We'd like to get started on our next presentation, Truist Financial. Many of you know this is one of our largest super-regional banks, being the mergers between the old BB&T and SunTrust. With us today is Mike Maguire, Chief Financial Officer. Mike joined the legacy SunTrust back in 2001 and had a number of roles with SunTrust and also with Truist when the merger took place back in 2019. He's been appointed CFO back in September of 2022, and he's got some prepared remarks for us with a slide deck that was filed this morning. Following that, we'll have some questions and answers. Mike, take it away.
Great. Thank you so much, Gerard. Really thank you also for accommodating us on relatively short notice. It's great to be here with all of you this afternoon. Hopefully a slightly less theatrical session than the last one. Before we get started, I would ask you to please take note of our forward-looking statements and non-GAAP information on slides two and three. With that, I will dive in and begin with our purpose, mission, and values on slide five. Truist is a purpose-driven company dedicated to inspiring and building better lives and communities. Our purpose is the foundation of success for us as a company, and it drives our performance, and it defines how we do business each and every day.
Examples of that are launching our Truist One banking product, raising our minimum wage, achieving our $60 billion community benefits plan. All those are good examples of us delivering on our purpose. I couldn't be more impressed with the dedication and the commitment of our teammates. What they've accomplished over the past 3 years since we announced our merger has been astounding. Our purpose-driven culture is also a strong foundation for our investment thesis. If you'll turn to slide 6. You know, our investment thesis really outlines our company's opportunity and describes why Truist is a compelling investment and a great place to work.
1st, as I just explained, we have a deep sense of purpose that guides everything we do. I think simply put, people want to work for and do business with companies that stand for something. Second, from that purpose-driven foundation, we've built an exceptional company. Truist has a comprehensive and diverse mix of businesses. We have a strong market share in our markets and opportunities in many of the most vibrant U.S. markets. We have distinct capabilities in insurance, investment banking, point-of-sale lending, and we're leveraging our extensive industry expertise as well to deliver value-added advice to our clients.
Third, we now have a more modern, best of both technology stack that allows us to lean further into the future of banking as we design and deliver new products. Fourth, combined with our conservative risk profile, our goal is to generate strong growth and profitability with lower volatility than our peers over the long term. I'll share more details on this framework later in the presentation.
Moving to slide seven. This provides a high-level overview of our markets and our operations. It shows why Truist is in a sweet spot in terms of size. Our client base spans more than 15 million. We're committed to providing them with distinctive, secure, and successful experiences through both touch and technology. Our core retail, small business, commercial community banking, and wealth businesses operate primarily in the Southeast and the Mid-Atlantic, where we have leading market share in many of the fastest-growing U.S. markets.
We go to market locally, which means that we keep decision-making close to the client. We maintain knowledge of the local economy and its unique business needs. We have a deep commitment to the communities that we serve. We supplement this local presence with industry experience, a comprehensive product set, and advice to ensure that clients receive the full breadth of Truist's experience and capabilities.
We've also done a great job of building the Truist brand. Currently, we have the 5th highest brand consideration in our markets, with momentum continuing to build. We have a highly diverse business mix that extends our presence well beyond our core banking markets. Several of our businesses do operate nationally, including our corporate investment bank, insurance, consumer finance solutions, wholesale payments, mortgage, and commercial real estate.
These businesses supplement the local presence, augment our capabilities and expertise, and create the opportunities to benefit our clients through integrated relationship management. As I mentioned, we do operate in a sweet spot when it comes to size. Truist has a broad range of capabilities, but we're small enough to maintain a strong and connected one-team culture, which is essential to our ERM strategy.
We're large enough to generate substantial capital that can be used for organic growth and shareholder returns. Our less complex and more diverse business model results in lower capital requirements than our larger peers. Next, I'll just spend a few minutes providing a bigger picture recap, and also just close the 1st chapter of Truist's history, which begins on slide nine. We've made tremendous progress during our 1st three years as a company to build an incredible foundation that's primed for purposeful growth.
Our 1st set of integration activities at the company was around purpose, mission, and values. You know, due to the strength and alignment of our heritage companies' cultures, those activities happened rapidly, and we were able to introduce Truist's purpose, mission, and values to our teammates within weeks of closing the transaction.
This rapid introduction and alignment around purpose helped us move quickly onto ESG, which to us is an opportunity to put our purpose into action. We built our new digital Truist Digital experience from scratch, making the hard but right long-term decision to fully own the consumer digital experience end to end. It was introduced in 2021 prior to the core bank conversion in 2022 via our digital straddle approach, an innovation we can leverage in the future.
Importantly, Truist Digital was built in the cloud, significantly accelerating our ability to add multiple features and capabilities into one singular digital experience. About a year ago, we completed the largest bank merger conversion in 15 years and successfully launched the new brand, which has led to an explosion of purple across our footprint and on social media.
As a result of our integration, we now have a more modern, modular and simple tech stack, which are key strengths that we can build on in the future to deepen client trust through touch and technology. To sum it up, we have found we have the right foundation that we can now leverage to drive purposeful growth and positive impacts for our clients, teammates, and communities.
Turning to slide 10. When we announced the merger in February of 2019, we believed the pro forma company would have industry-leading efficiency ratios and ROTCEs, which at the time would have been in the low 50s and the low 20s respectively. Fast-forwarding to 2022, Truist adjusted tangible efficiency ratio was 56% or 4th in the peer group and just below top quartile performance. Our adjusted ROTCE was 25%, 1st in our peer group.
If you were to exclude OCI, ROTCE was still a strong 19%. While the efficiency ratio remains above our initial target, partly due to environmental factors like inflation, it also reflects structural changes, including growth and higher efficiency ratio businesses such as Insurance and Investment Banking, as well as the ongoing decline in service charges.
Moving to slide 11. This strong relative profitability performance is in large part due to the achievement of our $1.6 billion in net cost saves target. From the outside looking in, our cost saves can be most clearly evidenced by Truist's relative adjusted expense growth over the past few years. Truist's adjusted non-interest expense has grown at a compounded annual growth rate of 1% over the past three years, compared to 5% annually for our median peer.
In addition, with the integration behind us, MOE-related costs are no longer in our expense base. This is a very positive development that will simplify our narrative, enhance earnings quality, and improve capital generation. While we expect to incur modest restructuring charges in 2023, these are distinct from the MOE and relate to insurance activity and BAU expense rationalization efforts. So far, I've highlighted our progress in achieving industry-leading returns and achieving our cost saves.
In order to generate sustainable shareholder value, we must complement our strong profitability with faster growth. Truist has lagged our peers in growth due to the integration, but we are beginning to make up lost ground now that our strategic shift from integration to execution is beginning to take hold. As slide 13 shows, our momentum since the integration is being reflected in key metrics, including operating leverage and client satisfaction scores.
Our retail banking client satisfaction scores continue to rebound and finish 2022 above their pre-conversion level. Client satisfaction scores for Truist Digital are at their highest level since the rollout, reflecting the increased agility and responsiveness of our new platform. Loan production has also accelerated post-integration. During the 1st six months of 2022, Truist ranked 10th out of 11 in our peer group for loan growth but improved to 2nd in the last six months of 2022.
Over the long term, we have the potential to generate much stronger organic growth given our markets, our differentiated business mix, and our ability to capitalize on earn and revenue synergies. Our organic growth will also be complemented by targeted acquisitions and partnerships that strengthen our competitive advantage, add new capabilities or clients, and position us for the future.
Next, I'd like to discuss how we'll measure our performance opportunity on a go-forward basis beginning on slide 15. By way of context, as we shifted our focus from integration last year, we asked ourselves what KPIs should we use to assess our long-term performance? To answer that question, we performed a rigorous analytical exercise with the largest 50 banks over the past 30 years to determine which financial and operational KPIs were most positively correlated to total shareholder return.
The results of that analysis rank ordered from highest to lowest correlation are shown on the left. Growth-oriented metrics tended to have the highest correlations, although profitability and capital allocation also mattered. As you can see on slide 16, once the correlations were calculated, we selected five metrics that were hot. One, highly correlated to TSR, and two, collectively represented a balanced scorecard of growth, profitability, and capital allocation.
These five metrics consist of EPS growth, PPNR growth, ROATCE, ROACE, and tangible book value per share plus dividend growth. After identifying the five metrics, we then considered how they should be used to evaluate our performance. You can see that answer on slide 17, where we plan to use the relative framework shown on the left. The use of relative KPIs acknowledges the fact that Truist, like all banks, is impacted by economic cycles.
It also holds our team accountable for delivering better-than-peer results across a broad range of economic scenarios. Going forward and over the long term, our goal is to be above the peer median for each KPI except for ROATCE, where we would target to be in the top quartile given our business mix. Over the near term, we think top quartile ROATCE for our peer group is in the low 20%, that could be different in different environments. On the right side, we also highlight some of the so what associated with the shift in focus towards these five KPIs. We believe the implications are an increased focus on profitable growth, discipline around capital allocation, and increased linkage between results, compensation, and shareholder return.
Moving to slide 18, I'll share some more specifics on how these KPIs will be incorporated into executive compensation at Truist. We've heard from many of our investors that due to our business mix using relative ROAA compared to peer median in short-term plan and relative ROATCE compared to peer median in our long-term plan resulted in a plan structure that was less sensitive to performance than it had an opportunity to be.
We took that feedback to heart and going forward, our annual incentive plan will be a function of EPS growth and PPNR growth, as well as achievement of our strategic priorities, and that will have a stretch nature to it. In addition, our new performance-based long-term incentive plan will be based on relative ROACE with a TSR modifier. We believe these changes will reinforce our strategic shift to execution and incent actions that promote purposeful and profitable growth, prudent capital allocation, and ultimately higher TSR over the long term. In short, we'll set a higher bar for executive pay at Truist. Now I'd like to shift gears and provide a brief recap of the Truist Insurance Holdings transaction, which was announced last month.
As we previously announced, Truist is currently under contract to sell a 20% minority stake in Truist Insurance Holdings, which will exclude premium finance to Stone Point Capital and co-investors at an aggregate value of $14.75 billion. The transaction is still expected to close in the 2nd quarter of this year. We're very excited about this development as it positions Truist Insurance Holdings for long-term success in a dynamic and consolidating industry. We also have a very strong partner in Stone Point.
Truist and Stone Point are highly aligned in our vision and strategy for the insurance business, and Stone Point's expertise and proven track record will be valuable as we look to capitalizing the growth opportunities within the insurance brokerage industry. It's also been great to hear that so many of our investors feel as positively about Stone Point as we do.
Financially, the transaction is attractive in that it's accretive to tangible book value and capital ratios while still being neutral to initial earnings per share. This reflects a combination of the high valuation multiples in the insurance brokerage sector and the higher interest rate environment. The transaction highlights the value of Truist Insurance Holdings within our organization, and overall, we believe this is a win-win for our company and for our stakeholders.
Since the announcement, we've received some incremental follow-ups on the transaction structure, including the preferred stock, details of which we provide on slide 21. The investment by Stone Point values Truist Insurance Holdings at $14.75 billion of aggregate value, inclusive of the common equity valuation and a preferred investment issued to Truist.
The common equity valuation of $9.75 billion represents Stone Point's purchase of 20% of Truist Insurance Holdings for $1.95 billion. The proceeds from the secondary sale will be received by Truist Bank. Additionally, the $5 billion of debt-like preferred equity investment will be issued by Truist Insurance Holdings to Truist Bank. The final component of the capital structure is that Stone Point will receive 3.75% warrant coverage struck at the transaction date equity valuation.
While these warrants don't have intrinsic value today, they will increase in value as the value of Truist Insurance Holdings increases, creating strong alignment with our shareholders. There are several key strategic reasons and financial benefits that drove the inclusion of an intercompany preferred equity investment as part of this transaction.
The preferred provides leverage similar to what you might see for other insurance brokerage firms in the market, and we wanted to provide that leverage ourselves without external financing. Since Truist Insurance Holdings has historically operated as a wholly owned subsidiary of Truist Bank, it had no leverage, and a capital structure was not yet optimized at the insurance brokerage subsidiary level. It fixes a portion of the valuation of TIH for Truist shareholders at the preferred return while maintaining upside on a significant majority of the business.
The instrument is structured such that it is expected to receive equity treatment for tax purposes and debt treatment for GAAP purposes, which provides significant future flexibility. In the near term, Truist will receive the $5 billion of TIH preferred tax-free with the transaction. In summary, the preferred essentially provides a tax-efficient seller financing as a framework.
From a financial standpoint, the preferred has no impact on the consolidated balance sheet of Truist since it is eliminated intercompany. For income statement purposes, inclusive of accounting for the warrants, 23% of the preferred coupon represents retained economic income to Truist, which you will effectively see as savings through creating less non-controlling interest attribution.
Looking ahead, Truist's future value of Truist Insurance Holdings will be based on, one, its 80% common equity ownership, and two, the $5 billion of proceeds received if there was an ultimate repayment of the preferred. As such, we have optimized the capital structure of Truist Insurance Holdings in a highly strategic manner that provides current financial benefits to Truist while allowing us to maintain significant future flexibility.
Lastly, later today, we will be reposting our transaction announcement presentation to include a couple of additional schedules in the appendix that will more clearly show the non-controlling interest treatment and other calculations for your reference, as we have received questions on these topics. Before I close and we move to questions, I'd like to pivot back to Truist for a moment. Gerard, I assume that you'd be asking about any changes in outlook, and so I'll go ahead and provide that now.
Thank you.
In January with earnings, we guided for revenues to decrease 2%-3% relative to 4Q 2022 and for adjusted expenses to increase 1%-2% relative to 4Q 2022. Currently, 1Q revenues are tracking a little ahead of our guidance given improvements in productivity as we continue to accelerate our performance post-integration as well as better than expected capital markets revenues. On the flip side, adjusted expenses are tracking a bit above our guidance, driven by higher than forecasted personnel expense, in part due to better revenue performance, but also driven by certain discrete items in the quarter. Net 1Q adjusted PPNR is tracking close to our previous expectations.
In addition, we do not currently have any changes to our full year 2023 revenue or expense guidance. We continue to feel great about our opportunity and momentum moving throughout the year. Lastly, credit quality and net charge-off performance is tracking well and in line with our expectations. I'll close with just five key takeaways on slide 22.
First, Truist has an incredible foundation that's primed for purposeful growth. Second, 2023 will be our 1st full year as Truist without integration activity and priorities are clear. Core execution to actualize Truist's purpose, harvesting earn opportunities, and continuing to digitize and automate our process and operations. Third, we're creating clarity around five KPIs that represent a balanced scorecard of growth, profitability and capital allocation, and sets a high bar to perform better than the competition over the long term.
Fourth, we're well-positioned across a broad range of economic outcomes given our diverse business mix, conservative credit culture, balanced approach to interest rate risk management, strong profitability profile, and strong risk-adjusted capital position. Lastly, our insurance business strategic partnership with Stone Point creates increased growth opportunities and significant flexibility and opportunities for Truist. Thank you for being here today, particularly late in the afternoon here on the last track and for your interest and support of Truist. Gerard, I'll come your way.
Great. Thank you, Mike. Maybe just a quick question on the transaction with the insurance company. I think I recall you guys saying the premium finance business is not part of the transaction and that will stay with Truist, or did I get that wrong?
You've got that right. Obviously, a ton of business opportunity that exists and there's synergy potential and reality between premium finance and the insurance businesses. The premium finance business is a specialized lending business. It's capital-intensive, we didn't feel like it was sensible to include it within the perimeter of the fence for Truist Insurance Holdings. That's why you saw that difference in sort of I think what was previously thought of as the public EBITDA profile for the insurance business.
Yeah. You know, premium finance is one of the-
Right.
... very, great businesses.
Yeah.
Yeah. I was just curious. Okay, good. I do want to highlight one of your, a couple of your slides which are quite unique. This KPI approach-
Yeah.
That you're taking, is very interesting. We're big believers in these metrics that you guys have identified to drive shareholder value. I guess the question is, and you gave the relative to your peers and stuff, will you be updating this on a quarterly basis, annual basis? How can we track what you've given us here today, which is quite good?
Yeah. Well, I think, you know, publicly, what we're saying is that these are the KPIs that we're going to hold near and dear. You know, our expectation and your expectation over a longer period of time is that we're operating above peer median for four of the five metrics. In the case of ROATCE, we should be in the top quartile. That's also on our report card, and it's going to impact how we get paid. It's, it'll be in focus for our board and all of our various stakeholders.
Oh, that's great.
I think you'll see it more prominently emphasized in some of our IR collateral.
Got it. Good. Can you share with us, you raised a little bit over 30 basis points of capital with the minority stake. How are you going to use the proceeds, do you think, from the deal?
Yeah.
What kind of capital ratios are maybe you're targeting over the near term?
You know, at 30 basis points that's about $1.5 billion after taxes, and this isn't like a transformational-
Right. Right.
... you know, capital raise or liquidity, you know, moment for Truist. From a capital perspective, I'd say, look, we're very comfortable. You know, we ended last year right at sort of 9% on the screws from a CET1 perspective. We're comfortable operating, you know, 9%, 9.5%, give or take. That's a lower level than we previously discussed.
You know, when we were in the throes of the merger, we had the integration, risk, all of the uncertainty. We felt like it was prudent to be a little bit better capitalized. We feel like a little more leverage is appropriate now. I wouldn't see this, you know, significantly changing, you know, our capital allocation or our capital, you know, planning. In terms of same maybe goes for the reinvestment of the proceeds. I think we mentioned on our call just assume some short-term investment in securities cash, and cash is doing okay these days.
Yeah. cash is king.
Look, our capital allocation waterfall, we've been pretty consistent about. One, we think our biggest opportunity at Truist is to continue to invest in our franchise and our clients, and so we'll continue to do that. Second of all, our dividend is a really important part of the investment thesis for our investors, and so continuing to pay a strong and growing dividend is important. M&A is going to continue to be an important part of our strategy. I think most notably recently, and I think in the short term that'll still be focused in supporting our insurance business, but also other places where we can add capabilities or clients. Lastly, to the extent it becomes sensible, share repurchase.
Yep. Truist over the years has done a number of these insurance transactions. I mean, not the minority stake but-
Yeah.
... quite acquisitions. When you look into the future, can you do more, deals or less with this structure?
Yeah.
What are you guys thinking about that?
I mean, look, we've been consistently supportive of the insurance business. We're very fond of it.
Oh, yeah.
We think we have, you know, the best CEO in the space. We think we have a premier asset. Our reputation in the market is for great client service. Our organic growth has been strong, and we've been a very successful acquirer of companies, as you mentioned. You know, it's difficult to buy businesses at, you know, 3 x your own PE multiple.
Right.
One of the benefits of this new structure, frankly, is to create an independent capital structure with an independent currency that can be leveraged, if and when it makes sense. Maybe it's the context of a larger deal, a transformational deal, where we can either raise some more capital with our new partners, with partners yet to be determined, or we may decide to continue to own the exact same stake and inject incremental equity into the business or fund it, you know, organically, ourselves.
I'd say, you know, what does that mean? I mean, our overall outlook for the insurance brokerage sector is that M&A is going to continue to be, you know, a really important theme. For us to maintain the value and frankly, increase the value of our business, we feel like we've got to participate. I think this structure will enable us to participate, with more confidence and more consistently than we even have in the past. I'm not sure it's necessarily a, you know, flag in the ground, we're going to do more deals. We're going to do smart deals and support the growth of the business.
Got it. I guess when you look out longer term, as you mentioned about supporting the business, is it ever put on the table that maybe of exiting? I mean, just really selling all of it, taking all that extra capital that you've created-
Sure.
... and using it for other depository type businesses or buybacks?
Yeah, I mean, I, you know. What I'd say this, is that we're open-minded, right? I think what this transaction, in my opinion, demonstrates is that we're looking through the lens of the insurance business, right? To be successful, want to continue to maintain our market position or improve our market position, we're going to have to be active. I think if down the road, there's a transformational transaction that makes sense for Truist Insurance Holdings to execute, that isn't feasible or isn't advisable for one reason or another at that time for Truist to participate, we'd be okay being diluted further and owning a smaller piece of a bigger pie. I don't think that's predestined, right? But I think that's a possibility.
One of the benefits of this transaction is we have all the flexibility we had and then a little bit more, right? I mean, we focused a lot in some of the one-on-one discussions we've had today and talking to some of our analysts about the transaction structure and future M&A. One of the really important components of this transaction is creating the currency for John, who's our CEO of our Insurance business, world-class, to continue to retain and recruit these producers in the insurance broking world. It's a fiercely competitive war for talent out there. We want to be able to buy businesses, create great incentives, using units that track to the value that they're creating over in Insurance Holdings.
Got it.
I think I answered your question.
Oh, yeah. No, very well. now that you've been in the CFO role for, you know, four months or so, four or five months.
5.5.
There you go. What are some of the areas of focus and are there changes that you're thinking of making as you go forward?
Well, I mean, you saw a little bit of it today and I think-
Yep.
... getting a little bit of emphasis around performance. What are we measuring? Why? You know, how are we using that framework to make decisions around capital allocation? What expectations are we setting for ourselves? How will that tie to comp? That was a sort of an early pulse of focus for me. You know, it seems I've chosen an unusual moment to become the CFO of a bank. I mean, this, the market backdrop and rates has been quite a ride. I'm spending quite a bit of my time, you know, focusing on our balance sheet, making sure that we're not just positioned short term for what comes next from a rates perspective or from a credit, you know, cycle perspective, but also over the longer term too.
That's been, you know, an area of focus. Not necessarily a change, but an area of focus. I think more broadly, you know, just, you know, we're in a moment in our company where we really are shifting our focus towards clients and execution and success and growth. In order for us to be successful, but in growing revenue, but also managing our expenses, we just have to get better at making trade-offs. You know, you know, when you're working through a merger like we've just gone through, there's sort of unavoidable amount of compromise and do no harm types of decisions that have to be made.
Now we're in a different moment, we've got to start to say, okay, what is it about Truist that makes us different, that makes clients want to work with us, that makes teammates want to work for us, and make sure that we're really clear on what that is, and that we're, you know, prioritizing those scarce investment dollars in those lanes. That might mean not investing in other lanes. That's been a big focus of mine too, just around, you know, quantifying those trade-offs and helping advise our business leaders around where we're focused.
Very good. We're running out of time, but I have another question. A lot of the banks have talked about deposit betas and what we're seeing with rates going higher. Can you share with us, what you folks are seeing in both commercial and consumer deposits in terms of deposit betas.
Yeah.
Second, if you look at how you're trying to grow or what strategies are you using to grow deposits or retain deposits?
Yeah. You know, it's funny. Towards the end of last year, you know, our commercial and broadly speaking, kind of our wholesale client base, the businesses obviously became more rate conscious, more quickly. We found ourselves having a lot of conversations around rates and different products and very proactively. The nice thing about that side of the business is we've got bankers, right, that manage these relationships.
They've got a great sense for the importance of that long-term relationship. You know, we sort of eased into those discussions, and we feel like we're doing a really good job, you know, thinking about the totality of the relationship and managing that. There are still, you know, there's pressure on balances out there, some of that QT, some of that perhaps inflationary.
I think relatively stable on the balance side, on the commercial side, but still some pricing pressure. What's been different here in the 1st quarter of 2023 is our retail consumers have become much more aware and have been more proactively pursuing higher rate products. We've seen quite a bit of pressure on our DDA balances. Some of that's, you know, burning off and just sort of a normalization in some of that leaving the system.
We've seen a lot of it disintermediate and remix into really primarily for us, time-based, like CD products. That wasn't a thing for us in the 4th quarter. We were doing some brokered CDs out of market through independent investment advisors and things like that, sort of staying out of our markets. Now we've got a much more proactive approach and reactive approach, and we're doing both, right? To make sure that we're, again, trying to avoid the hammer and using the scalpel to make smart decisions, but retaining those clients, being responsive to that increased rate consciousness.
So we've seen saving or money market and time deposits, you know, increase quite a bit and quite a bit of pressure on DDA and savings. On the betas, you know, we, you know, from Q3 to Q4, we went from, I think, 21%-27% or so, and that was an acceleration in that period. I think at the time in January, we talked about, you know, sort of through the cycle, you know, 40% beta.
Right.
Maybe then some. You know, and we have seen the betas continue to accelerate relative to even the Q3 to Q4 shift. I think we'll certainly be there and we'll pierce 40 and I think as an industry. You know, a lot of that has to do, I think, that lag, you know, was in many respects in hindsight was predictable given how quickly rates increased.
Right.
Now that we're at the levels we are and frankly, you know, the possibility that we're going even higher than many of us expected, I think we'll tune people in, businesses and retail clients, even more so. You're going to continue to see these betas catch up and so.
Yeah. Well, we've gone over a little bit. I thank you for a very informative presentation. We appreciate that. The Q&A was good. Please join me in a round of applause. Thanking Mike. Thanks.
Thank you.