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Truist Financial Q2 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Brad Milsaps
    Head of Investor Relations
  • Bill Rogers
    Chairman and Chief Executive Officer
  • Mike Maguire
    Chief Financial Officer
  • Clarke Starnes
    Vice Chair & Chief Risk Officer

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation's Second Quarter Earnings Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Brad Milsaps, Head of Investor Relations, Truist Financial Corporation.

Brad Milsaps
Head of Investor Relations at Truist Financial

Thank you, Karen [Phonetic], and good morning, everyone. Welcome to Truist's Second 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 second quarter results, share their perspectives on current business conditions and provide an updated outlook for 2023. Clarke Starnes, our Vice Chair and Chief Risk Officer; Beau Cummins, our Vice Chair; and John Howard, Truist Insurance Holding's Chairman and CEO, are also in attendance and 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 Slide 2 and Slide 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 it over to, Bill.

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Thanks, Brad, and welcome to the team. Good morning, everybody, and thank you for joining our call today. I don't think, it's a surprise to anybody on this call, that the increasing levels of uncertainty in our economy, the impact of interest rates on funding cost, and sort of post-march operating environment for our industry, are impacting our results and plans. Truist though, was specifically built to increase our flexibility to respond to any condition, to fulfill our purpose and commitment to all stakeholders.

Capital and liquidity have taken on an increase focused. And although Truist is currently well positioned, we're also intentionally building future flexibility. This environment also challenges us to move faster with greater intensity to tighten our strategic focus and right size our expense chassis to reflect the new realities.

We also have flexibility in strengthening our balance sheet to support our focus on our unique core client base and market opportunity. These decisions are less incremental and more time bound, than the ones previously made, during our shift from integrating to operating.

Mike will highlight some of these decisions in his comments, and I'll close with some of the underlying momentum. While these changes will be manifested over time, this is not business as usual, and reflects an important and significant pivot for Truist and for our leadership team. We'll provide more details about these topics and our second quarter results throughout the presentation.

Before we do that, let me start what I always do on Slide 4 on purpose, mission and values. Truist is a purpose-driven company, dedicated to inspiring and building better lives in the communities. I'd like to share some of the ways we brought that purpose to life last quarter. In May, we announced the launch of Truist Long Game, our mobile app that leverages behavioral economics to reward clients for building financial wellness. At a high level, user set goals, save money and earn rewards that are deposited into a Truist account, as they make progress towards their savings goals.

Based on early data, users tend to play four to five times a week with strong retention, and we've seen positive trends towards new client acquisition. This is also the first product from our Truist Foundry, our very own start-up, tasked with creating digital solutions to help meet clients where they are.

Truist is also highlighting small business owners through our small business community heroes initiative, which is all about focusing on the small business owners who worked tirelessly to serve our neighbors, create jobs and build our communities and help drive our economy. Our branch teammates are visiting and connecting with tens of thousands of small business clients, to say thank you and have a caring conversation to assist with their unique needs. The response so far has really been excellent, and our outreach efforts has helped drive a 31% increase in net new small business checking accounts during the second quarter alone.

Lastly, I want to thank our teammates who dedicated more than 16,000 hours, during the second quarter to volunteer in their communities. Really proud of the good work our company and our teammates are doing, to live on our purpose and to make a difference in the lives of their clients, teammates and communities.

So, let's turn to the second quarter performance highlights on Slide 6. Second quarter results were mixed overall. Net income available to common in the second quarter was, $1.2 billion or $0.92 a share. EPS decreased 16% relative to the year ago quarter, primarily due to a higher loan loss provision and noninterest expense, partially offset by higher net interest income. EPS decreased 12% sequentially as higher funding costs pressured net interest income. Total revenue decreased 2.9% sequentially, consistent with our revised guidance, and a 6.1% decrease in net interest income was partially offset by 2.6% increase in fee income, led by record results at Truist Insurance Holdings.

Adjusted expenses were within our existing guidance range, although we're actively working to manage costs even more intensely. Loan balances were relatively stable, and we're pleased with the initial progress we've made to reposition the balance sheet to higher-return core assets, especially in consumer, though there's always additional work to do.

Average deposits were down 2%, largely due to client activity in March though overall deposit trends have stabilized significantly since that time frame, and our conversations with our clients and our pipelines have improved.

We're also prudently increasing our provision and allowance due to increased economic uncertainty. At the same time, our CET1 capital ratio increased 50 basis points, driven by organic capital generation and the sale of a 20% stake in our insurance business. These same factors drove a 5% increase in tangible book value per share, from March 31st. Our stress capital buffer increased from 250 basis points to 290 basis points, higher than we think our steady-state business model warrants. But still a good performance as Truist had the fourth lowest loan loss rate, among traditional banks that participate in the stress test, reflecting again, our conservative credit culture and diverse loan portfolio.

We also announced plans to maintain our strong quarterly common stock dividend at $0.52 a share, subject to Board approval. Strategically, we continue to optimize our franchise and focus our resources on our core clients and businesses, which is why we made the strategic decision to sell a $5 billion non-core student loan portfolio, at net carrying value, which has no upfront P&L impact.

We're also making solid progress towards shifting our loan mix towards higher-return core assets. As we adapt to the current environment, we're highly focused on doubling down on our core franchise, simplifying where it makes sense, rationalizing our expenses and building capital. All of which we'll address later in the presentation.

So, moving to the digital and technology update on Slide 7. Digital engagement trends remain positive, reinforcing the importance of continued investment in digital due to its close association with relationship primacy, client experience and account growth. As a proof point, we recently enhanced our digital onboarding experience through a series of platform enhancements, resulting in higher conversion rates for new applications, faster funding and higher average digital account balances.

Our growing mobile app user base is also driving increased transaction volumes. Digital transactions grew 5% sequentially, and now account for 61% of total bank transactions. Zelle transactions increased 12% compared to the first quarter, and now account for one third of all digital transactions at Truist, which underscores the importance our clients place on our payments and money movement capabilities. Retail digital client satisfaction scores have also returned to their premerger highs. We're proud of our third place ranking in the Javelin 2023, Mobile Banking scorecard.

From an overall client experience and technology perspective, we continue to enhance our capability set. That includes recent improvements to our cloud-based self-service digital assistant Truist Assist. Since implementing these enhancements several months ago, Truist Assist has hosted over 500,000 conversations, with more than 380,000 clients. And has connected clients to live agents to support more than 100,000 complex needs via live chat. Over time, increased utilization of Truist Assist should lead to lower volumes in our call centers.

We're also delivering on our commitment to Q3, through the launch of our Truist Insights to our small business heroes earlier this month. Truist Insights empower small businesses, by providing actionable insights about financial activities, including cash flows, income and expense, and proactive balance monitoring. We first piloted Truist Insights in 2021, and this year alone have generated over 200 million financial insights, for more than 4.5 million clients. We're now delivering this valuable tool to small business. This is just one more way we're bringing touch and technology together, to build trust, and to help our small business clients bank with confidence where and how they want.

Overall, I'm highly optimistic that our investments in innovation in digital and technology will enhance performance, and further improve the client experience.

Let me turn to loans and leases on Slide 8. Loan growth continues to be correlated with the solid progress we've made to shift our loan mix towards more profitable portfolios and core clients, while intentionally pulling back from lower yielding in certain single product relationships. Average loan balances were stable sequentially, as growth in our Commercial portfolio was largely offset by lower consumer balances. Commercial loan growth was driven by seasonality in mortgage warehouse lending, and continued growth in traditional C&I, which is a core area for us. The decline in average consumer balances was primarily due to indirect order, where we've intentionally reduced production. Home equity, residential mortgage and student loan balances also declined, and I'll provide more details about the sale of the student loan portfolio in a few moments.

At the same time, we're seeing strong results, from our Service Finance and Sheffield businesses, where second quarter production grew 34% and 21% respectively, from the year ago quarter. Service Finance continues to perform very well and take market share, and consistent with our balance sheet optimization will increase our loan sale opportunities, to help support its growth.

As I mentioned, we made the strategic decision to sell our $5 billion non-core student loan portfolio, which had been running off at a pace of approximately $400 million per quarter. We sold a student loan book in late June and net carrying value with no upfront P&L impact. Proceeds from the sale, were used to reduce other wholesale funding. The transaction will modestly hurt NII but boost NIM and balance sheet efficiency, exactly what we should be doing in an environment, where cost of capital and funding has increased meaningfully.

Going forward, we'll continue to better focus our balance sheet on Truist clients, who have broader relationships, while limiting our exposure to single product and indirect clients. As well as, evaluate ways to increase the velocity overall of our balance sheet.

Now let me provide some perspective on overall deposit trends on Slide 9. Average deposits decreased $8.7 billion or 2.1%, primarily due to seasonal tax payments and outflows that occurred late in the first quarter, and were consistent with industry impacts of quantitative tightening. We continue to experience remixing within our deposit portfolio, as noninterest-bearing deposits decreased to 31% of total deposits, from 32% in the first quarter and 34% in the fourth quarter of 2022. Interest-bearing deposit costs increased 55 basis points sequentially, and our cumulative interest-bearing deposit beta was 44%, up from 36% in the first quarter, due to the continued presence of higher rate alternatives and the ongoing shift from noninterest-bearing accounts to higher-yielding products.

We continue to make a balanced approach in the current environment, being attentive to client needs and relationships, while also striving to maximize value outside of rate paid. Our continued rollout of Truist One and ongoing investments in treasure and payments are the bull's-eye of our sharpened strategic focus, and will remain critical as we look to acquire new relationships, deepen existing ones and maximize high-quality deposit growth.

Now, let me turn it over to Mike, to discuss our financial results in a little more detail.

Mike Maguire
Chief Financial Officer at Truist Financial

Great. Thank you, Bill, and good morning, everybody. I'll begin with net interest income on Slide 10. For the quarter, taxable equivalent net interest income decreased 6.1% sequentially, as higher funding costs more than offset the benefits of higher rates on earning assets. Reported net interest margin decreased 26 basis points to 2.91%, due primarily to an acceleration of interest-bearing deposit betas and mix-shift out of DDA into other high-cost alternatives. The lower net interest margin, also reflected our liquidity build late in the first quarter. While liquidity remained elevated throughout April and May, it has normalized by June, and will provide some modest boost in NIM going forward.

On a year-over-year basis, net interest income is still up 7.1%, and core net interest margin is up 13 basis points. This reflects the cumulative benefit we've seen from the rising rates during the cycle, particularly throughout 2022, though now we are losing some of that benefit in 2023.

Moving to fee income on Slide 11. Fee income rebounded 2.6%, relative to the first quarter. Insurance income increased $122 million sequentially to a record $935 million, demonstrating the strength of Truist Insurance Holdings. Year-over-year, organic revenue grew by 9.1%, the highest in four quarters, driven by strong new business growth, improved retention and a favorable pricing backdrop. Other income increased $65 million, primarily due to higher income from our nonqualified plan and higher other investment income. In contrast, investment banking and trading income decreased $50 million, reflecting lower bond originations, loan syndications and asset securitizations, as well as, lower core trading income from derivatives and credit trading. Finally, mortgage banking income increased, probably decreased $43 million, with most of the decrease related to prior quarter gain on sale of a servicing portfolio.

Turning to non-interest expense on Slide 12. Adjusted non-interest expense increased $67 million or 1.9% sequentially. The increase in adjusted expenses reflected a $75 million increase in personnel costs, due to higher variable compensation and non-qualified plan expense. And a $38 million increase in professional fees, associated with enterprise technology and other investments. These increases were partially offset by a $41 million reduction in other expenses, due to lower operational losses during the quarter.

As a company, we have substantial opportunities to operate more efficiently and are committed to generating expense reductions. On the April earnings call, we discussed a strategic realignment within our Fixed Income Sales & Trading business, in which we discontinued certain market-making activities and services, provided by middle market fixed income platforms, that had an unattractive ROE. We also identified various expense reduction activities that had already been underway, including realigning our LightStream platform to our broader consumer business, and ongoing capacity adjustments to market-sensitive businesses, such as mortgage. We're actively working to identify and accelerate additional actions, that could be implemented over the course of the next 12 to 18 months, to generate cost reductions to reflect efficiency opportunities and changing conditions.

These actions include, taking a much more aggressive approach towards FTE management, realigning and consolidating businesses to advance our long-term strategy, rationalizing our tech spend, to drive more efficient and effective delivery, and optimizing our operations in contact centers, which will help us transform Truist into a more effective and efficient company.

Taken together, we believe these actions will increase our focus, double down on our core, simplify our business, then the expense curve and enhance returns for our shareholders.

Moving to Slide 13. Asset quality metrics reflected continued normalization, during the second quarter. Non-performing loans rose 11 basis points, primarily due to increases in our CRE and C&I portfolios, though they remain manageable at 47 basis points. While the increase in CRE non-performing loans include some office, these loans are generally paying as agreed. Our net charge-off ratio was 54 basis points, inclusive of a 12 basis point impact from the sale of the student loan portfolio. Excluding the student loan sale, net charge-offs were 42 basis points, up five basis points sequentially. We would also note that the student loan sale had no impact on our provision expense this quarter, as the charge-off taken in conjunction with the sale was essentially equal to the allowance on the portfolio.

During the quarter, we also increased our ALLL ratio six basis points to 1.43% due to greater economic uncertainty. Consistent with our commentary last quarter, we have tightened credit and reduced our risk appetite in select areas, though we maintain our through-the-cycle approach for high-quality, long-term clients.

Next, I'll provide more details on our CRE portfolio, which takes us to Slide 14. On June 30, CRE, including commercial construction, represented 8.9% of loans held for investment, while the Office segment comprised only 1.6%. 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 multiple cycles. Our larger exposures tend to be associated with sponsors that have strong institutional ownership, and we have actively managed less strategic exposures out of the portfolio since the close of the merger.

Looking at Office, in particular, the chart at the lower right, provides a breakdown of our Office portfolio by tenant and class. Our office exposure tends to be weighted towards multi-tenant Class A properties that are situated within our footprint. All factors that we believe will drive outperformance. In addition, we have a strong CRE team, that is highly proactive in working with clients, to get ahead of the problems.

During the second quarter, we completed a thorough review of the majority of our CRE office exposure. We considered current conditions and client support in our risk rating approach. As a result, a handful of loans were moved to non-accrual, though the preponderance of the clients and exposure are paying as agreed. We believe our actions are prudent, in light of current market dynamics and demonstrate our commitment to proactive and early identification and resolution of credit risk. While problem loans have increased in recent months, we believe overall issues will be manageable in ligt of our laddered maturity profile, conservative LTVs and reserves, which for office totaled 6.2% of loans held for investment.

Turning to capital on Slide 15. As you can see from the capital waterfall, Truist is well capitalized and has significant flexibility to respond to potential changes in the risk and regulatory environment. Beginning on the left, CET1 capital increased 50 basis points to 9.6%, at June 30th. This was driven by organic capital generation and the completion of the sale of the 20% stake in Truist Insurance Holdings. I would also point out that, at 9.6%, we're well above our new regulatory minimum of 7.4%, which takes effect on October 1st. We expect to achieve an approximate 10% CET1 ratio by year-end, through a combination of organic capital generation and disciplined management of RWA growth. This view does contemplate the headwind from the pending FDIC assessment.

On top of this, Truist has more than 200 basis points of additional flexibility, given the residual 80% ownership stake in Truist Insurance Holdings. As we look beyond '23, we do expect regulatory and capital requirements become more stringent and potentially, and require us to deduct AOCI from our CET1 ratio. While the final form of any regulatory changes remains to be seen, Truist is well positioned to respond, due to our strong organic capital generation, and the likely phasing periods of any potential new requirement. Specifically, and as shown on the right-hand side of the slide, based on estimated cash flows and assuming today's forward curve, we would expect Truist AOCI to decline by 36% by the end of 2026. Assuming our current rate of organic capital generation remains constant, Truist should generate sufficient capital to offset the estimated remaining impact of AOCI on CET1 over this time period, while maintaining the strategic capital flexibility with Truist Insurance Holdings.

And now, I will review our updated guidance on Slide 16. Looking into the third quarter of 2023, we expect revenues to be down 4%, due to seasonally lower insurance revenue and slightly lower loan balances, which will lead to continued pressure on net interest income. Albeit at a slower pace relative to the decline we experienced in the second quarter. Adjusted expenses are anticipated to decline 0% to 1%, as seasonally lower insurance commissions and our efforts to bend the expense curve will offset several seasonal headwinds like, marketing and employee benefits, that should change the tailwinds in the fourth quarter.

For the full year 2023, we now expect revenues to increase 1% to 2%, compared to 2022. The decline from our previous outlook for 3% growth is primarily driven by lower net interest income, due to higher deposit betas, slower loan growth and lower investment banking revenue. Adjusted expenses are expected to increase 7%, which is at the upper end of our previously guided range due to continued investments in enterprise technology and other areas. This excludes the anticipated FDIC surcharge. This is a number that is higher than where we've been targeting, but as we've discussed, we are pursuing a number of actions, to reduce costs.

In terms of asset quality, our expectation is for the net charge-off ratio to be between 40 and 50 basis points, which includes the impact of the student loan sale. Finally, we expect an effective tax rate of 19% or 21%, on a taxable equivalent basis.

Now Bill, I'll hand it back to you, for some final remarks.

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Great. Thanks, Mike. So, let's conclude on Slide 17. We're 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 provide strong growth and profitability, and to do so with less volatility than our peers. Our strategic pivot from integrating to operating is well underway. And while the financial benefits of our pivot have been masked by the rapid increase in funding costs and related revenue pressure, we've made significant strategic progress over the past year and showing up in a number of operating metrics across our business.

In our Consumer Banking and Wealth segments, Retail and Small Business Banking net new checking production has been positive during past five quarters, reflecting the success of Truist One, and improved retention associated with our increasing client service metrics. Truist One also has many features that a field that millennials and Gen Z, represent 70% of the new client applications. Our Wealth Trust and Brokerage business continues to build momentum, as net organic asset flows, which exclude the impact of market value changes have been positive in last nine quarters. We've also steadily improved client satisfaction, through the distinctive service provided by our branches and care agents, as well as, improvements to our digital processes and procedures, that originated in our client journey routes. As a result, our client satisfaction scores were stable to improving across, most of our channels during the second quarter, but have been consistently rising over the past year since the integration.

In Corporate and Commercial, we continue to focus on left lead loan transactions, and the synergies between our CIB and CCB businesses. During the first half of the year, 25% of the left lead transactions closed by Truist were with our CCB clients. We're also making inroads with new CCB clients, as 65% of the CCB left leads I just mentioned were new relationships. In equity capital markets, transaction economics have improved approximately 300 basis points on average, since the merger. And in wholesale payments, our pipeline is the highest it's been since the merger. Each of these data points reflect our increasing strategic relevance with our clients.

In addition, our IRM program, integrated relationship management is off to a great start this year. As we've already delivered nearly 50% more IRM solutions year-to-date, than during the same period a year ago. Our strong progress demonstrates, what is possible post-integration when our teammates can focus their undivided attention on caring for their clients and deepening those relationships. However, just as we're shifting our focus from integrate to operate, the economic landscape shifted from favorable to more challenging. As a result, we too much shift and make tough decisions to fit the realities of today's economic environment, and tomorrow's regulatory requirements. This means, being more disciplined about where we choose to compete and deploy our capital, whether businesses, clients or products, and looking deeper and more structural cost opportunities that exist at Truist.

These opportunities exist, but not the primary focus during the integration period where the focus was on creating the best transition possible for clients and teammates.

Mike highlighted many of the specifics earlier, while the details are critically important, what will ultimately matter to stakeholders is, our absolute expense base and growth. And our teams are aligned internally on changing that trajectory. I'm really truly optimistic about the future of Truist, as our unwavering foundation of purpose, our talented teammates, leadership in growth markets and diverse business model will continue to drive our momentum and fulfill our potential.

So Brad, let me turn it back over to you for Q&A.

Brad Milsaps
Head of Investor Relations at Truist Financial

Thank you, Bill. Turning at this time, will you please explain how our listeners can participate in the Q&A session. As you do that, I'd like to ask the participants to please limit yourselves to one primary question and one follow-up, and so that we can accommodate as many of you as possible today.

Questions and Answers

Operator

[Operator Instructions]

We'll take our first question from Ken Usdin, with Jefferies. Please go ahead.

Ken Usdin
Analyst at Jefferies Financial Group

Thanks. Good morning, everyone. I just wanted to follow up, of course, it makes sense that the funding costs and slower loan growth is part of the change in the revenue outlook. Just wondering, as you look forward and you think about that deposit mix and deposit cost trajectory, as far as funding costs looking past the second quarter, how do you see that affecting the NII trajectory within that new revenue guide, for third and fourth? Thanks, guys.

Mike Maguire
Chief Financial Officer at Truist Financial

Good morning, Ken, it's Mike. I'd say, as we think about the rest of the year, the same factors that have been driving, I'd say, just average balance QT, primarily in the second quarter, we had a little bit more of an impact from tax payments will continue. The mixing has been pretty consistent too, from a noninterest-bearing demand perspective, into higher cost alternatives. We saw a little bit of an acceleration in the first quarter, as you'll recall. But this quarter, that stabilized a bit. We were down about 5.5% on those balances, and remix from, I guess, 32% to 31%. We would expect that trend to continue, as well.

I think, really the factor as we think about NII trajectory for the third and the fourth quarter, has much more to do with sort of the Fed policy track. Where we had about, call it, close to 50 basis points, average increase in the Fed funds rate in the second quarter, which really did have an impact on our betas and our funding costs. We would expect that to be about half that, in the third quarter and further moderating from there.

Ken Usdin
Analyst at Jefferies Financial Group

And just on the follow-up, what do you think that means, for kind of the view of, where you think terminal interest-bearing beta might land?

Mike Maguire
Chief Financial Officer at Truist Financial

It's tough. We're at 44% today, that's higher than where we expected to be. I think we, as recently as a month or so ago, expressed an expectation that maybe mid- to high 40s, would be the case. I think, certainly piercing 50%, but really hard to pick a number at this point, Ken, to be honest with you. A lot of it, I think, has to do with, how long we're higher for longer.

Ken Usdin
Analyst at Jefferies Financial Group

That makes sense. Okay, thank you.

Operator

We'll take our next question from Ebrahim Poonawala, with Bank of America. Please go ahead.

Ebrahim Poonawala
Analyst at Bank of America

Good morning. I guess, maybe the first question, Mike, just following up on what your response to Ken around, just the change in deposit beta expectations even relative to last month. Are they -- like when we think about, what you said on deposit beta outlook, are there any real signs that are suggesting that deposit trends are in fact, slowing down and the likelihood of the deposit beta update you provided today is more likely to play out, versus having to change this again next month?

I'm just wondering, are you seeing any tangible signs on the ground, that suggest things are getting better?

Mike Maguire
Chief Financial Officer at Truist Financial

You know, it's fine, we look at it on a weekly, monthly basis, Ebrahim. And so, I think, yeah, I mean, I think history would say that, as we approach and reach this terminal policy rate, we should start to see some moderation in the beta creep. We're starting to see that a little bit, but a month or a few weeks, trend does not make. And so, just being very cautious on the outlook there. I mean, at 5.25%, going to 5.50%, the degree of rate awareness across our client set is very, very high, across the industry, it's very, very high. And so look, I think, that's probably as much as anything driven the miss on betas for the sector so far.

Ebrahim Poonawala
Analyst at Bank of America

Got it. And I guess, just a separate question, you talked a lot, both you and Bill throughout the call around, wanting to bend the cost curve and the expense focus. I know, you're not giving '24 guidance today, but as we think about the opportunity there, I'm just wondering, if you can put some framework around, what we should expect around? What this entails, with regards to just quantifying it?

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Yeah. I'll take that, without again trying to sort of provide specific guidance, because we have a lot of things that we're working on. If you think about sort of the buildup, so the buildup was related to things, that are investing to build a large financial institution. And then, we have some unique onetime things to us, that are things like pension accounting and then we made acquisitions in part of that.

So, to say a couple of things. I mean, we're clearly at an inflection point in the growth rate. So the growth rate is going to change materially. And you can sort of see that by our guidance for the year relative to where we are right now. That will give you an impression of where we think the third and fourth quarter will be, from a growth perspective. I think similarly sort of on an absolute basis for the balance of this year, we'd expect to see some of that absolute level of expenses coming down.

But the real change comes in the structural opportunities, that Mike talked about, and the things that we're working on. So, we can bend the curve in lots of ways that are incremental. But I think, the big opportunity for us is, sort of the fundamental components, in terms of, how our company is structured, how it runs, what the chassis looks like, what are the businesses that we're in. And that's the work that we're doing. That's the big work of post-integration to running the company, in a way that reflects the current environment. What I would say, maybe I'll use the word appreciably, so expenses will be down appreciably. As we get into this latter part of this year, we'll provide a lot more guidance and thought about 2024.

Ebrahim Poonawala
Analyst at Bank of America

Thanks a lot. I appreciate it.

Operator

For our next question, will turn to Erika Najarian, with UBS. Please go ahead.

Erika Najarian
Analyst at UBS Group

Hi, good morning. And I apologize in advance, as it feels like, everyone's asking the same question. But I think, it's important for investors to have clarity. Mike, just on the net interest income trajectory, I apologize that we're asking you to spoon-feed it to us. I'm sure everybody could model it later. But investors are really thinking about, what the exit rate for the fourth quarter will be, potentially overlay your net interest income sensitivity, that you disclosed in your queue, which at down 100, just down 70 basis points would imply pretty good stability from fourth quarter levels.

So, I guess, I'm wondering from the three, six, seven, nine, what is the range of NII outcomes, that you expect for the fourth quarter? And do you agree with that notion that, if the Fed does cut 100 basis points, which a lot of investors are putting in their models, there is going to be relative stability, in terms of your net interest income power next year?

Mike Maguire
Chief Financial Officer at Truist Financial

Yeah. No, Erika, don't mind at all, the follow-up question here. A couple of things, yes. I mean, look, we are -- according to our NII sensitivity disclosure, relatively neutral. And I'd say, based on where we are in the cycle and how, in particular, betas are performing, we're probably even a little bit more liability sensitive to that, and you see that in our results. We're not currently contemplating a cut this year, when we talked about our expectations. In the middle of June, we were thinking about a cut.

As early as this year, we've updated our rate view to a up 25, at the next meeting and then holding until probably mid '24. So that probably is, what's influencing our revenue guide for the rest of this year, and especially the NII component. But yeah, I mean, just to get to your question, if we saw a down 100, that would absolutely be a stabilizing force, and would be a nice tailwind for our NII, based on how we're positioned.

Erika Najarian
Analyst at UBS Group

And within your guide [Speech Overlap] go ahead, Bill.

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Let me just add a couple of things, because we're really talking about sort of betas and NII. And we also need to shift to talk about client and client activity, which is also an important part of this. The tailwind, that we're creating about net deposit growth, expansion IRM, primacy with relationships. And then, on the pricing side, I mean, we're starting to see some of that pricing flexibility, particularly on the commercial side. So spread over SOFR, probably 20 some plus basis points, quarter-to-quarter.

The ability to be more relevant to our clients, reposition our portfolio to reflect that, be in higher returning. Quite frankly, taking some market share, where others are backing off, we're leaning into some opportunities, that have greater return for us. In addition to all the betas and the other components, there's just a lot of really good underlying client activity, that's tailwind.

Erika Najarian
Analyst at UBS Group

Got it. And just a follow-up question, and then I'll step aside. Mike, I guess, let me ask it a different way, within the down or up one to two, in terms of adjusted revenue, would it be NII outlook there, embedded there?

Mike Maguire
Chief Financial Officer at Truist Financial

Yes, no problem. So, our expectation is that, in the third quarter, with a single rate hike, it will continue on a downward trajectory, but at a much more moderate pace, call it, half of what we saw in the second quarter. I think, you would expect the pressure to decline even further in the fourth quarter.

Erika Najarian
Analyst at UBS Group

Perfect, thank you.

Mike Maguire
Chief Financial Officer at Truist Financial

Talking about NII. Yep, you got it.

Operator

Our next question comes from Betsy Graseck, with Morgan Stanley. Please go ahead.

Betsy Graseck
Analyst at Morgan Stanley

Hi, thanks do much. Just one quick follow-on to this discussion, regarding the noninterest-bearing component. I know, you mentioned earlier that, you'd expect the noninterest-bearing to remix, to stabilize here. I'm just wondering, in your NII outlook, where are you expecting noninterest-bearing to trend? And where do you feel that, that will stabilize?

Mike Maguire
Chief Financial Officer at Truist Financial

It's been remixing, at about 1%, a quarter for us, that was about $7 billion in average balance, and 5.5% in the quarter. I would expect that trend to continue at that rate. We spent a lot of time last quarter, talking about where that might ultimately land. I think, there's a chance that rate of 1%, or whatever 5% to 6% a quarter, does begin to moderate some here. Bill and I, both talked about sort of maybe, some mid-20s, terminal mix of DDA.

But even that, I think, in many respects, an estimate and trying to rely on pre-pandemic, and even pre -- back to the pre-DFC proxy. If that helps or not, but we are assuming that, DDA will continue to decline in the third and the fourth quarter. Again, the second quarter is a little tougher, because of the tax payments, and the likes.

Betsy Graseck
Analyst at Morgan Stanley

Got it. Okay, thanks. And then, just shifting the conversation a little bit towards capital. I see, your Slide 15, on the significant capital momentum and flexibility that you've got. Maybe, if you could just frame for us, how you're thinking about, what's the right level for you, as we're thinking through, what regulation could come through here next week? Supposedly, we're going to have some new proposals come out.

And then, give us a sense as to buy back capacity, and where you're thinking about that, at this stage.

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Yes, Betsy, it's Bill. I think, position right now, as we continue to build, and so the targets are developing, more information is coming. We'll know more over the next 90 days, in terms of, different proposals and impact on us. And really what this slide was meant to do, rather than show sort of an absolute level on a target, was really to show the flexibility in the organic creation of capital, that we have. So we start from a good position of 96, will be organically at 10 end of this year, without sort of doing anything dramatic related to risk-weighted assets. So to staying on the process that we're on.

And then, we just have a lot of flexibility, that the AOCI sort of runs off. And then we have, we just have other flexibility. So we'll know more as it develops. But I think, we're in left lane of capital accretion, and we'll stay in that mode until we're not. And that same thing applies to any buybacks or whatnot. We sort of have to understand, where the stopping point is, before we make any comment about buybacks. And today, that would be short term, not on the table, as we're building capital.

Betsy Graseck
Analyst at Morgan Stanley

Okay, thanks. And I appreciate that. It was very helpful, thanks.

Operator

We'll take our next question from Mike Mayo, with Wells Fargo Securities. The floor is yours.

Mike Mayo
Analyst at Wells Fargo Securities

Hi. I want to recognize that accelerated capital pass CET1 10% by year-end. So certainly, progress with capital. But otherwise, Bill, I need help in understanding how you can say, you're on the right path. One, you had a merger, end market merger. In end market merger, predicated on cost synergies, and here we are over three years later, and your efficiency ratio in the second quarter is 63%, worse than peer.

Second, your new guide is for '23, operating leverage -- negative operating leverage of 500 to 600 basis points. And to do the revenue guide was lowered by 500 basis points, and your expense guide went to the high-end of your prior range. Your personnel expenses are up 3% quarter-over-quarter, and 7% year-over-year.

And then three, you talk about bending the cost curve. But over the past three years, you've mentioned when the hood was open, you said, let's invest more, than it was investing more for growth. Now I hear you say, you're investing more in enterprise tech. From the -- the merger is predicated on cost synergies. The guide is for big negative operating leverage, you're still spending more. So, I understand the employees should be happy, they're being paid more. The customers are happy, you have strong relationships. The communities are happy, you're immersed in them. But the shareholders, I think, I can safely say, are not happy. I'm not happy about the expense growth. And they're not happy about the negative operating leverage. And it just seems like -- I love you personally, but I just wonder if you've just been a little too soft, and not taking the tougher actions, like some of your peers have. So correct my logic, or thinking, or my observations, if you would.

Mike Maguire
Chief Financial Officer at Truist Financial

Thanks, Mike. And appreciate the love. But right back at you, I think, so a couple of things. One is maybe a challenge a little bit the merger was predicated on cost saves alone. Remember the merger was predicated on opportunity, as well. An opportunity in our markets, and we want to make sure that, we're well positioned to take advantage of those. When I talk about sort of being on track, I don't want you to think that satisfaction, about where we are from an expense side. Building the infrastructure for a large company in this environment, was more expensive than we anticipated. So there's just no doubt about that.

But to that point, I think, we're at a really good inflection point. And that inflection point is a pivot. The intensity, I can assure you hear around expenses. But not just expenses, but just redesigning the chassis. I mean, there are lots of easy things you can do, you can do hiring freezes and those type of things. And we're underway on all that, and you'll start to see some of that in the next couple of quarters. But our commitment is to really under-change the fundamental structure and the business model, that results of this.

So there are certain businesses, we talked about student loan would be an example, that we've been supporting from an expense standpoint. That just doesn't fit into our strategy and it doesn't make sense. So we'll evaluate other parts of our business and other parts of our support structure, that are part of that. You could argue, we should have been doing that faster. I think, that's a legitimate push. And I accept that. But, I don't want you to think that, it's not happening. And that focus is intense, but it is about trying to create more permanent change, than structural. I mean, let's make the next quarter lower. Let's really change the fundamental structure of the company, from an expense standpoint.

You've seen me do it before, and you know we can do it again. My confidence comes from the fact that, we've got a team that's committed to this. And the plans that I see, and the focus that we have. This is an inflection point, from that standpoint in this quarter.

Mike Mayo
Analyst at Wells Fargo Securities

So, you mentioned, you'll come back with some plan for 12 to 18 months. Look, I know you wanted to have positive leverage, in the environment worked against you partly. As you acknowledged, there are some other things internally. But, it looks like, it's going be tough to get positive operating leverage in 2024. Is that something you're going to shoot for? And when do we hear about these new expense plans, over the next 12 to 18 months? You gave us a laundry list earlier, and what sort of magnitude might that be?

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Yeah. We'll start talking about that, in the next couple of quarters, Mike. And how they fit into the overall structure. As I've said to you before, I mean every business unit has a positive operating leverage plan. I mean, that's what we've asked them to do, is to create plans that are unique to their businesses. But what we need to do in addition is that sort of, the enterprise positive operating leverage focus.

2024, we'll just have to see how it plays out. I mean there's a lot of economic factors, that will determine that. So I'd say, not throwing in the towel, so to speak, but we just have to see where some of the economics layout, as it relates to that. If we're in a different rate environment, we're in a different investment banking environment, we're in a different -- then I'll have a different view on that. But as we sit here today, it's a tough climb. But what we want to do is, build that capacity for the long term.

Mike Mayo
Analyst at Wells Fargo Securities

And then, last short follow-up. I asked this with everybody, the NII guide is much lower for you and for others. Do you think, you've captured it all here? I mean, do you lead the year, at that kind of fourth quarter level? Or do you see more downside after that?

Mike Maguire
Chief Financial Officer at Truist Financial

As far as the year is concerned, look, we've flipped to this higher for longer. The new guide reflects, how betas are performing. So, I think, we feel like we've got it for the year. As far as trajectory, and trough, and '24, it's just, I think, it really is going to be rate path and policy dependent. So long as we're at these rates and for longer betas are going to keep creeping.

Now the good news is, we are seeing, and Bill mentioned there's some improvement on things like credit spreads and repricing assets, etc. But I think, so long as we stay at whatever 5.25%, 5.5%, there's risk, if there's a second hike for sure, Mike, to our outlook. But no, I think we've got Q3 and Q4 pretty well pegged.

Mike Mayo
Analyst at Wells Fargo Securities

All right. Thank you.

Operator

Our next question comes from John McDonald, with Autonomous Research. Please go ahead.

John McDonald
Analyst at Autonomous Research

Hi, good morning. I wanted to ask a little bit about credit. Could you talk a little bit about the asset quality trends, you saw this quarter? What drove the increase in non-performers, particularly around C&I and CRE?

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

I'll turn it over to Clarke. But just, there's not a trend. So a lot of idiosyncratic things. But let me turn it over to Clarke, to do a little more detail.

Clarke Starnes
Vice Chair & Chief Risk Officer at Truist Financial

Yeah, thanks, Bill. And thanks, John. I would just say, we had a number of moving pieces this quarter, from a credit perspective. And a lot of that was an intentionality around actively managing the portfolio. So the takeaways I would give you are, first, we had really solid consumer performance overall, with lower NPLs and losses, versus our forecast. So the consumer is holding up really well. So where we did see some of the impact, to your point, is in the C&I and CRE books.

From a C&I standpoint, we did see some uptick in NPLs and losses. But what I'd tell you is, it's more [Indecipherable]. There's no particular trend or segment issue, as Bill said. And we're coming off really low historical numbers. And so even where we are today, would be lower than our long-term numbers. But as far as the NPL increase, most of that was driven by an intentional focus on CRE office. What we did is, we did an intense loan-by-loan review of almost our entire book.

So, I would just give you some color on Q1 and our community bank, we looked at every -- we looked at all office loans, greater than $2 million. And in Q2, we looked at everything over $25 million. So we've done a loan-by-loan review, with the vast majority of all of our CRE office. That included updated risk assessments and view evaluation. We worked really, really hard to make sure we're not kicking the can down the road, we understand where we are. As a result of that, we put a few loans on non-accrual.

I would tell you that, the predominance of those loans are actually current. They're swapped to maturity from a rate standpoint, and they've got good economic rates. But we're trying to stay focused on their ability to exit at maturity. And so we're looking in making sure we fully understand that. That drove the increase in NPLs. And then we did recognize that, with six bip increase in our allowance. And so our office allocation is up overall, so we feel really good about that. So again, I would say the takeaway is, we worked really hard to make sure we have good visibility in the portfolio. And the good news is, our overall guidance for losses really didn't change. We included our student loan impact for Q2, but we maintain otherwise, our loss guidance for the year.

John McDonald
Analyst at Autonomous Research

Got it. And maybe just as a follow-up, Clarke. What should we think about, in terms of, maybe the charge-off trajectory in the back half of the year, that's embedded in the guidance relative to the 42, I guess, jumping off point here?

Clarke Starnes
Vice Chair & Chief Risk Officer at Truist Financial

Yeah. Again, we're very confident, we'll be within the range of 40 to 50, for the entire year. And I would just remind you all that, the second half of the year is always seasonally high in our consumer business. Particularly in our subprime auto, and so that's why you see the range stay in the 40 to 50 range. So, it will be higher than Q2, but within the guidance we've given you.

John McDonald
Analyst at Autonomous Research

Okay, thank you.

Operator

We'll move to our next question from John Pancari, with Evercore ISI. Please go ahead.

John Pancari
Analyst at Evercore ISI

Good morning. On the efficiency side of things, I know, I heard you are on the efficiency program, that you're working on and looking to bend the cost curve. How should we think about long-term efficiency for the company? As you're looking at this program, as you look at this quarter being the inflection and the -- clearly looking at across businesses, how should we think about the appropriate efficiency ratio is, from a long-term perspective, that you're likely to target here? Thanks.

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Hey John, this is Bill. I'll take that. What I said was, obviously, is that the expense growth is going to decrease materially. That's what we're going to see. And then, the absolute expense base related to our businesses, I think the way to think about it, and this was very similar to how we came out of the merger, is we should be sort of top quartile efficiency ratio. The efficiency ratio is kind of be a bit determined by a little bit of the market conditions, where rates are.

But our business model, our construct, things that we're engaged in, I think, rather than sort of holding in on a specific number. Because, I think, that's sort of boxes you in, so to speak, in terms of, business mix and those type of things. I think really hone in on the expectation from shareholders ought to be that we sort of top quartile, from an efficiency ratio, given the opportunities that we have, both from an revenue side, and then the diversity and construct of our business mix.

John Pancari
Analyst at Evercore ISI

Okay, thanks, Bill. That's helpful. And then, on the credit side, I appreciate the color you just gave around non occurs. Can you give us your thoughts around additional reserve additions here? Is it likely, that you still see some incremental build there? And then, where does the commercial real estate reserves stand right now, the ratio, and the same for the office commercial reserve?

Clarke Starnes
Vice Chair & Chief Risk Officer at Truist Financial

Yeah, John, this is Clarke. While we're comfortable with our reserve levels right now, based on what we noted today. Obviously, life of loan, given what you know today, obviously, if the economic outlook deteriorates any further, or we do see additional deterioration beyond what we believe, we've seen and forecasted today around the portfolio performance or risk attributes. You could see, some additional incremental build, but I would not expect to see any sort of large build or hockey stick type. So I think, it would be more incremental, if we see some.

And then, as far as -- did say the CRE office reserve is 6.2% overall. I would remind you all, we have about 40% of our portfolio with our small loans and our wealth and CCB segments, which carries higher reserves. So we've got -- but I think are really strong reserves against, where I think the fundamental risk is in the office side. And then, our total CRE allocation right now is 240.

John Pancari
Analyst at Evercore ISI

Okay, great. Thank you.

Operator

We'll move to our next question from Gerard Cassidy, with RBC. Please go ahead.

Gerard Cassidy
Analyst at RBC

Thank you. Good morning, Bill. Good morning, Mike. Clarke, you were talking about, what's going on here in commercial real estate. Can you give us some further color on, when you look at the non-accrual increase in commercial real estate, is it because the owners of these properties are losing tenants? Is it more -- the value of the properties have fallen, and therefore the loan to values are out of sync? And then, as part of the answer, how are you guys working to resolve -- working with your customers to resolve these issues?

Clarke Starnes
Vice Chair & Chief Risk Officer at Truist Financial

Great question, Gerard. I would say, for us, we take a very strict view of accrual status, when we think about whether a loan needs to be on non-accrual or not. And I would just remind you what I said, but majority of the loans that we placed on non-accrual this quarter, in the CRE office segment, and C&I. But in the CRE office segment are actually currently -- current from a contractual basis right now, because they still have good economic rents. They're hedged on the rent side, and so they're performing on their payments. But we're looking at, what might happen at the end of term. as the rate impact fully hit after the swaps go off. And whether there's any risk in leasing activity, and then what it costs to, for example, reposition the property from an operating standpoint, or structurally to be sure the loan could be resized at maturity. And so, that's what's driving our view of accrual status. So a lot of it is the valuation side, unless the sponsor of principle can address these risks.

The good news is, we're working with our sponsors. We don't see our clients in any way, just walking away from the loans. We have long-term relationships there. And so, we're looking at things like, asking them to refit, bring in more equity, give us NLC, bring us some interest reserves. We may do some AB note splits, while as they attempt to sell the property. So, we've got a lot of tools, and the tool chest and we're working all of those. Our goal is, to be early on this and work with as many borrowers as we can. And hopefully, the market will improve and will have good success.

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

And then, not to minimize the focus, because, I mean, it's acute. But just also remember, 75% of this portfolio is sitting in our markets. We're sort of a net in migration market. While they're dealing with current tenants, people are consolidating their office space, all that's happening. We're experiencing that with all of our bars. We also have markets in which there's a lot of in migration, so there's also more new tenants and more opportunities. And you've got to be in the right building, the Class A, the opportunities. And our portfolio starts to Class A and end-market, migration market. So again, not to minimize it, but we have some better opportunities from that side.

Gerard Cassidy
Analyst at RBC

Very good, Bill. Yeah. Just as a quick follow-up. Mike, when you look at the AOCI burn down, what would accelerate that, in terms, from an interest rate standpoint? The forward curve is looking for some short-term interest rate cuts, early next year. What would bring that number down even faster, from an interest rate environment standpoint? What would you have to say?

Mike Maguire
Chief Financial Officer at Truist Financial

Well, cup of adding the positive catalyst, even away from rates would be, I guess, in connection with rates would be, speeds increasing, in terms of, the actual cash flow profile. But if you're looking at the rates, we would need to see the long-end rally, and we'd actually need to see a parallel benefit from mortgage spreads as well. Some of the -- for example, rate rally you saw even from the end of the quarter to this, to where we are 20, 30 basis points on the tenure. If mortgage spreads don't come with it, it can lag a bit. But that would be the -- And Gerard, thanks for the question, because what we tried to lay out on the right-hand part of that slide, frankly, was a pretty conservative burn-down analysis, based on today's speeds, which are quite slow, and with no benefit from yield curve normalization.

Gerard Cassidy
Analyst at RBC

Thank you.

Operator

We have time for one more question from Matt O'Connor, with Deutsche Bank. Please go ahead.

Matt O'Connor
Analyst at Deutsche Bank Aktiengesellschaft

Hi, thanks for squeezing me in. Just one more on costs here. I guess, how are you thinking about organizing the effort, in terms of, who's kind of taking responsibility for running it? Are you thinking about bringing in, any outside consultants, to get kind of a fresh perspective? Or talk about the organization of it, thank you.

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Matt, maybe, at its simplest form, it's me, in terms of, sort of who's responsible. But our executive leadership team, and we've got a really good focus on this. We've got -- and by the way, we have different third-parties, helping us with different elements. So they're not an approach, because I actually think, we need to own it. It needs to be part of the work that we do as a leadership team. But we have a variety of consultants, looking on specific areas. So they may be focused on consolidation of a specific technology, or an outsourcing of a particular thing, so they exist as part of the process. But this is an overall leadership team, sleeves rolled up, everybody is in it. Not only line of business up, but most importantly, enterprise across, where I think the real efficiencies are achieved, and are more permanent as we think about the company.

Matt O'Connor
Analyst at Deutsche Bank Aktiengesellschaft

And in terms of, how you think about the timing, is this going to be like a one year effort, a several year effort, a continuous improvement effort? How are you thinking about that, so far?

Bill Rogers
Chairman and Chief Executive Officer at Truist Financial

Yeah. I mean, it's already underway, and it's a continuous improvement. I mean, I think, the mentality of structuring the company around our strategic focus, and creating a chassis that attaches to it, is not a onetime thing. I think, that's something that we're constantly doing, constantly looking at. Again, back to that commitment to sort of be top quartile, in terms of, how we run the company, from an efficient standpoint. So that's both the revenue and the expense part, that comes along with that. It's not a onetime big bang thing, because I actually don't think those are permanent, I don't think they stick. This is a philosophy of, how we run the company, and the approach that we take long term.

Matt O'Connor
Analyst at Deutsche Bank Aktiengesellschaft

Okay, thank you.

Operator

That concludes our question-and-answer session for today. I'll turn the floor back over for any closing remarks.

Brad Milsaps
Head of Investor Relations at Truist Financial

Okay. That completes our earnings call today. If you have any additional questions, please feel free to reach out to the Investor Relations team. Thank you for your interest in Truist, and we hope you have a great day.

Karen [Phonetic], you may now disconnect the call.

Operator

[Operator Closing Remarks]

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