given what we know, it's really a function. This is like as hard it's ever been in trying to forecast actually a margin number out because of all this excess liquidity going on and what's happening with the loan portfolio and all that.

That said, we expect to get more deposit growth as the stimulus plays out. That's going to continue to put pressure on core margin. No matter what we do with those funds right now until loan volume picks up, we're either going to put it at the Fed or we're going to invest the dollars. So our margin -- core margin is coming down. We believe that we can probably stay in the 2.60s throughout most of this year hopefully. And if as loans pick up in the second half of the year, we might be in the higher range of 2.60s, but right now, I will just say mid- to lower-2.60s.

And then, if you just look at the GAAP, our reported margin, we are running off the purchase accounting accretion. It's about 3 basis points or 4 basis points a quarter what it's been doing the last couple of quarters. That will continue. So we're at 3.01%. And you adjust for core coming down and then you take three or four down, that will come down probably end up in the 2.80s, give or take, by the end of the year depending on what happens with the accretion runoff. But that said, and I think the important thing there is that, we are focused on managing NII, and we're guiding for at least flat, if not, better than flat NII as the year plays out.

John Pancari -- Evercore ISI -- Analyst

Got it. Okay. Thanks, Daryl. That's helpful. And then separately on the loan growth front, you mentioned a couple of times now the likely inflection in loan growth in the -- ideally, in the back half of the year, it seems like. Maybe if you could help us think about the pace of growth that could materialize in the back half? And more importantly, what type of loan growth is fair to assume as we look into going into 2022? Are we talking about low-single-digit pace as being reasonable?

William H. Rogers -- President and Chief Operating Officer

Yeah. I think as Kelly noted earlier, I mean, it's hard to project out. We had a lot of months here because there are a lot of binary events that are going on. But we just look at things like pipelines, we look at things like productions, we look at things like the impacts of those. So, I do think if you look at overall and think about core and think about that base, I mean, we're talking about single-digit kind of growth, if there is a lot of part of the year. The things that can influence that more would be, as I mentioned earlier, revolver utilization changes, things like that. But maybe look at sort of the core growth part, I would think sort of averaging single digits. And then, of course, you just have to remember, we just have a little bit of that PPP headwind in the total loan growth, that we really think about sort of core second half of the year some type of single-digit opportunity.

John Pancari -- Evercore ISI -- Analyst

Got it. Thanks, Bill. That's helpful.

Operator

Thank you. We'll take our final question from Bill Carcache with Wolfe Research.

Bill Carcache -- Wolfe Research -- Analyst

Thanks. Good morning. Kelly and Bill, I wanted to follow-up on your ESG commentary in the release. How have your discussions evolved with different stakeholders? Are the investments you're making in ESG a source of differentiation? Or are they stable stakes? And how are you thinking about the financial impact of ESG?

Kelly S. King -- Chairman and Chief Executive Officer

Yeah. So, we feel very good about the long-term financial impacts of ESG. It's clearly the right thing to do for our communities, for the economy at large. To be honest, it's bumpy right now for all of us to figure out what the near-term economic impacts are because we all fairly new at this. But there's no doubt with the long-term economic impacts will be very positive, not to mention the quality of life and the future for our kids and our grand kids. And so, we are really committed to a very aggressive and broad-based ESG program. You're just seeing a lot of things we're doing like our social bond. Daryl has done a lot of things already in terms of bringing our environment. We have lots more plans as we go down the road. So, it's something that we all in the corporate community need to be highly invested in. Truist is. I think net accretive long-term and the short-term it could be a little bumpy.

William H. Rogers -- President and Chief Operating Officer

Yeah. I think as Kelly said, I mean, we view it collectively as an opportunity versus a requirement. I mean, I think that's how we want to think about it. And I think our teammates have embraced that. And I just -- there are things that will just make us a better Company and a better society.

Bill Carcache -- Wolfe Research -- Analyst

Yeah. It's helpful. Thank you. And if I may as a follow-up separate question for Darryl. Could you give some additional thoughts around the variability on either side of around the $2.1 billion and $1.8 billion of merger costs on Slide 15? With seven [Phonetic] quarters to go through 2022, how do you think about the potential for these to come in either better or worse, any perspective there would be great?

Daryl N. Bible -- Chief Financial Officer

Yeah. Bill, I would tell you, we're on track of getting about $4 billion. Last year, we did about $1.3 billion if you add the two numbers together. This year, we'll probably be $1.2 billion, $1.3 billion as well this year as the numbers come through and then we'll finish out and get the rest in '22. So, I think we're just on track right now. And our main focus, to be honest with you, is to really do a great job on the conversions to make sure everybody has a really positive client experience. I mean, that would be the best outcome of all and what the cost should -- that we have in there should be able to enable that to happen.

Bill Carcache -- Wolfe Research -- Analyst

Very helpful. Thank you.

Operator

That will conclude our question-and-answer session. I'd like to turn it back over to our speakers for any additional or closing remarks.

Kelly S. King -- Chairman and Chief Executive Officer

Okay. Thank you all for joining our call. This does complete our earnings call. We apologize to those in the queue that we didn't have time to get to your questions. We will reach out to you later today. Thank you, and we hope you have a great day.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Alan Greer -- Investor Relations Officer

Kelly S. King -- Chairman and Chief Executive Officer

William H. Rogers -- President and Chief Operating Officer

Daryl N. Bible -- Chief Financial Officer

Clarke R. Starnes -- Chief Risk Officer

Christopher L. Henson -- Head of Banking and Insurance

Gerard Cassidy -- RBC Capital Markets -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Matthew O'Connor -- Deutsche Bank -- Analyst

Erika Najarian -- Bank of America -- Analyst

Kenneth Usdin -- Jefferies -- Analyst

John Pancari -- Evercore ISI -- Analyst

Bill Carcache -- Wolfe Research -- Analyst

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