Truist Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

Key Takeaways

  • Solid Q3 earnings with $1.1 billion net income, EPS of $0.80 and net interest margin up 4 basis points.
  • Fee income was pressured by an $87 million service charge refund accrual and a $142 million sequential drop in seasonal insurance revenue.
  • Announced a $750 million gross cost-saves program aimed at 0–1% expense growth in 2024 through workforce reductions, realignment and technology cuts.
  • Balance-sheet optimization—including the sale of low-yield student loans and reduction of FHLB borrowings—boosted CET1 capital to 9.9% and improved loan spreads.
  • Digital engagement strengthened, with over 60% of transactions now digital, mobile users up year-over-year and Zelle usage up 32%.
AI Generated. May Contain Errors.
Earnings Conference Call
Truist Financial Q3 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

Ladies and gentlemen, and welcome to the Truist Financial Corporation Third Quarter 2023 Earnings Conference Call. Currently, all participants are in listen only mode. Call. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Brad Millsaps.

Speaker 1

Thank you, Anthony, and good morning, everyone. Welcome to Truist's Q3 2023 earnings call. With us today are our Chairman and CEO, Bill Rogers and our CFO, Mike McGuire. During this morning's call, will discuss Truist's 3rd quarter results, share their perspectives on current business conditions and provide an updated outlook for 2023. Clark Starnes, our Vice Chair and Chief Risk Officer Bo Cummins, our Vice Chair and John Howard, Truist Insurance Holdings' Chairman and CEO are also in attendance available to participate in the Q and A portion of our call.

Speaker 1

The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website, ir. Truest.com. Our presentation today will include forward looking statements and certain non GAAP financial measures. With that, I will turn it over to Bill.

Speaker 2

Thanks, Brad, and good morning, everyone, and thank you for joining our call today. So before we To get into the Q3 results, let's begin as always with our purpose on Slide 4. As we all know, Truist is a purpose driven company committed to inspiring and building better lives and communities. I'd like to take a few minutes just to highlight some of the ways we demonstrated our purpose last quarter. Truist is driving positive change by supporting organizations that promote the growth and vibrancy of our communities.

Speaker 2

In August, we invested $17,000,000 to support affordable housing in Charlotte and career development and economic mobility programs across the state of North Carolina. And just last week, we announced our allocation of $65,000,000 in new market tax credits from the U. S. Treasury's Community Development Financial Institution Fund. This is the 12th time Truist has received an award, which has allowed us to invest $750,000,000 in under communities by providing loans with reduced rates of interest and or non traditional terms.

Speaker 2

Over the years, these loans have helped Economic Development and Job Growth and Communities across the regions we serve. Really proud of the meaningful work we're doing as a company to have a positive effect on the lives of our clients, our teammates and our communities and of course our shareholders as we work to realize our purpose. Now let's turn to some of the key takeaways on Slide 6. Chorus reported Solid third quarter earnings that met our guidance despite certain discrete non interest income and expense items that negatively impacted our results. Mike is going to cover those later in the call.

Speaker 2

As you can see on the slide, our solid performance was defined by several underlying key themes. On our July earnings call, we discussed our intent to significantly reduce the rate of expense growth at our company, which was followed up with the introduction of our simplification efforts and $750,000,000 plus saves program in September. We're fully committed to delivering on this work and the reduction in 3rd quarter expenses is evidence of the hard work that's been ongoing throughout the year. We also manage our balance sheet more efficiently. During the past few earnings calls, I've described our focusing on core clients, reducing lower yielding portfolios and paying down higher cost borrowings, all of which occurred during the Q3 and helped drive our NIM higher by 4 basis points Moreover, these efforts have increased our CET1 ratio to nearly 10%, which is a level that we believe we can maintain throughout the We are encouraged that our metrics remained relatively stable during the quarter, while we continue to build our loan loss reserve considering the uncertain economic environment.

Speaker 2

Lastly, we're making strong progress on our cost saves program and organizational simplification, which we'll discuss in more detail later in the call. I'm pleased with our direction, the intensity and focus, and I'm confident in our ability to emerge as a stronger company. While the quarter was solid, we acknowledge there's more work to do as we strive to produce better and more consistent results in the future. We view this Q3 performance as a step forward in that direction. So let's do some more specific work on Slide 7.

Speaker 2

Net income available to common shareholders was $1,100,000,000 or $0.80 per share, merger related and restructuring charges primarily related to severance associated with our cost saves program, hurt EPS by $0.04 Total revenue decreased as expected It was essentially in line with our guidance despite an $87,000,000 discrete impact of service charges on deposits revenue. We're also encouraged that our net interest margin improved 4 basis points, driven by our ongoing balance sheet optimization efforts, including a reduction in FHLB borrowings, a decline in lower yielding loan balances and improving new and renewed loan spreads. Adjusted expenses were down 50 basis points and within our guidance range and would have decreased 2 50 basis points excluding $70,000,000 higher than normal other expense. Average loans decreased 2.5%, primarily due to the sale of the student loan portfolio in the 2nd quarter and our continued repositioning towards higher return core assets. Average deposits increased modestly as we continue to experience a remixing towards higher yielding We added 29 basis points of CET1 capital in the quarter and increased our ALLL ratio by 6 basis points in light of ongoing economic uncertainty.

Speaker 2

Lastly, we maintained our strong quarterly common stock dividend at $0.52 per share on September 1. So let's move to our digital update on Slide 8. Digital engagement trends at Truist remain positive, as you can see on the left side of Slide. Mobile app users have grown steadily over the past year and we're currently focused on driving additional growth through our mobile first engagement initiative. From an activity standpoint, digital transactions increased 9% relative to the Q4 last year, driven primarily by Zelle transactions, which were up 32% over the same period.

Speaker 2

Due to the rapid growth we experienced, digital has quickly become a preferred channel for interacting with Truist. In fact, digital transactions now account for more than 60% of total bank transactions. And while that's certainly positive, Truist has a meaningful opportunity to shift the transaction mix even more towards digital, specifically by leveraging what we call T3, which is this concept that touch and technology work together to create trust. And that further enhances the client increase in Truist One funding rates year to date, which may in turn lead to additional balances and transact activity with those new clients. In sum, Truist has solid momentum in digital and I'm highly optimistic about the potential we have to leverage T3 to further expand our digital user base and drive transaction volume.

Speaker 2

Next, I'm going to cover loans and leases on Slide 9. Average loans decreased 2.5% sequentially, reflecting our ongoing balance sheet optimization efforts, including the sale of our student loan portfolio last quarter and further reductions in lower return portfolios. Excluding the student loan sale, average loans were down 1.1%. Average commercial loans decreased 1.1%, primarily due to a 1.5% decrease in C and I balances driven by lower revolver utilization And production, lower C and I production in our Corporate and Commercial Banking segment reflected a combination of moderately lower demand due to economic uncertainty and greater pricing discipline, which contributed to wider spreads on new production and commercial community bank. In our consumer and credit card portfolios, average loans decreased 4.6%, primarily due to the sale of our student loan portfolio and further reductions in indirect auto production.

Speaker 2

Consumer and card balances were down 1% excluding the student loan sale. Residential mortgage was essentially flat relative to the prior quarter. We do continue to experience growth in higher yielding portfolios, especially Sheffield and Service Finance. Loan production increased 21% year over year at Sheffield and 17% at Service Finance. Overall, we expect average commercial and consumer balances to decline modestly in the 4th quarter, driven by our ongoing mix shift towards deeper client penetrations, Deeper relationships, the emphasis of lower return portfolios and the effects of continued economic uncertainty.

Speaker 2

Let's move to the deposit trends on Slide 10. Average deposits were flat sequentially, although we continue to currently represent 30% of total deposits compared to 31% in the 2nd quarter and 34% in the Q4 of last year. Within our segments, average deposits were down 1% in Corporate and Commercial Banking and relatively flat in Consumer Banking and Wealth due to the effects of quantitative tightening and availability of higher rate alternatives. We continue to deepen our relationships with consumer banking and wealth clients, In addition, small business deposits were up sequentially and August was the strongest month for net new small business checking account production in the last 3 years. Deposit costs continue to rise during the Q3, though at a slower pace.

Speaker 2

Interest bearing deposit cost increased 38 basis points sequentially, down from a 55 basis point increase in the prior quarter. Our interest bearing Cumulative deposit beta was 49%, up from 44% in the 2nd quarter due to the presence of higher rate alternatives an ongoing mix shift from non interest bearing accounts into higher yielding products. Going forward, we'll continue to maintain our balanced approach, being attentive to our client needs and relationships, while also striving to maximize value for them outside of rate pay.

Speaker 3

Primarily due to lower average earning assets and higher deposit costs. Although net interest income was down linked quarter, We are encouraged that the decline was slower than the 6.1% decrease observed in the 2nd quarter as deposit betas increased at a more moderate pace. Reported net interest margin increased 4 basis points after declining for 2 consecutive quarters. NIM stabilization our ongoing balance sheet optimization initiatives, including focusing on our core clients, improving spreads on new and renewed loans, Turning to non interest income on Slide 12. Fee income decreased $185,000,000 or 8.1 relative to the Q2.

Speaker 3

The decline was primarily attributable to lower insurance income, which decreased $142,000,000 sequentially due to seasonality. Insurance production is typically lowest in the 3rd quarter and highest in the second. Insurance fundamentals remain strong, driven by new business growth, retention and favorable pricing, all of which contributed to 6.3% organic revenue growth on a light quarter basis. Service charges on deposits were down $88,000,000 in the 3rd quarter due primarily to $87,000,000 of client refund accruals that were driven by changes we made to our deposit fee protocols. Investment banking and trading income was lower by $26,000,000 while other income increased $38,000,000 primarily due to higher income from other investments.

Speaker 3

Fee income was flat on a light quarter basis as higher insurance income and higher other income were offset by lower service charges and lower investment banking and trading income. Next, I'll cover non interest expense on Slide 13. As lower adjusted expense was offset by a $21,000,000 increase in merger related and restructuring expense, driven mostly by severance and facilities rationalization. Adjusted non interest expense decreased 50 basis points sequentially, in line with our July guidance range of flat to down 1%. The decrease in adjusted expenses was driven by lower personnel expense and reduced professional fees and outside processing expense, partially offset by higher other expense.

Speaker 3

The increase in other included $70,000,000 of costs arising from the previously mentioned client deposit service charge refund accruals as well as the settlement of certain litigation matters, including a settlement and patent licensing agreement, which resolved the USAA patent infringement lawsuit. If you excluded these items, adjusted expenses declined by 2.5% linked quarter. The work associated with our gross cost saves program is well underway, as we will discuss on Slide 14. In September, we announced a $750,000,000 gross cost saves plan that will be over the next 12 to 18 months. The cost saves will include $300,000,000 from reductions in force, dollars 250,000,000 from organizational realignment and $200,000,000 from technology expense reductions.

Speaker 3

Since these initiatives were announced in mid September, We have already realigned significant elements of our organizational and operational structure to improve efficiency and to drive revenue opportunities. The work we're doing includes optimizing spans and layers to improve organizational design health, consolidating redundant functions, restructuring select businesses and geographic simplification, all of which will result in reductions in force over the next couple of quarters. In addition, We are aggressively managing 3rd party spend, reducing our corporate real estate footprint and rationalizing technology spend. Based on the latest information available, we still expect one time costs associated with the cost saves program to range from 25% to 30% of gross cost saves. We also continue to project the cost saves program will help us manage adjusted expense growth to 0% to 1% in 2024, which is net of natural expense growth driven by inflation and other factors.

Speaker 3

Moving to asset quality on Slide 15. Asset quality metrics continued to normalize in the 3rd quarter, but overall remain manageable. Non performing assets were unchanged linked quarter, while early stage delinquencies increased 4 basis points sequentially as increases in our consumer portfolios were partially offset by declines in commercial. Included in our appendix is updated data on our office portfolio, which represents 1.7% of total loans. We're pleased that non performing and criticized and classified office loans increased only modestly linked quarter, while we increased the reserve on this portfolio from 6 0.2% at June 30, up to 8.3% at September 30.

Speaker 3

Our net charge off ratio decreased 3 basis points to 51 basis points, reflecting the prior quarter impact of the student loan sale, partially offset by increases in our CRE in consumer lending portfolios. We have filled reserves as provision expense exceeded net charge offs by $92,000,000 Our ALLL ratio increased to 1.49 percent, up 6 basis points sequentially and 15 basis points year over year due to ongoing credit normalization and greater economic uncertainty. Consistent with our commentary last quarter, we have tightened our risk appetite in select areas, though we maintain our through the cycle supportive approach for high quality long term clients. Turning to capital now on Slide 16. Based on our assessment of the proposed capital rules, we feel confident in our ability to meet the requirements under the proposed phase in periods.

Speaker 3

Truist added 29 basis points of CET1 capital in the 3rd quarter through a combination of organic capital generation and disciplined RWA management. With a CET1 ratio of 9.9%, Truist remains well capitalized relative to our new minimum regulatory requirement of 7.4%, which took place on October 1. As a company, we are strongly committed to building capital and achieving a CET1 ratio of approximately 10% by the end of the year. The projected trajectory for our CET1 ratio does incorporate headwinds from the pending FDIC assessment, which is now expected to be recognized in the Q4. Our primary capital priorities supporting the organic growth needs of new and existing core clients and the payment of our $0.52 per share common dividend.

Speaker 3

We have no plans to repurchase shares over the near term and we will continue to allow previous acquisitions to mature. RWA management continues to be disciplined as we allocate less capital to certain businesses, though we have been very clear that our balance sheet is open to core clients. In addition, we continue to believe that Truist's capital flexibility with Truist Insurance Holdings is a distinctive advantage. We estimate that our residual 80 percent ownership stake provides greater than 200 basis points of additional capital flexibility. The table in the center of the slide provides an updated analysis of our AOCI.

Speaker 3

Based on estimated cash flows in today's forward curve, we would The component of AOCI attributable to securities to decline from $13,500,000,000 at the end of the 3rd quarter and $9,700,000,000 by the end of 2026 or a decline of 28%. Finally, As it relates to the proposed rules for a long term debt requirement, we estimate the truest binding constraint is at the bank level and that the shortfall is approximately $13,000,000,000 We are confident that we will meet the proposed requirements at both the bank and holding company level through normal debt issuance during the phase in period. Now I will review our updated guidance on Slide 17. Looking into the Q4 of 2023, we expect revenues to be flat or to decline 1% from 3Q 'twenty three GAAP revenue of $5,700,000,000 We expect linked quarter improvement in non interest income due to higher insurance, Service charges on deposit income and investment banking and trading income partially offset by lower mortgage and other income. Net interest income is likely to remain under some pressure due to our smaller balance sheet and modest NIM compression.

Speaker 3

Adjusted expenses of $3,500,000,000 are expected to decline 3.5% due to lower personnel and other expenses. In April, we stated that our 2023 expense guidance excluded expenses associated with TIH independence readiness. Previously, we've not called out these costs because they totaled only $20,000,000 through the 1st 9 months of 2023, including $9,000,000 in the 2nd quarter and $11,000,000 in the 3rd quarter. In the 4th quarter, we expect these expenses to approximate $35,000,000 which are excluded from our 4Q 2023 expense guidance. For the full year 2023, we expect revenues to increase by approximately 1.5%, which is at the midpoint of our previous revenue guidance of up 1% to 2%.

Speaker 3

Our guidance includes the $87,000,000 client refund accrual that negatively impacted fees in the 3rd quarter. Full year 2023 adjusted expenses are still on track to increase 7%. This includes $70,000,000 related to the legal settlements and client deposit service charge refunds, but excludes The $55,000,000 of TIH independence readiness costs for 2023. In terms of asset quality, we have tightened our guidance from a range of 40 to 50 basis points to approximately 50 basis points for the full year, the impact of the student loan sale. Finally, we expect our effective tax rate to approximate 18% or 20% on a taxable equivalent basis compared to 19% 21% previously.

Speaker 3

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

Speaker 2

Great. Thanks, Mike, and I'll conclude on Slide 18. Looking beyond the Q3, our transformation which include key organizational changes. So for example, in the recent weeks, we've streamlined our commercial community banking regions from 21 to 14, Realigned several overlapping units into a unified commercial real estate business. We've merged our consumer payments wholesale payments businesses into a single enterprise payments organization, which will help us to accelerate payments activity more effectively across Truist.

Speaker 2

There have been a number of team consolidations within our consumer and small business banking lines of businesses. We've also realigned 9 teams under our enterprise operational services to drive efficiencies across our support team serving the whole organization. All of these changes are part of our $750,000,000 call saves program, which is well underway and designed to drive better service for our clients and limit adjusted expense growth to flat to up 1% in 2024. Although we're focused on reducing the rate of expense growth, We will continue to invest in our risk management organization and ability to maintain strong asset quality metrics. While there are many changes happening inside Truist, we've not lost focus on our core consumer and commercial businesses, which is an area that will continue to see significant investment.

Speaker 2

Net new checking account production has been positive for the 1st 3 quarters We're also maintaining momentum in wealth where net organic asset flows have been positive in 9 of the past 10 quarters. Client satisfaction scores were Stable or increased across most RSPB channels during the Q3. And in corporate and commercial, new left strong improvement in client sentiment amongst commercial clients reflecting product and digital investments that we've already made. As a company, we're also operating our balance sheet more efficiently, thanks to our focus on core clients, deemphasizing lower return portfolios and paying down higher Cost debt. We're building capital and we feel confident in our ability to satisfy the requirements proposed in the Basel III endgame rules with the proposed phase end periods, while preserving our strategic flexibility with TIH.

Speaker 2

In conclusion, we're making progress and we're doing what's necessary to improve our financial performance to meet your high expectations and of course ours. I am truly optimistic about Truist and I know we're well positioned for the future. Our teammates are really performing at high level and they are committed to serving our clients, caring for each other and capitalizing on our great growth markets. I am really proud of our teammates. Before we move to Q and A, I also want to publicly thank the 8 members of our Board of Directors who plan to retire at the end of this year.

Speaker 2

I'm deeply grateful for their years of service and meaningful contributions to our company. Truist literally exists due to their leadership and confidence. Following these retirements, our Board will consist of 13 members, including 12 independent directors, who are well positioned to oversee and advance Our strategic plans during this period of rapid industry transformation. So with that, Brad, let me turn it back over to you and we'll look forward to the Q and A.

Speaker 1

Thank you, Bill. Anthony, at this time, will you please explain how our listeners can participate in the Q and A session. As you do that, I'd like to ask the participants

Operator

Our first question will come from Ken Usdin with Jefferies. You may now go ahead.

Speaker 4

Hi, good morning guys. Thanks for all the color and the updates. I just Bill, just coming back to The independence preparation for TIH and articles that were in the paper, I know you're still and Mike talking about the optionality. Can you just give us an updated Tense of just how you're looking at the value of the business versus financially versus strategically and what would Change here to make you guys move forward with some type of transaction to move it forward?

Speaker 2

Yes, Ken. Good morning and thanks for that. As you can imagine, I don't want to comment on any sort of rumor or speculation. But to your question, Think about the reason we did the opportunity with Standpoint. I mean, what we wanted to do is exactly what you highlighted in your question is to Create this financial and strategic flexibility for both Truist and for We wanted to establish value in the business and the business is growing.

Speaker 2

I mean, we've been able to hire and retain talent. So we feel really good about what's happening in the core insurance business. We wanted to make sure that the insurance business had flexibility to continue to grow And then the Truist had an opportunity to respond to whatever may happen. I mean, we're obviously in a market that's got a lot of uncertainty And we just want to retain that strategic and financial flexibility. So there's not one thing, there's not like a queue.

Speaker 2

If something happens, we do this, But we want to just continue to reserve this flexibility and continue to apply it to both the bank and the insurance business.

Speaker 4

Yes. And I guess I'll just follow-up on it as well, like at what point does financial benefit become strategic because a lot of the questions we get are The trade off between the 2, an obvious ability to improve capital versus a delta in terms of like fee contribution ROE, etcetera. So yes, it's hard for the investor community to kind of just understand what that incremental switch is. I guess maybe how do you think about that notion of like when financial becomes strategic?

Speaker 2

Yes. As I said, there isn't a particular trigger point. We just want to make sure that we retain that flexibility and we're constantly looking at everything that you just talked about And factoring that into the decision making, this is something that we sort of continually keep in front of ourselves, we keep in front of the Board. But I think the intentionality, I mean, the reason we did this is we're allowed to have this conversation around flexibility.

Speaker 4

Right. Okay. Thank you, Bill.

Operator

Okay. Thanks, Tim. Our next question will come from John McDonald with Autonomous Research. You may now go ahead.

Speaker 5

Good morning, guys. I wanted to ask you about net interest income. A number of banks Do you have any visibility on whether that could stabilize Q4? And what factors should we think about for you as we think about the NII path heading into next year?

Speaker 3

Yes, good morning, John. We obviously did see some pressure this quarter, actually probably a little bit better than we first half of twenty twenty four and I think that just has to do with the rate path. We have an expectation that we think we've seen our last Pike, and we don't have a cut in the forecast until July of next year. We have 2 cuts in the second half. And As betas sort of again, the good news is are slowing down and we feel like grinding a bit lower.

Speaker 3

We should still feel a little bit of pressure There, we're trying to combat some of that pressure. We've been very intentional around how we're managing rate paid across our client base. We're beginning to see some nice progress as it relates to new and renewed credit spreads. We're re pricing some of the fixed rate loans. So the good news is while there pressure, it's moderating, but we still do see that pressure into early next year.

Speaker 5

Got you. Thanks, Mike. And in terms of the expenses, when you talk about the goal for next year to be flat to up 1%, Can you remind us how much of the $750,000,000 gross are you expecting it next year? And whether you might also have TIH readiness Costs go into next year too.

Speaker 3

Yes, I can start there John. I'll take Bill maybe want to wade in too. Hard to say. I mean, we said on the 750,000,000 it's kind of 12 months to 18 months. I mean, I think if you think about 2 thirds plus or minus Being recognized next year, maybe it's a little more than that.

Speaker 3

That's how we're thinking about the math there and that would again, John, give us confidence that we have to make sure we manage expense growth to less than 1%. You asked about TIH readiness costs We're not ready to talk about 2024 yet there. We will give you more visibility to that when we guide for the full year in January.

Speaker 5

Okay, fair enough. Thanks.

Operator

Our next question will come from Ebrahim Poonawala with Bank of America. You may now go ahead.

Speaker 6

Thank you. Good morning.

Speaker 3

Good morning.

Speaker 6

I guess maybe Mike just following up on the expense savings. 1, Just trying to think through when we look at the 0% to 1% growth next year, when do these get realized and does Should we assume that the expense run rate through 2024 continues to decline? So when we are thinking about Exit 2024, second half twenty twenty four expenses will be lower than first half twenty twenty four. Is that just from a construct standpoint the right way to think about how this flow through relative to your offsetting investments?

Speaker 3

Yes. Ebrahim, I think the way I'd answer that question is, A lot of the action we're taking actually right now and in the rest of the Q4 and early next year around, for example, Some of the organizational design and health and some of the reductions in force, you'll see that come into the run rate relatively quickly. Same goes for Some of the realignment of businesses, those have different flavors. In certain cases, if we significantly restructure a business, like as a good example, we continued our middle market agency trading business earlier this year. That was a pretty quick adjustment to run rate.

Speaker 3

Other adjustments we're making maybe take place throughout the course of next year. And then technology spend, which as you recall, is a pretty significant component of our cost savings plan. That has a variety of flavors as well. So I'd say for the most part, you're going to see pretty good progress on run rate adjustment, sort of as we exit 20 3 and enter 24, and you'll see I think just sort of continuous improvement throughout the course of the year.

Speaker 6

That's helpful. Thanks, Mike. And I guess just a separate question. So you talked about exiting certain businesses, the student loan portfolio, another one. How much more is there as you think about just making the balance sheet more efficient, optimizing capital?

Speaker 6

Is there a lot more to go on the asset side that you could look to exit or sale? And if there's any way to quantify that?

Speaker 3

I think we got after the lowest hanging fruit pretty quickly, Ebrahim, the student portfolio was not a strategic asset for us. It was less profitable. There have been other Businesses within even our C and I business, for example, that we didn't feel like were as highly as strategic. We've talked a lot about correspondent mortgage And some of our national indirect lending businesses. So I think that we have a pretty good line of sight to it.

Speaker 3

I think going forward, we're seeing that come through in our results as well, but there's not a I don't think a significant shoe to drop on portfolio sales and Those types of things.

Speaker 2

Maybe the only thing to add to that, Mike, is that just particularly in the areas that we've seen really good growth, thanks Sheffield and Service finance will do more securitization. So we'll create more velocity around those things on our balance sheet, which I think are great. Continue the production, continue to acquire new clients, but increase the velocity. We'll look at that with other parts of portfolios. I think Mike said it right.

Speaker 2

I mean, it's not a major power shift, but this optimization strategy, our team has really embraced. And I think we just continue to have more opportunities, I'm going to say around the edges, but maybe more significant that as we And you saw that reflected in the NIM this quarter.

Speaker 6

That's helpful. Thank you both.

Speaker 3

Yes.

Operator

Our next question will come from Erika Najarian with UBS. You may now go ahead.

Speaker 7

Hi, good morning.

Speaker 2

Good

Speaker 7

morning. This first question is for you, Bill. I think just taking a step back and thinking about Slide 16, I think a handful of your investors did think that once you struck the deal with Stone point that it was a sort of a one way exit. That being said, that deal was struck with February in February, right? The world Didn't change until March.

Speaker 7

And so my question for you is that you have this monetization opportunity for Charisk Insurance Holdings. And as you think about the proceeds, again, clearly, the world has changed. So How do you balance essentially the push that some investors are calling for in terms of restructuring your portfolio very meaningfully? And I can see in that middle chart in Slide 16 that, that portfolio just is a very, very slow bleed versus if you do that, you're essentially making the same call you did in 4Q 2020, which is assume that rates are going to stay where they are versus maybe doing more on the RWA mitigation side, which will cost you more in NII over the near term, but won't trap you into making a rate bet.

Speaker 2

So, Erica, I think you've been in all our meetings. These are all the things that we're evaluating. Everything's in a bucket to discuss.

Speaker 8

And

Speaker 2

as you noted, I mean, the world changed pretty substantially from March, But it just reaffirmed our desire to have this flexibility. And going back a little bit to the independents Question. Remember, we sort of got this large capital benefit, but we always had this part of getting that Capital benefit was the expense of creating the independence over the long term as you just highlighted that. So that to us that was always a really good trade off In terms of creating that flexibility. So I don't want to speculate today as to we're going to go left or we're going to go right Other than to say, I think you've encapsulated almost perfectly in your question all the alternatives we would consider and there are trade offs to every single There's not one perfect path.

Speaker 2

There are trade offs to all of them, and we're going to make the decisions that are In the best long term interest of our shareholders, that's going to be our North Star and the guiding post as we think through this And factor in all the environment that we exist today and that will exist tomorrow with everything that you put into your question.

Speaker 7

Thank you. And my second question is far more boring. On the service charges, Mike, it went down to 150 from like a 2 40 handle and 2.49 the previous quarter, in the previous March quarter, was that a one time reversal or is this a new run rate? I know that There is some offset in other income, but just trying to think about the moving pieces for fees from here.

Speaker 3

Yes. During the quarter, the accrual That we referenced was $87,000,000 and that's not something that we would expect to continue.

Operator

Our next question will come from John

Speaker 8

On the commentary you gave to John McDonald's question regarding Some incremental pressure in margin in NII in 4th quarter and into the first half. Can you maybe help quantify that The magnitude of the pressure that you would expect based upon your rate outlook and the balance sheet dynamics? And then secondly, Could you possibly unpack the deposit growth assumption and deposit beta assumption that's baked into that? Thanks.

Speaker 3

I'll just maybe give you a sense for the outlook on NIM for the Q4. I think we're Again, as I mentioned, with the deposit betas creeping, we're at 49%. As you know, as of the Q3, we were at 44% in the second. We would expect that to continue to worsen a bit. And just as customers continue to reprice a bit, that's obviously slowing.

Speaker 3

And for the most part, across 3 or 4 of our segments is sort of all the way where we think terminal betas might be, but we're still seeing some movement on the consumer side of things. So I think a little bit of pressure from the betas again offset perhaps a bit By some of the credit spread widening that we're seeing, so from a NIM perspective, maybe it's a few basis points. As far as our revenue outlook for the quarter, we have a sense that it's probably worse 1% perhaps flat. NII is going to be down a touch and fees will be up a touch. So I'd just sort of maybe leave it at that.

Speaker 3

As far as the balance sheet sizing, we had a much more significant decline in earning assets during the Q3, around $18,000,000,000 We would portfolio that's cash flowing at about $3,000,000,000 and maybe just a little bit of pressure on loans. So I think that's probably the math you need.

Speaker 8

Okay, great. Thank you. That's helpful. And then, secondly, you had a Pretty solid remix for the funding base that you discussed a bit on 5.11 in Q3 given the some of the pay down or reduction in the Club advances, etcetera. How much more do you think of rationalization of the funding mix do you think there is in coming quarters as you look at the setup now?

Speaker 8

Thanks.

Speaker 3

Yes, I think the Q3 was unique in the amount of remixing that was accomplished. You saw the student loan portfolio was a big component of that and that's a pretty low net interest margin Contributor, same thing, the investment portfolio at $3,000,000,000 We took cash down by close to $5,000,000,000 So if you think about that stuff as Sort of right at so for really, really thin spreads and then at the same time taking off the FHLB advances, That was really the driver that mixing that saw some of the benefit on the NIM and that sort of aided the NII in the quarter. I think in the Q4 you're going A more sort of traditional March of again I've hit it deposit costs creeping up a little bit higher. Hopefully again we'll continue to Testing different rate strategies, we've been looking at promo rates. We've looked at exception based pricing And so that will continue and so we're going to try to do the best we can to manage that.

Speaker 3

But I think the mix Driver that we saw in Q3 is really a Q3 only opportunity.

Speaker 8

Got it. All right. Thanks, Mike.

Operator

Our next question will come from Mike Mayo with Wells Fargo Securities. You may now go ahead.

Speaker 9

Hi. I hear you about the expense guide for next year is 0% to 1%, so that would be better. And I hear you about taking the tough actions. But then I look at the core efficiency ratio of around 60% and it's not what investors signed up for when you announced the merger, even recognizing the think the rate headwinds and other things, I don't think it's where you wanted to be. So as you embark on what Maybe you could call Truist 2.0 as compared to Truist 1.0.

Speaker 9

How is management changing in terms of The time to make decisions, Truist 1.0 was like selecting best of breed. It seemed to take a long time. Maybe that was slowed down by such A large board, which now is getting reduced, how is Truist 2.0 better on intensity? How is Truist 2.0 better in terms of moving shareholders up the pecking order. And I guess generally with all your optimism, Bill, that certainly is not the share price and there's a lot of frustrated and disgruntled shareholders out there.

Speaker 9

So how can Truist 2.0 with the $750,000,000 of savings, maybe strategic actions with insurance, intensity and the way you manage help shareholders more?

Speaker 2

Yes, Mike, thanks. The intensity is, I don't know how to I don't know what's superlative to use other than high. So the intensity is really good. And what's happened with the Cost save program and we talk about the $750,000,000 in cost saves, but I don't want to diminish the simplification of our business. So creating these consumer and wholesale towers and creating the simplification of our business That really has allowed us to move a lot faster.

Speaker 2

So I've been really pleased with how the team has embraced this whole I mean leaders are stepping up in really demonstrable ways, getting in front of it and they're sequential in the past. You sort of do one, you do another one, you sort of go through the process. And today, they're all on these great parallel paths. And I think that's going to have a faster longer term impact. And look, I mean, to your point, I mean, we're not happy with where the efficiency is now.

Speaker 2

I want to She is now one of them state that as publicly as possible. And we have demonstrable plans. We talked about the overall Play on the cost saves, but long term that also has to result in better revenue growth. And all the things that we do together, bringing these businesses together, optimizing the balance creating capacity, creating product and capability, training our teammates, having them lean in, demonstrated net new all the things that are building in terms of the momentum, those are key. And I can assure you for our Board, we have Presented an improvement plan on the efficiency ratio, long term improvement plan and we'll be on that track.

Speaker 2

I mean, we share your frustration, trust me. But I think we've got now the structure in place, The leadership in place, the commitment, the intensity, the support, and we're moving fast. And our team can feel it and they've embraced it.

Speaker 9

Just as a Follow-up, since you did present a plan to the Board for the efficiency ratio, I don't think consensus expects much improvement next I guess next year is going to be tough to have positive operating leverage, but if you could comment on that and maybe just a little bit more meat on the bones, you gave a lot 1 third less bank region, one payments business, any other color you can give on the efficiency? And And when you say simplification, I mean, you guys aren't Citigroup, right? It sounds like in a 100 countries, you're in adjacent regional markets Where you should be able to be a lot more simple than what happened after the merger. So Positive operating leverage, improving efficiency next year or is this really as you say a long term plan?

Speaker 2

Yes. On the They're just as with efficiency, there is a positive operating leverage long term plan in all of our businesses. And Part of the simplification allows them to control that destiny and make decisions about that on a faster basis. It will be harder in the 1st part of next year. I mean, as you know, I mean, you're sort of running off on NII comparison.

Speaker 2

So that's just a tougher hurdle. I can't without sort of a rate forecast and all that particularly can't comment exactly, but I can comment that during the second half of that of next year, you're going to start a lot of improvement on the operating leverage and going into 2025, we'll be firmly committed and be on a really good flight path. And then as you and then to the simplification things, we'll continue to it's a really good question. We'll continue to outline some of those. I mean, just Think about, for example, care centers.

Speaker 2

I mean, we have a lot of care centers serving a lot of different businesses. In the merger, we needed to bring those all over So while I agree with you, we're not sort of globally in 100 countries or whatever that Parallel may have been, but we still have a lot of opportunity to make this company simpler, faster, leaner And more responsive to clients and as you noted, more responsive to shareholders.

Speaker 9

All right. Thank you.

Operator

Our next question will come from Matt O'Connor with Deutsche Bank. You may now go ahead.

Speaker 10

Good morning. Can you guys elaborate on the service charge issue? Was that something that was kind of self identified? Was it driven by the Yes, P. B.

Speaker 10

Or we haven't seen that, appears at least not yet. Can you elaborate what happened there, please?

Speaker 2

Yes, Matt, this is Bill. Yes, we did that on our own volition. I mean, we've looked at All of our products and offerings, we've listened to a lot of client feedback. We reviewed and changed our protocols with respect to deposit related fees, and that resulted in refunds that did impact revenue and other expense. I think we're taking it just a more contemporary view of sort of where the world is, where the puck is going, and making sure that we get ahead of that.

Speaker 2

We're staying in front and Creating this clearer path as possible for next year and the continuous improvement we want to make in our business.

Speaker 10

And then how do we think about the run rate of the service charges given these changes? Obviously, we're not going to run rate the 1.52, but I guess, I would assume it's lower than previous quarters if you implemented changes going forward?

Speaker 3

Yes. Look, I mean, I think there's been pressure on this item In general, just given the evolution of the service charges on deposits, but I think you can We assume that the $87,000,000 that we've noted here during the Q3 It was a Q3 event. So again, I think you should expect there to be the same style of pressure you've seen on this line item sort of in trending in

Speaker 10

Okay. And then just to summarize, I guess at this point with the changes that you made and the refunds like How would you frame your approach to service charges? Are you kind of in the middle in terms of being conservative or More on the conservative side, how would you frame the overdraft and the fees overall, the approach?

Speaker 2

Yes, I think we've got a great product in TruistONE and that really reflects where we're going. And so we're adding Almost all of our new clients to TruistONE highlighted some of the benefits, some of the things we're doing that. And then we're migrating some of our back So I don't know how to characterize conservative, but I do know this is purposeful. And I think we've got An incredibly competitive product that has all the right mixes and that it's really, really client Responsive, but it's also contributed to our growth. So while service charges as an overall, as Mike talked, will continue to click down.

Speaker 2

We're balancing that with growth, adding new clients, expanding relationships, and I think that's Sort of the right mix as we think going forward. Those things won't align perfectly quarter to quarter, but long term, I think we're on a really, really good long term

Operator

Our next question will come from Gerard Cassidy with RBC Capital Markets. You may now disconnect.

Speaker 11

Thank you. Good morning, Bill. Good morning, Mike.

Speaker 12

Hey, George.

Operator

Bill, can you share with

Speaker 11

us, you think about the game plan that you and your peers have had to use post financial crisis in this low interest rate environment of 0 to 25 basis points. There was a blip in 2018, of course. But now we're in New rate environment that was really pre financial crisis. What changes are you if you are having some changes, What changes are you implementing to win new business in this new rate environment since it's quite a bit different than it was 3 or 4 years ago with both

Speaker 2

Yes, Gerard, I'm Unfortunately, maybe of the age to have operated in this environment in the past. So Same here. Yes, exactly. So I have some This is not unprecedented or new territory. And I think sort of a couple of things.

Speaker 2

It first starts with and you highlighted, I mean, The cost of funding is not free. So the first part starts with all the things we've been talking about, about Optimization and demanding more full relationships from our clients and all the things that go along with that, but have to offer competitive products and capabilities and be leading. And so for us, I highlighted a lot of the metrics, things like net new on the consumer side. So we've got The competitive environment that clients want more than rate paid. You've got rate paid is not the only option.

Speaker 2

You've got to offer more product and more capabilities. Think we're winning on that front. And then on the commercial and corporate side, same thing. We're in the advice business. And if we start that we're in the advice business versus we're in the rate business, We start with a really good framework.

Speaker 2

So this whole concept of business lifecycle advisory where we are, I highlighted the fact that We're winning on left lead relationships, so we're becoming more important to our clients. We're becoming the go to with our We're in the first call perspective where you want to be. So I think the changes are you just This relevance is so much more important. Start with the market share that we enjoy in our core markets of 20%, All the ubiquity and efficiency that comes with that. So this is not new work, but it's a double down You have to be really good at the job.

Speaker 2

You have to be really good at advice. You have to really be good at product and capability. And the which by the way, I think that's going to really work well for Truist as the new definition of winning, I think fits perfectly under our strategy going forward.

Speaker 11

I appreciate that those insights, Bill. And then on credit, maybe this is best answered by Clark. You guys talked about tightening up, I think, the credit standards a bit. But I'm more interested we're not worried about you folks. You guys have a good track record of credit underwriting.

Speaker 11

But can you make any comments about what Others might have been doing over the last 2 or 3 years, whether it's non depositories or depositories in lending. And those may be aggressive actions, if there were any, how that can impact your customers Who again, you've underwritten fine, but maybe they've done something crazy with somebody else, which then the second derivative you guys get impacted. But Clark, any color on that especially compared to prior cycles?

Speaker 12

Yes. Gerard, it's a great question. I know we've my peers and I have talked But I'd say in general, particularly since the Great Recession, I think the discipline in the industry overall Has been really good. And I think the fundamental credit approach despite the low rate environment, I think the industry in general is in a much better place than we were pre financial crisis and even the non bank players generally have done a good job there. So I don't think there's we don't necessarily see a big shoe to drop.

Speaker 12

I think the biggest impact We're trying to evaluate through as you shift from a long secular low rate environment to where we are now is How economic some of those deals were, even if you thought you're underwriting well, how sustainable Will all that be we feel really good about where we are and I'd say generally the industry as well.

Speaker 4

Thank you.

Operator

We will now take our final question from Ryan Kenny with Morgan Stanley. You may now go ahead.

Speaker 3

Hey, good morning. So just want to clarify something on the earlier questions on the NII path. So we heard the comment around not expecting any significant loan portfolio sales from here. But can you give us an update on your current approach to managing the securities portfolio? And Specifically, what are your views on potentially repositioning parts of the securities portfolio, especially if more capital is freed up from Yes.

Speaker 3

Good morning, Ryan. On the security side, we've on average, We see $2,500,000,000 to $3,000,000,000 of just cash flow and maturities from the portfolio. I think you should expect that To continue in terms of sort of just some of the drag on the earning asset base, as far as the repositioning, I don't think there's any new news here. I mean, obviously, Long rates have sort of been on the rise here and so we've been tracking the unrealized losses and we have some incremental disclosure kind of on our current position and the burn down on our capital slide. I think we're constantly evaluating potential strategies and the likes as it relates to the bond portfolio, but nothing new.

Speaker 3

We did, I'd just say, as we think about this new world we're living in where these unrealized losses, the at least the OCI is a factor in terms of capital. In an effort to manage that potential volatility in the future, we did add some pay fixed hedges during the Q3, which we'll see some benefit from to the extent that kind of rates in terms of credit quality and I'm asking because it does look like you've increased your 2023 NCO guide slightly to the higher end of the prior range. Just wondering if you can share what you're seeing under the surface?

Speaker 12

Yes, Ryan. It's a good question. First, I'd say we haven't established our 2024 guidance yet, but I believe the things that will drive where we go forward are the same considerations we are seeing now coming out of Q3 and going into So think of our regional acceptance subprime Aldo. And then you've also got some defined seasonality in the second half of the year that's impacting Q4 outlook. The other piece would be,

Speaker 1

Bill's point

Speaker 12

earlier and Mike's, we're remixing our balance sheet to be more Identifying the risk there to actually resolving several of the problem credits and we took some losses there to do that. And

Speaker 10

Great. Thank you.

Operator

Okay. This concludes our question and answer session. I would like to turn the conference back over to Mr. Brad Milstaps for any closing remarks.

Speaker 1

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

Speaker 1

Anthony, you can now

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