Truist Financial Corporation (NYSE:TFC) Q1 2022 Results Conference Call April 19, 2022 8:00 AM ET
Company Participants
Ankur Vyas – Head of Investor Relations
Bill Rogers – Chief Executive Officer
Daryl Bible – Chief Financial Officer
Clarke Starnes – Chief Risk Officer
Beau Cummins – Vice Chair
John Howard – Chief Insurance Officer
Conference Call Participants
Gerard Cassidy – RBC
Betsy Graseck – Morgan Stanley
Ken Usdin – Jefferies
John McDonald – Autonomous Research
Matt O’Connor – Deutsche Bank
Mike Mayo – Wells Fargo Securities
John Pancari – Evercore ISI
Ebrahim Poonawala – Bank of America
Erika Najarian – UBS
Operator
Greetings, ladies and gentlemen, and welcome to Truist Financial Corporation’s First Quarter 2022 Earnings Conference Call. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded.
It is now my pleasure to introduce your host, Mr. Ankur Vyas, Head of Investor Relations, Truist Financial Corporation.
Ankur Vyas
Thank you, Katie, and good morning, everyone. Welcome to Truist’s first quarter 2022 earnings call. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Daryl Bible.
During this morning’s call, they will discuss Truist’s forwarder results and share their perspectives on how we continue to activate Truist’s purpose, our progress on the merger and current business conditions. Clarke Starnes, our Chief Risk Officer; Beau Cummins, our Vice Chair; and John Howard, our Chief Insurance Officer, are also in attendance and are available to participate in the Q&A portion of the call. The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist IR website, ir.truist.com.
Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 and 3 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP.
In addition, Truist is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and achieved webcasts are located on our website.
With that, I’ll now turn the call over to Bill.
Bill Rogers
Thanks, Ankur, and good morning, everybody, and thank you for joining our call today. We delivered solid first quarter results, representing the diversity and flexibility of Truist in a more volatile market and business environment.
Net interest income declined sequentially due to lower day count, lower PPP revenue and purchase accounting. Net interest margin slightly exceeded our expectations, and more importantly, both NII and NIM appear to have bottomed and have good upside from here. Fee income was below expectations, primarily due to investment banking and mortgage both of which were negatively impacted by the market environment.
These effects were partially offset by higher insurance income, which underscores the advantages of our diverse business mix. Expenses were lower than expected, reflecting strong expense discipline and lower incentive compensation associated with softer fee income. We experienced continued solid loan growth, albeit with headwinds in certain areas.
Credit quality remains excellent, contributing to another provision benefit. We also completed our largest conversion event in February. There is a palpable level of excitement from our teammates to go to market as One Truist with an expanded toolkit to better fulfill our purpose. We’ll share more details on these topics during the presentation.
First and foremost, we are guided by our purpose, which is to inspire and build better lives and communities. We’re convinced that our purpose reinstates the foundation for our success as a company. Our purpose defines how we do business every day, and it provides a framework for how we make decisions.
On Slide 5, we highlight some of the ways we’re bringing purpose to life. A key area of focus for Truist is financial inclusion. We’re wholly committed to removing barriers and improving access to the financial system for all communities, which is why I’m pleased that the Truist foundation is supporting nonprofits that serve women and minority-owned small businesses and advancing digital equity among historically underserved communities.
We know people want to work for companies that stand for something meaningful and the combination of our purpose-driven culture with our industry-leading compensation and benefits, training, development and flexible approach to work is highly effective at attracting and retaining top talent. We plan to further strengthen our benefits programs by launching an employee stock purchase program later this year, subject to shareholder approval.
We also implemented our Truist work model with a focus on intentional flexibility as our teammates return to on-site work throughout March. Personally, it was just incredibly energizing to have so much in-person engagement over the last two months whether with teammates, clients, community members or shareholders. Hybrid and more flexible works here to stay, but I’m pleased at how our team mates have embraced this new model.
We’re also doing our part to convert climate change. And in late January, announced our plans to achieve net zero greenhouse gas emissions by 2050. We’re externalizing our own net zero aspirations and furthering the transition to a low-carbon economy by adding new teammates in our CIB and Commercial Community Bank to help our clients make their own transition.
Lastly, we completed our largest core bank conversion event in February. This was an enormous undertaking with that involved transitioning nearly 7 million clients to the Truist ecosystem and unveiling roughly 6,000 Truist signs across our footprint, which will further build our brand. The integration was successful overall, especially when you consider the scale and complexity involved. This was the largest bank technology integration in over 15 years.
I want to personally thank our teammates for their hard work and preparation as well as the many personal sacrifices they’ve made to ensure the integration was successful. Because of you, we now have millions of Truist clients who are absolutely pleased with their experience. At the same time, it’s also impossible to execute an integration of this magnitude perfectly.
We acknowledge there were some opportunities to improve along the way. Our teams did an incredible job in resolving client challenges with urgency and a view towards long-term client and teammate experience improvements. My commitment, though, is that we will not rest until every client is satisfied.
Coming to Slide 7. Our adjusted results exclude $166 million of after-tax merger-related and restructuring charges and $155 million of after-tax incremental operating expenses-related merger. We also generated a $57 million after-tax gain on redemption of a non-controlling equity interest related to the acquisition of certain merchant service relationships, which will provide Truist a larger share of the economics and more control over the end-to-end client experience.
Finally, we incurred a $53 million after-tax loss to reposition approximately $3 billion of securities to enhance our yield by approximately 100 basis points. The total EPS impact of these items was $0.24 per share. Daryl will provide more details on these items later in the presentation.
Turning to our first quarter performance highlights on Slide 8. We earned $1.3 billion or $0.99 a share on a reported basis. Excluding the selected items on Slide 7, adjusted earnings totaled $1.6 billion or $1.23 per share, up 4.2% compared to a year ago, primarily driven by lower loan loss provision.
Compared to the fourth quarter, adjusted EPS declined 11% driven primarily by a 4% decrease in adjusted revenue attributed to more challenging market conditions and fee businesses such as investment banking and residential mortgage in addition to some normal seasonal patterns.
Adjusted ROTCE was a strong 22.6%, unchanged from the prior two quarters. Even excluding the reserve release, adjusted ROTCE was still strong at 19.9%. Adjusted expenses decreased slightly as seasonal headwinds were offset by lower incentive compensation due to softer fee income in addition to our ongoing merger-related cost save efforts.
While operating leverage was a negative 240 basis points year-over-year, we are still targeting positive operating leverage for the full year 2022. Asset quality continues to be excellent, and net charge-offs remain low, contributing to a provision benefit during the quarter.
Capital deployment remained healthy in the first quarter as we completed the acquisition of Kensington Vanguard and certain merchant services relationships and funded solid organic loan growth. I’ll provide more details about loan growth shortly.
Overall, we’re off to a slower start in 2022 than we would like, but I believe our performance can improve throughout the year. In addition to the core bank conversion, we completed the migration of our retail business and wealth clients to the new Truist digital experience and now have sunset all heritage digital experiences.
As you’ll recall, early in the merger, we made the decision to build a completely new digital experience rather than relying on existing systems and parties given the increasing importance of digital channels to our clients, we’ve built this new platform based directly on clients’ feedback, and we’ve introduced it in waves, learning from each release and continually improving.
With a more modern and agile platform and approach, we’re able to introduce a number of new features to both sets of heritage clients in advance of the core bank conversion and our speed of client experience improvements will only accelerate in the coming months and quarters as our digital and technology teams shift their efforts from integration.
A great example of this will be Truist Assist, which will be our new cloud-based self-service digital assistant that we’ll introduce in the second quarter and will be accessible to all our clients 24/7 via various digital channels. Truist Assist will help clients execute basic tasks, schedules and provide insights and recommendations so they can have more control and confidence in their financial well-being.
In addition, we’re executing and investing in a number of other areas over the coming quarters to improve our clients and teammates digital experience, including, but not limited to, digital payments, digital on-boarding, enhanced authentication technology and expanding LightStream to include a new deposit product on a real-time cloud-based core.
Turning to loans and leases on Slide 10. Average loan balances grew 0.8% sequentially and rose 1.2%, excluding PPP loans. Sequential loan growth was driven primarily by C&I which increased 5.1%, excluding PPP and mortgage warehouse lending, where balances have declined rapidly due to declines in refinance volumes.
Loans grew across all CIB industry practice groups and growth was particularly strong within our Asset Finance group. Commercial Community Bank C&I loans grew 2.4%, excluding PPP, fairly broad-based across many of our regions. Revolver utilization and revolver exposure both grew in the quarter. CRE continues to be a headwind, given a very competitive market or optimistic that we’re approaching stabilization.
Excluding mortgage, consumer and card balances decreased 2%, driven primarily by a 3% decline in auto that was attributable to ongoing supply chain issues in a highly competitive environment. We also experienced continued declines in our home equity and student loan portfolios. These pressures were partly offset by service finance, which is performing well and off to a great start.
This quarter, we were also excited to announce a new alliance with State Farm, whereby their agents will be able to offer consumer lending products through LightStream. We’ll pilot this program later in the year and loan volumes will build over time. This alliance reflects Truist’s increasing size, scale and relevance in addition to the superior digital capabilities and client experience that LightStream provides.
In summary, we continue to be positive about the prospects for further loan growth in light of the current economic conditions in our pipelines, our increased capacity as a company to focus on clients post integration and our differentiated set of consumer businesses. At the same time, though, we’ve got to acknowledge the increased uncertainty presented by a range of geopolitical and economic risk, which could cause loan growth to deviate from our outlook.
Now turning to deposits on Slide 11. Average deposit balances increased 1% during the first quarter, reflecting some moderation from the 2% pace observed in the fourth quarter. Total deposit costs were stable at 3 basis points. As interest rate environment involves, we’ll take a balanced approach to managing deposits, being attentive to client needs and client relationships while maximizing value outside of rate paid.
Guided by our purpose and our desire to be responsive to the needs of our clients, as previously announced, we’ll discontinue a host of overdraft-related fees at the end of this month. We also remain on track to launch our new Truist One checking account experienced this summer, which will have zero overdraft fees, the capability to provide qualifying clients the liquidity they need to — via a simple $100 negative balance buffer and a deposit-based credit line limit up to $750.
We’re mindful of the impacts that inflation and reduced stimulus may have on certain segments of our clients particularly the least advantaged and Truist One of the many examples of where we’re advancing financial inclusion. Despite the financial impacts we’ve discussed previously, this is a long-term win for our stakeholders as we endeavor to improve retention, increase acquisition, and enhance the overall client experience.
And with that, let me now turn it over to Daryl to review our financial performance in greater detail.
Daryl Bible
Thank you, Bill, and good morning, everyone. Turning to Slide 12. Net interest income decreased 2% sequentially as the impact of two fewer days and lower purchase accounting accretion offset the benefits of solid loan growth and higher securities yields. Reported net interest margin was flat and core net interest margin increased 2 basis points both exceeding our guidance by 2 basis points. The improvement in core net interest margin was primarily driven by lower premium amortization in the securities portfolio.
Moving to Slide 13. Truist has intentionally maintained a balanced approach to managing interest rate risk, being well positioned to benefit from higher rates in the near-term while maintaining some level of downside protection if and when interest rates decline. We continue to be asset sensitive and estimate a 100 basis point ramp rate increase would increase NII by 4.3%, a 100 basis point shock would increase NII by 7.3%. Approximately 80% of our reported asset sensitivity is from the short end of the curve. While early, deposit betas thus far are tracking below modeled expectations.
Moving to Slide 14. Adjusted revenue declined 4.4% linked quarter, which is below our guidance range of down 1% to 2% and driven almost entirely by weaker-than-expected fee income. Fees declined 8% sequentially and reflecting challenging market conditions and seasonality. Investment banking and trading income declined $116 million or 31% as more volatile market conditions impacted M&A, high yield, leverage finance and equity. Investment banking pipelines look healthy, but market conditions will determine both how much and when the pipeline is realized.
Residential mortgage income declined $70 million or 44% as higher interest rates reduced refinance activity and pressured gain on sale margins on the production side. Servicing was not as large of an offset as expected since the benefits of slowing DK were eroded by higher hedging costs due to the flatter yield curve. Part and payment fees and service charges on deposits declined $33 million collectively primarily driven by seasonal but also due to client-friendly fee waivers we instituted in and around the time of our February conversion.
These items were partially offset by insurance income, which increased 9% primarily due to strong organic growth and the first month of Kensington Vanguard acquisition. We included a table at the bottom of Slide 14 to make other income trends more clear. Other income, excluding changes in our nonqualified plan and other gains was up $31 million sequentially given negative valuation adjustment for Visa-related derivative last quarter and up $56 million year-over-year primarily as a result of higher SBIC income.
Turning to Slide 15. Reported expenses were $3.7 billion, including $216 million of merger-related costs and $202 million of incremental operating expenses related to the merger. The merger costs in the quarter were primarily connected to new Truist signs, branch closings and impairments and data center decommissioning efforts. Adjusted expenses decreased sequentially, exceeding our guidance of up 1% to 2% and reflecting our disciplined expense management. The drivers of the decline include decreased personnel costs, reflecting lower incentive compensation expense and changes to the nonqualified plan, partially offset by seasonally higher FICA and 401(k) expenses. The decrease in personnel expense was partially offset by increased marketing costs as we continue building our brand.
Compared to the first quarter of 2021, adjusted expenses were stable as cost saves from FTE reductions and lower occupancy costs were offset by continued investments in software and marketing, along with higher operational losses. The operational losses have steadily increased in recent quarters as banks are experiencing higher levels of fraud activity, in addition to our own decisions to enhance client experience. We remain highly focused on reducing our operational losses and improving our client experience at the same time.
Overall, we have incurred significant costs in conjunction with the integration events, both in the merger categories as well as run rate fees and expenses. We were excited that our last major conversion event is behind us, and we can start to reduce the financial costs associated with these integrations.
Moving to Slide 16. Asset quality remains excellent, reflecting our prudent risk culture, diverse portfolio and favorable economic conditions. Our net charge-off ratio for the first quarter was unchanged at 25 basis points.
The ALLL ratio decreased to 1.44%, resulting in a provision benefit of $95 million first quarter. Our reserve levels reflect current credit conditions but also take into account uncertainty associated with inflation, rising rates and geopolitical events. Truist has no direct credit exposure to Russia or Ukraine and minimal indirect exposure. Including RAC, our exposure to subprime at the origination is 1% or less in the other consumer portfolios.
Continuing on Slide 17. Capital and liquidity levels remain strong. Our CET1 ratio declined approximately 20 basis points as a result of capital deployments related to the acquisitions of Kensington Vanguard and certain merchant service relationships, growth in risk-weighted assets and the CECL phase-in.
In order to mitigate ACI risk and volatility, we transferred approximately 40% of the securities portfolio to held to maturity during the first quarter. Because we are a Category 3 institution, AOCI does not impact regulatory capital, it simply impacts tangible common equity. We submitted our capital plan to the Federal Reserve in early April and look forward to sharing more details later this summer.
Moving to Slide 18. This slide provides additional details about three transactions we completed in the first quarter to enhance our future earnings and profitability. First, Kensington Vanguard acquisition significantly expands our presence in title insurance, augments our capabilities in larger and more complex commercial transactions and will also provide additional IRM opportunities given our significant presence in CRE. We anticipate Kensington Vanguard will add $115 million in revenue annually and be accretive to insurance EBITDA margin by year two.
Second, we terminated merchant revenue share alliance in which Truist had a non-controlling interest. The transaction resulted in a $74 million gain from marking our stake to fair value. In addition, we acquired significant portion of relationships from this alliance. This will position us to control more of the end client experience when serving those clients. We also believe that the acquisition will generate approximately $25 million of additional cash, PPNR annually. Last, we repositioned $3 billion of securities to enhance our yield by approximately 100 basis points resulting in a two-year payback.
Moving to Slide 20. As Bill mentioned, we successfully completed our large core bank conversion in February. We are now One Truist, not just culturally, but also in terms of branding, digital and technology, which allows us to serve our clients more effectively and make our company simpler to operate.
As we shift our focus from integration to executional excellence, we will maintain our focus on realizing remaining cost savings. Much of that will happen in the second half of ’22 as we decommission over 900 business applications and three of our six data centers. Our decommissioning efforts are complex and significant, and we are on track. With our final integration largely complete, our technology teams will shift towards more further enhancing client and teammate experience.
Turning to Slide 21. We have made excellent progress across the five cost-save buckets and are closing in on our commitment to achieve $1.6 billion in net cost saves. Third-party spend is down 11.9% from baseline levels exceeding our targeted reduction of 10%. This quarter, we closed over 400 branches exceeding our commitment to close over 800 total branches by the end of the first quarter of 2022. We now have finished the merger-related branch reduction efforts and will shift to more normal course branch network optimization.
We have also achieved our targeted reduction in non-branch facility space, strategically reducing our occupancy costs through consolidation and closures. However, we still have more opportunities in which we are working. Excluding acquisitions average FTEs are down 1% linked quarter and 14% since the merger. Our voluntary separation and retirement program will conclude in the next two quarters, further supporting our ongoing cost saving efforts. I will now provide guidance for the full year ’22 and new guidance for the second quarter.
In 2022, we now expect adjusted revenue growth of 3% to 4% from 2021. Relative to our outlook from January, the mix of revenue growth is now tilted more towards net interest income given the outlook for higher short-term interest rates, partially offset by weaker fees, primarily in residential mortgage and investment banking. This represents 6% to 7% core revenue growth when you exclude significant decline in PPP and purchase accounting.
As you will recall, we expect a mid-single-digit decline in service charges in 2022 given our elimination of certain overdraft-related fees and introduction of Truist One Banking. NII and net interest margin bottomed in the first quarter and should increase throughout the year based on the forward curve. We continue to expect point-to-point loan growth ex-PPP in the mid-single digits. But as Bill said, we acknowledge higher levels of economic uncertainty.
We will be at the high end of our 1% to 2% increase of adjusted noninterest expense largely due to the impact of Kensington Vanguard acquisition. The first quarter was the peak for our merger-related costs, and now we are projecting less than $400 million for the rest of this year and none in 2023.
We are still targeting positive operating leverage on a GAAP and adjusted basis in 2022, though this is somewhat dependent on interest rates and market conditions. We still expect net charge-off ratio to be in the 30 to 40 basis points given our assumptions for normalization throughout the year.
Looking into the second quarter, we expect adjusted PPNR to grow high single digit with possible upside from the first quarter level. As a result, higher net interest income and much longer fee income given seasonality in insurance and the potential rebound of investment banking, this outlook assumes the forward curve in interest rates and controlled deposit betas.
We expect core net interest margin to increase approximately 7 to 10 basis points due to the benefits from the March hike and from a projected 50 basis point hike in May. GAAP net interest margin is expected to increase only 3 to 4 basis points as purchase accounting accretion is slowing, given lower prepayment environment as a result of higher rates.
Now I’ll turn it back to Bill to conclude.
Bill Rogers
Thanks, Daryl. Moving to Slide 22. The first quarter of 2022 was historic for Truist as we’re now serving our clients as a true unified Truist across all dimensions.
In addition, the first quarter is a strategic and financial turning point for Truist. Strategically, the completion of our core bank conversion positions us to fully shift our focused executional excellence, transformation and growth. Our businesses that went through earlier conversions in 2021 such as wealth and mortgage are beginning to see the benefits of this shift whether in the form of new adviser hiring in wealth or significantly improve client satisfaction scores and mortgage.
Financially, the first quarter should be at the bottom for net interest income and net interest margin and fee performance should improve as market conditions normalize and we capitalize on the significant integrated relationship management and revenue synergy potential we have as a company.
In addition, the completion of the integration means merger costs will decrease dramatically through the remainder of 2022 and we’ll realize our remaining cost saves as data centers and systems are decommissioned in the back half of the year, all of which helped drive positive operating leverage.
To conclude, I remain highly optimistic about the potential and opportunity for Truist, all of which are clearly summarized on Slide 23, our investment thesis. Our opportunity and priorities are clear: shift from an integration focus to execution focus, deliver better client experiences, capture the significant IRM and revenue synergy potential we have to shift the millions of hours of development training and effort from the integration to building better lives for our clients. This shift does not require any incremental risk appetite or capital. It only requires execution and focus.
At the same time, while we believe the economy is on sound footing in the near term, the headwinds of geopolitical uncertainty, coupled with the inflationary environment and aggressive forecast for the tightening of monetary policy create a wide range of economic outlook as we move further into this year and next.
Truist is well positioned across all of these environments, given our advice-oriented model for our clients, balanced approach to interest rate risk management, conservative credit culture, diverse business mix and strong and improving earnings profile.
And with that, Ankur, let me turn it back over to you.
Ankur Vyas
Thanks, Bill. Katie, at this time, will you explain to our participants how they can participate in the Q&A session? As you do that, I’d like to ask the participants to please limit yourself to one primary question and one follow-up, so that we can accommodate as many of you as possible today.
Question-and-Answer Session
Operator
[Operator Instructions] We’ll take our first question from Gerard Cassidy with RBC.
Gerard Cassidy
Bill, can you elaborate or Daryl as well, I guess, on the loan growth that you guys are seeing, I think, Bill, you touched on some very competitive forces in the commercial real estate markets. And what are you guys seeing in that area? And then on the residential mortgage business, Daryl, I think you referenced that the refinancing business was down. What percentage of originations are refinancing in the home mortgage business?
Daryl Bible
Gerard, let me start on the loan growth and maybe sort of cover a variety of different topics in your question. We’re seeing interesting loan growth and I think the places that most highly correlate to performance, I think, is where we’re performing well. So, I think C&I as an example.
So in C&I, if you exclude PPP, where remember, we were over-indexed appropriately, you exclude the mortgage warehouse component, which has a lot of seasonal components to it, it sort of dissected to core C&I, it was up about a little over 5%. So we think that actually reflects the core component of where we see loan growth and the power and the execution of our franchise. That was particularly strong and literally across all of our business lines that was good across virtually all of our geographies areas like asset finance and ABL, sort of geared supply chain were particularly strong.
You asked about CRE, and I’d say it’s a couple of different stories. On the small CRE side, we have had some runoff. Some of that’s been intentional in the focused areas. On the sort of higher-end institutional borrowers, we actually performed very well. We’ve been very competitive on the residential and industrial side, particularly think specialized areas like data centers and those types of those types of things.
Clients are flying portfolios. But it is an aggressive market. So I think the places where we want to be competitive, we’re really competitive in the areas that we’ve allowed a little runoff, we’ve allowed a little runoff to happen there.
Daryl, do you want to talk specifically about — I think there was a question about the refi?
Daryl Bible
Yes. On the residential, Gerard, about two-thirds of our activity was in refinance activity. That has really come down significantly. As we move to the second quarter, it’s more of a purchase market kind of plays to our strength from that perspective. So I think we’re hopeful that, that will kind of maintain and hopefully build as the year goes on, but refi is definitely being impacted. The other impact on the residential mortgage is just the cost of hedging is just a lot higher right now. So, it’s offsetting some of the servicing benefit that you would get out there.
Gerard Cassidy
Very good. And then as a follow-up, Bill, Truist has a unique franchise where you’ve got your regional precedence throughout your franchise, so you have a good pulse on what’s going on in those markets. Can you give us an update on what your customers are telling you? Obviously, we’re in a very uncertain time with the tragedy going on over in Ukraine. What are they feeling? And are they still pretty optimistic about their business outlook?
Bill Rogers
Yes. Maybe I’ll do it in two ways, and maybe I’ll do it in — starting with the tangible side. If you look at production and pipeline specifically, they’re really strong. Our pipelines particularly in that core commercial business, which you’re talking about in the first quarter are equal to where they were in the fourth quarter in terms of strength.
So in terms of the evidence of what we see in terms of pipelines and production, I’d say there still is a great deal of confidence. Virtually every client is in some inventory build capacity. I mean from a supply chain perspective, they’re all wishing to increase their inventory to serve an increasing demand.
Demand does not seem to be the particular challenge. So I’d say that’s the tangible part. Now the intangible part in talking to clients, sort of where everybody is and what some of the anecdotal evidence, I don’t think we’re in a full risk-off mode, but there’s a little bit of a wait and see. I mean, I think that’s fair.
Maybe a little bit of a blinking yellow light, not a red light, nobody’s stopping. So I think the combination of this tangible part that we see in terms of pipeline production, need for inventory build is really solid and would be reasons to be really optimistic all with just a little bit of a cautionary note as people look forward into the next several quarters.
Daryl Bible
The only thing I would add to that, on the consumer side, it’s fair to say in February during the conversion our branch people were really distracted just going through the integration and the efforts. I think we’ve come out of that strong now, and we’re starting to see momentum in loan origination out of the branch areas. And if you look at our consumer convenience businesses that we have like LightStream and Sheffield and Service Finance, they’re all starting off really strong and seeing really good volumes as we enter into the second quarter.
Bill Rogers
Yes. So I think to bump those comments, I mean, there’s reason to have a lot of optimism with just a slight level of uncertainty, which sort of is the right balance.
Operator
We’ll take our next question from Betsy Graseck with Morgan Stanley.
Betsy Graseck
One question on just the outlook here for how we should be thinking about net interest margin. And part of the reason I ask is when I’m looking at the average balances where you show what the yields did Q-on-Q. We have some declines in consumer loans. So I’m just wondering, is that like swap related or is there something more intimate going on in the portfolio? I’m just wondering how quickly that should bounce back given the outlook for rates that you’ve got?
Daryl Bible
Yes, Betsy, I think what you’re looking at, we can maybe check off the line, but I think it’s just the runoff of purchase accounting. When you look at our new rates going on the books, our new volume rates are going on higher than what the existing portfolio is right now. So, we are averaging up in most cases across the board there. So, I think overall, yields will rise and when we have our projections throughout the year, I expect net interest margin to continue to rise throughout the year, NII to continue to grow just as the interest rates start to climb.
Betsy Graseck
And then just to follow on there is. How do you think about your deposit strategy? How interested are you going to be in generating accelerating deposit growth? Or would you be more in the mode of allowing runoff? Just trying to understand the balance sheet size and how we should think through that.
Daryl Bible
If you look at what we’ve attracted from COVID, $80-plus billion of new deposit funding, the vast majority of that is noninterest-bearing. And when you look at it, we pay the lowest rates of anybody else in the industry. So almost all of it is non-rate sensitive. So we definitely feel that we have betas modeled in to protect what we want to protect out there. There could be a little bit of ebb and flow.
But for the most part, we will be specific to make sure that we protect our good clients throughout the organization and do that. But right now, we’ve had rates just started to lift off and our deposit betas that we’re seeing right now are coming in much less than what we modeled. It’s very early into this. But I think right now, I think it’s not a huge impact on what we’ve had to pay and we still have the deposits growing for us, so non-interest-bearing growth from us in this past quarter as well.
Bill Rogers
And that’s what I might add to that, we’re operating now as a new Truist. So we’re operating with a company that has about an 18% average market share. So in number one, two or three market share in most of our markets. So that’s a new experience. Also this increased capacity and marketing expense. So our unaided brand awareness has really gone up actually fairly significantly since the rollout.
And then we just have a lot more capabilities other than rate pay. I mean we just have a lot more tools and capabilities to offer our clients. So, we’re operating in the kind of — this is the kind of environment we built through Truist forward in fairness. We have company that’s got that kind of prowess and capability to serve our clients in ways other than just rate paid.
Operator
We’ll take our next question from Ken Usdin with Jefferies.
Ken Usdin
I wanted to ask about the securities portfolio and the repositioning you did this quarter. So can you just talk a little bit about just where do you want that portfolio size to sit? And is the changes that you made, the sales and the repurchases in the forward outlook for NII?
Daryl Bible
Yes. So I think the way we are managing the balance sheet, and we’ve talked about this before is, right now, we are targeting $15 billion to $20 billion of balances at the Fed. Since the war started in the first quarter, we’re tilted a little bit towards the heavier side of that just for liquidity purposes. And you really look at the cash flows of the whole balance sheet in total. So we’ve had deposit growth come in, so that’s a positive inflow.
You have runoff of securities. That’s a positive inflow. Our first priority is to lend it out to our clients and to basically do that. Once we’ve done what we can do from a lending perspective, then the residual piece would basically go into the securities portfolio. Now from a securities portfolio perspective, we’re investing in the past in treasuries, MBS. So, those are very high-grade, very secure-type securities.
Ken Usdin
Okay. And then the repositioning that you did this quarter, I assume that, that’s built into the outlook. And I guess, is that generally where you’re purchasing now? You’ve mentioned in the slide deck 3.2, is that where the front book is from here?
Daryl Bible
So yes, the mix of what you’re doing, if you go into treasuries, it isn’t a forecast, Treasuries are in the 270s, 280s between the three- to five-year area. MBS are approaching 4%. So, it’ll blend there. But I would say, we’d be on the shorter end of that on a duration perspective, but all that is incorporated with the guidance we gave you.
Operator
We’ll take our next question from John McDonald with Autonomous Research.
John McDonald
I just want to follow up on Ken’s question. Just more broadly, how are you guys thinking about managing capital? On the regulatory side, you’re still well above your regulatory minimums with the 9.4% CET1, but a little bit below where you usually target how you’re thinking about that? And then on the GAAP side, how are you thinking about managing against further OCI risks as keep going up potentially?
Bill Rogers
Hey, John, it’s Bill. Why don’t I maybe start on the capital side? I mean, I think we’ve been very consistent about thinking about where we wanted to establish capital, where we want to operate based on three primary factors. One was just where we were in the merger, how much risk do we have on the merger, do we need to allow additional capital for merger risk. That’s obviously come down substantially. I mean, I would consider that sort of be in a normal mode right now, and we don’t — we’ve gotten through the big components of that really, really successfully.
The second is how much economic risk do we have? And we probably have a little more economic risk in fairness than we had a year ago, but I think maybe on the marginal side. And then sort of where we fit from risk profile as evidenced by some of the CCAR results. And I think will be another confirmation of our lower risk profile, higher PPNR model as Truist.
So, those are the three things that we put into the mixing bowl as it relates to capital. And we’ll continue to reevaluate that. We feel very comfortable where we are right now. We’ll reevaluate that in the mid part of this year and try to determine the appropriate place for Truist to operate. But I feel like we’ve got a lot of opportunity in the capital side based on the evaluation of those risks. And Daryl, would you answer the other part of that question.
Daryl Bible
Yes. So on the OCI, John, what I would tell you is Category 3 it’s not in our regulatory capital numbers. 99% of our portfolio is guaranteed. So it’s just a matter of timing. We’re going to get the funding back. It’s not a permanent impairment that you see. There are partial offsets once a year you mark your pension plan that Mark will obviously be against what the OCI is, which would be some benefit at 12/31.
But the real hedge when you really look at this is the economic hedge with deposits. I mean deposits have increased in value. We don’t mark to market these non-maturity deposits, but we really look at it. The value of that has well exceeded the adjustment than what you saw on the securities portfolio. So that’s really, I think, the offset that you see there.
If we wanted to, we could put more than 40% into held to maturity, I don’t think we’re there yet where we need to do that from that perspective. I think we feel good with what we’ve done today.
John McDonald
Okay. And then one nitpick as a follow-up, Daryl, the duration of the AFS portfolio before the transfers, I think it was about $5 million, do you have the new number on what that looks like now after you’ve moved some to held to maturity?
Daryl Bible
About 6.5%, and our modeling, even with rates going up higher is basically capped out. So, we’re really in the six handle, and that’s where it’s going to be until rates start to fall again.
John McDonald
6.5% now.
Operator
We’ll take our next question from Matt O’Connor with Deutsche Bank.
Matt O’Connor
Sorry if I missed that earlier, but did you say how much of the $1.6 billion of cost saves you’re looking to achieve by year end in the 1Q run rate?
Daryl Bible
Yes. Matt, what I would say, it’s pretty minimal. I mean we had a little bit more reduction in VSRP at the beginning of the quarter. Most of the branch closures were back-end loaded in the quarter. Some of the technology savings that’s going to come through that’s really all in the second half. We have a little bit more closures in corporate real estate. So, I would say, it’s much more back-end loaded. We maybe got a little bit, but the vast majority of it would be in the second half of ’22.
Matt O’Connor
Okay. When you say a little bit, meaning a little bit more than last quarter, right? Because you already had at least a chunk of the 1.6 in the run rate at year-end, right?
Daryl Bible
That’s right. Yes. So, we were two-thirds of the way through at the end of the year. We made a little bit of progress in the first quarter, and we got more to do in the second half of ’22.
Bill Rogers
Yes. I’d say, Matt, I mean — yes, Matt, we’re on really good track on the cost saves. I mean, we’re ahead in most of the categories where we want to be. And now we’ve got a couple of remaining big chunky ones and they’re binary. You close the data center and you get the cost saves. I mean, so we feel really good about where we are in that trajectory.
Matt O’Connor
Okay. And then more broadly speaking, like as we think about costs beyond this year, how do you think about — how should we think about what Truist is trying to be? Like is this a kind of key growth low? Is it an operating leverage story? Because obviously, there’s been lots of puts and takes with the merger. We also have inflation. We also have revenue benefiting from rates, which is usually a very good efficiency business. But what is Truist from an expense perspective looking out beyond this year?
Bill Rogers
Yes. I think, Matt, if we think about sort of overall for Truist, what we expect to be a low efficiency ratio company. So I think the construct of our business mix and our structure allows us to be a low-efficiency industry-leading low efficiency ratio company, sort of where that ends on an absolute basis will depend on a lot of market conditions, but we’ll be at the low end of that. We will be a company with higher growth potential and less volatility.
So I mean when we think about how expenses fit into that rather than sort of the absolute dollar amount in light of expenses that support a growing business and being able to do that with, I think, an industry-leading low efficiency ratio. And positive operating leverage. And maybe I showed you asked that I want to make sure I make that clear as well.
Operator
We’ll take our next question from Mike Mayo with Wells Fargo Securities.
Mike Mayo
Just first, just a clarification. So you’ve guided revenue growth for this year from 2% to 4% up to 3% to 4%, and you expect $500 million of merger savings by year-end from this point forward. Is that correct?
Daryl Bible
Roughly, I would say $400 million to $500 million, Mike, because we got a little bit of savings in the first quarter.
Mike Mayo
Okay. And then more generally, Bill, you just talked about your terminal and state superior growth, superior efficiency, and I would — from what you said before, you have superior geographies superior business mix, superior levers with the merger model. So superior, but then you look at the current loan growth and its average the current deposit growth, its average operating leverage this year looks average. So superior features, but average results, I know you’re going from integration to kind of execution. But from our standpoint, it looks like you’re in a corvette going 60 miles per hour. So when will this superior positioning lead to superior growth?
Bill Rogers
Okay. We’re going to assume we’re on the auto bot. We have no speed limits in terms of opportunity. And Mike, we’re at that inflection point. I mean we talked about this. This is — I think we’re right at that pivot point. And I can feel it. I mean I can feel all the things if you categorize loan growth. But if we break it down to, I think, the things that are highly correlated to positive trajectory, I think those areas where actually we’re doing well, things like sort of core C&I. Other decisions on loan growth are related to the decisions we’ve made about positioning our company, which I think will be really beneficial to us long term.
And then I look at sort of the pivot points of, I mean, I’ll pick several categories if I look at integrated relationship management. It wasn’t at the level we needed it to be in sort of the fourth quarter, first quarter, we’ve made the pivot point, and we’re starting to see significant increase, and you’ll start to see that in some of our results. You see that a little bit in the insurance results in this quarter where we are in terms of positive asset flow and wealth, wealth teams and insurance teams net positive in terms of adding people.
So we’ve reached sort of really good inflection points there. Investment banking, clearly, in terms of adding, retaining opportunities in those businesses, things like the core commercial pipelines, where we are in terms of more lead deals more on the left side, where we are positioned in terms of production in the places we want to be. So I can feel the inflection point. So maybe we’re — whatever it was 60 miles an hour, but the foot is on the accelerator, not the brake. And I totally feel that in the transition that we’re making at this particular juncture, and I’m very confident about our positioning for the future.
Mike Mayo
Maybe just one follow-up. What percentage of your time was spent on the merger before and how much of it has been on continued integration now?
Bill Rogers
Jeff, I look at my personal calendar, I don’t think I’ve been in Charlotte in the last five weeks or so. I mean, so I look at all of our leaders’ time in terms of where they’re spending time, and there’s a significant difference. I’ve been much more in front of teammates, in front of clients and community. And just my own personal time, I can feel it. And in fairness, I’m just one symbol.
More teammates have been in that mode for a longer period of time than I have, and we feel that power shift. I mean just thinking about it in a simple way and Daryl was talking about it in a simple way, we did about 0.5 million hours worth of training. So just maybe put that in context of which that 0.5 million hours of training, we now translate into 0.5 million hours of client-related activity just as like one symbol.
Operator
We’ll take our next question from John Pancari with Evercore ISI.
John Pancari
On the efficiency, the medium-term efficiency goal of the low 50s, I just want to get a little bit more color from me in terms of what exactly would you say is needed to get there in terms of the rate backdrop? And then also in terms of timing that you see as reasonable to get to that low 50s range?
Daryl Bible
Yes, John, you kind of go back where we were when we announced this transaction back in ’19. Rates were a couple of hundred basis points higher back then. And at that point, we thought if we got those cost saves, we would be able to come in at the low 50s at that point. We’re definitely a different company. We continue to buy and add businesses and all that. But we definitely have at least a forecast from the Fed for it to go up a couple basis points this year and into 2023.
So assuming you get the Fed up to 3%, 3.5% and we will execute on our cost saves, we should have really strong efficiency ratios coming in. Whether we get low 50s or not, I think there’s a shot that that could happen just because of the asset sensitivity that we have in the Company and what we’re seeing in the marketplace, our deposit beta is how they perform. So no guarantees from that perspective, but rates going up definitely helps on the net interest income side significantly, and it’s back to kind of where we were back in ’19.
John Pancari
Okay. And then also on the expense side, your expectation for the $492 million in incremental expenses related to the merger to roll off in 2023. What are the biggest drivers of that decline? I know you mentioned the consolidation of data centers. Like if you could just give us a little more granularity around what are the biggest components. And related to that, I know you indicated you completed your core conversion. Regarding the core deposit system, what was the upgrade there? What did you move to?
Daryl Bible
Yes. So from a cost save perspective, obviously, technology is the biggest chunk of where the cost savings would come in. So that would be the majority of the savings, both data centers, application systems, FTEs, all in that area would basically will be cost savings. We still have more to do on — a little bit on the VSRP that will help benefit. You have more on corporate real estate reductions. So, we have other savings.
So I would say overall, now that we’ve moved from the integration to now running and operating the Company, we will continue to look for more efficiencies as we operate the Company to give us more fuel to make more investments in the Company as we move forward from that perspective. And I’ll put it back to Bill.
Bill Rogers
Yes. And then on the core conversion, I mean, we consolidated to our heritage core platform but that doesn’t really sort of explain the next-gen opportunities we have within that. So you think about the use of cloud-based and API technologies to create, for example, the digital experience, which we’ve talked about. So this concept of a digital straddle, we were able to convert add flexibility and add products and capabilities to our clients digitally long before we converted them physically in the core conversion.
So I think we’ve got a really good strong first second-gen core platform with third gen, fourth gen kind of capabilities that sit on top of that. And then as you know, we’re also experimenting with a new core platform for LightStream. So, I think we’ve got our feet in the right place where we want to be in terms of maximum flexibility listing core and experimenting with a new core with LightStream and a product called FinSac, which we’ve talked about before. And this digital straddle agility I think will really, really pay strong dividends for us going forward.
Operator
We’ll take our next question from Ebrahim Poonawala with Bank of America.
Ebrahim Poonawala
Just wanted to touch base on credit. One, Bill, Daryl, if you can just talk to us about the consumer book be it Sheffield, LightStream, anything in particular that you are watching around consumer trends, just a fair amount of concern around credit quality. And I’m not sure, if you can give any breakdown in terms of FICO scores within that consumer book?
Bill Rogers
Yes. Clarke, do you mind you talk about…
Clarke Starnes
Yes, Ebrahim, what I would say is that the area we’re most focused on from the consumer standpoint around of more path to normalization or any potential stress out there with the inflationary pressures would be in our subprime auto book. Remember, that book is less than $5 billion to high return business. So, we are watching that really closely. And so, we’re seeing the credit performance more normalized there.
I would say, for the remaining consumer segments, we principally have a prime-based portfolio. So, less than 1% or so of our borrowers in those segments would be considered non-prime, so it’s just not as big of an issue there, but I would say our expectations are that you’ll continue to see as we go through the rest of the year. More normalization on the consumer side first and where we’re watching most closely would be the lower income consumer in our subprime auto.
Ebrahim Poonawala
That’s helpful. And just as a follow-up to that, when we look at the reserve ratio at 144, just give us a context of a day one CECL and where you expect to bottom out, given sort of the macro uncertainties Bill and Daryl talked about.
Clarke Starnes
Sure. And just to remind you all, our day one CECL was at 154 and at Q2 level now is at 144. So it’s down 9 bps from the first quarter. And so, the other point I would make to you is our reserve coverage is even at that level, are very strong to NCOs and NPAs. So, the way we think about CECL, we continue to incorporate multiple economic scenarios and the estimate, including maintaining a pretty healthy weighting on our downside case. We also, this quarter, considered qualitatively in precision and uncertainty with respect to inflationary pressures, rate increases in the war in Ukraine.
But remind you, I’d also reflected the outstanding performance we had from a risk profile and a credit performance for the quarter. So all that being said, we still anticipate potentially additional reserves in ’22, but probably at a decelerated pace compared to last year. And I would just say this, obviously, the number and the amount of the releases is really dependent upon how the economic situation unfolds.
Katie, we have time for one more question.
Operator
We’ll take our final question from Erika Najarian with UBS.
Erika Najarian
Just one clarification question for me. Underneath your revenue guide of 3% to 4%, is it fair for us to assume that given the outlook for Fed funds for the rest of the year, we should take that 7.2% in the up 200 ramp scenario from Slide 13 as sort of maybe the starter point for the NII growth for 2022. And maybe take 80% of that to up 5.8%, then later on how we’re thinking about loan growth and the long end of the curve?
Daryl Bible
Yes. So a lot of moving parts there. What I would say is that in spirit, I think using a good gauge with a gradual over 200, I think is a good approximation. The deposit betas we talked about earlier, we have those being phased in and that’s built into these numbers. So, we’re expecting 25% the first 100, 35 and the next 150 after that. Right now, we’re performing better than that. But we definitely have a pickup in trajectory. If this forward curve does play out as what’s embedded in there you will see a big increase in both core net interest margins from where we are today, probably peers seen 3% maybe by the end of the year.
Erika Najarian
Got it. So the follow-up here is, given what you’ve baked into the deposit betas in the first 100, which could be very minimal. The 7.2% in the up 200 could be the floor in terms of this year?
Daryl Bible
I think we have good conservative estimates. So, there is a chance for outperformance, but it’s still very early, Erika. So you don’t really know. But I feel pretty good with these projections and feel good. Bill talked about earlier about our deposit base and our clients and density that we have. So, I think we’re going to have really positive net interest income as this year plays out in the ’23.
Ankur Vyas
Okay. Thanks, everyone. This 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 hope you have a great day. Katie, you may now disconnect the call.
Operator
Thank you. That will conclude today’s call. We appreciate your participation.
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