Q1 2022 Truist Financial Corp Earnings Call
Greetings, ladies and gentlemen, and welcome to <unk> Financial Corporation's first for 2022 earnings Conference call.
All participants are in a listen only mode.
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. Ankur Vyas head of Investor Relations <unk> Financial Corporation.
Thank you Katie and good morning, everyone. Welcome to true its first quarter 2022 earnings call with US today are our chairman and CEO Bill Rogers and our CFO Daryl Bible. During this morning's call Dan will discuss truest first quarter results and share their perspectives on how we continue to activate truce purpose.
Our progress on the merger and current business conditions Clarke Starnes, our chief risk Officer, Beau Cummins, Our Vice chair and John Howard Our Chief Insurance Officer are also in attendance and are available to participate in the Q&A portion of the call the accompanying presentation as well as our earnings release and supplemental financial information.
<unk> are available on the truest IR website, IR dot shrewish dot com.
Our presentation today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two and three of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP in.
In addition, truest 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 webcasts are located on our website with that I'll now turn the call over to Bill. Thanks, Rocco and good morning, everybody and thank you for joining our call today.
We delivered solid first quarter results, representing the diversity and flexibility of true ups in a more volatile market and business environment net interest income declined sequentially due to lower day count lower P. P P revenue and purchase accounting.
Net interest margin slightly exceeded our expectations and more importantly, both NII and NIM appear to have bottomed and have good upside from here.
Income was below expectations, primarily due to investment banking and mortgage both of which were negatively impacted by the market environment.
These effects were partially offset by higher insurance income, which underscores the advantages of our diverse business mix.
<unk> were lower than expected, reflecting strong expense discipline and lower incentive compensation associated with softer fee income we.
We experienced continued solid loan growth, albeit with headwinds in certain areas credit quality remains excellent contributed to another provision benefit.
Also completed our largest conversion Nevada in February there is a palpable level of excitement from our teammates to go to market as one true us with an expanded toolkit to better fulfill our purpose.
There are more details on these topics during the presentation.
First and foremost we are guided by our purpose, which is to inspire and build better lives and communities. We're convinced that our purpose driven culture is the foundation for our success as a company.
Our purpose defines how we do business everyday and it provides a framework for how we make decisions on slide five we highlight some of the ways, we're bringing purpose to life.
A key area of focus for <unk> financial inclusion for wholly committed to removing barriers and improving access to the financial system for all communities.
Which is why I am pleased with the Truest Foundation is supporting nonprofits and serve women and minority owned small businesses and advancing digital equity among historically underserved communities.
We know people want to work for companies that stand for something meaningful and the combination of our purpose driven culture with our industry, leading compensation and benefits training development and flexible approach to work is highly effective in attracting and retaining top talent.
We plan to further strengthen our benefits programs by launching an employee stock purchase program later this year subject to shareholder approval.
We also implemented our tours work model with a focus on intentional flexibility as our teammates returned to onsite work throughout March.
Firstly it was just incredibly energizing to have so much in person engagement over the last two months, whether with teammates clients community members, our shareholders hybrid and more flexible works here to stay but I'm pleased at how our teammates have embraced this new model.
We're also doing our part to convert.
Climate change and in late January announced our plans to achieve net zero greenhouse gas emissions by 2050, where externalizing, our own net zero aspirations and furthering the transition to a low carbon economy.
Adding new teammates in our CIB and commercial community bank to help our clients make their own transition.
Lastly, we completed our largest core bank conversion event in February this was an enormous undertaking with better involve transitioning nearly 7 million clients to the truest ecosystem and unveiling roughly 6000 trivial signs across our footprint, which will further build our brand.
The integration was successful overall, especially when you consider the scale and complexity involved. This was the largest bank technology integration in over 15 years I want to personally thank our teammates for their hard work and preparation as well as the many personal sacrifices. They have made to ensure the integration was successful because of you. We now have.
Millions of truths tourist clients, who are absolutely pleased with their experience.
At the same time, it's also impossible to execute an integration of this magnitude perfectly.
Knowledge, there were some opportunities to improve along the way our teams did an incredible job of resolving client challenges with urgency and a view towards long term client and teammate experience improvements.
My commitment, though is that we will not rest until every client is satisfied.
Yes.
Turning to slide seven our adjusted results exclude $166 million of after tax merger related and restructuring charges and $155 million of after tax incremental operating expenses related to the merger.
We also generated a $57 million after tax gain on the redemption of our Noncontrolling equity interest related to the acquisition of certain merchant service relationships, which will provide us a larger share of the economics of more control over the end to end client experience.
Finally, we incurred $53 million after tax loss to reposition approximately $3 billion of securities to enhance our yield by approximately 100 basis points.
The total EPS impacts of these items was 24 per share Daryl will provide more details on these items later in the presentation.
Turning to our first quarter performance highlights on slide eight.
We earned $1 3 billion or 99 cents a share on a reported basis. Excluding the selected items on slide seven adjusted earnings totaled $1 6 billion or $1 23 per share up four 2% compared to a year ago, primarily driven by lower loan loss provision.
Compared to the fourth quarter adjusted EPS declined 11% driven primarily by a 4% decrease in adjusted revenue attributed to more challenging market conditions in fee businesses, such as investment banking and residential mortgage in addition to some normal seasonal patterns.
Adjusted ROE TCE was a strong 22, 6% unchanged from the prior two quarters, even excluding the reserve release adjusted R. O T. C was still a strong 19, 9%.
Adjusted expenses decreased slightly as seasonal headwinds were offset by lower incentive compensation due to softer fee income. In addition to our ongoing merger related cost save efforts.
Operating leverage was a negative 250 40 basis points year over year, we are still targeting positive operating leverage leverage for the full year 2022 asset quality continues to be excellent net charge offs remain low contributing to a provision benefit during the quarter.
Capital deployment remained healthy in the first quarter as we completed the acquisition of Kensington Vanguard and certain merchant services relationships and funded solid organic loan growth I'll provide more details about low growth shortly.
We're all we're off to a slower start in 2022, then we would like but I believe our performance can improve throughout the year.
In addition to the core bank conversion, we completed the migration of our retail business, our wealth clients to the new truest digital experience and now have sunset All heritage digital experiences as you recall early in the merger we made the decision to build a completely new digital experience rather than relying on existing systems and third parties.
Given the increasing importance of digital channels to our clients. We built this new platform based directly on clients' feedback and we've introduced it in waves learning from each release and continually improve it.
With a more modern and agile platform and approach, we're able to introduce a number of new features to both sets of heritage clients in advance of the core bank conversion and our speed of client experience improvements will only accelerate in the coming months and quarters as our digital and technology teams shift their efforts from integration.
A great example of this will be truest assist which will be our new cloud based self service digital assistant that will it will introduce in the second quarter and will be accessible to all our clients 24, seven via various digital channels. So as to assist will help clients execute basic task schedule appointments and provide insights and recommendations.
So they can have more control and confidence in their financial wellbeing.
In addition, we are executing and investing in a number of other areas over the coming quarters to improve our clients and teammates digital experience, including but not limited to digital payments digital onboarding enhanced authentication technology and expanding our lifestream to include a new deposit product on a real time cloud based core.
Turning to loans and leases on slide 10.
Average loan balances grew 8% sequentially and rose one 2%, excluding PPP loans sequential loan growth was driven primarily by C&I, which increased five 1% excluding PPP in mortgage warehouse lending where balances have declined rapidly due to declines in refinance volumes.
Loans grew across all CIB industry practice groups and growth was particularly strong within our asset Finance group.
Commercial community Bank C&I loans grew two 4%, excluding PPP fairly broad based across many of our regions revolver utilization and revolver exposure both grew in the quarter.
CRE continues to be a headwind given a very competitive market or optimistic that we're approaching stabilization.
Excluding mortgage consumer and card balances decreased 2% driven primarily by a 3% decline in auto that was attributable to ongoing supply chain issues in a highly competitive environment. We also experienced continued declines in our home equity and student loan portfolios. These pressures.
Partly offset by service finance, which is performing well and off to a great start.
This quarter. We were also excited to announce a new alliance with state farm, whereby their agents will be able to offer consumer lending products through light stream will pilot. This program later in the year and load volumes will build over time.
Alliance reflects to its increasing size scale and relevance in addition to the superior digital capabilities and client experience that light stream provides.
In summary, we continue to be positive about the prospects for further loan growth in light of the current economic conditions and our pipelines are increased capacity as a company to focus on clients post integration and our differentiated set of consumer businesses at the same time, though we've got acknowledge the increased uncertainty presented by a range of geopolitical and.
Economic risks, which could cause loan growth growth to deviate from our outlook.
Now turning to deposits on slide 11 average deposit balances increased 1% during the first quarter, reflecting some moderation from the 2% pace observed in the fourth quarter total deposit costs were stable at three basis points.
As the interest rate environment evolves, we'll take a balanced approach to managing deposits and attendant to client needs and client relationships, while maximizing value outside of rate paid.
Guided by our purpose and our desire to be responsive to the needs of our clients as previously announced will discontinue a host of overdraft related fees at the end of this month.
We also remain on track to launch our new true. It's one checking account experienced this summer, which will have zero overdraft fees the capability provide qualifying clients the liquidity they need to via a simple $100 negative balance buffer and a deposit base credit line limit up to $750. We're mindful of the impacts that.
Inflation and reduced stimulus may have on certain segments of our clients, particularly the least advantaged and tourists. One is one of the many examples of where we're advancing in financial inclusion.
Spite the financial impacts we've discussed previously this is a long term win for our stakeholders as we endeavor to improve retention increased acquisition and enhance the overall client experience and with that let me now turn it over to Daryl to review our financial performance in greater detail.
Thank you Bill and good morning, everyone turning to slide 12, noninterest income decreased 2% sequentially as the impacts of two fewer days and lower purchase accounting accretion offset the benefits of solid loan growth and higher securities yields.
Reported net interest margin was flat and core net interest margin increased two basis points, both exceeding our guidance by two basis points improvement in core net interest margin was primarily driven by lower premium amortization in the securities portfolio moving to slide 13.
<unk> has essentially maintained our balanced approach to managing interest rate risk.
Being well positioned to benefit from higher rates in the near term, while maintaining some level of downside protection, if and when interest rates decline.
We continue to be asset sensitive and estimated 100 basis point ramp rate increase would increase NII by four 3%.
100 basis point shock would increase NII by seven 3%.
Approximately 80% of our reported asset sensitivity is from the short end of the curve.
While early deposit betas, thus far are tracking below modeled expectations.
Moving to slide 14.
Adjusted revenue declined four 4% linked quarter, which is below our guidance range of down 1% to 2%.
And driven almost entirely by weaker than expected fee income.
These declined 8% sequentially, reflecting challenging market conditions and seasonality.
Investment banking and trading income declined $116 million or 31% as more volatile market conditions impacted M&A high yield leverage finance and equity.
Investment banking pipelines look healthy, but market conditions will determine how much and when the pipeline is realized.
<unk> mortgage income declined $70 million or 44% as higher interest rates reduced refinance activity and pressured gain on sale margins on the production side.
Servicing was not as large of an offset as expected since the benefits of slowing decay or eroded by higher hedging costs due to the flatter yield curve.
Card and payment fees and service charges on deposits declined $33 million collectively.
Primarily driven by seasonality, but also due to.
Client friendly fee waivers, we instituted in and around the time of our February conversion.
These items were partially offset by insurance income, which increased 9% primarily due to strong organic growth and the first month of Kensington Vanguard acquisition. We included a table at the bottom of slide 14 to make other income trends more clear.
Other income excluding changes in our nonqualified plan and other gains was up $31 million sequentially, given negative valuation adjustment for visa related derivative of last quarter and up $56 million year over year, primarily as a result of higher Spic's income.
Turning to slide 15.
Reported expenses were $3 7 billion, including $216 million of merger related costs and $202 million of incremental operating expenses related to the merger.
The merger costs in the quarter were primarily connected to nature of assigns branch closings and impairments and datacenter decommissioning efforts.
Adjusted expenses decreased <unk>, 4% sequentially exceeding our guidance of up 1% to 2%.
And reflecting our disciplined expense management.
Drivers of the decline include decreased personnel costs, reflecting lower incentive compensation expense and changes to the nonqualified plan, partially offset by seasonally higher FICA and four one K expenses.
The decrease in personnel expense was partially offset by increased marketing costs as we continue building our brand.
Compared to the first quarter of 2021 adjusted expenses were stable as cost saves from FTE reductions and lower occupancy costs were offset by continued investments in software and marketing along with higher operational losses.
The operational losses has steadily increased in recent quarters as banks are experiencing higher levels of fraud activity. In addition to our own decisions to enhance client experience.
We remain highly focused on reducing our operational losses and improving our client experience at the same time.
Overall, we have incurred significant costs in conjunction with the integration events.
Both in the merger categories as well as run rate fees and expenses.
We're excited that our last major conversion event is behind us and we can start to reduce the financial costs associated with these integrations.
Moving to slide 16.
Asset quality remains excellent, reflecting our prudent risk culture diverse portfolio and favorable economic conditions.
Our net charge off ratio for the first quarter was unchanged at 25 basis points.
The a triple our ratio decreased to 144%, resulting in a provision benefit of $95 million for the first quarter.
Our reserve levels reflect current credit conditions, but also take into account uncertainty associated with inflation rising rates and geopolitical events.
<unk> has no direct credit exposure to Russia, or Ukraine, and minimal indirect exposure.
Our exposure to subprime at the origination is 1% or less in the other consumer portfolios.
Continuing on slide 17.
Capital and liquidity levels remain strong our CET one ratio declined approximately 20 basis points as a result of capital deployments related to the acquisitions of Kensington Vanguard and certain merchant service relationships growth in risk weighted assets and the seasonal phasing in order to mitigate <unk> Iris and <unk>.
Volatility, we transferred approximately 40% of the securities portfolio to held to maturity during the first quarter.
We are a category three institution, a OCI does not impact regulatory capital is simply impact tangible common equity we submitted our capital plan to the Federal reserve in early April and look forward to sharing more details later this summer.
Moving to slide 18. This slide provides additional details about three transactions, we completed in the first quarter to enhance our future earnings and profitability first Kansas. The Vanguard acquisition significantly expands our presence in title insurance augments, our capabilities and larger and more complex commercial.
Actions and will also provide additional ERM opportunities given our significant presence in CRE, we anticipate Kensington Vanguard will add $115 million revenue and annually and be accretive to insurance EBITDA margin by year two.
Second we terminated merchant revenue share alliance in which truest had a noncontrolling interest.
<unk> order and a 74 million gain for marketing our stake to fair value. In addition, we acquired significant portion of relationships from this alliance.
Will position us to control more of the end to end client experience when serving those clients. We also believe that the acquisition will generate approximately $25 million of additional cash P. PNR annually.
Last we repositioned 3 billion of securities to enhance our yield by approximately 100 basis points, resulting in a two year payback moving to slide 20, as Bill mentioned, we successfully completed our large core bank conversion in February .
We are now went through not just culturally but also in terms of branding digital and technology, which allows us to serve our clients more effectively and make our company is simpler to operate.
As we shift our focus from integration to execution excellence, we will maintain our focus on realizing remaining cost savings.
That will happen in the second half of 'twenty, two as we decommission over 900 business applications and three of our six data centers.
Our decommissioning efforts are complex and significant and we are on track with our final integration largely complete our technology teams will shift towards more further enhancing client and teammate experience turning to slide 21, we have made excellent progress across the five kasay buckets in our closing.
And on our commitment to achieve $1 6 billion and net cost saves third.
Third party spend is down 11, 9% from baseline levels exceeding our targeted reduction of 10%.
First quarter, we closed over 400 branches exceeding our commitment to close over 800 total branches by the end of the first quarter of 2022.
We now have finished the merger related branch reduction efforts and will shift to more normal course branch network optimization.
We have also achieved our targeted reduction in non branch facilities space strategically, reducing our occupancy cost through consolidation and closures. However, we still have more opportunities in which we are working.
Excluding acquisitions average ftes are down 1% linked quarter and 14% since the merger.
Our voluntary separation and retirement program will conclude in the next two quarters further supporting our ongoing cost saving efforts.
I will now provide guidance for the full year 'twenty, two and new guidance for the second quarter.
In 2022, we now expect adjusted revenue growth of 3% to 4% from 2021 relative to our outlook from January that mix of revenue growth is now tilted more towards net interest income given the outlook for higher short term interest rates, partially offset by weaker fees primarily in resin.
Actual mortgage and investment banking.
This represents 6% to 7% core revenue growth when you exclude significant decline in PPP in purchase accounting.
As you will recall, we expect a mid single digit decline in service charges in 2022, given our elimination of certain overdraft related fees introduction of truest one banking.
And net interest margin bottomed in the first quarter and should increase throughout the year based on the forward curve. We continue to expect point to point loan growth ex PPP in the mid single digits, but as Bill said, we acknowledged higher levels of economic uncertainty.
Will it be at the high end of our 1% to 2% increase of adjusted noninterest expense largely due to the impact of Kensington The Vanguard acquisition.
The first quarter was the peak for our merger related costs and now we are projecting less than $400 million for the rest of this year and none in 2023.
We are still targeting positive operating leverage on a GAAP and an adjusted basis in 2022, though this is somewhat dependent on interest rates and market conditions, we still expect net charge off ratio to be in the 30 to 40 basis points, given our assumptions for normalization throughout the year.
Looking into the second quarter, we expect adjusted <unk> to grow high single digit with possible upside from the first quarter level as a result, higher noninterest income and much stronger fee income given seasonality in insurance and the potential rebound of investment banking.
This outlook assumes the forward curve and interest rates and control deposit betas.
We expect core net interest margin to increase approximately seven to 10 basis points due to the benefits from the March hike and from a projected 50 basis point hike in may.
GAAP net interest margin is expected to increase only three to four basis points as purchase accounting accretion is slowing given lower prepayment environment. As a result of higher rates now ill turn it back to bill to conclude.
Thanks Darryl.
Moving to slide 22.
The first quarter of 2022 was historic for truest, because we're now serving our clients is a true unified truest across all dimensions.
In addition, the first quarter is a strategic and financial turning point for Churros strategically the completion of our core bank conversion positions us to fully shift our focused execution excellence transformation and growth.
Our business as I went through earlier conversions in 2021, such as wealth and mortgage are beginning to see the benefits of this shift whether in the form of new adviser hiring and wealth are significantly improved client satisfaction scores and mortgage.
Financially the first quarter should be at the bottom of where net interest income and net interest margin and fee performance should improve as market conditions normalize and we capitalize on the significant integrated relationship management and revenue synergy potential we have as a company. In addition, the completion of the integration means merger costs will decrease dramatically through the.
<unk> 2022, and we will realize our remaining cost saves as data centers and systems are decommissioned in the back half of the year all of which helped drive positive operating leverage.
To conclude I remain highly optimistic about the potential and opportunity for true us all of which are clearly summarized on slide 23, our investment thesis.
Our opportunity and priorities are clear shift from an integration focus to execution focus deliver better client experiences capture the significant.
And revenue synergy potential we have a shift of millions of hours of development training.
And the effort from the integration to building better lives for our clients. This shift does not require any incremental risk appetite for capital and only requires execution and focus at the same time, while we believe the economy is on sound footing in the near term.
Winds of geopolitical uncertainty, coupled with inflationary environment and aggressive forecasts for the tightening of monetary policy create a wide range of economic outlook as we move further into this year and next.
This is well positioned across all of these environments, given our advice oriented model for our clients balanced approach to interest rate risk management Conservative credit culture diverse business mix and strong and improving earnings profile and with that Ankur, Let me turn it back over to you.
Thank you Bill.
At this time will you explain to our participants how they can participate in the Q&A session. As you do that I'd like to ask the participants to please limit yourself to one primary question and one follow up so that we can accommodate as many of you as possible.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, if youre using a speakerphone. 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. As a reminder, it is star one to ask a question, we'll pause for just a moment to allow everyone.
On an opportunity to signal for questions.
We will take our first question from Gerard Cassidy with RBC.
Thank you good morning, Bill good morning Darryl.
Good morning, Good morning Bill.
Bill can you elaborate or Daryl as well I guess on the loan growth that you guys are seeing I think bill you touched on some very competitive forces in the commercial real estate markets.
And what are you guys seeing in that area and then on the residential mortgage business. Daryl I think you referenced that the refinancing business was down what percentage of originations or refinancing in the home mortgage business.
John Let me, let me start on the on the loan growth and maybe sort of cover.
A variety of different topics in your in your in your question.
We're we're seeing interest in loan growth.
The places that most highly correlated to performance I think is where we're performing well so think C&I as an example, so in C&I.
When you exclude PPP, where remember we were over over indexed appropriately you exclude the mortgage warehouse.
Component, which.
Which has a lot of seasonal components to it.
And sort of dissected to core C&I it was up about little over 5%.
So we think that actually reflects the core component of where of where we see loan growth from the power and the execution of our of our franchise that was particularly strong and literally across all of our all of our business lines. It was good across virtually all of our geographies.
Areas like asset finance, and ABL sort of geared to supply chain, where we're particularly strong you asked about CRE and I'd say, it's a couple of different stories on those small CRE side.
We have had some run off some of that's been intentional and then in the focused areas.
On the sort of higher end institutional.
<unk>, we actually performed very well.
We've been very competitive on.
The residential and industrial side, particularly <unk> specialized areas like data centers and those type of those type of things clients are buying portfolios.
But it is a it is a aggressive market. So I think the places where we want to be competitive we're really competitive the areas that we have a lot of little run off we have a lot of little runoff to happen there.
Darrell do you want to talk specifically about I think there was a question about the refi.
On the on the residential through are about two thirds of our activity was in refinance activity that has really come down significantly.
As we move to the second quarter, it's more of a purchase market kind of plays to our strength from that perspective. So I think we're hopeful that that will kind of maintain and hopefully build as the year goes on by refi is definitely being impacted.
Other impact on the residential mortgages as a cost of hedging is just a lot higher right now so it's offsetting some of the servicing benefit that you would get out there.
Very good and then as a follow up.
Bill.
<unk> has a unique franchise, where you've got your regional President President.
Throughout your franchise. So you have a good pulse on what's going on in those markets can you give us an update on what your customers are telling you obviously were in a very uncertain time with the tragedy going on over in Ukraine, what are they feeling and are they still pretty optimistic about their business outlooks.
Yes, maybe I'll do it in two ways and maybe I'll do it at the starting with the tangible side. If you look at production and pipeline specifically, they're really strong.
Pipelines.
Particularly in the core commercial business, what you are talking about it in the first quarter are equal to where they were in this in the fourth quarter in terms of strength. So in terms of.
Evidence of what we see in terms of pipelines and.
And production I'd say, there's still is a great deal of confidence virtually every client is and some inventory build capacity maybe from a supply chain perspective at all.
Wishing to.
Increased their inventory to serve.
And increasing demand demand does not seem to be the particular challenge. So I'd say, that's the tangible part now the intangible part and talking to clients, so to where everybody is and what some of some of the anecdotal evidence I don't think were in a full risk off mode. But there is there is a little bit of a wait and see I mean, I think that's fair.
Here.
Maybe a little bit of a blinking yellow light not a red light nobody's stopping.
So I think the combination of this tangible part that we see in terms of pipeline production need for inventory build is really solid and would be reasons to be really optimistic all with just a little bit of.
Cautionary note.
As people look forward into into the next several quarters.
The only thing I would add to that.
Numerous side.
Fair to say it in that in February during the conversion to our branch people were really distracted just going through the integration and the efforts.
I think we've come out of that strong now and we're starting to see momentum in loan origination out of the branch areas and if you look at our consumer convenient businesses that we have like livestream in Sheffield and.
Service Finance they are all started off really strong and seeing really good volumes as we enter into the second quarter, yes. So I mean I think so.
<unk> commented somebody there is reason to have a lot of optimism with just a slight level of.
Of uncertainty, we're taking sort of a is the right balance.
Thank you I appreciate all the color guys. Thank you.
We will take our next question from Betsy <unk> with Morgan Stanley .
Hi, good morning.
Hi, Betsy.
One question on just the outlook here for how we should be thinking about net interest margin and part of the reason I ask is when I'm looking at the.
Average balances, where you show what the yields did Q on Q, we have some declines in consumer loans. So I'm, just wondering is that like swap related or.
Is there something more.
And Tim it going on in the portfolio I'm, just wondering how quickly that should bounce back given the outlook for rates that you've got.
Yes, Betsy I think what you are looking at we can maybe check offline, but I think it's just the runoff of purchase accounting when you look at our new rates going on the books are new volume rates are going on higher than what the existing portfolio is right. Now. So we are averaging up in most cases across the board there so I think <unk>.
<unk> yields will arise and we have our projections throughout the year I expect net interest margin to continue to rise throughout the year NII to continue to grow just as the interest rates start to climb.
And then just a follow on there is how do you think about your deposit strategy how.
Interested are you going to be in.
Generating.
Accelerating deposit growth or would you be more in the mode of.
Allowing run off just trying to understand the balance sheet size and how we should think through that.
If you look at what we've attracted.
From Covid 80, plus billion dollars of new deposit funding the vast majority of that is noninterest bearing.
And when you look at it we pay the lowest rates of anybody else in the industry. So.
Almost all of it is non rate sensitive. So we definitely feel that we have beta is modeled in to protect what we want to protect out there.
Could be a little bit of ebb and flow, but for the most part we will be specific.
To make sure that we.
Protect our good clients throughout their organization and do that but right now we've had rates just started to lift off and our deposit beta is that we're seeing right now are coming in much less than what we model. It is very early into this but I think right now I think.
It's not a huge impact on what we have had to pay that and we still have to deposits growing for us so noninterest bearing growth from us as this past quarter as well.
What I might add to that.
We're operating now as a new truest. So you know we're operating with a company that has about a.
18% average market share so and number one two or three market share in most of our markets. So that's that's a new experience also this this increased capacity and marketing expense. So you know our unaided brand awareness has really gone up actually fairly significantly since our since the rollout and then we just have a lot more.
Our capabilities other than the rate paid I mean, we just have a lot more tools and capabilities to offer our clients. So we're operating in the kind of and this is the kind of environment, we built through us forward in fairness to have.
Company, that's got that kind of prowess and capability to to serve our clients in ways other than just repaid.
Got it alright, thanks, Bill Thanks, Joe appreciate it.
Thank you we'll take our next question from Ken Houston with Jefferies.
Hey, Thanks, Good morning, I wanted to ask about the securities portfolio.
The repositioning as you did this quarter. So can you just talk a little bit about.
Yes.
Where do you want that portfolio size to sit and is the changes that you've made the sales and the repurchases.
The forward outlook for NII.
Yes, so I think the way we are managing the balance sheet and we've talked about this before is right.
Right now we are targeting $15 billion to $20 billion of balances at the fed since the war started in the first quarter were tilted a little bit towards the heavier side of that.
Liquidity purposes.
And you really look at the cash flows of our whole balance sheet in total so we've had deposit growth come in so that's a positive inflow you have run off of securities Thats, a positive inflow. Our first priority is to lend it out to our clients and to basically do that.
Once once we've done what we can do from a lending perspective than the residual piece, we basically go into the securities portfolio from.
From our securities portfolio perspective, we're investing in the past and treasuries MBS.
So those are very high high grade very secure type securities.
Okay, and then the repositioning that you did this quarter I assume that that's.
That's built into the to the outlook and then I guess is that generally where youre purchasing now you've mentioned in the slide deck $3. Two is that where the front book is from here.
So yes, the mix of what you're doing if you go into treasuries it isn't a forecast treasuries or in the $2 72 to <unk> here in the three to five year area MBS are approaching 4%. So a blend there, but I would say we'd be on the shorter end of that on the duration perspective, but all that is incorporated with the guidance. We gave you.
Okay got it thanks Darren.
Okay.
Thank you we'll take our next question from John Mcdonald with Autonomous research.
Hi, Thanks, I just wanted to follow up on Ken's question, just more broadly how are you guys thinking about managing capital on the regulatory side, you're still well above your regulatory minimums with the nine point for CET, one, but a little bit below where you usually target. How are you thinking about that and then on the GAAP side. How are you thinking about managing against further.
OCI.
Risks as rates keep going up potentially thanks.
I wanted to maybe start on the on the capital side I mean, I think we've been.
Very consistent about thinking about where we wanted to establish capital where we wanted to operate.
Just on three primary factors.
One was just where we were in the merger how much risk do we have in the merger do we need to allow additional capital for merger risk. That's obviously come down substantially, but I would consider that sort of being a normal mode right now and we don't and we've gotten through the big components of that really really successfully.
The second is you know how much economic risk do we have and we probably have a little more economic risk in fairness than we had a year ago, but I think.
Maybe on the marginal side, and then sort of where we fit from a risk profile as evidenced by some of the CCAR results. You know I think will be another confirmation of our lower risk profile higher P. PNR model as is true of so those are the three things that we put into the mixing bowl as it relates to as it relates to <unk>.
Capital and we'll continue to reevaluate that we feel you know.
Very comfortable where we are right now we'll reevaluate that.
Mid or mid part of this year and try to determine the appropriate place for for tourists to operate but I feel like we've got a lot of opportunity in the in the capital side.
Based on the evaluation of those risk and the neurology and so the other part of that question. So on the OCI, John what I would tell you as a category three it's not in our regulatory capital numbers.
99% of our portfolio is as guaranteed so it's just a matter of timing, we're going to get that funding back it's not a permanent impairment that you see there are partial offsets once a year you Mark your pension plan that Mark will obviously be against what the OCI is which would be some benefit at 12 31.
But the real hedge when you really look at this is the economic hedge with deposits and deposits have increased in value. We don't mark to market. These non maturity deposits, but we really look at it the value of that as well exceeded the adjustment than what you saw on the.
The securities portfolio. So that's really I think asset that you see there.
Okay.
If we wanted to we could put more than 40% into held to maturity I don't think we're there yet where we need to do that from that perspective, I think we feel good with what we've done today.
Okay, and then one nitpick as a follow up Darryl the duration of the DFS portfolio before the transfer is I think it was about five eight.
Do you have the new number on what that looks like now after you've observed.
So to help their journey.
Six and a half and are modeling even with rates going up higher as basically capped out. So we're really in the six handle and that's where it's going to be until rates start to fall again.
Six and a half now okay. Thank you.
Welcome.
Thank you we'll take our next question from Matt O'connor with Deutsche Bank.
Hi, good morning, sorry, if I missed it earlier, but did you say how much of a $1 6 million of cost saves.
Looking at <unk> and the <unk> run rate.
Yeah, Matt what I would say, it's pretty minimal I mean, we had a little bit more reduction in <unk> at the beginning of the quarter. Most of the branch closures were back end loaded in the quarter.
Some of the technology savings that's going to come through that's really all in the second half.
We have a little bit more closures in corporate real estate. So I would say, it's much more backend loaded we maybe got a little bit but the vast majority of it would be in the second half of 'twenty two.
Okay. When you say, a little bit meeting a little bit more than last quarter right. Because he already had at least a chunk of one point and the run rate around right.
That's right, yes. So we were two thirds of the way through at the end of the year, we made a little bit of progress in the in the first quarter and we got more to do in the second half of 'twenty two.
I would say Matt.
Yes.
We're on really good track on the cost saves somebody we're ahead in most of the categories, where we want to be and now now we've got a couple remaining big chunky ones in there binary you close the data center and you get the cost saves I mean, so we feel.
A really good about about where we are in that in that trajectory.
Okay, and then more broadly speaking like as we think about costs beyond the year.
How do you think about how should we think about what truth is trying to be like is this a kind of keep expense growth low.
An operating leverage story.
Because obviously, there's been lots of puts and takes with the merger. We also have inflation. We also have revenue benefiting.
Right, which is usually a very good efficiency business, but what is true from an expense perspective looking out beyond this year.
Yes, I think Matt if you could talk about sort of overall for true.
What we expect to be as you know.
Low efficiency ratio company, so I think the construct of our business mix.
And our structure allows us to be a low efficiency industry, leading low efficiency ratio company sort of where that ends on an absolute basis will depend on a lot of market conditions, but that will be it will be at the low end of that.
We'll be a company with higher growth potential and less volatility.
I mean, when we think about how expenses fit into that rather than sort of the absolute dollar amount.
In light of expenses that support.
Our growing business and being able to do that with I think.
Industry, leading low efficiency ratio.
Okay. Thank you very much.
And positive operating leverage and maybe I'll show you asked that I make sure I make that clear as well.
And we'll take our next question from Mike Mayo with Wells Fargo Securities.
Hi, just a first just a clarification so you've guided revenue growth for this year from 2% to 4% up to 3% to 4% and you expect 500 million.
Merger savings by year end from this point forward is that correct.
Roughly I would say four to 500, Mike because we got a little bit of savings in the first quarter.
Okay, and then more generally at Bell you just talked about your terminal end state.
Superior growth superior efficiency.
And that would then from what you said before you have superior geographies superior business mix superior leverage with the merger model. So superior, but then you look at the current loan growth and its average the current deposit growth its average operating leverage this year <unk> average.
<unk> superior features but average results I know youre going from integration to kind of execution, but.
From our standpoint, it looks like Youre in a corvette.
60 miles per hour, so when will the superior positioning lead to superior growth.
Okay, well, we're going to assume or on the auto body.
No we have no speed limits in terms of in terms of opportunity.
And Mike we're at that we're at that inflection point I mean, we've talked about this this is I think we're right at that pivot point and I can feel it I mean I can fill all the things if you.
You categorize loan growth, but if we break it down to I think the things that are highly correlated to <unk> positive trajectory.
I think those are areas, where actually we are doing well things like sort of core C&I other decisions on low growth or related to decisions. We've made about positioning our company, which I think will be really beneficial to us long term and then I look at some of the pivot points of.
I'll pick them up.
Several categories, if I look at integrated relationship management.
Not at the level, we needed it to be in sort of a fourth quarter first quarter. We've made the pivot point and we're starting to see significant increase and youll start to see that in some of our results. What do you see that a little bit of insurance results in this quarter.
Where we are in terms of positive asset flow in wealth wealth teams on insurance teams net positive in terms of adding people. So we've reached sort of a really good inflection points their investment banking clearly you know in terms of adding and retaining and opportunities in those businesses things like the core commercial.
<unk> pipelines.
You know, where we are in terms of more lead deals more on the left side, where we are positioned in terms of production and the places we want to be so I can feel the inflection point so maybe we're at.
Whatever it was 60 miles an hour, but the photos on the accelerate or not the break.
And I totally feel that in the transition that we're that we're making at this particular juncture and I'm very confident about our positioning for the future.
Maybe just one follow up to that what percentage of your time was spent on the merger.
Before and how much has been spent on continued integration now.
Yes, if I look at my my personal calendar I don't think ive been in Charlotte.
The last you know.
Five weeks or so I mean, so I look at all of our leaders' time in terms of where they are spending time and it's a significant difference.
I've been a much more in front of teammates in front of clients that community.
Just my own personal time, I can feel it in and in fairness I'm just one symbol.
More teammates have been in that mode for a longer period of time that I have and we feel that feel that power shift.
I mean, just a simple way and the.
Darrell has talked about a simple way, we did about a half a million hours worth of training. So just maybe put that in context of which that half a million hours of training, we now translate into a half a million hours of client related.
Activity, just as like one symbol.
Alright, thank you.
Thank you we'll take our next question from John <unk> with Evercore ISI.
Good morning.
On the efficiency the <unk>.
Liam term efficiency goal of the of the low Fifty's just wanted to get a little bit more color from you in terms of.
What exactly would you say you needed to get there in terms of the rate backdrop and then also in terms of timing that you see is reasonable to get to that low <unk> range.
Yes, John .
Go back to where we were when we announced.
We announced this transaction back in 19 rates for a couple of hundred basis points higher back then.
And at that point, we thought well if we got those costs as you know we would be able to.
Come in at the low <unk> at that point, we're definitely a different company, we continue to buy an AD businesses and all of that but we definitely have at least a forecast from the fed for it to go up a couple of hundred basis points this year and into 2023.
Assuming you get the fed up to 335%.
<unk> and <unk>.
We will execute on our cost saves, we should have really strong efficiency ratios coming in.
Do we get low fifties or not I think there's a shot that that could happen just because of the asset sensitivity that we have in the company.
But what we're seeing in the marketplace our deposit beta is how they perform so.
No guarantees from that perspective, but rate's gone up definitely helps on the net interest income side significantly and it's back to kind of where we were back in 19.
Okay. Thanks, Daryl and then also on the expense side the your expectation for the.
$492 million and incremental expenses related to the merger to roll off in 2023.
What are the biggest drivers of that decline I know you mentioned the consolidation of data centers.
If you could just give us a little more granularity around what are the biggest components and related to that I know you indicated you completed your core conversion regarding.
Regarding the core deposit system, what was the upgrade there.
You too thanks.
Yes, so from a cost save perspective, obviously technology is the biggest chunk of where the cost savings would come in.
So that would be the majority of the savings both datacenters application systems.
<unk> all in that area would basically will be a big cost savings, we still have more to do on a.
A little bit on the V. SRP that will help that effect you have more on corporate real estate reductions.
So we have other savings.
So I would say overall now that we've moved from the integration to now running and operating the company. We will continue to look for more efficiencies as we operate the company to give us more fuel to make more investments in the company as we move forward from that perspective, and I'll put it back to Bill, Yes, and then on the on the.
Core conversion I mean, we consolidated two to our heritage core platform, but that doesn't really sort of.
<unk>. The next Gen opportunities, we have with them that so you can think about.
Use of cloud based and API technologies to create for example, a digital experience, which we've talked about so this concept of a digital straddle we were able to.
Convert add flexibility and add products and capabilities to our clients digital a long before we converted them physically in the core conversion. So I think we've got a really good strong you know.
<unk>.
Our second Gen core platform with third Gen fourth Gen kind of capabilities that sit on top of that.
And then as you know we're also experimenting with new core platform for light stream. So I think we've got like we've got our feet in the right place, where we want to be in terms of maximum flexibility with existing core and experimenting with with our nucor with with light stream and a product called <unk>.
Which we've talked about before and this digital straddle.
<unk> Ah I think will really really pay strong dividends for us going forward.
Got it great. Thanks Bill.
Yep.
Thank you we'll take our next question from Ebrahim <unk> with Bank of America.
Hey, good morning, just wanted to touch base on credit one bill.
Bill.
Just talk to us about the consumer book B chassis light seem anything in particular that youre watching around consumer trends because a fair amount of concern and then on credit quality and I'm not sure. If you can give any breakdown in terms of FICO scores within that consumable.
Yes.
Yeah Clarke Javan.
You can come up.
But I would say is that the area, where most focus on from the consumer standpoint around.
More path to normalization or any potential stress out there with the inflationary pressures would be in our subprime auto book remember that book is less than $5 billion. So high return business. So.
We are watching that really closely and say we're seeing the.
The credit performance more normalize there I would say for the remaining consumer segments, we principally have a prime based portfolio, so less than 1% or so of our borrowers in those in those.
Segments would be considered non prime so it's just not as big of an issue there, but I would say our expectations are that youll continue to see as we go through the rest of the year more normalization on the consumer side first and we're watching most closely would be the lower income consumer in our subprime auto.
That's helpful. And then just as a follow up to that when we look at Adobe issuing $1 44.
Given us.
Context of Devon season, and where you expect that to bottom out given sort of the macro uncertainties Belinda has talked about thanks Chuck.
Sure and just to remind you all are day, one seasonal was at $1 54 in Q2.
Level now is at 144 suits down nine bps from.
The first quarter and so the other point I would make to you is our reserve coverage is even at that level are very strong to Ncos and NPA is so the way we think about C. So we continue to incorporate multiple economic scenarios and the estimate including.
Maintaining a pretty healthy waiting when our downside case, we also this quarter considered qualitatively precision and uncertainty with respect to deflationary pressures rate increases in the war in Ukraine, but remind you I'd also reflected the outstanding performance we had from.
The risk profile and our credit performance for the quarter. So all that being said, we still anticipate potentially additional reserves in 'twenty, two but probably at a decelerated pace compared to last year and I would just say this obviously the number and the amount of the releases is really depended upon how the economic situation on.
Folds.
Thank you.
Katy we have time for one more question.
We'll take our final question from Erika Najarian with UBS.
Hi, good morning.
Just one clarification question from me underneath your revenue guide of 3% to 4% is it fair for us to assume that.
Given the outlook for fed funds for the rest of the year, we should take that seven 2%.
On any up 200 ramps scenario from slide 13.
Maybe it does start or point for the NII growth for 2022.
And may be take 80% of that two up five 8% and then layer on how we're thinking about loan growth and the long end of the curve.
Yeah, and a lot of moving parts there.
I'd say is that it.
In spirit I think using a good gauge with a gradual over 200.
I think it is a good approximate.
A good proxy Mason the deposit beta as we talked about earlier.
We have those being phased in and that's built into these numbers. So we're expecting 25% in the first 135 in the next hundred 50 after that right now, we're performing better than that but we definitely have a pick.
Pickup in trajectory at this forward curve does play out is what's the what's embedded in there you will see a big increase and both core and net interest margin from where we are today, probably <unk> seen 3% maybe by the end of the year.
Got it so the follow up here.
Given what you've baked in to the deposit betas and the first time grid.
It could be very minimal the seven 2% in the up 200 could be the floor in terms of this year.
I think I think we have good conservative estimates that there is a chance for outperformance, but it's still very early Erika.
So you don't really know, but I feel pretty good with these projections and feel good and bill talked about earlier about our deposit base and our clients and density that we have so.
I think we're gonna have really positive noninterest income as this year plays out into 'twenty three.
Got it thanks.
Okay. Thanks, everyone. This completes our earnings call. If you have any additional questions. Please feel free to reach out to the Investor Relations team. Thank you for your interest in truth. We hope you have a great day Katie you may now disconnect the call.
Thank you that will conclude today's call and we appreciate your participation.
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