Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation's First Quarter Call. [Operator Instructions] As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Ankur Vyas, Head of Investor Relations, Truist Financial Corporation.

Thank you, Ally, and good morning, everyone. Welcome to Truist's First Quarter 2023 Earnings Call. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Mike Maguire. During this morning's call, they will discuss Truist's first quarter results, share their perspectives on current business conditions and 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, Truist 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 Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slides 2 and 3 of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP. With that, I'll now turn the call over to Bill.

Thanks, Ankur, and good morning, everybody, and thank you for joining our call. I know you have a busy day ahead of you. The first quarter of 2023 was certainly an unusual and maybe even possibly a historic one for our banking industry. I am really extremely proud of our more than 50,000 teammates who leaned into our purpose and continue to care for our clients and stakeholders, reassuring them of Truist's position of strength and commitment to serve them. Throughout the quarter, we continue to experience the benefits of our shift from integrating to operating as evidenced by improved organic production and increasing client satisfaction scores, which in our branches ascended to new highs in the weeks after March 9. Faced with a volatile and uncertain environment, we successfully demonstrated the strength and resiliency of Truist's diverse business mix, scale and market share, granular and relationship-oriented deposit base and strong capital and liquidity. But as we will 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 have an advantage in the marketplace and 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'll provide more details on the quarter's results and other topical items throughout the presentation. But first, let's begin with our purpose on Slides 4 and 5. And 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 at Truist. These slides are a powerful reminder that the most effective way to grow over the long term is to deliver on our purpose to inspire and build better lives and communities. But 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 that's 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 Truist's financial position and strength and help them move forward with their financial needs. In addition to client care we provided last month, there were many other ways we actualized our purpose throughout the quarter, which we highlight on Slide 5. You can read more about these items and many of our other efforts to build better lives and communities in our 2022 Corporate Responsibility Report, which we published last week. Now I'll walk through our first quarter performance highlights on Slide 7. Quarter performance slide focused mostly on GAAP or unadjusted results given that MOE-related spend 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 PPNR since intangible amortization expense remained significant due to the scale of the MOE and has no impact on capital generation. Truist reported first quarter net income of $1.4 billion or $1.05 a share, up 6% like quarter due to strong growth and adjusted PPNR, 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 PPNR decreased 7% sequentially, consistent with our prior guidance as 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 to the first quarter of 2022, adjusted PPNR grew 19%, and we delivered 310 basis points of positive adjusted operating leverage, reflecting a good start to the year. Asset quality remains strong and net charge-offs continue to normalize consistent with our expectations. We prudently built our ALLL ratio 3 basis points to reflect a more uncertain economic environment. Balance sheet trends, despite all the noise in mid-March, were fairly expected and more business as usual, and we'll cover more about loans, deposits, capital and liquidity later in the presentation. So moving to our digital and technology update on Slide 8. 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 Truist prioritized 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 end to end. Our first quarter results reflect our continued investments, agility and momentum. In the first quarter, we opened 146,000 deposit accounts digitally, exceeding our internal expectations. We saw a strong growth in digital transactions and Zelle, 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 reimagine our capability set. In the deposit space, we launched a new data-driven deposit pricing engine, which provides personalized relationship-based rates for clients during account opening and will allow us to be even more targeted with respect to rate paid. We also enhanced our digital lending capabilities with the launch of our commercial loan dashboard, an industry-leading solution that allows wholesale lending clients to track the status of their loans, upload documents and eventually electronically signed documents. Our goal is to eventually incorporate this dashboard into 1 view, our desired end-state integrated digital experience across payments, lending and capital markets creating a seamless experience for commercial and corporate clients' entire relationship with Truist. So turning to loans and leases on Slide 9. Loan growth was solid in portfolios targeted for growth and lower portfolios where we've intentionally pulled back. Average loan balances grew 1.7% 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, while also increasing rates and spreads from ongoing production. C&I balances increased 3.6% on an average basis and 1.8% on an end-of-period basis due to continued growth across CIB and CCB, 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're focusing our balance sheet on Truist 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. This allows us to be more impactful and 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. Average deposit balance decreased 1.2%, driven by quantitative tightening inflation and movements to higher-rate alternatives. Within the month of March, more deposit flows were concentrated in the period from March 11 to March 18 and have largely been business as usual since, including through yesterday. Positive outflows during mid-March were primarily related to CIG and CCB clients, who chose to diversify in the money market mutual funds and in some cases, across multiple banks. These outflows tended to be a higher cost of nonoperational deposits. We also 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 to operating and leading with the value proposition of Truist One. In the first quarter, Truist 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. Commercial Community Banking had record new account growth in March, and we've seen good 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 noninterest-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, contributing to a cumulative interest-bearing deposit beta of 36% so far in the cycle. Deposit betas accelerated relative to the fourth quarter due to the presence of higher rate alternatives and the previously mentioned shift from noninterest-bearing DDA into interest-bearing products. We'll continue to be attentive to client needs and relationships, while maximizing the value outside of rate paid. Given higher investor interest and additional deposit details, we provided a closer look at our deposit base on Slide 11. Truist has one of the most robust deposit franchises in the banking industry, thanks to 3 key factors. First, Truist has strong market shares in many of the fastest-growing markets in the U.S. Truist is currently ranked first, second or third in deposit share in 17 of the top 20 markets. Those include cities like Atlanta, Charlotte, D.C., Miami, Tampa, Raleigh-Durham, among others, making us the dominant player in the Southeast and Mid-Atlantic. Second, Truist has a granular retail leading deposit base that is 63% insured and/or 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 account at Truist has been open 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 17,000. [ RSPB ] deposits are highly granular, and 86% of balances are insured. In addition, Truist is the primary bank for the preponderance of those clients. In our Wealth business, 90% of the depositors have investments with Truist Wealth and in our Commercial Community Bank, 81% depositors have a payments, lending or advisory relationship with Truist, with the majority of that related to operating treasury management products. Together, these factors are a source of strength for Truist 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 2.8% sequentially as higher funding costs and 2 fewer days in the quarter more than offset the effects of solid loan growth. Reported net interest margin decreased 8 basis points, while core net interest margin decreased 7 basis points. When you break down the decrease in the core net interest margin, approximately 5 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 2 basis points was due to our decision to conservatively carry more liquidity during the last few weeks of March. 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 4.7%. Mortgage banking income rose $25 million, primarily due to a gain on sale of a 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. Wealth continues to build momentum as net organic asset flows, which exclude the impact of market value changes, were approximately $1 billion for the quarter and have been positive for 7 of the last 8 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. CIB's performance continues to be aided by 2 idiosyncratic factors, strategic hiring over the past 2 years as well as increased integrated relationship management activity. With respect to IRM, 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 IRM 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. The expense reductions I just described were largely offset by $103 million or a 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 within Truist Insurance recognized prior to completing our transaction with Stone Point. As a company, we are committed to generating expense reductions and have undertaken a number of actions that help bend the expense arc at Truist. 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 depositories and had produced an unattractive ROE. This realignment will result in an approximate $50 million run rate expense save with little PPNR impact and enable us to focus more on our core strategy of being a fulsome and premier investment bank for corporates, sponsors and municipal issuers. We're also in the process of realigning our LightStream platforms with our broader consumer business with the goal of bringing the innovation, digital capabilities, efficiencies and cloud-based infrastructure of LightStream to Truist's broader client base. This will reduce the cost of supporting a separate brand and strategy, enhance the experience and 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 Truist to shareholder expectations, which I shared with many of you about a month ago. Taken together, we believe these as well as other actions we're taking will increase our focus, bend our expense curve and improve returns for Truist. 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 3 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 ALLL ratio by 3 basis points to 1.37%. 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 Truist, 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. While we did not wholly pause 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, Truist CRE portfolio actually decreased by 2.2% from the end of 2019 to the end of 2022, whereas our median peer grew 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 and the office segment comprised 1.6% of our loan book versus 1.9% at 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 have 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 remain solid. In the lower right, you can see a snapshot of our office portfolio, which had approximately $5 billion in outstanding balances as of March 31 and another area where Truist has been risk averse and highly selective over the past 2 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 conservative LTVs, our reserves and the laddered maturity profile of the portfolio. Turning to capital and liquidity on Slide 17. Our CET1 ratio increased from 9% to 9.1% as approximately 20 basis points of organic capital generation was partially offset by 12 basis points of CECL phase-in. While not included in our CET1 ratio, AOCI improved by $1 billion from December 31 to March 31. Of our $12.6 billion of after-tax OCI, as of March 31, $8.5 billion is related to our AFS 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 $2 billion 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 3, we also closed on the sale of a 20% minority stake in Truist 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 $0.52 per share, which was paid on March 1. Finally, Truist 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 liquidity position. Our average consolidated LCR improved 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, FHLB borrowing capacity, unpledged securities and discount window capacity. As a reminder, government and agency obligations represent 97% of our securities portfolio, which produces about $2.5 billion to $3 billion of cash flow per quarter. During the quarter, we conservatively increased our cash position from $16 billion as of December 31 to $33 billion at the end of March, funded largely by callable FHLB advances and would expect that to somewhat normalize going forward given that activity has stabilized. More broadly, we do expect regulatory requirements around capital and liquidity to heighten, but believe we're 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 in the orderly phase-in period that would likely accompany potential changes. 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 2022. 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 5% 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 2 items. First, we are not including the impact of any potential incremental FDIC surcharge or assessment. After we receive clarity, we'll provide an update on estimated impact. Secondly, there will be some onetime costs occurring in 2023 and 2024 tied to preparing Truist 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 in our results, but we will provide transparency. Our goal is still to produce positive operating leverage and positive adjusted PPNR growth for the full year, excluding these 2 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 to the 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, Truist is on the right path. And 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 to 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 are most synergistic with our core strengths. Since that time, we focus on product solutions and distinctive experiences that are most relevant to our primary consumer and deposit households into our commercial, corporate and high net worth clients, while reducing our investment in businesses and clients that are less strategically relevant with respect to returns and relationship opportunities. We believe these changes are consistent with where the banking industry is likely to go from here. We're already realizing the early benefits of this shift. For instance, first quarter net new consumer checking account production was among the best we've seen since becoming Truist. Driven by our continued focus on core deposit clients, the attractiveness of new products, including Truist One and improve retention as well as [ right to ] quality. Branch checking account production has increased 13% since the launch of Trust One and, as I said earlier, has accelerated up to 18% compared to a year ago in the first quarter. The 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 to care of our teammates -- care our teammates provided to our clients in March, and this is reflected in higher Voice of the 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 IRM partnerships, details of which I 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. In closing, while uncertainty has increased, Truist is in a position of strength across a broad range of outcomes because of our diverse business mix, dynamic markets, [ conservative culture ], balanced approach to interest rate risk management, strong profitability profile and our strong risk-adjusted capital position. I am truly optimistic about the future of Truist as our more than 50,000 talented teammates build on our momentum 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 you for Q&A.

Great. Thank you, Bill. Ally, at this time, will you explain 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 1 primary question and 1 follow-up so that we can accommodate as many of you as possible today.

[Operator Instructions] And we'll go ahead and take our first question from Ken Usdin with Jefferies.

Just wanted to start just 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 just wondering if you can give us a little bit more color on just how you saw deposits end the quarter, if you've seen stabilization and what kind of outlook you just see for the flow and mix of deposits from here?

Ken, it's Mike. That's right. We saw really throughout the course of the quarter, relatively stable flows. Actually, if you think about sort of where we saw our balances evolve throughout the first 2 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 ended down 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 since really that first week in March. And our expectation, frankly, is that the impacts that were driving some pressure in the fourth quarter and the first 2/3 of the first quarter, will continue to put pressure on deposits, probably to the tune of 1% to 2%.

Okay. And just my follow-up is just then what about that mix? And what -- how do you expect that mix of DDAs to total as there's more cycling of that? I think you're down to about 32% in the first quarter. What do you think? You had previously said you thought you could approach that [ 30% ] over time. Has that view changed at all given what's happened?

Yes. Ken, it's Bill. We're -- pre-Covid, we were sort of at 29%. As you mentioned, we're right 32% now. We're going to clearly migrate down to that high 20s. And sort of depending upon where rates are, I think that sort of is the stabilization level as based upon what we know right now. And just to add to what Mike said as well, and continue to just focus on the positive side of the retail deposit production, I just expect that engine to continue. So while sort of on balance, we might be down flattish to down 1 or so percent, that includes a really good positive production momentum we have in our core franchise.

We'll move on to our next question from Betsy Graseck with Morgan Stanley.

This is Blake Netter, on the line for Betsy. I'm wondering if you could talk about how you're thinking about the potential impact of tougher LCR requirements and [ TLAC ]. These changes are expected to be 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 TLAC perspective, this is something that we've had our eyes on for a number of quarters that the entire industry has, certainly, companies our size. We've studied the framework. We've previously probably were considering tailored versions of TLAC, perhaps that will ultimately be the case. But in the abundance of caution, the framework that we've assessed is sort of a traditionally applied framework, the same that the largest banks in the country have applied. And from our perspective, our regular way issuance, certainly given some reasonable phase-in period will allow Truist to comply really without much effort. And so to your question around debt issuance, we -- you saw we raised $3 billion in January. Our expectation given Truist's scale and funding needs and perspective is that we'll be a relatively regular issuer. And to the extent that we get a better sense for what's eligible and not eligible from a TLAC perspective, that may influence how we issue whether it's at the holding company or the opco. But I think the net of it is that we feel really well prepared and positioned to comply with TLAC to the extent that that's applied to Truist.

Got it. And separately, just 1 real question for me. Service charges on deposits came down a bit sequentially this quarter. Can you talk about the potential for overdraft fees to get even lower from here?

Yes, they're going to continue to get lower like we instituted our Truist One, which is sort of a big part of the deposit generation and new client acquisition, but it's also our no overdraft fee accounts. So those will continue to [ drift ] lower. And those are in all of our guidance and everything that we talked about. And they're basically right on path to where we thought they'd be.

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

On the -- back to the deposit growth expectation, I just want to confirm that on 1% to 2%, is that on end-of-period balances and debt for the full year, your expectation?

Yes. That's a quarterly view. And I'm not sure that's going to sort of be linear in its progression. If we think about just the impact of qualitative tightening and some of the work that we've done and certainly prior to this first quarter was just getting a sense for our share of the easing and how that may impact our share of the tightening. And so that 1% to 2% is reflective of QT continuing on a quarterly basis, and it's also reflective of, frankly, is 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 that's a quarterly view.

Okay. Got it, Mike. And then separately, also on the margin and deposit dynamics. Can you maybe talk to us about how you see this playing out in terms of net interest margin, margin project -- progression from here? And then also, what do you expect is a fair through-cycle deposit beta. I know you're currently at 36%. And I want to get your thoughts there.

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 8 basis points, and that really had 2 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 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 there's very sort of de minimis negative carry relative to the funding cost there, it did swell the size of the balance sheet a bit. So the denominator impact drove about 2 basis points of net interest margin decline. And then we also had just the overall funding mix shift, which probably drove the bulk of the rest. There's also a basis point in there for PAA. Those same factors that drove our NIM down 8 basis points in the first quarter exist in the second quarter as well. Perhaps to -- and to some extent, in terms of the behaviors, maybe it will be a little bit more modest, but you also have to quarterize some of those impacts. And so our expectation is that NIM probably has downside of another, call it, dozen basis points in the second quarter. As far as the second half, probably have a more stable outlook for the NIM. There's -- we've mentioned before that we've sort of intentionally approached a more neutral kind of rate sensitivity position, but I think beyond that, it's really going to depend on some of these other factors. The betas, the mix that Bill just talked about on the DDA side, whether or not we see credit spreads widen as an example, is a factor, too. The beta that we have in our assumption around NII and NIM, you mentioned we're at 36% today. That until now, we've been exceeding our expectations. This was the first quarter where we performed a little worse than we expected. Our spot beta today on an IBD basis is 40%. We expect that to migrate to the low 40s for the full second quarter, and we have a terminal outlook of 44%.

Our next question comes from Mike Mayo with Wells Fargo Securities.

I am not sure if should keep pushing that [ Corvette ] analogy here, but it just looks like the fuel efficiency isn't quite as good. I don't know if you put diesel fuel in the [ Corvette ] by mistake or what, but you closed 117 branches in the first quarter, so that should be good. You're getting other merger benefits. You've completed the integration phase and you guide for 5% to 7% revenue growth, which is decent, but also 5% to 7% expense growth. And isn't this the time when you go back to your management team and say, hey, we're getting more cautious on lending as you indicated. And we need to tighten some of this expense spend. And I get some of the expenses are FDIC and pension, minimum wage, but that's true at some of your peers, which are looking for positive operating leverage. I know you said positive operating leverage at least, 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 Truist as you transition from integration to growth.

Right. And Mike, I'm going to spare from the Corvette analogies. I just try to sort of go right at it. As Mike said, I mean, we're really -- we're going to continue to focus on positive operating leverage. The revenue guidance is really an NII guidance issue. Our continued focus on insurance, investment banking, all the other things that comprise that, we're still very confident of. And hopefully, if 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 manage is in that other component of that. And trust me, every business leader has a positive operating leverage plan, and they are readjusting those plans based on particularly those that have an NII component to their plans and the 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, consolidation of LightStream. I mean in the past, these might have been things that sort of would have been off the table. Now they're firmly on the table like everything else as it relates to expenses. We'll do more work in the mortgage area, all the things with spans and layers, real estate, digitization, automation, all 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 eye on positive operating leverage.

Okay. And then 1 separate question. Do you plan to rebrand LightStream to Truist? And if so, does that mean you're going to have more of a national branding strategy. And it's interesting, you're in the Southeast, Mid-Atlantic with Truist. You go outside the region with the different brands. So I'm just trying to reconcile your brand names.

Yes, really sort of sail the way around actually. So we really -- we're going to eventually wind down the LightStream brand and increase the Truist side of that. We created LightStream for completely different reasons that don't really exist today as it relates to Truist. So we've got this incredible franchise, incredible market, really good digital capabilities. And what we're doing now is say, let's bring all those digital capabilities, really fast turnaround times, incredible Net Promoter Scores with LightStream to all the Truist client base. So the emphasis will be on the Truist client base and then also with partnerships that are Truist clients rather than sort of this national brands. 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 are 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 Truist 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 and penetrating and further cementing these incredible deposit relationships we have.

Our next question will come from Ebrahim Poonawala with Bank of America.

Ebrahim, are you on mute.

Ally, maybe we just shift to the next person.

And our next question will come from Erika Najarian with UBS.

You're anticipating tighter capital and liquidity standards. And Bill, as you think about growing your capital from here, your starting point is 9.1%. Do you feel like the build is now closer to 9.5% and 10% as you anticipate higher capital and liquidity standards. And if so, how should we think about your plans for dividend growth? I suspect that buybacks would be lowest priority? And also, is there some RWA mitigation that you could do in order to perhaps speed up that 20 basis points of organic capital generation.

Yes, Erika, thanks. Remember, we're actually at 9.4% today as we've completed the interest and Truist Insurance Holdings. So if we start with there, I mean the mode we're in right now, I mean, we're comfortable where our capital level is. But 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, be prepared. We've got 20 basis points or so of sort of organic capital accretion that comes into play. That's post our dividend. Our dividend will continue to be important to us, and we'll continue to support our dividend. So I think we've got -- we're at a good place right now with capital. We'll continue to be in a little bit of the capital build mode. So we'll sort of blow through that 9.5% number you mentioned here in several quarters. And then we'll see. We'll just sort of see where the regulatory things line up and the opportunities 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 come our way. You did mention though, and our focus is going to continue to be on supporting organic growth. We're going to maximize RWA, but we don't need to reduce RWA. So that we don't need to change RWA from a capital standpoint. But we do want to optimize it. We do want to create more velocity around RWA, which I talked about. Dividend being important and then M&A on particularly things like insurance and then capabilities to create sustainable advantages. And then as you mentioned, share repurchase is just not in our short-term window. I mean that's just not our focus right now.

Got it. And my second question is -- sorry to make this another car analogy, but a 24% ROTCE is more like an F1 car rather than a Corvette right. But the conversation on your AFS portfolio that was brewing over the quarter aside, it feels like some of what's holding now in your valuation is the puts and takes the specials 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 Mike's laundry list that you are accelerating has everything to do with the optimization of this franchise. And I wonder how you're weighing sort of pulling forward that optimization. And I mean, look, there's always a continuous improvement process for every company, right? But is it better to just clean everything up this year and perhaps for the sake of positive operating leverage to think about cleaner '24 and '25 numbers when it comes to the expenses. Because I do think that it's very clear what the potential of this franchise is, but there's always adjustments here and there. And so I feel like your investors are less likely to see that visibility on that expense curve bend that you guys are aiming for.

Yes. Let me try to break that up into 2 components, if I understood the question. So the question is around the strategic parts of our business and optimizing those, you are seeing a little bit of an acceleration around there. That's not sort of dramatic shift, but you're all 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 know, I mean, our core franchise is so powerful. And what we want to do is make sure that the resources that we have at this company are devoted towards growing, expanding that incredible franchise. So the things that we talked about, about capital markets and LightStream, 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. If you're going to the balance sheet side, are we going to do anything on the securities portfolio? The answer to that is not at this time. I mean there's just not a really good economic benefit for that, and we want to be long-term protectors of shareholder value. And so I think we'll stay the course there unless something were to change dramatically that would cause us to change our posture. Did that get added, Erika?

Yes. Wondering -- just a follow-up, it seems as if you have optimized and accelerated some of the initiatives, and I'm wondering if you can tell your investors that your goal for '24 is really sort of cleaner quarters on expenses so that they could really see that expense curve in terms of your GAAP EPS power?

Yes. I think relative to the first part of that, yes, that would be the goal. And I think they're getting cleaner every quarter, and they're going to continue to stay on that flight path. But when we have opportunities that we think are long-term beneficial, we're not going to miss those. But I think your basic statement of we'll be -- will we have a cleaner quarter process in '24, yes. And I think they get cleaner every quarter along that path.

Our next question will come from Gerard Cassidy with RBC.

Mike, and maybe this is more directed to Clarke on credit. You guys had very strong credit quality, obviously. But you perked my interest with something that you said in the prepared remarks that charge-offs, again, they're low, went up by 3 basis points. But you cited C&I, which was interesting to me. So the question is, what do -- and then you also pointed out that the allowance, of course, was built up for CRE, but you talked about you're 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 in comments also about your leverage loan portfolio that I assume is included in the C&I as well.

Clarke, why don't you start with [indiscernible]

So as far as what areas are we focused 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 lend. We just want to be more cautious and prudent where it makes sense. So things like less exceptions, more due diligence, and some of the areas we're focused on right now would be the ones you would expect, higher leverage. So leverage finance would be one, things like senior care given the market aspects of CRE, lower-end consumer, things like that, Gerard. So I think it's more around being cautious, but being consistent there for our clients. And to 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 on is about 3.6% 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%. Our NCOs are at 0.11%. So very good overall performance. And then as far as the C&I losses in Q1, there's 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 toward a normalized range. So nothing specific there.

Very good. 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 2 years. And we know from the market conditions from some of your larger competitors, it's challenging out there. Are you guys comfortable with your revenue to expense area in 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. I'll start there and maybe Bill may have something to add. But the investment banking business is performing well. It was a bright spot for us. In the first quarter, we have expectations that it will continue to perform well. Pipelines remain solid. And I think that a lot of that is driven by the fact that we've been adding really high-caliber, 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. There's market interruptions, transaction markets, deal markets are a little harder. But in sort of the 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. And so we're still very supportive and optimistic about the investment banking business. And look, we're managing it carefully and revenues will be highly correlated with expenses in that business, but that's always been the case.

Yes. And for us, I mean, to your margin question, investment banking business always been a good margin business and 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 is back to the earlier comments and questions were having about the strength of the franchise. So being able to take advantage of this incredible franchise and client base really afford us this opportunity all across high grade, debt and equity, IRM revenue being up. So it just creates more consistency and more confidence for us in that revenue base.

Ally, we've got time for 1 more question.

And we'll take our last question from John McDonald with Autonomous Research.

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 your thoughts about utilizing the increased optionality that the transaction has gotten you and what the M&A environment looks like for you.

John, do you want to...

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, they are both affected by the inflationary environment that we're experiencing. Those are tailwinds for us. There are some capacity headwinds, particularly around catastrophe-exposed property. But net-net, we'll 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 the Stone 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 think we're very well positioned.

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 Truist. We know you guys will have a busy day, but we hope you have a great day. Ally, you can now disconnect the call.

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.