Q4 2022 Truist Financial Corp Earnings Call
Please standby we are about to begin.
Greetings, ladies and gentlemen, and welcome to the Truest financial Corporation's fourth quarter 2022 earnings Conference call.
Currently all participants are in a listen only mode and be a brief question and answer session will follow the formal presentation.
As a reminder, this event is being recorded it is now my pleasure to introduce your host Mr. Oncor P. S head of Investor Relations Choosed, a financial Corporation. Please go ahead Sir.
Thank you Jess and good morning, everyone welcome to Truest fourth quarter 2022 earnings call.
With us today are our chairman and CEO , Bill Rogers and our CFO , Mike Mcguire. During this morning's call Dan will discuss truest fourth quarter results and share their perspectives on our continued activation of truth purpose current business conditions.
<unk> and our outlook for 2023, sorry.
Clarke Starnes, our vice chair and 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 our call.
The accompanying presentation as well as our earnings release and supplemental financial information are available on the truest Investor Relations website.
I R 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 in measures as well as the appendix for the appropriate reconciliations to GAAP.
In addition, truth 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 let me now turn it over to bill. Thanks, Rocco and good morning, everybody and happy New year. Thank you for joining our call.
Today.
<unk> delivered a strong finish to a pivotal and purposeful here, we completed our final integration and decommissioning activities and incurred the final set of merger related cost adjusted deep in our grew a strong 12% sequentially ahead of our guidance and helped us deliver on our commitment for positive operating leverage for the full year.
Well a couple of details on the quarter's results throughout the presentation I will start with our purpose the foundation of our company on slide four.
Sure. There is a purpose driven company dedicated to inspiring and building better lives and communities. Our purpose is the foundation for our success as a company that drives performance and defines how we do business every day.
Slide five highlights many examples of how we activated our purpose and in 2022 for our clients are mentioned as provide distinctive secure and successful experiences through touch and technology.
We achieved a major milestone along that journey with the launch of truest, one banking, our differentiated product suite that re imagines everyday banking and includes two new accounts that eliminate overdraft fees and provide greater access to credit.
These accounts meaningfully advance financial inclusion in our communities and we're very encouraged by the positive reception that they've received from new and existing clients alike.
Based on our August through December data, which reflects true as one branch checking production increased 10% from a year.
Oh period, and we achieved this result, despite having around 400 branches.
Tourist once we've now also includes our new cash reserve deposit based credit line up to $750, which launched in mid December .
<unk>, our commitment to our clients and communities.
Billy to innovate at the intersection of touch and technology was greatly enhanced by the opening of our new innovation and Technology Center, which brings our cross functional teams together with clients and large tech companies to re imagine banking experiences for everyone.
We've already realized the benefits of the ITC is truest one back in that in the new digital and hybrid investment capabilities launched throughout the year, we're all co creating client with clients and our cloud journey rooms.
We also continued to deliver on our mission for our teammates in October we took a bold step to improve the lives of our teammates by raising our minimum wage to $22 an hour.
Three months since this took effect we've experienced improved teammate recruitment retention lower turnover expenses better execution and an all around better client experience.
We also enhanced our total rewards program to include unemployed stock purchase program to further align our teammates our interests with those of our shareholders.
As a company the champions diversity equity and inclusion we achieved our goal to increase ethnically diverse representation in senior leadership roles of your early with aspirations for further progress.
Finally curious has made a significant impact on the communities, we serve by meeting and in some categories exceeding our $60 billion community benefits plan. Our first inspirational commitment is true and one that has served as a framework for similar plans across the industry.
This plan was a testament to our purpose of building better lives and communities.
All of that in low and moderate income and minority communities or material support for affordable housing nonprofit small business community development lending.
In summary, we're delivering on our purpose and the significance of what our teammates have accomplished is just outstanding.
We will continue to raise the bar and I look forward to the year ahead, as we actualize our purpose advanced integrated relationship management.
Does it really impact clients and communities through continued investment in touch on technology that make true ups to an even better place to work.
Turning to slide seven selected items for the quarter totaled $170 million pre tax and included our final charges related to the M O eight now.
Now that our integration activities are complete M O E costs will exit our run rate going forward.
This is a positive development for shareholders that underscores our pivot execution and will simplify our narrative enhance our earnings quality and improved capital generation.
Turning to our fourth quarter performance highlights on slide eight.
Tourists delivered strong fourth quarter earnings of $1 $6 billion or $1 20 per share on a reported basis adjust.
Adjusted earnings totaled $1 7 billion or $1 30 per share up 5% sequentially, a strong PPA and our growth was partially offset by higher provision expense.
Adjusted <unk> was 30% and even excluding ALC odd was 20% both data points are very strong.
Net interest income grew 7% to $4 billion, a new high for true US supported by strong loan growth and significant margin expansion resulted from higher short term rates and well controlled deposit costs.
The income rebounded, 6%, primarily due to insurance seasonality of full.
Quarter of benefit mall results in investment banking.
Adjusted expenses increased sequentially, mostly as expected as the impacts of higher minimum wage acquisitions and targeted investments were partially offset by the final leg of some of our cost saving efforts.
Together these factors drove a 12% increase in adjusted P. P and are exceeding our guidance.
This performance also resulted in 370 basis points of adjusted operating leverage relative to the fourth quarter of 2021, our strongest operating leverage results for the year. Our adjusted efficiency ratio was 54, 2% our best quarterly performance of true us thus far.
Asset quality remains strong and the sequential increase in provision expense primarily reflects more moderately slower economic assumptions were.
We also deployed 10 basis points of capital as a result of strong organic loan growth and the bank direct acquisition, our capital position remains strong relative to our risk and profitability profile and we remain confident in our ability to withstand and outperform in a range of economic scenarios.
Turning to our full year highlights on slide nine.
GAAP EPS was relatively stable year over year at significantly lower merger related costs were offset.
Well higher and more normal provision levels adjusted.
Adjusted EPS declined 10% year over year, a solid four 4% adjusted P. P and our growth was more than offset by the $1 6 billion dollar increase in the low loss.
Provision expense in <unk>.
<unk>. However, we delivered 60 basis points of adjusted and 680 basis points of GAAP operating leverage for the full year, which was a primary metric to which we hold ourselves accountable to in 2022. This was our first year of operating leverage as true and has established a firm foundation, which from which we can accelerate as we head into 2012.
Threat.
Turning to slide 10.
Digital engagement rose steadily through 2022, as a result of changing client preferences and our improved agility is truest, we experienced strong growth in digital transactions and zelle in particular as transaction volume increased 42% since the beginning of the year.
No.
Presented an increasing percentage of our overall transaction mix and highlights the importance of continuing to invest and money movement capabilities.
Our agility and responsiveness have improved tremendously since we've migrated to one digital platform built on the cloud, resulting in better client experiences we.
We delivered three times as many production releases across retail business and.
Well in 2022, as we did in 2021 and as a result, our mobile App was rated as an average of four seven stars on Android and iOS at year end up materially from a year ago.
We introduced many new digital capabilities and solutions to clients in 2022 from truth, one banking insurance to assess and expanded digital investment capabilities. Some of which are highlighted on the right side of the slot in.
In 2023, our goal is to more fully activate those capabilities with our clients to improve acquisition retention and reduce cost.
In addition to enhanced digital capabilities for our clients, our digital and technology team successfully completed the largest bank merger in 15 years decommission three data centers successfully piloted a new deposit product on a next gen real time cloud based core enhanced credit decisioning and underwriting across certain.
<unk> lending platforms and upgraded our contact center technology stack and completed a five G network and branch Wi Fi pilot program.
We have a great digital and technology team and they've been battle tested and have demonstrated incredible agility in responding to client needs. During the integration period, while also keeping their eyes on the future.
Turning to loans and leases on slide 11.
Average loan balances increased a strong 11 3 billion or 3.6 sequentially approximately 20% of which came from the bank direct acquisition.
Improved loan growth we've experienced in recent quarters reflects our shift to execution of truth, greater competitiveness, where clients due to our size and capabilities as well as broader industry trends.
I grew $7 2 billion or four 7% overall and increased three 2% excluding bank direct as balances increase across most CIB industry verticals and product groups N C E D.
As in recent quarters growth continues to be strong within our asset Finance group as we continue to build that business with more talent product capabilities and a larger balance sheet.
Macro trends such as supply chain management infrastructure spending inflation and choppy capital markets are also supporting growth here.
CIB delivered growth across most industry verticals due to a combination of new client acquisition upturn, our position with existing clubs acquisition activity and business as usual liquidity management.
Community Bank C&I balances grew three 7%, reflecting the strength of our markets and our teams focus on execution.
Residential mortgage balances increased 3 billion or 5% sequentially due to previous correspondent channel production and lower prepayments.
Excluding mortgage consumer and card balances decreased on an end of period basis, primarily reflecting continued runoff in our student loan portfolio as well as our decision to pivot away from lower return portfolios such as Prime auto at the same time, we continue to invest in higher return consumer finance businesses, such as service finance Livestream and shovels.
Yep.
Service Finance continues to grow and ended the year with over $3 billion worth of loans ahead of the high expectations of the time of the acquisition.
Going forward loan growth will moderate from the robust levels in 2022 as clients respond to the impact of higher rates high inflation and a slowing economy. In addition, we also expect growth in residential mortgage and prime auto to continue to slow as we focus our capital on higher return opportunities.
<unk> remains well positioned to advise clients across a range of economic scenarios, given our broad capability talented teammates increased capacity post integration.
Now turning to deposits on slide 12.
Average deposit deposit balances decreased one 6% sequentially as effects of tighter monetary policy inflation and higher rate alternatives continue to weigh on balances.
Deposit costs remain well controlled.
Reflecting the strength of our deposit franchise and our strategy to be attentive to client needs and relationships, while maximizing value outside of rate paid during.
During the fourth quarter interest bearing deposit cost increased 53 basis bard's contributed to a cumulative interest bearing deposit beta of 27% thus far.
As the interest rate environment evolves, we'll continue to take a balanced approach to maintaining and managing deposit growth and rate paid given our broad access to alternative forms of funding. Our continued rollout of truest, one and ongoing investments in treasury and payments will be key areas of focus going forward as we look to acquire new and deepening.
Existing relationships and maximize high quality deposit growth now.
Now with that let me turn it over to Mike.
Great. Thank you Bill and good morning, everyone I'm going to begin on slide 13.
For the quarter taxable equivalent net interest income rose a very strong 7% to $4 billion, primarily due to ongoing margin expansion and strong loan growth.
Deposit costs were well controlled and reflect the strength of our deposit franchise.
Purchase accounting accretion decreased $19 million and is expected to continue to gradually diminish.
Our reported net interest margin increased 13 basis points and core net interest margin improved 15 basis points as a result of higher short term interest rates alongside well controlled deposit costs.
We're all we maintain a balanced approach to managing interest rate risk maintaining modest upside to higher short term interest rates, while having some downside protection when and if interest rates begin to decline.
Moving to slide 14.
B income rebounded during the quarter, increasing $125 million or 6% sequentially. The improvement was largely attributable to seasonality and insurance and the benefit of all acquisition as well as higher investment banking and lending related fee income.
<unk> income increased $41 million, largely due to seasonality and a full quarter of benefit mall results organic revenue for the full year grew 7% driven by a firm pricing environment, new business and strong retention.
Investment banking and trading income increased $35 million as higher investment banking fees and strong core trading results in the quarter were partially offset by negative impacts from CVA DVA.
For the full year investment banking income declined 37%, which we believe compares favorably to overall industry fee performance as the partnership between CIB and other lines of business continues to grow and our momentum builds strategic hiring within within CIB over the past two years has also led to improved lead table standings.
Fee income declined 4% compared to a year ago, primarily driven by declines in market sensitive businesses, such as investment banking wealth and mortgage and partially offset by organic and inorganic growth in insurance.
Overdraft fees also declined from approximately $150 million and <unk> 21 to approximately $120 million in four Q 'twenty two as a result of the actions. We took last year to eliminate a host of overdraft related fees and the continued introduction of tourist one banking to new and existing clients.
We expect overdraft fees to decline another 40% as we move from year end 2022 to year end 2024.
While fee income remains below its potential we are optimistic that our investments in key areas, such as insurance investment banking and wealth will pay off as markets normalize and our execution continues to progress.
Turning to slide 15.
Reported noninterest expense increased $109 million or 3% sequentially.
Merger and restructuring costs rose $18 million linked quarter and exceeded our October guide by $70 million due to higher than expected restructuring charges related to planned facility and branch reductions that will occur in 2023.
These were business as usual decisions unrelated to the M O E and have solid financial returns.
As Bill indicated we will have no more restructuring charges or incremental operating expenses related to the M. O going forward, we would anticipate restructuring costs related to prior acquisition activity and other b a you expense normal rationalization efforts it is difficult to forecast with accuracy, but we would anticipate.
<unk> approximately $100 million to $125 million for 2023.
Adjusted noninterest expense increased $68 million or 2%, primarily due to the effects of our nonqualified plan, excluding changes associated with Nonqualified plan adjusted expense rose, 0.6% sequentially fairly consistent with our outlook from October .
Personnel expense increased $84 million half of which was from changes in the nonqualified plan and half of which was from the recent increase in our minimum wage.
These increases were partially offset by a $35 million decrease in marketing expense and a $28 million reduction in other expense.
Decline in other expense was driven by lower operational losses, which have decreased for two consecutive quarters as recent investments in talent technology and process had begun to mitigate our fraud related costs.
Compared to the fourth quarter of 2021, adjusted noninterest expense grew by 8% as a result of the increase in minimum wage investments and revenue generating businesses technology and acquisitions higher call center staffing to support our clients post merger and are normalizing TNF spend.
For the full year adjusted expenses were $13 $1 billion up modestly from the $12 $8 billion baseline in 2019. This performance is strong reflecting the achievement of the $1 $6 billion net cost save target overall.
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.
Below the line our fourth quarter results also reflected an effective tax rate of 16, 7% down from 18, 2% in the third quarter, primarily due to annual true ups for state income tax returns.
Moving to slide 16.
Asset quality is strong, reflecting our prudent risk culture and diverse loan portfolio net charge offs increased seven basis points to 34 basis points, largely due to seasonality in indirect auto and lower recoveries.
The allowance increased $172 million, reflecting strong loan growth and the a AAA or a triple our ratio was stable at 1.34% as the effects of a moderately slower economic outlook were offset by high quality organic loan growth and the bank direct acquisition.
Excluding the bank direct portfolio, which has extremely low losses through cycles. The a triple oil ratio would have increased approximately two basis points.
Can you in slide 17.
Our CET one ratio decreased for 9.1% to 9.0 per cent as we deployed capital to support strong organic loan growth and closed the bank direct acquisition.
We also continue to pay a strong dividend at <unk> 52 per share overall.
Overall, our capital position remains strong relative to our risk and profitability profile, we expect organic capital generation to improve in 2023 due to the elimination of Mou related costs and more focused loan growth all of which will provide additional flexibility and opportunities for trust.
Finally, our liquidity position remains strong with an average LCR of 112% and access to multiple funding sources, our securities portfolio remains high quality at 97% government guaranteed and continues to produce approximately $3 billion of cash flow per quarter, which has supported our loan growth.
Turning to slide 18.
Where I'll provide guidance for the first quarter and full year 2023.
Looking into <unk> 'twenty, three we expect revenues to decline, 2% to 3% relative to <unk> 2022, primarily driven by two fewer days impacting net interest income. In addition to typical seasonal patterns in investment banking card and payments and service charges amongst other factors.
Adjusted expenses are anticipated to increase 1% to 2% as higher pension expense and FDIC premiums along with seasonally higher personnel expenses are partially offset by ongoing cost discipline.
For the full year 2023, we expect revenues to increase 7% to 9% driven largely by strong net interest income growth and modestly improving fees.
Adjusted expenses are anticipated to increase 5% to 7% as a result of higher pension expense higher FDIC premiums the full annual impact of our minimum wage increase and acquisitions that closed throughout 2022. These four factors drive about 4% of our year over year increase.
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Given these factors we are targeting adjusted operating leverage to be 200 basis points or greater which would be more than three times our pace in 2022.
We also expect the net charge off ratio to be between 35, and 50 basis points in 2023, given our expectations for continued normalization across the loan portfolio.
Lastly, excluding discrete items, we expect our effective tax rate will be approximately 19%, which translates to approximately 21%. If you model it on a taxable equivalent basis.
Now I'll hand, it back to Bill for some final remarks, great. Thanks, Mike continued on slide 19.
The fourth quarter was a strong finish to a year that was strategic and financial turning point for tourists.
Pivot from integrating the operating is real it's palpable and it can be evidenced across a number of dimensions.
Production in the fourth quarter was near the highest it has been a truest. This is despite some intentional reductions in certain consumer categories commercial community bank loan and deposit production in both the fourth quarter and full year was the strongest we've had a truest importantly left lead relationships with N. C. C. D were up 36% in 2022.
Reflecting our increased strategic relevance and advisory capabilities with clients.
Deposit and checking unit production in the fourth quarter increased 24% and 8% respectively compared to the year ago quarter as teammates became more confident with processes and systems, but also improved solutions and capabilities. Our wealth line of business has had three consecutive quarters of adding net new advisors and organic asset flows continue to be part.
Ziv.
Integrated relationship management activity across the company gained momentum throughout the year as a result of more focus increased alignment and improved reporting as we ended the year with a 16% increase in qualified referral activity, excluding mortgage relative to 2021.
Average client satisfaction scores for retail and small business banking or ascending and in the fourth quarter reached their highest levels of the year in key areas that include our branches call centers retail digital experiences and small business. Our digital App ratings ended the year is one of the leaders in our peer group after starting near the bottom.
The financial benefits of this momentum can be seen with a fourth quarter operating leverage being the strongest of the year and adjusted P. P and are building each quarter.
So to conclude on slide 20, our fourth quarter results reaffirm that truest is on the right path and that.
We're highly optimistic about our ability to realize our significant post integration potential are summarized our it is on our investment thesis.
Our goal financially is to produce strong growth and profitability and to do so with less volatility than our peers to.
2023 will be our first full year as truest with zero integration activity and our priorities are very clear core execution to actualize truest at our purpose harvesting ERM opportunities continuing to digitize and automate our processes and operations and maintaining a strong profitability profile.
We'll also raise the bar on ourselves focusing on the Kpis that drive total shareholder return and ensuring executive compensation targets reflects our potential not just our business mix.
Economic uncertainty remains high truth is in a position of strength across a broad range of outcomes because of our diverse business mix conservative credit culture balanced approach to interest rate risk management strong profitability profile and a strong risk adjusted capital position and most notably our significant performance mobile.
As we continue the shift from integration to execution excellence and purposeful growth.
Let me turn it back over to you and begin the Q&A.
Thanks, Bill just at this time, if you would explain how our listeners can participate in the Q&A session. As you do that I'd like I'd 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.
Thank you, ladies and gentlemen, if he would like to ask a question. Please press star one on your telephone keypad.
You're using a speaker phone. Please make sure you mute function is turned off kind of like you're sticking out to reach our equipment.
And another reminder to please limit yourself to one question and one follow up question again. It is star one to ask a question well pause for just a moment to allow everyone an opportunity to signal for a question.
Our first question comes from Mike Mayo with Wells Fargo Securities. Your line is open. Please go ahead.
Hi.
Can you hear me.
Yeah, We got you.
Okay great.
So it looks like Oh my God.
Placing the corvette analogy it looks like you're guiding for the year corvette of a franchise to go from first to second gear or maybe in second or third, but you're guiding for twice as much revenue growth.
Guiding for three times more operating leverage.
Yeah.
I and others are going to be unsure if you're going to be able to get that you know given your head count's up 3% quarter over quarter in the fourth quarter.
You have NII pressure from deposits and you have capital market headwinds. So I guess the question is what's your degree of confidence with this 2023.
Our guidance gives.
Given some of the the pressures and the internal expenses and along with that your mergers save are they all in now or do you still get some tail effect.
Benefit in the first quarter I know you disconnected three datacenters. Thanks.
Yeah, Yeah, Mike Let me start with the with the last one first yes, they're all done so.
So we're.
Excuse me that are in the year without.
You know positive aspect of not sort of having those adjustments every quarter to talk about and then as it relates to the confidence in our in our guidance.
There is a lot of market uncertainty. So we have to accept that I mean, there's you know things could change.
The <unk>.
Inflation, what are clients gotta do it but we have a lot of our own internal momentum you know we talked about them in your analogy of first second or third or fourth I dunno, how many gears a corvette has but we continue to grind through that so we have our own momentum that we're creating and you saw that in some of the production numbers I think you'll see that in some of the deposit.
Betas, you see that in terms of our ability to you know I think outperform both the asset and liability and performance of our company as well as in the stability of some of the fee businesses. So you've got a great insurance business, we've got great momentum within our investment banking business that isn't just market driven I mean these are also relationships that we're developing with our.
Actual.
Our core businesses. So you know, we're expanding our capabilities and our prowess. So while there are headwinds and we accept those and understand those we have enough of our own tail webs I sort of call. It the truest tailwind that's just our increased performance our increased capacity.
And when I offset those Mike that's what so it gives me the confidence in the <unk>.
And the guidance as I can feel enough tailwind to know that we can offset some of the headwinds that we may be facing.
And then a follow up you've mentioned good insurance, maybe this is for you Bill and Mike you.
You have an insurance operation were publicly.
Comparable peers trade at like three times valuation of true itself.
A lot of press no comment from you guys or they did present in Boston about this business.
How do you think about monetizing some of that unrealized value that trapped value so that shareholders might benefit more or is this just.
Part of your firm Forever, and you would never consider a move like that.
Yeah, Mike I mean, I think one I respect the question, but I think you've got to respect that you know as it relates to specific market rumors or speculation I just I just can't comment on that.
But I can comment in fact that we really like the insurance business and.
And we've been in the insurance business for a long time, just celebrated its 100th year anniversary. So that was sort of a level soda cool.
You know we've been supporting the insurance business from from acquisitions, so they've been able to grow both I think very competitively from a organic and inorganic basis, but it's also a consolidating business we want to make sure that you know, we're always providing the right level of support for that insurance business to continue to grow and continue to be really valuable.
You know contract contribution for our shareholders.
Alright, thank you.
We will go next to Ken Houston with Jefferies. Your line is open. Please go ahead.
Thanks. Good morning, just wondering if you can provide us a little breakdown detail between inside your revenue growth guide for the year. Just generally speaking what are you expecting for NII versus fees and what current rate curve are you using in your NII forecast.
Hey, Ken it's Mike I'll take that one I.
I guess, starting with the last question on the rate curve you know our outlook is that we will see two rate hikes in the first quarter 'twenty five a piece in February and March and N C. A policy rate stable until November where.
Where are we would expect to cut which obviously at the end of the year, probably doesn't have much of an impact on our on.
On our NII perspective.
Breaking revenue for the year into two components, you know from an NII perspective.
The way I'd think about it is you know, we obviously had really strong growth in 2020 to the second half in particular also had very nice margin expansion.
So we have a really nice exit velocity from an NII perspective, we believe we have a little bit of asset sensitivity left so we do have the opportunity to realize some of the upside of the hikes in the first quarter and we'll have you know as bill mentioned slowing loan growth but are.
Those two factors combined we think give us a stable outlook for Q1, NII and then you know for the rest of the year you know that we believe will will will stay relatively stable.
Some pressure on the nims offset by some modest amount of loan growth on a year over year basis, just given the the average loan growth that we would expect that'll be we think very nice growth and frankly will drive the the majority of the of the growth potential in the in the revenue guide from a from a fee.
Our respective I think a couple of puts and a few takes we expect to continue to have a good performance from the insurance business, which is growing nicely on an organic basis as well as realizing the full benefit of the acquisitions that we completed in 2022, our investment banking business.
We believe has some potential to the benefit from improvements in market conditions, probably more likely in the second half than the first half and then I think we'll have you know.
A little bit of pressure you know, we would expect there to be pressure on the on the residential mortgage business as well as the the the service charges and overdraft fees on deposits.
Okay, Great and then a follow up on deposits you know, 27% cumulative interest bearing deposit beta through for through the fourth quarter. You guys were in the mid thirties last time I don't think you've given US an idea of what you think the cumulative could be this this this cycle.
Any views on that at this point in terms of the direction and the endpoint. Thank you.
Yeah.
Yeah, Ken I'll take that one again.
I've been very pleased by how the betas have performed so far they've they've outperformed our expectations on a pretty consistent basis. We obviously are seeing some acceleration of of Rae pursuing behaviors and seeing pressures on balances as well.
Charter territory in many respects, we think we will get through the last cycle you know perhaps even.
High thirties approaching it even hitting 40% by the time, you know where to the last hike.
And Ken's Bill the other thing I'd add is just the strength of our deposit franchise. You know sees that I asked about our relative deposit beta performance, but we're really experiencing what we hope we would experience as true US you know we're sitting in great markets you know we've got a.
21% average share you know are our competitors are mainly large bags.
We've introduced some great new product capability and true as one our branch production's up our teammates are really doing a doing a great job.
Ubiquity of presence the ability to amortize your marketing and be more effective so are our strength of our overall deposit franchises.
Turning to manifest itself in show itself of what we thought we could create.
And creating tourists.
Okay. Thank you guys.
Our next question comes from Matt O'connor with Deutsche Bank. Your line is open. Please go ahead.
Good morning can you talk about your capital priorities and remind us what your near term capital target is please.
Yeah, Matt you know our priorities remain the same in terms of the top four priorities. The first is to continue to invest in our business and we've seen a lot of opportunity to do that I mean, you've seen the asset growth in our business and our <unk> growth and we feel really good about the opportunities to invest in that you.
The second is to have a secure and growing dividend base Oh.
That's important to our both.
Both our institutional and a retail shareholder so that's a that's a critical and then the third as you know.
M&A opportunities inorganic opportunities and you've seen we've been active you know there've been some of the smaller by nature, but we've seen opportunities to enhance our businesses, mostly in the insurance business, but also on the technology side and some capability side and some talent side that we've added.
Those areas and then the fourth is the.
Is share repurchase and you know for us that just hasn't been as big a priority because we've done a lot in the first three of those all of those priorities and then as it relates to target.
Then sort of careful to say, we're really up we like where we're operating right. Now. So we think we've got the capacity to do the things we need to do we think given our risk profile given our stress adjusted risk profile. We think we're in a really strong position from a capital perspective, but also as Mike noted in his comments you know we are.
Accrete no. If you think about our earnings profile, but also the fact that our M O expenses come off worse.
Sort of in a unique position to accrete capital. So we'll accrete about 25 basis points worth of capital we've been using some of that for those first three priorities that we talked about.
So I think on balance, we'll probably see capital increase.
But we're comfortable that we've got enough capital to execute our strategies and support our businesses.
Okay and then so hypothetically if you say won the lottery for $5 billion, what would you do with that capital I don't think you're going to change the organic growth the dividend is kind of capped by regulation.
We're left with the last two buckets of M&A and buybacks and if.
If you walk into that $5 billion, what would you do it up.
I don't want to answer a hypothetical lottery question.
Because we're we're not lottery ticket buyers, that's not part of our part of our strategy.
We've got you know that's.
Really based on can we support our businesses long term and can we provide the capital they need to they need to grow and we're going to use all of our strategies in all of our capabilities to ensure that we're supporting businesses in their growth.
Okay. Thank you.
Thanks, Matt.
Our next question comes from John Mcdonald at Autonomous Research. Your line is open. Please go ahead.
Yes, Hi, good morning was wondering if you could give us some color on how you see credit unfolding for true is this year and what you've baked into the charge off guidance that you'd get this year.
Yes, John This is Clarke I'll Oh.
Take that one as you saw we had 34 basis points in losses in Q4 that reflected primarily seasonality normal seasonality in our consumer segments in a little bit of normalization and as Mike mentioned, we had lower recoveries in our wholesale area. So that's that's what the Delta was from Q3 to Q4.
For and then.
What we're seeing is the consumer segments are normalizing and also just remind you all that the whole industry's had anemic wholesale when CRE losses over the last couple of years. So you know were pretty similar to that so therefore, we'd expect losses to return toward the lower range of our long term loss range of.
40 to 60 basis points as we go through 'twenty three and it just depends upon how the economy performs and that's why you see that reflected in our guidance of 35 to 50 bps.
Okay. Thanks, and then for Mike Mike on the expense outlook for adjusted expense growth you know mid single digits. How much of that is kind of pulling through acquisitions. You added at the end of last year and you know how much of that is kind of core expense growth and investments. Thanks.
Sure in.
In 'twenty three I believe the annualized M&A impact is 127 or $7 million. So that's about about 1% of that growth.
If you recall in the in the guide.
So we talked about these four components that were where we have quite a bit of a visibility into and frankly not much flexibility and that's the the pension the M&A impact the annualized impact of minimum wage and the FDIC expense and those those components in the aggregate or about 4%.
Hope that helps okay got it yeah, that's great. Thank you.
Our next question comes from Ebrahim <unk> at Bank of America. Your line is open. Please go ahead.
Good morning.
I guess just one follow up then on on the capital allocation question one.
Just give it means that obviously it all just speculation when you talk to investors that own the insurance business.
If you can talk to given Oh.
Dividends between the insurance companies trading at 20 times P. Do you still think it makes sense in terms of deploying capital.
Two more acquisitions on the insurance front as opposed to buying back stock.
And.
On the other and would love to hear how you would think about maybe moving away from that business, but giving up a very defensible revenue scheme.
Yeah, again, I'm not going to comment at all and sort of where we are from a speculative standpoint other than to say, we love the insurance business, we want the insurance business to grow.
We've done I'm staring to John probably 100 acquisitions over time, you know so we've got a really good framework.
Assisting that business to grow but as I mentioned in my earlier comments. It is a consolidated business. So we want to make sure that we've got all the flexibility and capability.
To create capital and support all of our businesses and their growth.
Got it and I guess, just taking a step back with the merger integration down the cost of the ideal remind us in terms of like what you've not heard so far on the call is the scale benefits as we think about go forward.
In terms of picking up bigger deals on the lending side on the fee that when you say just remind us if.
Did you have any synergies we should expect from Nicholas fan changed on a go forward basis in law you can outperform.
It appears we didnt within the market over the news at six 8%.
Yeah, Great Great question, and one of them you know I talked about just mitigating the deposit franchise. So you know the scale and the ubiquity of the size of the prowess that we have with our AR and our markets are I think there is a distinct advantage and you see that.
The other component of that is the markets that we're in and so not only is it scale, but a scale in the right places. So we have markets that are outside coal sustain sort of any economic environment with you know a higher beta to the upside and a lower beta to the downside.
Markets, where we have a lot of in migration versus out migration and business development and growth. So that's one component.
You mentioned the the you know the capital market saw it and I talked about the.
Community back the prowess that we've seen there you know, 36% inquiries and left leads and those type of things that comes from scale that comes from an ability to be more relevant to our clients to.
To have discussions with them that we weren't having before to be more strategic.
And to be in that less lead spot versus that right lead spot and we all know the economics of that I mean, the economics are multiples of where you are in the spectrum. So our relevance is not only related to our scale, but also related to our products and capabilities we have.
Tried to sort of put out put a number on that and you know I'd say, probably you know what I was sort of back of the envelope math I mean, it's at least 10% of sort of the growth that we've seen in our investment banking business. We could attribute to be you know more scale oriented you know.
Again, not taking outsized positions, but taking positions that are on the left versus the right and the economics that are that come along with that and then everything to do with all the operations and efficiency. So everything to do with the base that we operate from.
Just have more opportunity to create more efficiency. So when we do something that has you know previously you had you know tens.
Tens of millions of dollars of impact today, it can have $50 million to $60 million of an impact because you're doing it across a bigger base and a bigger bigger capability.
The ability to negotiate better contracts with our with our providers and our partners and we saw a lot of that in the merger.
Our ability to go in and be more relevant and more important to them get terms that we think better reflect that Mike.
Mike Wilson, what else am I forgetting in that in that list because it is a long list I mean, it's a great question and we probably ought to talk more about.
I think it's green moving more relevant on capabilities more relevant on size you know you're seeing it in the results you know whether it would be you know the ability to manage expenses.
Expenses are the financial markets are pricing.
Deals and getting it exactly right to do.
The list is pretty long.
Alright, thank you.
Our next question comes from Stephen Scouten with Piper Sandler. Your line is open. Please go ahead.
Steve I think the checking leaving or either right.
Maybe Jess we go to the next person Steve Stephen can get back in after.
Absolutely we are looking at that we'll go next to Gerard Cassidy with RBC. Your line is open. Please go ahead.
Thank you good morning, Bill Good morning, Mike.
Right.
Can you guys share with us you've got some good guidance on the operating leverage for 2023 being I think Mike you said about three times the level of what you achieved in 2022, but I noticed that in.
Third and fourth quarters, the operating leverage was higher than what you're hoping to achieve in 'twenty three can you share with us.
Why there seems to be some slowdown in that operating leverage relative to the fourth quarter or third quarters of 2022.
Yeah sure Gerard.
As as we look into 'twenty three I think a couple of factors one you know.
We've obviously 2022 was a year, where we had outsized, particularly in the second half loan growth and net interest margin expansion, which obviously was a great tailwind on the revenue side.
As we look into 'twenty three we expect to continue to have nice growth from a year over year perspective, but we are expecting that NII trend to really stabilize and frankly, we're going to be and begin to experience. Some pressure on the NIM side, probably in the second quarter.
From an expense perspective, we also mentioned you know there are a few just structural expenses that are that are in the plan for 'twenty. Three you know that when combined add up to about 4% year over year change, we obviously intend to make investments beyond those four categories and in our clients and our teammates and in other.
Our strategic investment priorities.
But that that structural expense growth is there. So again feel good about that sort of 2% with upside operating leverage guide and feel good about our frankly, our revenue guide as well so.
Hopefully hopefully that's helpful to you.
Good no I appreciate that and then as a follow up.
Many of you and many of your peers and yourselves are obviously building up loan loss reserves. The the outlooks that people are using are calling for you know a weaker economy, but we don't seem to be seeing that yet in any of the numbers and if you look at the spreads in the high yield market they haven't.
Blown out one of your competitors appears just pointed it out then the spreads on commercial loans still a pretty tight so I don't know bill if when you talk to your customers what are they seeing that maybe we might not see as much of a downturn as everybody is kind of a forecasting right. Now later this year.
Yes, I mean, I think you point out I mean, the data are confusing. There's just no doubt about that I mean, you see some positives and you see some and you see some negatives.
Look at just just think about the last few days you know retail sales were not.
Not really very strong sort of above or Christmas selling season.
You know as you've seen.
Inflation being a bigger part of what people do in supply chain seems to sort of be be reconciling itself. So I think it's more of a prospective just you know there has to be higher impact from higher inflation.
And whether that's reduced hiring from our clients, whether that's reduced capital investment.
And all those type things and in fairness, it's a little more prospective so when we talk to our clients and we look at our portfolio today things are great I mean, as Clarke mentioned, our you know our our commercial portfolio looks looks fantastic our clients are in really good shape.
But.
You know rental club do things will you know payments will come do things will change over time. So I think it's just a little more I'm trying to understand where the economies pucks going versus where it is today because I think today, it actually looks looks pretty strong.
What would you what would you add to that I would just say to your point build client's balance sheets their liquidity their their financial positions are very good going into this obviously, depending on what happens in the economy the impact of higher rates input costs. All of these things we're monitoring very closely with our clients chart, we're looking at things.
CRE in the term risk in things like golf is so I think we're just looking out what could be some of those impacts.
From the India, if the economy does slow and obviously that's reflected in everyone's provisioning models, but to your point the actual performance today in the near term outlook is still is still strong.
On the consumer side, I mean on the consumer side.
It is normalizing and in some cases normalized you know to where we are right. Now. So you do start to see some of that we've done a lot of work looking at sort of our lower income borrowers and.
Some of the challenges that they may be facing from inflation, maybe they're not facing it today, but that's starting to build as they start to withdraw a little more deposit. So it is more of a prospective thing than a current bang and we're all trying to find the right calibration, where things might where things might land and we do we don't want to you know we do.
Don't want to undershoot that runway and we want to be conservative wanna be appropriate and through all the.
Risks that could exist in the portfolio.
Thank you I appreciate the color.
Right.
Our next question comes from Betsy <unk> with Morgan Stanley . Your line is open. Please go ahead.
Hi, good morning.
That's right.
Hi.
I just want to understand a little bit more I know, we touched on a couple of different ways, but you've got the revenue outlook for 2023 up 7% to 9%.
And what I'm hearing is loan growth slowing slightly from the 11% level you have now.
But really not that much in that you know the fees fee growth will be.
Slower due to you know some of the things you've mentioned around mortgage but that loan growth is likely to be a little bit above that adjusted revenue number.
With the pressure coming a little bit in fees and then also NIM are pulling back in the back half of the year is that is that a fair summary.
Yes, that's same thing I'd say is maybe a little bit differently than they might just trying to make this point I mean, we're sort of you know if you.
You look at sort of NII for the fourth quarter, and we're assuming that sort of stable through the year. So that's the big driver I mean, if you think about what's the what's the big boss in the revenue guidance.
It's NII being stable and that's not loan growth that you know at the kind of revenue numbers I mean, our loan growth has gone up.
Pull back a little bit some of that is going to be intentional on our part a lot of it is going to be return oriented just making sure that we've got really really great relevance with our with our clients.
In some cases, you know the fee businesses, we expect to be up you know, we expect insurance to be up we expect it to continue and it's you know.
So at a high single digit organic growth, we still have some inorganic momentum from some of the acquisitions. We've done we expect the investment bank could actually return.
An increase.
Its revenue growth.
That'll probably be a little more backend weighted in fairness, but as we see where markets.
<unk> come out, but the big driver is sort of the NII fourth quarter.
Where we are in that moving forward on a stabilized basis. That's that's the that's the biggest driver.
And I know in the.
Press release, you talked a bit about having you know.
Managing your deposit cost well and tightly et cetera can you give us a sense as to how you think about the trajectory of that line item as we go through 'twenty three.
Yes, I'll do it at a high level I mean, it will be continue to be slightly down you know so myopic bets that that trend will that trend will continue.
Think on a relative basis, we're showing deposit betas that are.
More reflective of our opportunity.
And you know.
As the as the costs continue to grow I mean deposit betas will increase Mike in or do you want to comment sort of specifically, how we're how we're thinking about that yes. We mentioned in an earlier question that we see betas, increasing you know whether they reached the 40% level or not.
Well, we'll see.
I'd say the other trend Betsy, which is consistent with what others are expecting and was consistent with our expectation is we're still seeing a remixing from DDA and interest bearing so that that makes sense and we're still well above where we were sort of pre stimulus. You know we were in the high Twenty's 28, 29% we peaked during.
The sort of height of stimulus in the 35, 536% were back at like 34, right now and go into 33, and probably approaching 30 overtime.
And I think Bill you hit it right I mean, I think we're seeing some deposit balance pressure in the aggregate and we would expect that to continue in 2023, perhaps moderate a bit.
Okay got it.
Got it got it.
That's great.
Yeah.
Alright, Thanks, Betsy Jets it looks like there's not anyone left in the queue. So that completes our earnings call. If you have any additional questions. Please feel free to reach out to the Investor Relations team. Thank you all for your interest in Truest. We hope you have a great day Jess you can now disconnect the call.
Thank you, ladies and gentlemen that will conclude today's call. We thank you for your participation you may disconnect your lines at this time.
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