Truist Financial Q3 2023 Earnings Results & Report

Truist Financial EPS Results

• Actual EPS: $0.80
• Consensus EPS: $0.82
• Beat/Miss: Missed by -$0.02
• One Year Ago EPS: $1.24
• EPS Beat Rate: 3 of last 8 quarters

Truist Financial Revenue Results

• Actual Revenue: $5.73 billion
• Expected Revenue: $5.70 billion
• Beat/Miss: Beat by +$25.17 million
• YoY Revenue Growth: -2.70%

Truist Financial (NYSE:TFC) is a financial services company headquartered in Charlotte, North Carolina, operating through its principal subsidiary, Truist Bank. The company provides banking, lending, investment, insurance and wealth management services to consumers, small businesses, commercial clients and institutional customers.

Its offerings include checking and savings accounts, mortgages, consumer loans, credit cards, commercial and industrial lending, treasury and payment services, investment banking, brokerage, asset management and insurance products. Truist also serves high-net-worth individuals, businesses and institutions through its wealth management and capital markets operations.

Truist was formed through the merger of BB&T Corporation and SunTrust Banks, which was completed in 2019. The company primarily serves clients across the United States, with a significant presence in the Southeast, Mid-Atlantic and other markets through branches, digital platforms and specialized financial services teams.

Truist Financial Q3 2023 Earnings Call Transcript

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%.

Presentation

[Operator]

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Q3 2023 Earnings Conference Call. Currently, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Brad Milsaps.

[Brad Milsaps, Head of Investor Relations at Truist Financial]

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 Maguire. During this morning's call, they'll discuss Truist's Q3 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 Holdings 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.

[Brad Milsaps, Head of Investor Relations at Truist Financial]

Please review the disclosures on slides 2 and 3 of the presentation regarding these statements and measures, as well as the appendix for appropriate reconciliations to GAAP. With that, I will turn it over to Bill.

[Bill Rogers, Chairman and CEO at Truist Financial]

Thanks, Brad, and good morning, everyone, and thank you for joining our call today. So before we get into the Q3 results, let's begin, as always, with our purpose on slide four. 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. In August, we invested $17 million to support affordable housing in Charlotte and career development and economic mobility programs across the state of North Carolina. Just last week, we announced our allocation of $65 million in New Markets Tax Credits from the U.S. Treasury's Community Development Financial Institutions Fund.

[Bill Rogers, Chairman and CEO at Truist Financial]

This is the twelfth time Truist has received an award which has allowed us to invest $750 million in underserved communities by providing loans with reduced rates of interest and/or non-traditional terms. Over the years, these loans have helped spark economic development and job growth in communities across the regions we serve. I'm 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 six. Truist reported solid third-quarter earnings that met our guidance, despite certain discrete non-interest income and expense items that negatively impacted our results. Mike's going to cover those later in the call.

[Bill Rogers, Chairman and CEO at Truist Financial]

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 million cost saves program in September. We're fully committed to delivering on this work, and the reduction in third-quarter expenses is evidence of the hard work that's been ongoing throughout the year. We're also managing our balance sheet more efficiently. During the past few earnings calls, I've described how we're 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 four basis points during the quarter.

[Bill Rogers, Chairman and CEO at Truist Financial]

Moreover, these efforts have increased our CET1 ratio to nearly 10%, which is a level that we believe we can maintain throughout the proposed phase-in period under pending Basel III rules based on our current rate of organic capital growth. Although asset quality is normalizing off historically low levels, 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. 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.

[Bill Rogers, Chairman and CEO at Truist Financial]

We view this third-quarter performance as a step forward in that direction. Let's do some more specific work on slide 7. Net income available to common shareholders was $1.1 billion, or $0.80 per share. Merger-related and restructuring charges, primarily related to severance associated with our cost saves program, eroded EPS by $0.04. Total revenue decreased as expected and was essentially in line with our guidance, despite an $87 million discrete impact to service charges on deposits revenue. We're also encouraged that our net interest margin improved four 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.

[Bill Rogers, Chairman and CEO at Truist Financial]

Adjusted expenses were down 50 basis points and within our guidance range and would have decreased 250 basis points, excluding $70 million of higher-than-normal other expense. Average loans decreased 2.5%, primarily due to the sale of the student loan portfolio in the second quarter, and our continued repositioning towards higher return core assets. Average deposits increased modestly as we continue to experience a remixing towards higher-yielding alternatives. 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. Lastly, we maintained our strong quarterly common stock dividend at $0.52 per share, paid on September first. 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 the slide.

[Bill Rogers, Chairman and CEO at Truist Financial]

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. Due to the rapid growth we're 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. 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 experience and drives greater digital adoption and efficiency.

[Bill Rogers, Chairman and CEO at Truist Financial]

As a proof point, recent enhancements to the digital onboarding have helped drive a 19% increase in Truist One funding rates year to date, which may in turn lead to additional balances and transaction 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. 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%.

[Bill Rogers, Chairman and CEO at Truist Financial]

Average commercial loans decreased 1.1%, primarily due to a 1.5% decrease in C&I balances, driven by lower revolver utilization and production. Lower C&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. 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.

[Bill Rogers, Chairman and CEO at Truist Financial]

Overall, we expect average commercial and consumer balances to decline modestly in the Q4, driven by our ongoing mix shift towards deeper client penetrations, deeper relationships, de-emphasis of lower return portfolios, and the effects of continued economic uncertainty. So let's move to the deposit trends on Slide 10. Average deposits were flat sequentially, although we continued to experience remixing within the portfolio as clients sought higher rate alternatives. Non-interest bearing deposits decreased 3.9% and currently represent 30% of total deposits, compared to 31% in the second 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.

[Bill Rogers, Chairman and CEO at Truist Financial]

We continue to deepen our relationships with consumer banking and wealth clients, especially in payments. Net new checking account production has been positive for three quarters in a row. We're also seeing solid adoption of our flagship Truist One checking product. 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 three years. Deposit costs continued to rise during the Q3, though at a slower pace. 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 second quarter, due to the presence of higher rate alternatives and ongoing mix shift from non-interest-bearing accounts into higher-yielding products.

[Bill Rogers, Chairman and CEO at Truist Financial]

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

[Mike Maguire, CFO at Truist Financial]

Great. Thank you, Bill, and good morning, everyone. I'm going to begin with net interest income on slide 11. For the quarter, taxable equivalent net interest income decreased 1.6% linked quarter, 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 second quarter, as deposit betas increased at a more moderate pace. Reported net interest margin increased four basis points after declining for two consecutive quarters. NIM stabilization reflected our ongoing balance sheet optimization initiatives, including focusing on our core clients, improving spreads on new and renewed loans, reducing lower yielding loan portfolios and paying down higher cost wholesale borrowings, including FHLB advances, which were down about $20 billion on average compared to the second quarter.

[Mike Maguire, CFO at Truist Financial]

Turning to non-interest income on slide 12. The income decreased $185 million, or 8.1% relative to the second quarter. The decline was primarily attributable to lower insurance income, which decreased $142 million sequentially due to seasonality. Insurance production is typically lowest in the Q3 and highest in the second. Insurance fundamentals remain strong, driven by new business growth, improved retention and favorable pricing, all of which contributed to 6.3% organic revenue growth on a like quarter basis. Service charges on deposits were down $88 million in the Q3, due primarily to $87 million of client refund accruals that were driven by changes we made to our deposit fee protocols.

[Mike Maguire, CFO at Truist Financial]

Investment banking and trading income was lower by $26 million, while other income increased $38 million, primarily due to higher income from other investments. The income was flat on a linked 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. Non-interest expense was flat sequentially, as lower adjusted expense was offset by a $21 million 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.

[Mike Maguire, CFO at Truist Financial]

The increase in other expense included $70 million 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 million gross cost saves plan that will be achieved over the next 12-18 months. The cost saves will include $300 million from reductions in force, $250 million from organizational realignment and simplification, and $200 million from technology expense reductions.

[Mike Maguire, CFO at Truist Financial]

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 third-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%-30% of gross cost saves. We also continue to project the cost saves program will help us manage adjusted expense growth to 0%-1% in 2024, which is net of natural expense growth driven by inflation and other factors.

[Mike Maguire, CFO at Truist Financial]

Moving to asset quality on slide 15. Asset quality metrics continued to normalize in the Q3, 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 6.2% at June 30, up to 8.3% at September 30. 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 and consumer lending portfolios.

[Mike Maguire, CFO at Truist Financial]

Reserves as provision expense exceeded net charge-offs by $92 million. Our ALL ratio increased to 1.49%, 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. Truist added 29 basis points of CET1 capital in the Q3 through a combination of organic capital generation and disciplined RWA management.

[Mike Maguire, CFO at Truist Financial]

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 first. As a company, we are strongly committed to building capital and achieving a CET1, 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 are supporting the organic growth needs of new and existing core clients and the payment of our $0.52 per share common dividend. We have no plans to repurchase shares over the near term, and we will continue to allow previous acquisitions to mature.

[Mike Maguire, CFO at Truist Financial]

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% 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. Based on estimated cash flows in today's forward curve, we would expect the component of AOCI attributable to securities to decline from $13.5 billion at the end of the Q3 to $9.7 billion by the end of 2026, or a decline of 28%.

[Mike Maguire, CFO at Truist Financial]

Finally, as it relates to the proposed rules for a long-term debt requirement, we estimate the Truist binding constraint is at the bank level and that the shortfall is approximately $13 billion. 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 2023 GAAP revenue of $5.7 billion. 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.

[Mike Maguire, CFO at Truist Financial]

Net. Net interest income is likely to remain under some pressure due to our smaller balance sheet and modest NIM compression. Adjusted expenses of $3.5 billion 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 million through the first nine months of 2023, including $9 million in the second quarter and $11 million in the Q3. In the Q4, we expect these expenses to approximate $35 million, which are excluded from our 4Q 2023 expense guidance.

[Mike Maguire, CFO at Truist Financial]

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%-2%. Our guidance includes the $87 million client refund accrual that negatively impacted fees in the Q3. Full year 2023 adjusted expenses are still on track to increase 7%. This includes $70 million related to the legal settlements and client deposit service charge refunds, but excludes the $55 million of TIH Independence Readiness costs for 2023. In terms of asset quality, we have tightened our guidance from a range of 40-50 basis points to approximately 50 basis points for the full year, which includes the impact of the student loan sale.

[Mike Maguire, CFO at Truist Financial]

Finally, we expect our tax rate, effective tax rate to approximate 18% or 20% on a taxable equivalent basis, compared to 19% and 21% previously. Now I'll hand it back to Bill for some final remarks.

[Bill Rogers, Chairman and CEO at Truist Financial]

Great. Thanks, Mike, and I'll conclude on slide 18. Looking beyond the Q3, our transformation into a simpler, more profitable company is underway. We're driving swift and meaningful actions to simplify our organization, 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 and wholesale payments businesses into a single enterprise payments organization, which will help us to accelerate payments activity more effectively across Truist. There have been a number of team consolidations within our consumer and small business banking lines of businesses. We've also realigned nine teams under our enterprise operational services to drive efficiencies across our support team, serving the whole organization.

[Bill Rogers, Chairman and CEO at Truist Financial]

All of these changes are part of our $750 million cost savings 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. Net new checking account production has been positive for the first three quarters of this year, and we're on track to continue positive net new for the whole year. During the quarter, we acquired more than 39,000 households through our digital channel.

[Bill Rogers, Chairman and CEO at Truist Financial]

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 our SBB channels during the Q3, and in corporate and commercial, new left lead transactions were up 45% year-over-year. Lastly, our wholesale payments pipeline is up 10% year-over-year. We're also seeing 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, de-emphasizing 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-in periods, while preserving our strategic flexibility with TIH.

[Bill Rogers, Chairman and CEO at Truist Financial]

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 a 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&A, I also want to publicly thank the eight members of our board of directors who plan to retire at the end of this year. I'm deeply grateful for their years of service and meaningful contributions to our company. Truist literally exists due to their leadership and confidence.

[Bill Rogers, Chairman and CEO at Truist Financial]

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. With that, Brad, let me turn it back over to you, and we'll look forward to the Q&A.

[Brad Milsaps, Head of Investor Relations at Truist Financial]

Thank you, Bill. Anthony, 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 in order that we may accommodate as many of you as possible on the call today.

[Operator]

Ladies and gentlemen, if you'd like to ask a question, please signal star then one on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We ask that you limit yourself to one question and one follow-up question. Again, please press star then one to signal for a question. Our first question will come from Ken Usdin with Jefferies. You may now go ahead.

[Ken Usdin, Managing Director, Equity Research at Jefferies]

Hi, good morning, guys. Thanks for all the color and the updates. I just, you know, 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 sense of just how you're looking at, you know, the value of the business versus, you know, financially versus strategically? And what would change here to, you know, to make you guys move forward with some, you know, some type of transaction to move it forward?

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, Ken, good morning, and thanks for that. You know, as you can imagine, I don't want to comment on any sort of rumor or speculation, but to your question, you know, think about the reason we did the opportunity with Stone Point. I mean, what we wanted to do is exactly what you highlighted in your question, is to create, you know, this financial and strategic flexibility for both Truist and for TIH. You know, we wanted to establish value in the business, and the business is growing. 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.

[Bill Rogers, Chairman and CEO at Truist Financial]

You know, we wanted to make sure that the insurance business had flexibility to continue to grow, and then that 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 to it, and we just want to retain that strategic and financial flexibility. So there's not one thing, there's not like a queue, you know, 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.

[Ken Usdin, Managing Director, Equity Research at Jefferies]

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

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, as I said, there isn't a particular trigger point. You know, 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.

[Ken Usdin, Managing Director, Equity Research at Jefferies]

Right. Okay. Thank you, Bill.

[Bill Rogers, Chairman and CEO at Truist Financial]

Okay, thanks, Ken.

[Operator]

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

[John McDonald, Senior Analyst, Large-Cap Banks at Autonomous Research]

Morning, guys. I wanted to ask you about net interest income. A number of banks have said that they see NII dollars potentially bottoming in the Q4. Mike mentioned you see a little bit of slippage into the Q4, but do you have any visibility on whether that could stabilize, you know, Q4? And what factors should we think about for you as we think about the NII path heading into next year?

[Mike Maguire, CFO at Truist Financial]

Yeah, good morning, John. We you know, obviously did see some pressure this quarter, actually, probably a little bit better than we expected and that we talked about during the second quarter. You know, we do expect to continue to see some pressure in the fourth and frankly, even into the first half of 2024, and I think that just has to do with you know, the rate path. You know, we have an expectation that we've you know, we think we've seen our last hike, and we don't have a cut in the forecast until July of next year. We have 2 cuts in the second half.

[Mike Maguire, CFO at Truist Financial]

You know, as betas sort of, again, the good news is, are slowing down and we feel like grinding a bit lower, we should still feel a little bit of pressure, you know, there. You know, 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 repricing some of the fixed rate loans. So, you know, the good news is while there's pressure, it's moderating, but we still do see that pressure into early next year.

[John McDonald, Senior Analyst, Large-Cap Banks at Autonomous Research]

Gotcha. Thanks, Mike. 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 gross are you expecting it next year, and whether you might also have TIH readiness costs go into next year, too?

[Mike Maguire, CFO at Truist Financial]

Yeah, you know, I can start there, John. I'll let Bill, he may want to weigh in, too. You know, hard to say. I mean, we said on the 750, it's kind of 12-18 months. I mean, I think if you, if you think about, you know, two-thirds plus or minus being recognized next year, maybe it's a little more than that. That's how we're thinking about, about the math there. And that would, you know, again, you know, John, give us the, the confidence that we have to, to make sure we manage expense growth to less than 1%. You know, you asked about TIH readiness costs as well. You know, we're not, we're not ready to talk about 2024 yet there.

[Mike Maguire, CFO at Truist Financial]

We will give you more visibility to that when we guide for the full year in January.

[John McDonald, Senior Analyst, Large-Cap Banks at Autonomous Research]

Okay, fair enough. Thanks.

[Operator]

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

[Ebrahim Poonawala, Senior Equity Research Analyst at Bank of America]

Thank you. Good morning.

[Mike Maguire, CFO at Truist Financial]

Good morning.

[Ebrahim Poonawala, Senior Equity Research Analyst at Bank of America]

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

[Mike Maguire, CFO at Truist Financial]

Yeah, Ebrahim, you know, I think the way I'd answer that question is, you know, we're a lot of the action we're taking, you know, 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, you know, relatively quickly. Same goes for some of the realignment of businesses. Those have different flavors. You know, in certain cases, if we if we significantly restructure a business, like as a good example, we, you know, discontinued our middle market agency trading business earlier this year. That was a pretty quick adjustment to run rate. Other adjustments we're making maybe take place throughout the course of next year.

[Mike Maguire, CFO at Truist Financial]

And then technology spend, which, as you recall, is a pretty significant component of our cost savings plan. That has a, you know, 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 2023 and enter 2024. And you'll see, I think, just sort of continuous improvement throughout the course of the year.

[Ebrahim Poonawala, Senior Equity Research Analyst at Bank of America]

That's helpful. Thanks, Mike. I guess just a separate question. 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? Is there a lot more to go on the asset side that you could look to exit or sell? And if there's any way to quantify that.

[Mike Maguire, CFO at Truist Financial]

You know, I think we got after the lowest hanging fruit pretty quickly. Ebrahim, you know, the student portfolio was not a strategic asset for us. It was less profitable. There have been other, you know, businesses within even our C&I business, for example, that, you know, 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. I think going forward, it's just much more around optimization, right? And being more disciplined in how we select, you know, opportunities, how we price opportunities. We're seeing that come through in our results as well.

[Mike Maguire, CFO at Truist Financial]

But there's not a, I don't think, a significant shoe to drop on portfolio sales and those types of things.

[Bill Rogers, Chairman and CEO at Truist Financial]

Maybe the only thing to add to that, Mike, is that just, you know, particularly in the areas that we've seen really good growth, like Sheffield and Service Finance, we'll do, we'll do more securitization. So we'll create more velocity around those things on our balance sheet, which I think are great. So, you know, continue the production, continue to acquire new clients, but increase the velocity. And we'll look at that with other parts of our, other parts of our portfolio. So I think Mike said it right. I mean, it's not a, you know, major power shift, but this optimization strategy, our team's really embraced, and, I think we just continue to have more opportunities, I'm going to say, around the edges, but, but maybe more significant that as we move forward.

[Bill Rogers, Chairman and CEO at Truist Financial]

You saw that reflected in the NIM this quarter.

[Ebrahim Poonawala, Senior Equity Research Analyst at Bank of America]

That's helpful. Thank you both.

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah.

[Operator]

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

[Erika Najarian, Senior Equity Research Analyst at UBS]

Hi, good morning.

[Mike Maguire, CFO at Truist Financial]

Morning.

[Erika Najarian, Senior Equity Research Analyst at UBS]

This first question is for you, Bill. I think, just taking a step back and thinking about slide 16, you know, I think, you know, a handful of your investors, you know, 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 in February, right? The world didn't change in February until March. And so my question for you is, you know, you have this monetization opportunity for Truist Insurance Holdings. You know, and as you think about the proceeds, you know, again, clearly the world has changed. So how do you balance essentially, you know, the push that some investors are calling for in terms of restructuring your portfolio very meaningfully?

[Erika Najarian, Senior Equity Research Analyst at UBS]

You know, 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, you know, making the same call you did in 4Q20, 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.

[Bill Rogers, Chairman and CEO at Truist Financial]

So, Erika, I think you've been in all our meetings. These are all the things that we're evaluating. You know, everything's in a bucket to discuss. And as you noted, I mean, you know, the world changed pretty substantially from March, but it just reaffirmed, you know, our desire to have this flexibility. And you know, going back a little bit to the independence question, you know, remember, we sort of got this large capital benefit, but we always had this, you know, part of getting that capital benefit was the expense of creating the independence over the long term, as you just highlighted that.

[Bill Rogers, Chairman and CEO at Truist Financial]

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, you know, today as to, you know, 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 one. You know, there's not one perfect path. There are trade-offs to all of them, and we're going to, you know, we're going to make the decisions that are, you know, in the best long-term interest of our shareholders.

[Bill Rogers, Chairman and CEO at Truist Financial]

That's going to be, 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'll exist tomorrow with everything that you put into your question.

[Erika Najarian, Senior Equity Research Analyst at UBS]

Thank you. And my second question is far more boring. On the service charges, Mike, you know, it went down to $150 from like a $240 handle and $249 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 was some offset in other income, but just trying to think about the moving pieces for fees from here.

[Mike Maguire, CFO at Truist Financial]

Yeah, during the quarter, the accrual that we referenced was $87 million, and that's not something that we would expect to continue.

[Erika Najarian, Senior Equity Research Analyst at UBS]

Perfect. Thank you.

[Mike Maguire, CFO at Truist Financial]

Yeah.

[Operator]

Our next question will come from John Pancari with Evercore ISI. You may now go ahead.

[John Pancari, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Morning.

[Bill Rogers, Chairman and CEO at Truist Financial]

Morning, John.

[John Pancari, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

On the commentary you gave to the John McDonald question regarding some incremental pressure in margin and NII in Q4 and into the first half, can you maybe help quantify that 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.

[Mike Maguire, CFO at Truist Financial]

John, I'll just maybe give you a sense for, for the outlook on NIM for the Q4. You know, I think we're, you know, again, as I mentioned, you know, with the deposit betas, you know, creeping, we're at 49%. As you know, as of, as, as of the Q3, we were at 44 in the second. We would expect that to continue to, to worsen a bit, just as, you know, customers, you know, continue to reprice a bit. That's obviously slowing, and, and for the most part, you know, across, you know, I think about three or four of our segments is, is sort of, you know, all the way where we think terminal betas might be, but we're still seeing some movement on the, on the, on the consumer side of things.

[Mike Maguire, CFO at Truist Financial]

So, you know, I think a little bit of pressure from the betas, again, offset perhaps a bit by, by some of the, some of the credit spread widening that we're seeing. So from a NIM perspective, maybe it's a few basis points. You know, as far as our revenue outlook for the quarter, you know, we have a sense that it's, you know, probably, you know, worse 1%, perhaps flat. You know, NII is going to be, you know, down a touch and fees will be up a touch. So I'd just sort of maybe leave it at that. You know, as far as the balance sheet sizing, you know, we had a much more significant decline in earning assets during the Q3, you know, around $18 billion.

[Mike Maguire, CFO at Truist Financial]

We would expect that to be much, much smaller in the Q4. So, you know, maybe, you know, closer to the tune of, you know, $5 billion or so. You know, you've got the securities portfolio that's, that's cash flowing at about $3 billion and maybe just a little bit of pressure on, on loans. So I, I think that's, that's probably the math you need.

[John Pancari, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Okay, great. Thank you. That's helpful. And then, secondly, you had a pretty solid remix with the funding base that you discussed a bit on slide 11, you know, in Q3, given some of the pay down or reduction in the club advances, et cetera. How much more do you think of rationalization of the funding mix there is, you know, in coming quarters as you look at the setup now? Thanks.

[Mike Maguire, CFO at Truist Financial]

...Yeah, I think, you know, the Q3 was unique in the amount of remixing that was accomplished. I mean, 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 billion, you know, we took cash down by close to $5 billion. So if you think about that stuff as sort of, you know, right at SOFR or really, really thin spreads, and then at the same time taking off the FHLB advances, you know, that was the driver, that mixing, that saw some of the benefit on the NIM and that sort of, you know, aided the NII in the quarter.

[Mike Maguire, CFO at Truist Financial]

I think in the Q4, you're going to see a more sort of traditional march of, again, I've hit it, you know, deposit costs, you know, creeping up a little bit higher. You know, hopefully, again, we'll continue to be successful as we have been around, you know, thinking about rate paid. I mean, I'm really pleased by how the businesses has been performing. I mean, we've been, you know, testing different rate strategies. We've been looking at promo rates. You know, we've looked at exception-based pricing and structure, and so, that will continue. And so we're going to try to do the best we can to manage that. But I think the mix, you know, driver that we saw in Q3 is really a Q3-only opportunity.

[John Pancari, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Got it. All right. Thanks, Mike.

[Operator]

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

[Mike Mayo, Managing Director, Equity Research at Wells Fargo Securities]

Hi. I hear you about the expense guide for next year, 0%-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 had announced the merger, even recognizing the rate headwinds and other things. It's. I don't think it's where you wanted to be. So, you know, as you embark on what maybe you could call Truist 2.0, as compared to Truist 1.0, you know, how is management changing in terms of the time to make decisions? You know, Truist 1.0 was like selecting best of breed. It seemed to take a long time.

[Mike Mayo, Managing Director, Equity Research at Wells Fargo Securities]

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 reflected in the share price, and there's a lot of frustrated and disgruntled shareholders out there. So how can Truist 2.0, with the $750 million of savings, maybe strategic actions with insurance, intensity, and the way you manage, help shareholders more?

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, Mike, thanks. You know, the intensity is, I don't know how to—I don't know what 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 million in cost saves, but I don't want to diminish the simplification of our business. So, creating these, you know, consumer and wholesale towers and creating the simplification of our business, that really has allowed us to move a lot faster. So I've been really pleased with how the team has embraced this whole process. I mean, leaders are stepping up in really demonstrable ways, you know, getting in front of it, and they're making decisions at a much, much faster pace.

[Bill Rogers, Chairman and CEO at Truist Financial]

So I outlined a bunch of the different consolidations and those type things. Those would have been more sequential in the past. You know, 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, you know, faster, longer-term impact. And look, I mean, to your point, I mean, we're not happy with where the efficiency is now. I want to state that as publicly as possible. And we have, you know, demonstrable plans. You know, we talked about the overall play on the cost saves, but long term, that also has to result in better revenue growth.

[Bill Rogers, Chairman and CEO at Truist Financial]

All the things that we do together, bringing these businesses together, optimizing the balance sheet, creating capacity, creating product and capability, training our teammates, having them lean in, you know, I demonstrated net new, all the things that are building in terms of the momentum, those are, those are key. I can assure you, you know, for our board, we have presented, you know, a improvement plan on the efficiency ratio, long-term improvement plan, and we'll be on that track. 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, and we're moving fast. And our team can feel it, and they've embraced it.

[Mike Mayo, Managing Director, Equity Research at Wells Fargo Securities]

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 year. 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, you know, 1/3 less bank region, one payments business. Any other color you can give on the efficiency? And when you say simplification, I mean, you guys aren't Citigroup, right? It's not like in 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, improvement in efficiency next year, or is this really, as you say, a long-term plan?

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, you know, on the, just as with efficiency, there is a, you know, positive operating, you know, leverage long-term plan in, in all of our businesses. And, part of the simplification allows them to, control that destiny and make decisions about that on a, on, on a faster basis. It'll be harder in the first part of next year. I mean, as you know, I mean, you're sort of running off on NII comparison. So that's just a tougher hurdle. But as we get into the latter part of next year, I mean, we're going to see continuous improvement and, commitment to that on a long-term basis.

[Bill Rogers, Chairman and CEO at Truist Financial]

So I can't, I can't, you know, without sort of a rate forecast and all that, particularly, I can't comment exactly, but I can comment that, you know, during the second half of next year, you're going to start seeing 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, you know, to the simplification things, you know, 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. I mean, we have a lot of care centers serving a lot of different businesses. In the merger, we needed to, you know, bring those all over the transom and have them perform well.

[Bill Rogers, Chairman and CEO at Truist Financial]

We've invested in a lot of technology, and we can consolidate care centers. Just think about that as one of dozens and dozens of examples of this component of simplification. So while I agree with you, we're not sort of, you know, globally in a hundred 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.

[Mike Mayo, Managing Director, Equity Research at Wells Fargo Securities]

All right. Thank you.

[Operator]

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

[Matt O'Connor, Senior Equity Research Analyst at Deutsche Bank]

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

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, Matt, this is Bill. Yeah, we did that on our own volition. I mean, we've, you know, we've looked at, you know, all of our products and offerings. We've listened to a lot of, a lot of client feedback. We reviewed and changed our protocols with respect to deposit-related fees, and that resulted in refunds that, that did impact revenue and other expense. You know, I, I think, 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. We're staying in front and, you know, creating as, you know, clear a path as possible for, for next year and the continuous improvement we want to make in our business.

[Matt O'Connor, Senior Equity Research Analyst at Deutsche Bank]

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 $152, but I guess I would assume it's lower than previous quarters if you implemented changes going forward.

[Mike Maguire, CFO at Truist Financial]

Yeah, look, I mean, I think there's been pressure on this item, you know, in general, just given the evolution of the service charges on deposits. But I think you can safely assume that the $87 million that we've noted here during the Q3 was, you know, a Q3 event. So again, I think you should expect there to be, you know, the same style of pressure you've seen on this line item, sort of trending in the industry and for Truist. But this particular event wasn't sort of a step function, you know, driver.

[Matt O'Connor, Senior Equity Research Analyst at Deutsche Bank]

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, you know, 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, you know, the overdraft and, and the fees overall, the approach?

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, I think we've got a great product in Truist One, and that really reflects where we're going. And so, you know, we're adding, you know, the almost all of our new clients to Truist One. I highlighted some of the benefits, some of the things we're doing in that, and then we're migrating some of our, back book to Truist One. 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.

[Bill Rogers, Chairman and CEO at Truist Financial]

So, you know, while service charges, as an overall, as Mike talked, will, you know, continue to click down, 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 shareholder value-building path.

[Matt O'Connor, Senior Equity Research Analyst at Deutsche Bank]

Okay. Thank you.

[Bill Rogers, Chairman and CEO at Truist Financial]

Thanks, Matt.

[Operator]

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

[Gerard Cassidy, Managing Director and Senior Research Analyst at RBC Capital Markets]

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

[Bill Rogers, Chairman and CEO at Truist Financial]

Hey, Gerard.

[Gerard Cassidy, Managing Director and Senior Research Analyst at RBC Capital Markets]

Bill, can you share with 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 0-25 basis points? There was a blip in 2018, of course, but now we're in this new rate environment that was really pre-financial crisis. 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 three or four years ago, with both commercial and consumer customers, loans, deposits, et cetera?

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, Gerard, you know, you know, I'm you know, unfortunately, maybe of the age to have operated in this environment in the past, so-

[Gerard Cassidy, Managing Director and Senior Research Analyst at RBC Capital Markets]

Same here.

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah, exactly. So I have some familiarity. This is not, you know, unprecedented or new territory. And I think sort of a couple things. You know, it first starts with, and you highlight it, I mean, you know, the cost of funding is not free. So the first part starts with all the things we've been talking about, about, you know, optimization and demanding more full relationships from our clients and, you know, all the things that go along with that. But you have to offer competitive products and capabilities and be leading. And, you know, so for us, you know, I highlighted a lot of the metrics, things like net new on the consumer side. So we've got a product like Truist One that's really responsive.

[Bill Rogers, Chairman and CEO at Truist Financial]

We're winning the battle with you know, with the competitive environment that clients want more than rate paid. You've got your rate paid is not the only option. You got to offer more product and more capability. So I 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. So this whole concept of Business Lifecycle Advisory, where we are, you know, I highlighted, you know, the fact that, you know, we're winning on left lead relationships, and we're becoming more important to our clients. We're becoming you know, the go-to with our clients.

[Bill Rogers, Chairman and CEO at Truist Financial]

We're in the, you know, the first call perspective where you want to be. So I think the changes are you just—just relevance is so much more important. You know, start with the market share that we enjoy in our, you know, in our core markets of 20%. You know, all the ubiquity and efficiency that comes with that. So this is not, this is not new work, but it's a double down on, you know, you have to be really good at the job. You have to be really good at advice. You have to really be good at product and capability.

[Bill Rogers, Chairman and CEO at Truist Financial]

And the, you know, which, by the way, I think that's going to really work well for Truist, is the, you know, the new definition of winning, I think, fits perfectly into our strategy going forward.

[Gerard Cassidy, Managing Director and Senior Research Analyst at RBC Capital Markets]

I appreciate that, those insights, Bill. And then, on credit, maybe this is best answered by Clarke. You guys talked about, tightening up, I think, the credit standards a bit, but I'm more interested... Yeah, we're not worried about you folks. You, you guys have a good track record of credit underwriting. But can you make any comments about what others have, might, might have been doing over the last two or three years, whether it's non-depositories or depositories in lending? And those may be aggressive actions, if there were any, how that could 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 Clarke, any color on that, especially compared to prior cycles?

[Clarke Starnes, Vice Chairman and Chief Risk Officer at Truist Financial]

Yeah, Gerard, it's a great question. I know we've, my peers and I have talked about this, 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, you know, 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.

[Clarke Starnes, Vice Chairman and Chief Risk Officer at Truist Financial]

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, you know, how economic some of those deals were, even if you thought you were underwriting well, how sustainable, you know, will all that be? And, you know, we feel really good about where we are, and I'd say generally the industry as well.

[Gerard Cassidy, Managing Director and Senior Research Analyst at RBC Capital Markets]

Thank you.

[Operator]

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

[Ryan Kenny, Equity Research Analyst at Morgan Stanley]

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 potential future exits or optionality?

[Bill Rogers, Chairman and CEO at Truist Financial]

Yeah. Good morning, Ryan. On the securities side, you know, we, we've, you know, on, on average, we see, you know, $2.5 billion-3 billion 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, some of the drag on the earning asset base. As far as the repositioning, I don't think there's any new, any new news here. I mean, obviously, you know, 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, you know, kind of on our current position and the burn down, you know, in our on our capital slide.

[Bill Rogers, Chairman and CEO at Truist Financial]

You know, I think we're constantly evaluating, you know, potential strategies and the likes as it relates to the bond portfolio, but nothing new. You know, we did, I'd just say, you know, as we think about this new world we're living in, where these unrealized losses, at least the securities OCI is a factor in terms of capital, you know, in an effort to manage that, you know, potential volatility in the future, we did add some pay fixed hedges during the Q3, you know, which we'll see some benefit from to the extent that kind of rates hang where they are or worsen a bit.

[Bill Rogers, Chairman and CEO at Truist Financial]

So we've got about a third, a little less than a third of the AFS securities, you know, hedged.

[Ryan Kenny, Equity Research Analyst at Morgan Stanley]

... Thanks. And then just as a follow-up on the credit side, just give a little bit more color on what you're seeing 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. Thanks.

[Clarke Starnes, Vice Chairman and Chief Risk Officer at Truist Financial]

Yeah, Ryan, that, that'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, we are seeing now in, coming out of Q3 and going into Q4. And so I would say for us, we are seeing, normalization in our consumer area, particularly in the low-end consumer. So think of our Regional Acceptance, subprime auto, 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, Bill's point earlier, and Mike's, we're remixing our balance sheet to be more optimal, and so you're seeing more growth in our higher margin businesses like Sheffield and Service Finance, but they carry higher normal losses.

[Clarke Starnes, Vice Chairman and Chief Risk Officer at Truist Financial]

And then I think most importantly, something that we control is our efforts to get ahead of the CRE office risk. So in Q3, we were very intentional about working through moving from just identifying the risk there to actually resolving several of the problem credits, and we took some losses there to do that, and we're anticipating maybe opportunities to do more in Q4. So I think those are the three factors that'll impact where losses go.

[Ryan Kenny, Equity Research Analyst at Morgan Stanley]

Great. Thank you.

[Operator]

Okay, this concludes our question... Sorry, this concludes our question and answer session. I would like to turn the conference back over to Mr. Brad Milsaps for any closing remarks.

[Brad Milsaps, Head of Investor Relations at Truist Financial]

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. Anthony, you can now disconnect the call.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Brad Milsaps, Head of Investor Relations
• Bill Rogers, Chairman and CEO
• Mike Maguire, CFO
• Clarke Starnes, Vice Chairman and Chief Risk Officer

Analysts

• Ken Usdin, Managing Director, Equity Research at Jefferies
• John McDonald, Senior Analyst, Large-Cap Banks at Autonomous Research
• Ebrahim Poonawala, Senior Equity Research Analyst at Bank of America
• Erika Najarian, Senior Equity Research Analyst at UBS
• John Pancari, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI
• Mike Mayo, Managing Director, Equity Research at Wells Fargo Securities
• Matt O'Connor, Senior Equity Research Analyst at Deutsche Bank
• Gerard Cassidy, Managing Director and Senior Research Analyst at RBC Capital Markets
• Ryan Kenny, Equity Research Analyst at Morgan Stanley