Q1 2023 Truist Financial Corp Earnings Call
Please standby we're about to begin.
Greetings, ladies and gentlemen, and welcome to the financial corporations first quarter call.
Currently all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
Thank you Ali and good morning, everyone. Welcome to Truest first quarter 2023 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 first quarter results share their perspectives on current business conditions.
The recent events and provide an outlook updated outlook for 2023.
Clarke Starnes, our vice chair and Chief Risk Officer, Beau Cummins, our Vice chair.
John Howard Scher was insurance Holdings', Chairman and CEO 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, IR dot truest dot com or.
Our present today 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 appropriate reconciliations to GAAP with that I'll now turn the call over to Bill.
Thanks, Curt and good morning, everybody and thank you for joining our call I know.
You have a busy day ahead of you but.
First quarter of 2023 was certainly an unusual and maybe even possibly an historic one for our banking registry.
Hi, I'm really extremely proud of our more than 50000 teammates who leaned into our purpose and continue to care for our clients and stakeholders reassuring I'm curious position of strength and commitment to serve them.
Throughout the quarter, we continued to experience the benefits of our shift from integrating the operating as evidenced by improved organic production and increasing client satisfaction scores, which at our branches and I'll send it to new highs in the weeks after March night.
Faced with a volatile and uncertain environment, we successfully demonstrated the strength and resiliency of tourists diverse business mix scale and market share granular.
Granular and relationship oriented deposit base and strong capital and liquidity.
We'll also discuss some of that positive momentum was offset by some higher funding costs and somewhat elevated expenses.
Strategically we continue to take actions to optimize our franchise and focus our resources on areas, where we havent advantage in the marketplace at the same time simplify consolidate or exit certain activities to improve profitable growth Mike will share some of those details later in the call.
We will provide more details on the quarters results and the other topical items throughout the presentation, but first lets begin with our purpose on slides four and five.
In uncertain times, it can be easy to focus on the short term at the expense of the long term, which is why it's important that we always lead with purpose the truest.
Slides are a powerful reminder, that the most effective way to grow over the long term.
Liver on our purpose to inspire and build better lives and communities.
Today, My comments will be on this topic, a little briefer to gauge investor interest and other topics.
Our purpose statement intentionally begins with the words inspire and thats exactly what I witnessed while working closely with our teammates in March as I mentioned I was inspired by how our teammates leaned into purpose and care as they held numerous discussions with clients and stakeholders to answer their questions about the banking system to emphasize <unk> financial position.
<unk> strike and.
Help them move forward with their financial needs.
In addition to client care, we provided last Bob there are many other ways, we actualized our purpose throughout the quarter, which we highlight on slide five you can read more about these items in many of our other efforts to build better lives and communities and our 2022 corporate.
Responsibility report, which we published last week.
Now I'll walk through our first quarter performance highlights on slide seven.
Quarter performance slide focused mostly on GAAP or unadjusted results given that Mou related.
It's been exited our run rate last year going forward, we intend to focus primarily on GAAP results with the exceptions of adjusted tangible efficiency and adjusted P. PNR since intangible amortization expense were made significant due to the scale of the already and has no impact on capital generation.
Tourists reported first quarter net income of $1 $4 billion or $1 five a share up 6% light quarter due to strong growth in adjusted BP and our lower merger cost, partially offset by a more normal provision level compared to a year ago.
Relative to the fourth quarter of 2022, EPS decreased 13%, primarily due to lower net interest income and seasonality.
Adjusted <unk> decreased 7% sequentially consistent with our prior guidance is better than expected fee income due to higher capital markets activity was more than offset by lower net interest income and somewhat higher than expected expenses relative.
Relative to the first quarter of 2022 adjusted P. P. NR grew 19% and we delivered 310 basis points of positive adjusted operating leverage reflecting a good start to the year.
Asset quality remains strong net charge offs continued to normalize consistent with our expectations, we prudently built or a triple L ratio of three basis points to reflect a more uncertain economic environment.
Balance sheet trends. Despite all the noise in mid March were fairly expected did more business as usual and we'll cover more about loans deposits capital liquidity later in the presentation.
So moving to our digital and technology update on slide eight.
Continued investments and progress in digital will be even more critical due to the close relationship between digital engagement primacy of relationships and deposits. The good news is curious prioritize digital early in the merger building the truest digital experience organically and in the cloud, which allows us to fully own the digital.
Experience for our clients and.
Our first quarter results reflect our continued investments agility and momentum in the first quarter. We opened 146000 deposit accounts digitally exceeding our internal expectations.
Saw a strong growth in digital transactions and sale in particular, underscoring the importance of payments and money movement capabilities to our clients.
More broadly we had an incredibly productive technology quarter as we advance our strategy to re imagine our capability set and the deposit space, We launched a new data driven deposit pricing engine, which provides personalized relationship base rates for clients during account opening and will allow us to be even more targeted with respect to rate.
Hey.
We also enhanced our digital lending capabilities with the launch of our commercial loan dashboard and industry, leading solution that allows wholesale lending clouds to track the status of their loves upload documents.
Eventually electronically sign documents.
Our goal is to eventually incorporate this dashboard into one view our desired end state integrated digital experience across payments lending and capital markets, creating a seamless experience for our commercial and corporate clients entire relationship of trust.
So turning to loans and leases on slide nine.
Growth was solid in portfolios targeted for growth and lower portfolios, where we've intentionally pulled back average loan balances grew one 7% sequentially while end of period balances increased a more modest 50 basis points.
The slower growth on an end of period basis was intentional and expected and reflects our strategic decision in the second half of last year to reduce production in certain lower return portfolios, including indirect auto and correspondent mortgage will also increasing rates and spreads from ongoing production.
C&I balances increased $3 six on an average basis at one 8% on an end of period basis due to continued growth across CIB and CCP, reflecting the benefits of our capabilities and our markets.
Consumer loan balances decreased 60 basis points on average and were down 1% from December 31, reflecting ongoing runoff in student and partnership lending as well as lower indirect auto production.
Strategically we are focusing our balance sheet onshore as clients, who have broader relationships, while limiting our balance sheet usage with more single product and indirect clients. We're also evaluating ways to increase the velocity of our balance sheet, increasing greater utilization of loan sales and securitization.
Allow us to be more impactful increase returns in businesses such as service finance.
Next I'll provide some perspective on overall deposit trends starting on slide 10.
Despite the unique events of mid March average deposit trends during the first quarter were generally consistent with our expectations averaged.
Average deposit balance decreased one 2% driven by quantitative tightening tightening inflation and movements to higher rate alternatives within the month of March more deposit flows were concentrated in the period from March 11th to March eight Jane and have largely been business as usual sense, including through yesterday.
Deposit outflows during mid March were primarily related to <unk> clients, who chose to diversify into money market mutual funds and in some cases across multiple banks.
These outflows tend to be a higher cost of non operational deposits.
Experienced deposit inflows as we're both attracting new clients and expanding our relationships with existing clients.
Retail production continues to improve due to our shift from integrating the operating and leaving with the value proposition of truest. One in the first quarter <unk> saw record new deposit production, including 18% year over year uplift in branch account openings with improved client retention driving strong net new account performance.
<unk> <unk>.
Commercial community banking had record new account growth in March.
Momentum in the first couple of weeks of April as clients are beginning to move money to fund those accounts.
More noteworthy than overall deposit flows was the pace of the mix shift from DDA as non interest bearing deposits decreased to 32% of deposits from 34% previously this happened a little sooner than we previously anticipated.
Interest bearing deposit costs increased 64 basis points sequentially.
<unk> is contributing to our cumulative interest bearing deposit beta of 36% so far in the cycle.
Deposit beta has accelerated relative to the fourth quarter due to the prevalence of higher rate alternatives and the previously mentioned shift from noninterest bearing DDA into interest bearing products will continue to be attentive to client needs and relationships, while maximizing the value outside of rate paid.
Given higher investor interest in additional deposit details we provided a closer look at our deposit base on slide 11.
<unk> is one of the most robust deposit franchises in the banking industry. Thanks to three key factors first <unk> has strong market shares in many of the fastest growing markets in the us.
<unk> currently ranks first second or third in deposit share in 17 of the top 20 markets. Those will suite includes cities like Atlanta, Charlotte DC Miami.
Our Raleigh Durham, among others, making us the dominant player in the southeast and mid Atlantic.
Second <unk> is a granular retail leaning deposit base that is 63% insured <unk> collateralized, which is the second highest in our peer group and an important source of stability.
In addition, our commercial deposits are diversified across 21 industry groups with no one sector, representing more than 10% of corporate and commercial banking deposits.
Third we're highly relationship oriented as you can see from the table at the bottom of the slide the average deposit accounted truest has been opened for 17 years during which time. These relationships have broadened to include multiple products and services.
In retail and small business banking, we have over 12 million deposit accounts with an average account balance of 17000 Rspb deposits are highly granular and 86% of balances are insured. In addition, truest as the primary bank for the preponderance of those clients in.
In our wealth business, 90% of the depositors have investments with true as well in our commercial community bank, 81% of depositors have a payments lending or advisory relationship with truest.
With the majority of that related to operating Treasury management products.
Together. These factors are a source of strength for <unk> and for our clients. So now let me turn it over to Mike to discuss our financial results in more detail.
Thank you Bill and good morning, everyone I'll begin with net interest income on slide 12.
For the quarter taxable equivalent net interest income decreased two 8% sequentially as higher funding costs and two fewer days in the quarter more than offset the effects of solid loan growth reported net interest margin decreased eight basis points, while core net interest margin decreased seven basis points.
Can you break down the decrease in the core net interest margin approximately five basis points was driven by a shift in the funding mix from DDA and other low cost deposit products into interest bearing deposits.
And about two basis points was due to our decision to conservatively carry more liquidity during the last few weeks of March moves.
Moving to fee income on slide 13.
Fee income was relatively stable compared to the fourth quarter and modestly exceeded our expectations in light of typical seasonal headwinds insurance income increased $47 million largely due to seasonality year over year organic revenue growth was four 7%.
Mortgage banking income rose $25 million, primarily due to a gain on sale of our servicing portfolio, which was partially offset by MSR valuation adjustments.
Income from core mortgage activity was relatively stable compared to the prior quarter.
Wealth management income improved $15 million benefiting from an increase in brokerage commissions asset flows and higher fees due to rising asset prices during the quarter. While it continues to build momentum as net organic asset flows, which exclude the impact of market value changes were approximately $1 billion for the quarter. It had been positive for <unk>.
Seven of the last eight quarters.
In addition, we were pleased by the modest increase in investment banking and trading income led by strength in investment grade and high yield bond originations fixed income derivatives and loan syndications Ti.
Cib's performance continues to be aided by two idiosyncratic factors strategic hiring over the past two years as well as increased integrated relationship management activity with respect to arm capital markets fees from non CIB clients increased 12% sequentially and were 20% up from first quarter 2022.
Other income decreased $56 million, primarily due to lower income from our nonqualified plan.
While fee income remains below its potential our investments in key areas such as insurance investment banking and wealth will continue to be a source of momentum as markets normalize and as our arm execution continues to mature.
Turning now to slide 14.
Reported noninterest expense declined $31 million driven by a $107 million reduction in merger costs due to the completion of integration activities and a $27 million decrease in amortization expense.
Expense reductions I, just described were largely offset by $103 million or 3% increase in adjusted noninterest expense.
Expense drivers included a $39 million increase in pension expense and a $23 million increase in regulatory charges due to higher FDIC premiums.
We also experienced a $33 million increase in operating losses, which are reflected in other expense due to industry check fraud issues and then operating loss with insurance insurance recognized prior to completing our transaction with standpoint.
As a company we are committed to generating expense reductions and have undertaken a number of actions that help bend the expense or get truest.
Last week, we announced a strategic realignment within our fixed income sales and trading business in which we discontinued certain market, making activities and services provided by our middle markets fixed income platform.
This platform was largely focused on MBS related sales and trading for depository and had produced an unattractive Roe.
This realignment will result in an approximate $50 million run rate expense save with little P. PNR impact and enable us to focus more on our core strategy of being a fulsome and premier investment bank for corporate sponsors and municipal issuers.
We're also in the process of realigning our light stream platforms with our broader consumer business with the goal of bringing the innovation digital capabilities efficiencies and cloud based infrastructure of light stream to truest broader client base. This will reduce the cost of supporting a separate brand and strategy and enhance the experience.
Primacy with our existing and prospective clients.
In addition, we continue to adjust our capacity and focus in mortgage to reflect current challenging market conditions and our own strategic focus on client primacy. These actions among others are what drove the $63 million of restructuring charges during the quarter.
Furthermore, we've also aligned executive compensation to truth to shareholder expectations, which I shared with many of you about a month ago.
Together, we believe these as well as other actions, we're taking will increase our focus and our expense curve and improve returns for trust.
Moving to slide 15.
Asset quality remained strong in the first quarter, reflecting our prudent risk culture and diverse loan portfolio.
Leading indicators remain favorable loans 30 to 89 days past due decreased 15 basis points sequentially and were down 17 basis points versus the first quarter of 2022.
Our NPL ratio was steady at a relatively benign 36 basis points.
Net charge offs increased three basis points to 37 basis points, primarily due to C&I and continued normalization in the consumer and are consistent with pre pandemic levels.
We became even more cautious in our outlook regarding CRE fundamentals and in light of increased economic uncertainty, we prudently increased our allowance by $102 million and increased our a triple O L ratio by three basis points to 137%.
In anticipation of an increasing risk environment. We are also tightening credit and reducing our risk appetite in selected areas, while maintaining our through the cycle approach for high quality long term clients.
Next given high Investor interest I will dive deeper into CRE on slide 16.
As we began the integration process to become trust, we were very intentional about retaining the diversification benefits of the merger.
To achieve this outcome, we carefully evaluated our various portfolios, including CRE to ensure we fully understood their combined risk profile and to establish how we would manage them going forward.
We did not wholly pods CRE production. During this process, we did deemphasize it until we aligned on a single go to market strategy. As a result of this decision tourists CRE portfolio actually decreased by two 2% from the end of 2019 to the end of 2022, whereas our median peer group CRE, 21%.
Our disciplined focus on diversification has also resulted in less CRE concentration and risk relative to our peer group at year end CRE represented 11% of our loan mix compared to 12% at our median peer in the office segment comprised one 6% of our loan book versus one nine <unk>.
<unk> and our median peer.
We maintain a high quality CRE portfolio through disciplined risk management and prudent client selection, we typically work with developers and sponsors we know well and have observed their performance through the cycle, our exposure tends to be large CRE with strong institutional sponsorship and we've reduced our exposure to smaller CRE.
The quality of our CRE portfolio is also reflected in the federal Reserve's annual stress test results.
Our disciplined approach to CRE is reflected in our asset quality metrics, which remained solid in the lower right. You can see a snapshot of our office portfolio, which had approximately $5 billion and outstanding balances as of March 31, and another area, where tourist has been risk averse and highly selective over the past two years.
Our office portfolio tends to be weighted towards class a properties within our footprint, which we believe will perform better than large urban markets. We have a great CRE team that is very proactive in working with clients to get ahead of any problems criticized trends have increased over the past few months, but we believe overall problems will be manageable given our concern.
A bit of Ltvs are reserves in the ladder maturity profile of the portfolio.
Turning to capital and liquidity on slide 17.
Our CET one ratio increased from 9% to nine 1% as approximately 20 basis points of organic capital generation was partially offset by 12 basis points of Cecil phase in.
While not included in our CET one ratio.
<unk> improved by $1 billion from December 31 to March 31.
Of our $12 $6 billion of after tax OCI as of March 30, 185 billion is related to our <unk> portfolio.
$2 5 billion is related to the frozen portion of the HTM portfolio.
And $1 5 billion is related to our pension plan.
We would expect the securities portfolio related OCI to decrease by two to $2 $5 billion by the end of 2024.
Or by approximately 20% and that's in a static rate environment.
In addition, this accretion will be a powerful driver of higher tangible book value per share over time, a small glimpse of which we saw this past quarter with tangible book value increasing 8%.
On April 3rd we also closed on the sale of a 20% minority stake in <unk> insurance holdings, which added approximately 30 basis points to our capital ratios and provides flexibility in the future.
Additionally, we declared a strong common dividend of <unk> 52 per share which was paid on March one.
Finally <unk>.
<unk> continues to have significant access to liquidity and a very robust liquidity managed process that includes internal and external stress testing as well as real time monitoring of our of our liquidity position.
Our average consolidated LCR improved a 113% during the first quarter and remains well above the regulatory minimum of 100% we have access to approximately $166 billion of liquidity, including cash F. Hlv borrowing capacity Unpledged securities and discount window.
<unk>.
As a reminder, government in AGR agency obligations represent 97% of our securities portfolio, which produces about two and a half to $3 billion of cash flow per quarter.
During the quarter, we conservatively increased our cash position from $16 billion as of December $31 billion to $33 billion at the end of March funded largely by callable <unk> advances and we'd expect that to somewhat normalize going forward given that activity has stabilized.
More broadly, we do expect regulatory requirements around capital and liquidity to heightened but believe we are in a strong position to respond given the already high expectations for an institution of our size the strategic and financial flexibility, we have as a company and the orderly phase in period that would likely accompany potential changes.
And now I will review our updated guidance on slide 18.
Looking into the second quarter of 2023, we expect revenues to be relatively stable compared to the first quarter as a modest decline in NII is offset by seasonally stronger insurance revenue.
Adjusted expenses are anticipated to increase 1% to 2% linked quarter, primarily as a result of higher incentive based compensation from insurance revenue growth.
For the full year 2023, we now expect revenues to increase 5% to 7% compared to 2020 to the.
The decline from our previous outlook is driven almost entirely by a lower net interest income outlook, given higher deposit and funding costs.
Adjusted expenses are still expected to increase between five and 7% as I indicated earlier, we remain focused on taking actions throughout the year to reduce costs.
Excluded from our adjusted expense outlook are two items.
First we are not including the impact of any potential incremental FDIC surcharge or assessment. After we receive clarity we will provide an update.
Estimated impact.
Secondly, there will be some one time costs occurring in 2023, and 2024 tied to preparing tourist insurance holdings to transition its operating model to be more independent which is consistent with its new capital structure.
These expenses directly correlate to realizing significant value in the business over time, we will not adjust for these expenses and our results, but we will provide transparency.
Our goal is still to produce positive operating leverage and positive adjusted P. PNR growth for the full year. Excluding these two items. The degree of difficulty has increased relative to January given higher funding costs.
Our expectations for the net charge off ratio to be between 35 basis points for the full year is unchanged.
Lastly, excluding discrete items, we now expect our effective tax rate will be approximately 20%, which translates to approximately 22% on a taxable equivalent basis due to our adoption of recent accounting guidance regarding the amortization of new market tax credits. This change simply shifts contra revenue and other.
Income tax expense line and has no impact on the bottom line.
Now I'll hand, it back to Bill for some final remarks, great. Thanks, Mike.
So to conclude on slide 19, truest is on the right path and I'm I'm highly optimistic about our ability to realize our significant post integration potential as summarized in our investment thesis. Our goal financially is to produce strong growth and profitability and to do so with less volatility than our peers.
As we began to shift from integrating the operating several quarters ago. We also made a strategic decision to focus our resources on areas, where we have an advantage in the marketplace and our most synergistic with our core strengths.
And at that time, we focus on product solutions, a distinctive experiences that are most relevant to our primary consumer deposit households to our commercial corporate and high net worth clients, while reducing our investment in our businesses and clients that are less strategically relevant.
With respect to returns a relationship opportunity. We believe these changes are consistent with where the banking industry is likely to go from here or already realizing the early benefits of this shelf for instance, first quarter net new.
New consumer checking account production was among the best we've seen since becoming true us driven by our continued focus on core deposit clients, the attractiveness of new products, including tourists, one and improve retention as well as flight to quality.
<unk> checking account production has increased 13% since the launch of <unk>, one and as I said earlier has accelerated up to 18% compared to a year ago in the first quarter.
Steady improvement we've seen in client satisfaction has been driven by the distinct service our branch and care agents provide as well as improvements in our digital processes and procedures that originated in our client journey rooms.
As I indicated earlier I'm really proud of the care of our teammates the care our teammates provided to our clients in March and this was reflected in higher voice of client scores during the last few weeks of the quarter.
Lastly, we continue to advance our integrated relationship management program by establishing long term growth targets for our most strategic or partnerships details of which are shared in December relative to the first quarter of last year. These strategic partnerships have grown revenues by 35%.
At the same time, we acknowledge that the environment is tougher and strong balance sheet and expense management will remain critical for our stakeholders and.
In closing while uncertainty has increased tourists was in a position of strength across a broad range of outcomes because of our diverse business mix dynamic markets Conservative credit culture balanced approach to interest rate risk management strong profitability profile and our strong risk adjusted capital position I am too.
Truly optimistic about the future truest as Moore as our more than 50000 talented teammates build on our <unk> to create distinctive client experiences and deliver on our purpose to inspire and build better lives and communities. So with that Ankur, Let me turn it back over to Q&A, great. Thank you Bill.
Ali at this time, we explained to our listeners how they can participate in the Q&A session. As you do that I'd like to ask the participants to limit yourselves to one primary question and one follow up so that we can accommodate as many of you as possible today.
Of course, thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
If youre using a speakerphone. Please make sure mute function is released.
Signal to reach our equipment.
Again, please limit yourself to one question and one follow up question as a reminder, Davis star one if you would like to ask a question.
Just for a moment, so everyone an opportunity to signal for questions.
And we will go ahead and take our first question from Ken <unk> with Jefferies. Please go ahead.
Thanks, Good morning, guys.
Just wanted to start just on the on the deposit front. Good color you gave in terms of the relationships you mentioned in the deck that end of period was down 2% and some of that was seasonal. So I'm. Just wondering if you can give us a little bit more color on just how you saw deposits in the quarter and if you've seen stabilization and what kind of outlook.
You just see for the.
The flow and mix of deposits from here. Thanks.
Hey, good morning, Ken its Mike.
Right, we saw really throughout the course of the quarter.
Relatively stable flows you know actually if you think about sort of where we saw.
Our balances evolve throughout the first two months of the quarter very typical we saw some seasonal outflows related to public funds. We saw the expected impact of qualitative tightening, which we've seen throughout the previous couple of quarters.
And so we're probably down about.
1% or so and then in the last month of the quarter.
We really saw continued public fund outflows, we saw a little bit of.
Higher rate pursuant behavior, we saw people cycling into money market accounts to a higher extent, we saw some of our wealth clients.
Cycle into investment accounts.
And and ended down about about 2% for the quarter I'd say the bulk of the money in movement happened during that week that Bill mentioned in our opening remarks as far as outlook is concerned it's been business as usual and steady sense really that that that first week in March.
And you know what our expectation frankly is that the impacts that were driving some pressure in the fourth quarter and the first two thirds of the first quarter and we will continue to put pressure on deposits probably to the tune of 1% to 2%.
Okay, and just my follow up business, and what about that mix and how.
How do you expect that mix of DDA to total as Theres more cycling of that I think you are down to about 32% in the first quarter.
Or do you think you had previously said you thought you could approach that over 30 overtime is that view changed at all given what's happened.
Yeah, Kevin This is bill.
Pre COVID-19, we were sort of at the 29% as you mentioned, we're about 32% now.
We're going to clearly migrate down to that high twenties.
Sort of depending upon where rates are I think that sort of is the stabilization level is based upon what we know what we know right now and you know.
And continue to just focus on the positive side of our retail.
Deposit production I, just expect that engine to continue.
<unk> sort of on balance we might be down.
Flattish to down 101 or 7%.
That includes a really good positive production momentum we have in our core franchise.
Understood. Thank you.
No.
Hi, This is Blake matter on the line for Betsy Good morning.
I'm wondering if you could.
Could you talk about how youre thinking.
The potential impact of tougher LCR requirements and.
T y.
Changes are expected to be announced announced in the near future, how and how should we think about your debt issuance plans and other potential impacts.
Sure.
I'd say from a T. Lack perspective. This is something that we've had our eyes on for a number of quarters in the entire industry has certainly companies our size.
We've studied the framework we've.
<unk>.
Previously probably were considering tailored versions of T lag, perhaps that will ultimately be the case, but in the <unk>.
And the abundance of caution the framework that we've assessed as sort of up.
Traditionally applied framework the same that the largest banks in the country have applied and you know from our perspective, our regular way issuance.
Certainly given some reasonable phase in period that will allow us to comply really without without much without much effort and so and to your question around around debt issuance. We are you saw we raised $3 billion in January .
You know our expectation given tourists.
Scale and funding needs in.
In perspective is that will be of a relatively regular issuer and you know to the extent that we get a better sense for what's what's eligible and not eligible for antilock perspective that may influence, how we issue whether it's at the holding company or the opco, but but I think the net of it is is that we feel really well prepared and positioned.
Two to comply with with <unk> to the extent that that's that's applied to tourists.
Got it and separately just one more question for me.
Service charges on deposits came down a bit sequentially. This quarter can you talk about the potential for overdrafts are used to get even more from here.
Yes, they're going to they're going to continue to get lower.
We.
Institute at our tourist one which is sort of a big part of the deposit generation of new client acquisition, but it's also are no overdraft fee accounts. So those will continue to drift lower and and those are in all of our guidance and everything that we've talked about in there.
Basically right on path to wherewithal, but.
Thank you.
Thanks.
We will take our next question from Jonathan <unk> with Evercore ISI. Please go ahead.
Good morning.
Hey, good morning.
I'm on the back to the deposit growth expectation I, just want to confirm that down 1% to 2% is that an end of period balances in the back for the full year your expectation.
Yeah, that's a that's a quarterly view and you know and I'm not sure that's going to sort of be linear and its and its progression.
If we think about just the impact of qualitative tightening in.
Some of the work that we've done and certainly prior to this first quarter, which is getting a sense for our.
Our share of the easing and how that may impact our share of the tightening and so that 1% to 2% is reflective of of Qt continuing.
On a quarterly basis, and it's also reflective of.
You know frankly, just the rate environment that we're in as people continue to assess bank alternative products, where perhaps higher rates or investment products are an alternative but.
But that's that's a quarterly view.
Okay got it. Thank you and then separately also on the on the margin and deposit dynamics can you maybe.
Talk to us about how you see this playing out in terms of market than.
And then interest margins margin project.
Progression from here and then also what do you expect is it fair through cycle deposit beta I know Youre currently 60.
6%.
Thanks.
Sure.
Maybe just and we mentioned in our prepared remarks, our net interest margin.
In the first quarter, we were down on a reported basis about eight basis points and that really had two primary drivers. The first was we also mentioned that we have a little bit more liquidity on the balance sheet that was something that we are.
Made the decision to do sort of in the abundance of caution and so while that doesn't really have an impact on NII, because theres very sort of de minimis negative carry.
Relative to to the funding cost there it did swell the sides of the balance sheet a bit so the denominator impact drove about two basis points of net interest margin decline and then we also had just the overall funding mix shift, which probably drove drove the bulk of the rest. There's also a basis point in there for PAA those same factors that drove.
Our NIM down eight basis points in the first quarter exist in the second quarter as well, perhaps two and to some extent in terms of the behaviors, maybe it'll be a little bit more modest but you also have to quarter is some of those impacts and so our expectation is that NIM probably has downside of another call.
A dozen basis points in the second quarter as far as the second half.
You know probably have.
A more stable outlook for the NIM you know there is.
We've mentioned before that we've sort of intentionally approach to more neutral kind of rate sensitivity position, but.
But I think beyond that it's really going to depend on some of these other factors.
You know the debate is that the mix that bill just talked about on the DDA side.
Whether or not we see them.
Now whether or not we see.
Credit spreads widened as an example is a factor to the beta that we have in our assumption around around NII and NIM you mentioned, we're at 36% today that until now we've been exceeding our expectations. This is the first quarter were.
We performed a little worse than we expected our spot beta today.
IBD basis as is 40%, we expect that to migrate to the low <unk> for the full second quarter, and we have a terminal outlook of 44%.
Got it thanks, Mike.
Okay.
Our next question comes from Mike Mayo with Wells Fargo Securities. Please go ahead.
Hi.
I'm not sure if I can keep pushing the corvette analogy here, but it just looks like the fuel efficiency it isn't.
Isn't quite as good I don't know if you put diesel fuel and the corvette by mistake or why that.
You closed 117 branches in the first quarter, so that should be good youre getting other merger benefits.
<unk> the integration phase and your guide for five 7% revenue growth, which is decent but also 5% to 7% expense growth.
And a business at a time when you go back to your management team and say Hey, you know.
We're getting more cautious on lending as you indicated and we need to.
<unk> tightened some of this expense.
And I guess some of the expenses, there FDIC intention and minimum wage but that some of your peers, which are looking for positive operating leverage I know you said positive outcome.
But then you have 5% to 7% higher both for revenues and expenses. So just give a little bit more color about the efficiency of truest as you transition from integration to growth. Thanks.
And Mike I'm going to I'm going to spare from the corvette.
Allergies or just try to sort of go go right at it you know as Mike said I mean, we're really you know we're going to continue to focus on positive operating leverage you know the revenue guidance is really on NII guidance issue. Our continued focus on insurance investment bank and all the other things that.
You know comprised that we're still very confident of.
<unk> of markets really improve in the second half of the year might even have some upside but your point on the expense side is exactly right I mean, we have.
Call, it 4% or so sort of embedded in the categories that you talked about so the ability to managers in that in that other component of that.
Trust me.
We're a business leader has a positive operating leverage plan.
And they are readjusting those plans based on.
Particularly those that have in NII component too to their plans.
Things that they can do you saw already this quarter.
Things that we're doing that are.
More reflective of the strategy you talked about the realignment of fixed income you know consolidation of widespread but I've been in the past. These might've been things that sort of would have been off the table now firmly on the table like everything else as it relates to expenses.
We will do more work in the mortgage area all of the things, we're spans and layers real estate.
You know digitization automation all of that.
Is firmly on the table and a clear focus for us.
As we move into the rest of this year with a keen focus and I on positive operating leverage.
Okay, and then one separate question.
Do you plan to rebrand light stream to truest.
And if so does that mean youre going to have more of a national branding strategy.
And it's interesting you are in the south the southeast mid Atlantic with true as.
When you go outside the region with the different brands. So I'm just trying to reconcile your brand names.
Yeah, I'll really sort of see all the way around actually so we're really we're going to eventually wind down the light stream brand and increase the true a side of that.
We created livestream for completely different reasons that don't really exist today as it relates to as it relates to true. So we've got this incredible franchise incredible market really good digital capabilities and what we're doing now is saying, let's bring all of those.
Digital capabilities really fast turnaround times.
Accretable net promoter scores with livestream to all the true its client base. So the emphasis will be on the <unk> client base and then also with partnerships that are that are true as clients.
Rather than sort of this nash.
National National brand. So I'm pleased with what we did I think we did all the right things we created this really cool capability.
But to the comment I made earlier, we're also supporting a separate brand and that has a lot of expense associated with it there's a lot of marketing and other things with that and we're having incredible success with the truest brand. So we want to bring it under that umbrella.
Create some more efficiencies from an expense standpoint, and then I think accelerate from a revenue standpoint in penetrating and further cementing these incredible deposit relationships we have.
Alright, thank you.
Thanks.
Our next question will come from <unk>.
Ebrahim that Colin Huang with Bank of America. Please go ahead.
And your line Ebrahim or your view.
And Ali maybe we just shift to the next person.
And our next question will come from Erika Najarian with UBS. Please go ahead.
Hi, good morning.
Good morning, you mentioned, good morning, Youre, anticipating tighter capital and liquidity standards and.
And Bill as you think about growing your capital from here.
Starting point of $9 one.
You feel like.
The build is now closer to nine and a half and pan.
Precipitate higher capital and liquidity standards.
And if so how should we think about your plans for dividend growth.
That buybacks would be lowest priority and also is there some ardebili mitigation that you could do in order to perhaps speed up that.
20 basis points of organic capital organism or generation.
Yeah, Eric Thanks, remember, we're actually at nine 4% today.
As we've completed the.
The interest and our interest in insurance holding so if we start with there I mean the mode. We're in right now I mean, we're comfortable where our capital levels, but we're not we're in a capital build mode right now until we're not.
So we want to really understand the landscape understand the regulatory landscape.
B B.
Be prepared.
We've got you know.
20 basis points or so of sort of organic cash.
<unk> accretion.
That comes into play that's post our dividend our dividend will continue to be important to us and will continue to support.
Our dividend. So I think we've got you know we're at a good place right now with capital will continue to be in a little bit of the capital build mode.
So we will sort of blow through that nine and a half number you mentioned here and you know and in several quarters.
And then we'll see we'll just sort of see where the regulatory things line up and the opportunities that are that we have and I think we've got the most organic combined with financial and strategic flexibility on capital to respond to sort of anything that might that might come our way you did mention though.
Our focus is going to continue to be on supporting organic growth, we're going to maximize <unk>, but we don't need to reduce our <unk>.
So you know that we don't need to change our <unk> from a capital standpoint, but we do want to optimize that you would do want to create more velocity around <unk>, which I talked about dividend and be an important and then M&A on newer particularly things like insurance and then capabilities to create sustainable advantages and then as you mentioned share repurchases.
Not in our short term window I mean, that's just not our focus right now.
Got it.
My second question.
No.
Sorry.
There's another car analogy, but.
Like an F one car rather than a corvette right.
The congregation on your asset portfolio that was brought in over the quarter aside it feels like some of what's holding down your valuation is the puts and takes the special.
That keep coming up.
And I Wonder Bill.
Where are you in terms of the optimization of this franchise.
Because it's pretty clear that the steps that you have been taking and it seems like based on my laundry list.
Celebrating.
Everything to do with the optimization of its franchise and I Wonder how your way.
Pulling forward that optimization and kit.
Yeah, I mean look theres always a continuous improvement process for every company right.
Is it better to just clean everything up.
And perhaps you know for that.
For the sake of positive operating leverage.
To think about clean our 'twenty four and 'twenty five numbers when it comes to expenses.
Because I do think that.
It's very clear what the potential of this franchise is but there is always adjustments here and there.
Do you like your investors are less likely to see that visibility on that expense curve than what you guys are aiming for.
Yeah, maybe let me try to break that up into two components, if I if I understood. The question So <unk>.
The question is around the strategic parts of our of our business.
And optimizing those you are seeing a little bit of an acceleration around there that's not sort of a you know.
No dramatic shift, but youre seeing a speed up in that and it's things around the edges and I talked a little bit about those today. There are some more of those that we're thinking through because as you note I mean, our core.
No.
Franchise is so powerful and what we wanted to do is make sure that the resources that we have at this company are devoted towards growing expanding.
That incredible franchise, so you know the.
Things that we talked about about.
Capital markets, a livestream I think are really good examples of those and you could argue they were probably a little accelerated.
Maybe with a small a of accelerating up youre going to the balance sheet side.
We're going to do anything on the Securities portfolio. You know the answer to that is you know not at this time I mean, theres just not a really good economic benefit for that and we want to be long term protectors of shareholder value.
So I think we'll stay the course, there unless something were to change dramatically that would cause us to.
Change change our posture.
Did that get at it Eric.
Okay, Yeah yeah.
Yes.
Just a follow up.
Yes.
You have optimized and they accelerated.
Some of the some of the initiatives.
I'm wondering if you can tell your investors that your goal for 'twenty four is really sort of cleaner quarters on expenses. So that they can really see that expense curve in terms of your GAAP EPS power.
Yes, I think relative to the first part of that yes that that would be the goal and I think there.
Theyre getting cleaner every quarter.
And theyre going to continue to stay on that on that flight path.
But when we have opportunities that we think are long term beneficial where we're not going to we're not going to mess those but I think your basic statement of will be when we have a cleaner quarter.
<unk> and 'twenty four yes, and I think they get cleaner every quarter alone that alone that pound.
Perfect. Thank you.
Our next question will come from Gerard Cassidy with RBC. Please go ahead.
Good morning, Good morning, Mike.
Morning.
Mike and maybe this is more directed to Clark on credit you guys had very strong credit quality, obviously, but you piqued my interest with something that you said in the prepared remarks that.
Your charge offs again, there theyre low.
Went up by three basis points, but you cited CNI, which is interesting to me. So the question is.
And then you also pointed out that.
The allowance of course was built up for CRE, but you talked about youre, reducing your risk appetite in selected areas. So.
Where are those areas number one and then in C&I.
If you guys could elaborate what maybe what happened there and in comments also about your leverage loan portfolio, but I assume that's included in C&I as well.
Hey drew.
Quite a few start with thermal and Theyre, Florida, so as far as what areas are we or are we focus on first and foremost what I'd say is that we want to maintain our through the cycle lending approach as we always have for our clients. So we're not going to make dramatic shifts in our appetite or how we land, we just want to be more cautious and prudent where it makes sense.
So things like <unk>.
Less exceptions more due diligence.
And some of the areas, we're focusing on right now would be the ones you would expect higher leverage to leverage leverage finance would be one things like senior care given the market.
<unk> CRE lower in consumer thinks like that Gerard So I think it's more around being cautious but being consistent there for our clients into your other question. Our leverage book is performing very well right now so I would just remind you all.
The portion that you would be focused owns about three 6% of our total loans portfolio is 50% investment grade we have very modest hold levels, our leverage multiples have come down over the last couple of years in that book and right now it's performing very well we have npls at 0.6% are in.
Yeah.
Point, 11%, so very good overall performance and then as far as the C&I losses in Q1, there is nothing episodic there we're coming off such extremely low levels. If we go back into 2022, we were in just a couple of basis point range and we were up just.
More towards a normalized range so nothing nothing specific there.
Very good thank you Clark.
And then following up Mike you talked about the investment banking business, how you've built it out with some strategic hires over the last two years and we know from the market conditions from some of your larger competitors.
Challenging out there are.
Are you guys comfortable with your revenue to expense area, and then investment banking now or do you really want to see or need the revenues to kind of really pick up as the market conditions pick up.
Yes.
Yeah, I'll I'll start there and maybe build may have something to add but the investment banking businesses is performing well.
It was a it was a bright spot for us in the first quarter, we have expectations.
That it will continue to perform well pipelines remain.
You know solid.
And I think that a lot of that is driven by the fact that we've been adding really high caliber or sort of franchise type talent to that platform not just recently, but.
Consistently over the years and so.
Look I mean, there's no doubt about it you know there's there's market interruptions.
Transaction market steel markets are a little harder but.
In the in sort of that middle market and upper middle market space, where we feel like we've really got a powerful franchise. We continue to get deals done for our clients on the corporate and sponsor side.
So we're still very supportive and optimistic about about the investment banking business and then look we're managing it carefully and revenues will be highly correlated with expenses in that business, but that's always always been the case for us to your margin question on investment banking, but it's always been a good margin business.
He has had a lot of discipline over a long period of time and part of that sustainability. I think you saw some of it this quarter as you know.
Back to the earlier comments and questions wherever about the strength of the franchise.
Able to.
Take advantage of this incredible franchise and client base.
Really afford us an opportunity all across.
Hi, great.
No.
Debt and equity earned revenue being up so it just creates more consistency of more confidence for us in that in that revenue base.
Great. Thank you for the insights tumor.
Ali we've got time for one more question.
And we'll take our last question from John Mcdonald with Autonomous Research. Please go ahead.
Hi, Good morning, I know, we're running tight maybe we could get a comment from John about the operating environment for insurance. This year and then also if you could add on you.
Your thoughts about utilizing the increased optionality that the transaction has gotten you and what the M&A environment looks like for you. Thanks.
Hey, John .
Hello.
Yeah sure. John This is John Howard. Thank you very much for the question when I look at the environment from an insurance standpoint. It continues to be favorable pricing continues to be firm.
If you think about insured values and you think about insured rates are they are both affected by the inflationary environment that we're experiencing those are tailwind for us.
Some capacity headwinds, particularly around catastrophe exposed property.
But net net we will continue to see good organic growth in insurance and I do expect our organic growth to improve over the course of the year.
And to your question about acquisitions.
The market response to it.
The strong point transaction has been very positive. So we've gotten great feedback from teammates clients insurance companies business partners as well as acquisition candidates. So I.
I think we're very well positioned.
Great. Thanks.
Thanks, John .
Okay 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 tours. We know you guys have a busy day, but we hope you have a great day Ali you can now disconnect the call.
And with that that does conclude today's call. Thank you for your participation you may now disconnect.
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