Q3 2022 Truist Financial Corp Earnings Call
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Ladies and gentlemen, please standby.
Greetings, ladies and gentlemen, and welcome to the Truth Financial Corporation third quarter 2021 earnings Conference call.
Currently 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 with Truth Financial Corporation. Please go ahead.
Thank you Jake and good morning, everyone. Welcome to Truest third quarter 2022 earnings call with US today are our chairman and CEO Bill Rogers and our CFO , Mike Mcguire. During this morning's call. They will discuss truest third quarter results and share their perspectives on our efforts to transition from an.
<unk> focus to an operating focus current business conditions and our continued activation of truths purpose Clarke Starnes, our vice chair and Chief risk Officer.
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.
Accompanying presentation as well as our earnings release and supplemental financial information are available on the truest investors Investor Relations website, IR Dot truest dot com.
Our presentation today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slides two and three of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP.
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 webcast are located on our website with that I'll now turn the call over to bill. Thanks.
Thanks, Al and good morning, everyone and thank you for joining our call today.
Our third quarter reflected strong progress in many areas overall.
However, our financial performance was mixed reflecting continued challenging market conditions strong spread income resulted from significant markets and expansion that exceeded our guidance and strong broad based loan growth credit quality remains excellent.
At the same time capital markets revenue did not rebound as anticipated and in fact declined linked quarter.
Strategically we continue to realize the benefits of shifting from integrating the operating which I'll share more on later.
Operating losses continue to be too high however, other expense growth reflects targeted investments in talent and technology and key areas of long term sustainable growth.
Merger costs diminished again, and our remaining decommissioning activities are mostly complete it will be finalized by year end.
Where should share details on each of these themes throughout the call.
Now turning to our purpose on slide four.
Tourist as a purpose driven company, that's dedicated to inspire and build better lives and communities. This commitment to purpose and our value of care could not have been more apparent and how our teammates responded to each other and their clients in the aftermath of hurricane.
I experienced this firsthand when I visited with our teams in southwest, Florida soon after the storm subsided.
<unk> Express there are significant appreciation that we opened our branches to care for them. During this time of loss.
The many truckloads of food water supplies and other critical items that we sent to the region made a real difference.
And the $1 million to $5 million donation from the tourist foundation will continue to provide support to affected areas in Florida and South Carolina.
The rebuilding process has only begun and <unk> is committed to supporting these communities in the short term, but also helping them be more resilient in the long term.
This is one of the many ways we're living our purpose as you can see on slide five.
In order to inspire it's often necessary to be bold and to be first and that's exactly what we did on October one we made a significant investment in our teammates are raising our minimum wage to $22 per hour.
The new minimum wage benefits approximately 14000 teammates about 80% of them are in client facing roles.
We strongly believe this action will drive purposeful growth and offset the estimated $200 million increase in annual personnel expense through improved teammate recruitment and retention lower turnover expense better execution and it all around better client experience in.
In fact, we are already starting to see the benefits of the higher minimum wage teller turnover in August and September was down about 25% compared to the first seven months of the year and our branch vacancy rates has been cut in half since July .
We also advanced our commitment to inspire with the launch of curious one banking in July .
First one is our differentiated suite of checking solutions at re imagine everyday banking, including two new accounts that eliminate overdraft fees and provide greater access to credit for.
The flagship tourist one checking account has zero overdraft fees and the capability to provide qualifying clients the liquidity they need through a simple $100 negative balanced buffer. We also introduced the <unk> confidence account, which provides consumers access to mainstream banking services and no overdraft fees.
These accounts meaningfully advance financial inclusion in our communities and I've been embraced by new and existing clients since their launch overall branch deposit production has increased 13% in August and September compared to the prior year, despite having 16% fewer branches.
We're also in the process of rolling out our cash reserve deposit based credit line up to $750. We began a pilot earlier this month and expect the cash reserve feature to be available across our footprint later this quarter.
Now turning to slide seven.
Merger cost totaled $152 million down, 36% sequentially and 58% year over year as our integration activities wind down.
The final merger costs expected in the fourth quarter are primarily related to our decommissioning efforts, which as I mentioned, we will conclude by Europe . The.
The completion of merger activities is a monumental move forward that will reflect a seamless client experience simplify our narrative enhance our earnings quality improved capital and help us realize industry leading returns.
Turning to our third quarter performance highlights on slide eight.
We earned $1 5 billion or $1 15 per share on a reported basis adjusted earnings totaled $1 7 billion or $1 24 per share up 3% sequentially as 5% adjusted PPE and our growth was partially offset by higher provision as a result of our higher consumer net charge offs.
Net interest income grew 10% to a post merger high benefiting from higher short term rates and well control deposit cost all of which drove significant margin expansion as well as strong broad based loan growth.
Despite solid forward progress the pace of <unk> growth was weaker than we had anticipated primarily due to ongoing pressure in investment banking as well as unfavorable valuation marks taken a quarter Ed.
Adjusted expenses increased two 6% linked quarter, mostly as expected however, operational losses remain elevated.
While we made a purposeful decision to proactively refund our clients for fraud losses. Our overall goal is to reduce them significantly to improve our results in the client experience. This is an industry wide phenomenon and part of our technology spend is directly related to this effort. These.
These investments include efforts to enhance identity authentication and fraud detection among others adjust.
Adjusted operating leverage was a strong 260 basis points compared to the third quarter of last year, reflecting strong net interest income growth combined with modest expense growth. This momentum has helped us close the gap towards our goal of positive operating leverage for the full year 2022.
Asset quality remains excellent notwithstanding normalizing trends on a seasonal uptick in net charge offs within our consumer portfolios.
We deployed 10 basis points of capital to support strong loan growth and complete the benefit mall acquisition, which expands our capabilities in fills a strategic gap on our wholesale insurance business, our capital position remains strong relative to our risk and profitability profile and we're confident in our ability to withstand and outperform in a range of economic scenarios.
Yes.
Now turning to slide nine.
Digital activity continues to increase from the first quarter levels, reflecting strong momentum post integration.
This progress reflects our significantly improved agility and responsiveness from being on one digital platform year to date, we've delivered three times more production releases across business retail and wealth than in all of 2021 clients.
Client satisfaction with their digital experience has also improved rapidly each quarter.
Consistent with our pivot from integrating to operating our technology and digital teams are allocating more of their time energy and resources to transformation and innovation.
And we recently launched truest assist to our retail and wealth clients through our mobile and online banking platforms.
Tourist assessed as our AI enhanced virtual assistant that Leverages natural language processing and natural language understanding to interact and respond to client questions.
Through September 30 tourist assist had been deployed to our personal banking clients and had been utilized by 114000 unique clients to handle a 147000 interactions that otherwise might have occurred in a branch or contact center.
We're also expanding light stream both by enhancing the sophistication of its underwriting models through artificial intelligence and by piloting our new savings product broadened its capability set.
In addition, the recent acquisition of the arena platform from software startups Maloney will help accelerate our data journey through the development of a stronger integrated data infrastructure solution deployed in a hybrid cloud environment as a result, our data quality analytics and speed to market will all significantly improved.
Overall I'm highly optimistic about the potential of our increased investments in capabilities to enhance performance and client experience I'm turning to loans and leases on slide 10.
Loan growth was strong and broad based for the second consecutive quarter average balances grew $13 billion or four 3% sequentially in part due to our shift from integrated operating C&I remains strong as average balances grew 7 billion or four 5%.
C&I loans grew across most CIB industry verticals and product groups, reflecting higher revolver utilization the current shift to banks from the bond market and our increased competitiveness for new and existing clients revolver utilization increased just over 100 basis points to approximately 31% the highest level since.
The second quarter of 2020.
And our commercial community bank C&I balances, excluding PPP and dealer floor plan increased one 3% the seventh consecutive quarter of growth, we achieved growth across almost all of our CCP regions.
Residential mortgage balances increased $4 billion or eight 2%, reflecting previous corresponded mortgage production and slower prepayment speeds.
Excluding mortgage consumer and card balances increased three 1% a strong growth in prime auto service finance lifestream recreational lending in Sheffield more than offset run off in our partnership and student portfolios.
Production in our consumer finance business was up 20% year over year, reflecting good business development momentum with service finance abating inventory shortages within Sheffield and rack and improved automated decisioning capabilities across the board, which ultimately improves consistency efficiency and creates better client experiences.
Near term our loan growth loan growth outlook remains healthy as our pipelines are relatively strong and teammates continue to shift their capacity from integrating to operating and take advantage of new tools in their toolkit.
Over the medium term loan growth may moderate as clients absorb and digest the impact of higher rates or inflation and slowing growth. We also expect growth in residential mortgage and prime auto to slow going forward as we shift our capital towards higher return opportunities.
<unk> continues to remain well positioned to advise clients across the.
Broad range of economic scenarios, given our capabilities talented teammates and increased capacity post integration.
Now turning to deposits on slide 11.
Average deposits decreased $3 $7 billion or just under 1% in the third quarter driven by tightening monetary policy reduced saving in a response to higher inflation and seasonal patterns.
Deposit costs were very well controlled reflecting as true a strong retail and commercial franchise and our enviable market share position in.
In addition, our lines of business and corporate Treasury teams continued to deliver excellent execution against a thoughtful strategy to be attentive to client needs and client relationships, while maximizing value outside of rate paid.
As a result interest bearing cumulative deposit betas have been 21%, thus far well below our modeled assumptions.
As the interest rate environment evolves, we will continue to take a balanced approach to managing deposit growth and rate paid particularly given our broad access to other forms of funding.
Before I turn it over to Mike I'd like to acknowledge and thank Daryl Bible.
<unk> has built a best in class finance function.
A key essential role in the success of our merger and he's really been incredibly supportive in helping my transition into the CFO role. Many of you in the investment community know Darrell well and appreciate his knowledge and transparency, which will continue to be hallmarks of true risk going forward.
I'm also excited to introduce Mike Mcguire as our new CFO . Most recently, Mike led troops consumer finance and payments businesses, including light stream service Finance, Sheffield and auto Finance. He was also responsible for our enterprise payment strategy group and wholesale payments businesses, including Treasury solutions merchant services and <unk>.
Commercial card.
Mike is a strategic thinker, a purpose driven leader with an exceptional depth of experience across our enterprise and a deep understanding of how technology is shaping our operating environment.
It's truly an industry thought later in the Fintech space will certainly draw on this experience as Mike assumes his new role. During this time of exciting transformation, so Mike with that I'll turn it over to you.
Thank you Bill and good morning, everyone before I begin I would also like to thank Daryl for his guidance and his support throughout my transition into the CFO role I'm excited about the opportunity and I'm confident that the transition will be seamless for all of our stakeholders. I also want to thank my teammates in the finance organization for welcoming me and for their support.
We have a really talented team and I'm looking forward to I look forward to working with all of them.
For our analysts and investors I'll be on the road soon and hope to meet as many of you as possible. This is really a great opportunity and I'm excited about helping take trips to new heights.
So moving to slide 12.
For the first for the quarter net interest income increased 10% sequentially to $3 8 billion as higher short term interest rates and strong loan growth more than offset lower purchase accounting accretion.
Core net interest income was up a strong 14%.
Posit costs remain well controlled reflecting the strength of our deposit franchise.
Lower purchase accounting accretion was the result of elevated accretion in previous periods due to conversion activity in slowing prepays in the current period.
Reported net interest margin increased 23 basis points, while core net interest margin increased 30 basis points driven by similar trends as net interest income.
Moving to slide 13.
Fee income decreased $146 million or six 5% sequentially insurance income decreased $100 million, primarily due to seasonally lower property and casualty commissions.
Investment banking and trading income decreased $33 million as lower fees from structured real estate investment grade and high yield bonds and syndicated in leveraged finance were partially offset by increased M&A fees.
Credit spreads tightening liquidity and general macroeconomic and geopolitical uncertainty are all contributing to slower activity levels.
By these current headwinds we continue to make strong strategic progress within corporate and investment banking capital markets revenue from non corporate and investment banking clients is up 25% year over year as our commercial community Bank commercial real estate and wealth teammates continue to learn how to successfully partner with CIB to deliver strategic advice to our clients.
<unk>, our lead table position has improved across most products, including equity capital markets high yield investment grade and syndicated in leveraged finance.
The strategic progress, we intend to continue to take advantage of the challenging environment to invest insurer securities by selectively adding talent to drive long term share gains as we successfully done during previous market disruptions.
Other income excluding impacts from our nonqualified plan.
<unk> $17 million linked quarter, primarily due to valuation related marks compared to a year ago. Other income decreased $81 million as a result of lower investment income and valuation marks on Spi related and other strategic investments.
Turning to slide 14.
Adjusted noninterest expense increased $83 million or two 6% sequentially, reflecting forward focused investments in talent and technology as well as elevated operational losses.
Professional fees and outside processing expense increased $34 million on an adjusted basis as we advanced critical projects, including investments in cyber security contact center modernization fraud detection and the build out of our in house payments capabilities. Other expense increased $28 million, primarily due to higher operational.
<unk>.
Personnel expense increased $23 million on an adjusted basis, reflecting strategic and purposeful additions in technology commercial community banking Civ, consumer finance and wealth as well as the benefit mall acquisition.
Compared to the third quarter of last year adjusted noninterest expense only increased 2%. This modest increase was driven by higher operational losses, and investment spend which were partially offset by merger related cost savings in software and not net occupancy expense.
Overall, we continue to focus on generating expense reductions in certain areas to fund longer term investments in talent and technology and to generate ongoing operating leverage.
As an example, we believe recent technology investments to enhance identity authentication and fraud detection. Among other factors will mitigate operational losses also with the conversion behind us we have additional flexibility to rationalize certain businesses, such as mortgage where capacity exceeds demand.
<unk>, we have our final leg of datacenter related technology savings that is expected to materialize throughout the fourth quarter.
Below the line our third quarter results also reflected an effective tax rate of 18, 2% down from 19, 5% in the second quarter, primarily due to discrete tax benefits arising from final true ups to our 2021 tax return.
We continue to expect a normal effective tax rate to be 20%, which translates to 21% on a fully taxable equivalent basis.
Moving to slide 15.
Asset quality continues to be excellent, reflecting our prudent risk culture and diverse portfolio.
Leading credit indicators remained strong nonperforming loans decreased one basis point and loans 30 to 89 days past due decreased seven basis points.
Net charge offs remained benign at 27 basis points up five basis points from the prior quarter, primarily due to normalizing trends and seasonality in certain consumer portfolios.
Our total allowance increased $18 million to support our loan growth and the a triple a rate a triple El ratio decreased four basis points due to strong portfolio performance and growth in higher quality loans, partially offset by a moderately slower economic outlook.
Moving on to slide 16.
Our CET one ratio decreased from nine 2% to nine 1% as we deployed capital to support strong loan growth and to complete the benefit mall acquisition.
We also increased the dividend, 8% to <unk> 52 per share beginning in the third quarter, reflecting our confidence in our improving earnings trajectory.
Overall, our capital position remains strong in light of our risk and profitability profile and we maintain a strong liquidity position with access to multiple sources of funding for incremental loan growth.
Turning now to slide 17, I'll next outline the strategic rationale and financial impact of two recently announced insurance acquisitions.
First benefit mall closed on September one, providing a scaled entry into wholesale employee benefits and filling one of the remaining strategic gaps in our capability set benefit mall is expected to add $160 million of annual revenue at an initial EBITDA margin in the mid 20% that will build to the mid 30 percents over time <unk>.
<unk> realized the.
The transaction also has potential earn benefits with interest insurance by supporting our brokers at Mcgrath, our retail insurance business and also outside jurist insurance with our corporate and commercial clients.
We also recently announced the acquisition of Bank direct capital Finance.
<unk> bank direct effectively doubles, our premium finance business broadens our capabilities to include life insurance and expands our west coast presence pro forma we estimate tourists insurance holdings will be the number two premium finance player in the market. After this deal closes later this quarter banked.
Bank direct brings with it a $3 $2 billion loan portfolio with strong projected growth attractive profitability limited credit risk and short duration.
While both acquisitions are expected to be dilutive. Initially we believe they are strategic and financially attractive over the long run.
So I'll now provide new guidance for the fourth quarter.
Looking into the fourth quarter, we expect a mid double digit basis point increase in both our core and reported net interest margin due to benefits from the recent rate hikes and a projected 75 basis point hike in November .
These will rebound sequentially driven by insurance income improving due to seasonality solid organic growth and the full impact of the benefit mall acquisition.
The extent to which investment banking fees improve will be dictated by levels of capital markets activity.
Adjusted expenses are anticipated to increase approximately 1% as the increase in minimum wage investments and revenue producing businesses in technology and acquisitions are partially offset by the impacts of cost savings.
Putting these pieces altogether, we expect adjusted <unk> to grow approximately 10% with some upside based on the realization of investment banking pipelines.
Based on our year to date results and fourth quarter expectations. We are on track to achieve positive operating operating leverage for the full year.
We remain consistent with our expectation that the net charge off ratio will be between 25% to 35 basis points for the full year due to our performance year to date and normalizing trends across our loan portfolio.
So with that I will turn it back to bill to conclude right. Thank you Mike.
Continuing to our strategic shift on slide 18.
Earlier this year I Express my view that the first quarter was a strategic and financial turning point per truest, our third quarter results build upon the second quarter progress, even though market conditions diminished overall, PPE and our trajectory.
<unk> is real and it's palpable.
Made significant progress in our digital and technology areas as evidenced by improving mobile app ratings and enhanced client experience with within treasury and payments and many other new features and capabilities that strengthened the financial confidence of our clients.
Speed to answer and our care centers is now well below our initial service level agreements and more investment will improve the efficiency as well low production in the third quarter was the highest it has been a true us up 8% compared to the second quarter.
Branch loan and deposit production are up a solid 14, and 20% like quarter, respectively as teammates become more confident with processes and systems, but also improved solutions and capabilities.
Perm referrals to our wealth businesses increased 17% sequentially in the amount of income generated from ERM referrals by our commercial and community Bank was the second highest ever both highlighting the power of our advice driven and client centric model.
Our brand awareness was up almost 400 basis points in the third quarter.
While our peers were flat to down and our brand consideration, which meant which measures whether consumers are given truest, a serious thought rose 210 basis points and ranks us fifth highest in our markets, having only been alive.
That brand for three years, almost all of our client satisfaction scores are ascending and in many cases at their highest levels since we become truest. The financial benefits of this momentum are being realized and will be increasingly visible as market conditions normalize and merger related expense noise abates.
To conclude <unk> is on the right path.
Highly optimistic about our ability to realize our significant post integration potential which is clearly summarized in our investment thesis on slide 19.
Strategically we have shifted from execution.
Two execution transformation in growth, we're investing in digital and technology as we reduce cost including operational losses, we're simplifying our processes and operations and we're acting on our purpose each and every day with a singular goal of improving our client experience. We're also intensely focused on capturing the significant.
Greater relationship management and revenue synergy potential we have is it squarely in the center of building better lives for our clients.
These shifts in activities do not require incremental risk appetite or capital just execution and focus both of which lie within our sphere of control.
Externally, while we believe the economy is generally healthy persistent high inflation and a rapid tightening of monetary policy combined with geopolitical tensions have reduced visibility and increased uncertainty as we move into 2023.
<unk>, Nevertheless, well positioned across a broad range of economic outcomes, given our advice oriented model for clients Conservative credit culture diverse business mix and our strong capital position relative to our risk profile and our significant performance momentum as we continue the shift from integration to execution in.
Growth.
Soccer, let me turn it back over to you for Q&A.
Thanks Bill.
<unk> at this time, if you don't mind will you. Please explain how our listeners can participate in the Q&A session. As you do that I would like to ask the participants to please limit yourselves to one primary question and one follow up so that we can accommodate as many of you as possible today.
Of course, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is released to allow your excuse me for each of our equipment. Once again, please limit yourself to one question and one follow up question.
As a reminder, star one for questions, we'll pause for just a moment to allow everyone an opportunity to signal for questions.
And we will begin with Jared Cassidy with RBC.
Thank you good morning, guys.
Good morning, Jeremy.
You mentioned that you guys had positive operating leverage on an adjusted basis of 260 basis points can you give us some color what you're thinking about.
And when you look at adjusted positive operating leverage for the next 12 months.
Think that could come in at.
Yes, I think we will obviously for the balance of the year, we talked about this as well, but I think we will have positive operating leverage for the year.
As we look into into 2023 I'm. Obviously, there are a lot of puts and takes there is a lot of uncertainty headed into that but positive operating leverages is going to be a core tenet of what we do so if we look at the revenue potential in terms of.
The loan growth and deposit production, we've had been able to capitalize on those opportunities with those clients as we move forward. So even if the economy slows down a bit we still have a lot of momentum in that area. We've got great strength in our insurance business, we've got great strength in our overall capital markets business.
<unk> has been building its capabilities. So we've got a lot of engines and tailwind from that side.
And then we've got a lot of tailwind on the cost saves. So we'll complete the bulk of the merger cost cost saves at the end of this year, but heading into next year is really where we get to leverage all of those if you think about the concept of you put two things together.
Now you make those two things more efficient so those those opportunities for Digitization and automation.
We're consolidating our card platform all the things that will continue on in terms of cost side. So.
I'm, just not giving specific guidance on operating leverage for the year other than to say that will be a core tenet and component of how we plan for the future.
Very good and then as the follow up question.
You pointed out that the deposit beta was 21% on a cumulative basis and 14% without the brokerage Cds and that was below your models. Two things can you tell us what your model would suggest that the deposit beta would have been and then second using the forward curve what do you do.
You end up with a final cumulative deposit beta thank you.
Good morning, Gerard it's Mike I'm happy to take that one so.
You're right we've been very pleased by the performance of the deposit portfolio. So far at 21% and I think we said earlier this year, we expected the betas to be closer to 30% as we get to the second half of the year, we still expect that to be the case by year end.
In terms of a terminal beta very very hard to tell we've seen.
Probably some lag given the rate at which rates have increased and so we do expect there to be some catch up but whether or not it'll be to the tune of the previous cycle in the mid <unk> or beyond we'll be.
We'll observe that together.
Very good thank you Mick.
We'll move to Ken Houston with Jefferies.
Okay.
Hi, good morning, everyone. Thank you.
Just wanted to ask a question on funding and deposits.
You guys are showing fairly good resiliency as the industry.
More context of what you are expecting to see in terms of mix shift and also your thoughts about pick you did add a bunch of wholesale borrowings relative to your incremental cost of funding through deposits. So just think help us think about how youre thinking about liability structure and deposit growth. Thanks.
And good morning, it's Mike I'll start here as well. So we again, we have been very pleased from the deposit perspective with only a sequential decrease of 1%.
So very pleased by how the balances are hanging in there.
We're expecting I think over this over the near term to continue to have some pressure on deposits as well as some pressure on mix. We did see some shift from DDA into interest bearing that's been a moderate shifts so far and we're still well above levels.
Now that we experienced pre COVID-19, but we are beginning to see to see that shift to take place in terms of short term borrowings youre right. We we are accessing brokered markets. We are access accessing short term markets.
And do you expect that to continue over the over the intermediate term, but but don't expect that to shift.
Significantly as we think about funding loan growth for one has been very very high so far year to date, we do expect loan growth to moderate somewhat which should alleviate some of that gap.
But between the deposit.
Balanced levels between leveraging some of the securities portfolio running off to the tune of 10% to $15 billion per year.
Accessing some of the wholesale markets, which is a pretty wide array of tools and even thinking about the capital markets. We feel we feel really good about our our funding capability.
Mr <unk>.
Kevin maybe just maybe just maybe just to add to that in terms of the first part of the question too is just the.
Just the strength of our deposit franchise.
Pretty granular 42% under under 250000, we've got really good market share, but what we're seeing and I've talked about this in my prepared comments. Our production is really strong truest. One has been has been really successful our teammates have really responded clients and.
Both new clients and existing clients have really responded investments in treasury and payments.
So we are leaning into this in terms of our own capabilities from from the deposit production side and then for.
For the fourth quarter remember the third quarter has got some seasonality and things like public funds for example, where that's a strong area for us. So I think we'll be sort of stable in the fourth quarter.
And then Mike talked I think eloquently about the funding side.
And just one quick follow up just can you just give us a sense of where you are reinvesting the cash flows that are going back into the securities portfolio versus what's rolling off thanks, guys.
Yes.
The cash flow, that's coming off is being invested in the loan portfolio.
Yes, there are.
There is de Minimis investing to support our CRA efforts, but the bulk of the cash flow is being invested in loans.
Great.
As we have something to deploy towards which is perfect right.
Yes understood. Thank you.
Moving on to Ryan Nash with Goldman Sachs.
Okay.
Hey, good morning, Bill Good morning, Mike.
Laura.
So you saw.
And I saw a nice sequential growth and is likely to continue to grow into <unk>, given your outlook plus the asset balances at the centre balance sheets.
Based on your comments on to Gerard betas in the mid <unk>, and maybe a little bit higher.
You can continue to grow NII as a on a sequential basis as we look ahead over the next few quarters adjusted for seasonal impacts and maybe just talk about some of the puts and takes involved in that.
Yes, Michael I'll, let you start and ill talk about that as well, yes, Ryan good morning. Thanks for the question.
Youre right I mean look we've got really good trajectory going into Q4 with the NIM as we mentioned in our guide expected to increase <unk>.
Or so basis points.
Look as long as rates continue to increase we expect I think you needed to continue to see some NIM expansion at some point I think we all expect.
To achieve this terminal policy rate and whether it's higher longer or begins to decline we will see from an NII perspective, we'll obviously benefit from that NIM expansion over that period, and then I think as nims begin to feel some pressure.
<unk>.
We feel good again today, we've got really nice, earning asset growth, we expect that to moderate but should offset any impact over the intermediate term.
The decline in Nims, we see we see 23 from a rates perspective is a relatively stable period.
Yes.
Mike's point a lot of it also depend on loan growth and what we see going into going into next year.
It really positive momentum through this quarter, which I think will continue into the fourth quarter at all for gets a little murkier as we headed into next year, but I like the momentum on the production and the pipelines and the relevance and the competitiveness of our franchise right now from that standpoint.
Got it Bill maybe a bigger picture question from me. So I think at a recent conference you highlighted that you expected expenses to grow in 'twenty, three which makes sense given you've done a handful of deals as pressure from inflation.
However, when we think back on the drivers of the merger we were talking about best in class growth improving returns in and I know, we've now made the shift to offense, but when I speak to investors I get the sense I feel we're not quite there yet so I know youre not giving 'twenty three guidance.
What do we need to see for this to begin to come through whether it's operating leverage or better than peer expense growth and just how are you measuring this.
Success of all these efforts.
Yes, I think I think overall I mean, we've talked about this it's a measurement of.
Can we grow revenue long term over time and.
And <unk> faster and relative to our market opportunities.
I think that opportunity set squarely in front of US I think if I look at the things that contribute to that in the areas of production like loan production AUM production deposit production.
Argue we're actually we're sort of getting to a sort of a peak kind of performance in those areas.
As it relates to the expense side and this stuff just doesn't go quarter to quarter, you're just going to have different levels of investment.
We've made a conscious decision.
Well I'll look I'll acknowledge I'm cranky on the operating losses sides. So operational losses, I think we've got some opportunity there I see some.
Improvements coming but that has been longer than.
Taken longer than anticipated, but we are consciously investing in some areas. So we are consciously investing in investment banking and wealth and insurance and you know as well I mean, we got a good track record here when times are a little bumpy and the opportunities there we've taken advantage of it and that's proven to be really.
Smart investments on our standpoint, so we're sort of on.
The bashed about that and that has a quarter to quarter implication to it.
Just have to absorb it and take it because I'm confident that we are.
Doing the things that will create.
Better opportunity for us and allow us to gain share over time, so long answer to a short direct question I think we can grow disproportionately over time, it just won't look like that quarter to quarter and I think.
Look at the production look at the capabilities that were created today.
And I am confident and manifesting those towards the future.
Thanks for all the color Bill.
Yes, thanks, Rob.
And Betsy <unk> with Morgan Stanley has our next question.
Hi, Betsy how are you doing.
Yeah.
Good thank you.
I wanted to just dig into a couple of things one is on loan growth, it's been really strong and I heard the comments around how you're funding it and how youre thinking about.
Driving that from here I wanted to get a little bit of an understanding on.
How youre thinking about the quality of the book relative to its ability to absorb this interest rate hike. So obviously, we've had about 300 basis points. So far we're going to get at least another 150 plus over the next quarter or so.
Ken how are you assessing.
Assessing your borrower's ability to pay back.
Are we all too worried about credit risk I know you gave the guide for the full year NCS, which.
I'm wondering why not having have brought that down given the performance you've had to date.
A few questions on credit from that perspective. Thanks.
Yeah, I'll start about San Francisco also turn it over to Clark.
It should to get it.
Talk about credit quality.
And the quality of the portfolio and what we've what we've put on the books.
We have not.
Diminished our commitment to credit quality, we're taking our clients through the appropriate stress testing process.
We're underwriting at new rates in new environments. So.
So I think our production just reflects our competitiveness and our ability to win more.
Size and relevance with our clients and then you'll see that reflected right now in our in our reserve, particularly on the wholesale side the quality actually is.
Mike argues might improving so Clark once you.
Tell us that if you would yeah, thanks, Bill and I agree with you.
We are very careful in our underwriting right now so we're looking obviously at a rate shock and the ability to absorb that we're looking at other things like pricing power and their margins, giving supply and input cost inflation looking at clients investment decisions, how they're deploying capital there liquidity there.
Balance sheet and just overall strength. So we feel really good about the core Enjoining fact, I would tell you for the quarter.
95% of our C&I production was investment grade or near investment grade credit so.
High quality, there and as far as our.
NCO guidance for the full year, we feel really good about where we are but do remember we normalize as we go into the fourth quarter.
From a consumer standpoint, and we have the seasonal impact so thats really truly the consumer side that may increase losses some.
Okay got it and then just digging in a little bit on the commercial side on this theme can you remind us how you are thinking about your shared national credit exposure you know what that is.
Leverage lending I know legacy Suntrust had a bigger.
SKU in their business model to that but with the combined organization.
Been reduced a bit as a percentage of total so just give us a sense as to.
How big those books are today, how they are trending and how much capacity you have to lean in with the bigger balance sheet, you've got now thanks.
Clark do you want to take up yes.
Yes, maybe I'll start a build first from us.
SMC standpoint, we're in really good shape, we just went through the exam and had great results and feel very good about that we have about 59 billion in outstandings in our Snick book, So it's about 19% of our balances and if it had been fairly steady or so so it's a very diversified book, we feel really good about that.
As far as our.
Leveraged finance book is remember that's about 7% of our total book however over half of that is is 55% investment grade clients really 3% would be more in the sponsored or non investment grade side that books performing extremely well today. So.
Minimal NPA npls.
We've had about nine basis points of losses in our criticized are in good shape. So while there's been disruption and challenges in the market. Our overall performance has been very very good.
I think you've characterized it right.
<unk> says when a good part of the benefits of the merger is the diversification of that portfolio by definition of the denominator. So we haven't grown at you know in proportion to the increase in the size of our business.
And it's well diversified leverage portfolio is well diversified.
Exposures are not significant to any one person and it's about 50% sponsors and about 50% on us. So this is a business that supports our client base.
It is categorized as <unk>.
You know as leverage but its really supporting the growth in our client base and consistent with our strategy of helping our clients with their business lifecycle. So I mean I think so.
It's a little bit different and a little more focused on.
On us component.
Thank you.
Mike Mayo with Wells Fargo will have our next question.
Hi can you hear me.
Yeah, Mike.
I'll continue my analogy with your franchisees.
I mean.
You're clearly in the country's sweet spot for population growth I mean, I keep meeting more of investing clients that have moved to New York to Florida permanently entire firms.
So you are certainly in the sweet spot you did mentioned momentum.
And certainly NII and loan growth and how you're going from defense to offense, so I get it.
And then I hear are below your target.
For positive operating leverage of over zero percent.
Just seems like with a target like that youre aiming for.
The Charlotte Motor Speedway, instead of Indianapolis 500, right. It seems like and this is at a time when your peers are showing much greater positive operating leverage and they don't have this unique in market merger with these incredible synergies that are possible. So yes.
I know youre, not giving too much guidance for next year right now, but can you just talk about whatever headwinds may be going away you can talk about the operational losses.
It seems like you're doing a lot for your customers youre, making them all.
More than others, perhaps you're doing a lot for your employees, you're you're raising what they get paid but I'm just thinking about the shareholders here and so what are some of the headwinds that that may or may not go away and what is some of the tailwind that you think we'll see more of.
Yeah, Thanks, Mike and we will we will.
Continued to.
Keep the corvette <unk> digest, but if we define speed is related to how are you doing against your markets.
I look at the loan deposit.
The production side and I'd say, we're actually had a really good high rate of speed and I'd say, we're at a speed that reflects the opportunity that sits in our market. So.
If we if we defined it that way if we define the opportunity, which I, 100% agree with is to have you know.
Better improved.
Positive operating leverage over time.
And increased revenue in PPE and our growth. We also have to invest to make that happen.
So we like you see the same things that you are seeing in our markets and we've got to make sure that we invest in those and again I wish it sort of balanced out quarter to quarter. It just doesn't.
So the opportunities for us to invest right now.
And I think gained share long term in areas that Ive mentioned before like investment banking and life insurance and like well, we're just going to do that and I think that's going to have a good long term impact for us you've seen this before you've seen this movie and you know how well it ends for us. So we know how to do this so I'm very confident on that side.
And then the.
The part about the operational losses, and the commitments that we've made to our clients. Those are also good long term decisions I mean look we're in the middle of a merger.
We gave the benefit of the doubt to a client.
There was a benefit of a doubt I think long term, that's going to create sustainable long term relationships and the same thing with teammates.
Increasing minimum wage is fantastic for shareholders.
Some of the stats that we're seeing already.
An improved turnover and improved vacancy rates.
I Didnt mentioned the care center, we're seeing that as well.
So long term, that's going to have a tremendous benefit for our shareholders.
As well as our as well as our teammates so.
I'm confident I think we're.
Materializing the things that we want to have is just not coming in quarter to quarter as I'd like it was not as match decided life. There are some pesky things that I think <unk> come down and I'm already seeing that at the end of the quarter and the first of this quarter.
In terms of operational losses, so we can have a cleaner.
More focused easier to understand and easier to.
Have the production of those things will result in the kind of PPE and our growth, but I think we're able to do long term.
So follow up even if I can see the speed part I guess.
The cost of gas.
It's quite high.
And maybe Mike from your perspective coming into the CFO spot things.
Things that you might be able to do.
<unk>.
Control of the expenses as Bill was alluding to.
Yes, Mike good morning.
Happy to happy to react to that I mean, I think first and foremost still at this point absorbing.
Coming in and meeting the team getting a sense for for where we are look to bill made some great points.
I don't come to the table with some pre defined view or or silver bullet as it relates to these things that the headwinds that bill talked about minimum wage inflation some of the investments that we're prioritizing.
They are important.
But then again, we have some great some great tailwind as well whether it be realizing the benefits of the savings.
There is some benefit from an automation perspective.
Some work we're doing that's in more nascent phase and then just overall productivity I mean I look at if we.
We I think we've got a great track record in terms of being able to manage expense.
If and when that becomes.
A more important priority based on market conditions, but but no I think I think bill Bill said it well Mike.
Alright, thank you.
Now I'll move to our next question from Ebrahim <unk> with Bank of America.
Hey, good morning, I guess, one follow up first for Clark on the reserves.
And Clark apologies, if I missed it.
Got it.
Can you remind us what's the base case.
He did unemployment claims that speaking to your reserving at the end of the quarter.
As we think about sort of what the next 12 months could look like what are the other one or two big inputs that could change data jobing outlook other than unemployment. Thank you.
That's a great great question.
In our base case, which we wait.
At 40%, we have unemployment going up to 4% and then going higher into the mid fours as we go into 'twenty, three and beyond so clearly a little more pessimistic.
As we ran the reserves this quarter I would say for us other big drivers would be.
<unk> would be another input there in our models and you've already mentioned GDP so from our standpoint.
The big driver for us would be the scenario weighting in the scenario outlook would have the biggest impact on our reserves.
Obviously versus other things like our mix of production in our overall portfolio performance for right now I think the scenario outlook would be the biggest driver.
Got it and I guess, just one follow up for you and if you look at the next stage I mean, obviously BB&T Suntrust history of acquisitions.
A lot of your peers might be struggling in terms of deposit deposit pricing given what the fed might be doing talk to us in terms of as we look forward to the next year or two appetite for bank M&A, extending the franchise and how you think about that.
Yes.
Now we have.
Best franchise to invest in and it's called Truest.
That's where our focus is and that's where our opportunity is in <unk>.
<unk> ability to expand and create more capacity within our existing markets is really our primary focus right now.
Thank you.
We'll move on to Matt O'connor with Deutsche Bank.
Hi, Good morning can you guys talk about.
The open market to maybe some restructuring of the securities portfolio I mean, obviously rates have gone up a lot.
The yield on your current book or a lot lower.
It would cost a lot to restructure a big part of it but there might be some opportunities here and there as you think about the strong capital generation and with the use of capital for.
Yeah, Hey, Matt it's Mike.
Morning, and happy to to react to that as of this moment. There are no plans to restructure the securities portfolio I think I mentioned that we do view the portfolio as.
A tool for funding loan growth as that continues it's creating cash flow of approximately $10 million to $15 million per year.
Yes, Matt I mean today, we are today, we are redeploying it into the growth in our business and you acknowledged that would be that would be very expensive and we try to do is look at that securities portfolio over time.
So we're going to take that cash flow and right now we've got great opportunities to reinvest it.
And not you know.
Take a capital hit from the securities portfolio, I'd, rather use that capital and invest in our business.
Okay, and then just separately you had mentioned earlier on mix shift out of auto and mortgage.
Can you frame how much do you expect that to be over time and then.
Maybe you mentioned, it but where is the mix shift going if it's out of mortgage and auto what are you leaning into thank you.
Yes, Matt just purchased basically sort of an overall return focus and make sure that we're maximizing.
Our capital as we see some of the returns.
The mortgage business and the auto business being a little more stretch we want to make sure we're serving our clients and we're doing a great job in doing that but by the same token we're seeing the other opportunities in our commercial portfolio in our consumer portfolios. So we just wanted to get the right balance in our return focus.
Versus we've never been sort of a growth for growth's sake, we want to be return oriented I don't want to maximize the return on the capital that we're investing in the portfolio.
Got it and Jake I think we've got time, thanks, Matt. Thanks, Marc Jacobs have got time for one more question.
And that final question will come from Erika Najarian with UBS.
Hi, good morning.
Eric.
I had one follow up question Bill you got asked several times, but I just wanted to make sure your shareholders understand what youre, saying you've been asked a lot about delivering operating leverage.
At the same time.
Dislocation creates opportunity and this is also a sort of.
Once in a cycle.
And help from rates right in terms of <unk>.
Operating leverage getting help helping the denominator.
Is the message here really like that.
You are going to always try to deliver positive operating leverage.
As a way of life.
What youre seeing opportunities to invest today and as we think about the tougher part of the cycle, whether we fall into a recession next year and we don't have rate hikes, helping your investments today are going to help deliver.
Deliver above average PPA NR over a longer period of time other than just now when youre getting a lot of help from rates.
I think that's really well stated and I wish I had stated in it as well as your question I.
I think thats exactly right and as I mentioned I mean <unk>.
Operating leverage will be a hallmark of what we do so that is.
That's core and focus of what we did we just can't be wed to that quarter to quarter. When we see an opportunity. So we're going to have positive operating leverage this year. It will be a little less than we'd hoped for six months ago, but we're investing that I think it's going to create not only better operating leverage and more importantly.
<unk> <unk> growth for the future and we just we just have to make sure that we're for the benefit of our shareholders thinking long term and thinking about this incredible opportunity that sits in front of us and maximizing our ability to capitalize on it. So I think you stated it actually quite well.
Got it.
Last question is for Claire thank.
Thank you so much for sharing that data.
ICL and just.
In terms of how Cecil works, if we do hit a 4% unemployment rate, which is your base case.
Does that mean that you have to then wait worse scenarios in that 4% in other words.
You say, okay. We hit 4% that's our base case, we don't have to build reserves further or does the model.
We're at 4% to get worse, so we now need to build for something worse than 4%.
Great question, Eric I would say.
Keep in mind, we've run multiple scenarios. So we have our base case, which I described but we also run a much more severe set of <unk>.
Downside scenarios and as we look forward those scenarios get worse as well as even if the baseline.
Deteriorate some.
Additionally, so we've weighed all of that and we look at it each quarter and so.
Even if the baseline is at one place the downside scenarios may be more would be more severe so we're going to look at all of that and decide how we weigh all of those.
Factors in determining the allowance and so yes, I mean, the downside scenario could push it even further even if the baseline is going up.
Thank you.
Alright, Thank you Erika that 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 tourists. We hope you have a great day Jake you may now disconnect the call.
Well once again, everyone. This does conclude your conference for today. Thank you for your participation and you may now disconnect.