Truist Financial Corp

NYSE:TFC

Earnings Call Analysis

Revenue Flat, Adjusted Expenses to Decline

The company saw a slight decrease in net interest income by 1.6% due to lower earning assets and higher deposit costs, while non-interest fee income fell by 8.1%, largely from seasonal drops in insurance income. However, initiatives to focus on core clients and optimize balance sheets resulted in a moderate 4 basis points increase in net interest margin. They've embarked on a $750 million cost savings plan to slash expenses by boosting efficiency and reducing technology spend, aiming to keep expense growth between 0% to 1% through 2024. Forward-looking, revenue is projected to remain stable or drop by 1% from the previous quarter's $5.7 billion, with a full-year increase expected around 1.5%. Adjusted expenses are set to go down by 3.5% due to lower personnel costs and other reductions.

Stabilizing Net Interest Income Amid Cost Pressures

In a challenging rate environment, the company's net interest income saw a modest decrease of 1.6% compared to the previous quarter. This represents a deceleration in the pace of decline, improving from a 6.1% drop in the second quarter. Deposit costs climbed but at a slower beta compared to the prior period, indicating a measured response to the rate environment while optimizing the balance sheet through strategic initiatives.

Diverse Revenue Streams with Fluctuating Fee Income

The company's fee income diminished by $185 million or 8.1%, primarily affected by seasonal factors in their insurance income and service charge adjustments. Despite lower revenue in some areas like investment banking and trading, the fundamental strength in insurance and new business avenues provided support to maintain fee income stability when compared on a like-quarter basis.

Expense Management and Efficiency Initiatives

Strict expense control measures resulted in a flat non-interest expense, balancing out with a slight increase in adjusted non-interest expense due to merger-related costs and settlements. The $750 million gross cost saves plan is already being implemented to streamline operations, promising to limit future expense growth to around flat to 1% up in 2024, highlighting a commitment to operational efficiency while also aiming to drive revenue opportunities.

Strengthening Capital Ratios: A Strategic Cushion

The institution is fortifying its capital base, taking proactive steps to meet regulatory requirements comfortably. The ALLL ratio moved up to 1.49%, reflecting a prudent yet supportive risk approach. The Common Equity Tier 1 (CET1) ratio stood at 9.9% with a goal of reaching around 10% by year-end, underscoring strong capital planning against a backdrop of economic uncertainty.

Guidance for Investors: Revenue and Expenses Outlook

The company sets a conservative tone for the near future, foreseeing revenues to be flat or dip slightly by 1% from the third quarter. The adjusted expenses are expected to decrease by 3.5% excluding costs associated with TIH independence readiness. For the full year, an estimated revenue increase of approximately 1.5% falls squarely in the middle of previous revenue guidance, with a full-year expense growth projection of 7%, weighting legal settlements against savings from cost initiatives.

Business Growth and Strategic Realignments

In the face of internal changes and market challenges, the company has seen positive signals such as an increase in household acquisitions and corporate transaction activity. These reflect effective digital strategies and cohesive payments operations. As part of its transformation plan, the company has achieved cost savings and continues to invest in risk management and strategic initiatives, ensuring readiness for industry transformations ahead.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Third Quarter 2023 Earnings Conference Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. As a reminder, this is being recorded.

It is now my pleasure to introduce your host, Mr. Brad Milsaps.

[Bradley Milsaps, executive]

Thank you, Anthony, and good morning, everyone. Welcome to Truist Third Quarter 2023 Earnings Call. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Mike Maguire. During this morning's call, they will discuss Truist's third quarter results, share their perspectives on current business conditions and provide an updated outlook for 2023. Clarke Starnes, our Vice Chair and Chief Risk Officer; Beau Cummins, our Vice Chair; and John Howard, Truist Insurance 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. 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'll turn it over to Bill.

[William Rogers, executive]

Thanks, Brad, and good morning, everyone, and thank you for joining our call today. Now before we get into the third quarter 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. 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. And just last week, we announced our allocation of $65 million 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 million in underserved communities by providing loans with reduced rates of interest and/or nontraditional terms.

Over the years, these loans have helped spark economic development and job growth and 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 6. Truist reported solid third quarter earnings that met our guidance despite certain discrete noninterest income and expense items that negatively impacted our results. Mike is going to cover those later in the call. As you can see on the slide, our solid performance was defined by several underlying key themes. On 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 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 third quarter and helped drive our NIM higher by 4 basis points during the quarter.

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. We view this third quarter performance as a step forward in that direction.

So 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 per 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 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 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 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 the 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 fourth quarter last year, driven primarily by Zelle transactions, which were up 32% over the same period.

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

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%. 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% and 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. Overall, we expect average commercial and consumer balances to decline modestly in the fourth quarter, driven by our ongoing mix shift towards deeper client penetrations, deeper relationships, deemphasis 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 continue to experience remixing within the portfolio as clients sought higher rate alternatives. Noninterest buried deposits decreased 3.9% and currently represent 30% of total deposits compared to 31% in the second quarter and 34% in the fourth quarter 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, especially in payments.

Net new checking account production has been positive for 3 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 3 years.

Deposit costs continued to rise during the third quarter, though at a slower pace. Interest-bearing deposit costs 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 noninterest-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 paid.

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

[Michael Maguire, executive]

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 4 basis points after declining for 2 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.

Turning to noninterest income on Slide 12. Fee 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 third quarter 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 third quarter due primarily to $87 million 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 million, while other income increased $38 million primarily due to higher income from other investments. Fee income was flat on a like-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 noninterest expense on Slide 13. Reported noninterest 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 noninterest 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.

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 to 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. 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 onetime 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.

Moving to asset quality on Slide 15. Asset quality metrics continued to normalize in the third quarter, but overall remain manageable. Nonperforming 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 nonperforming 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. [Audio Gap] reserves as provision expense exceeded net charge-offs by $92 million. Our ALLL 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 third 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 fourth quarter.

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. 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 third quarter to $9.7 billion 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 that Truist's 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 fourth quarter of 2023, we expect revenues to be flat or to decline 1% from 3Q '23 GAAP revenue of $5.7 billion. We expect linked-quarter improvement in noninterest 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.

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 9 months of 2023, including $9 million in the second quarter and $11 million in the third quarter. In the fourth quarter, we expect these expenses to approximate $35 million, which are excluded from our 4Q '23 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%. Our guidance includes the $87 million client refund accrual that negatively impacted fees in the third quarter.

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 to 50 basis points to approximately 50 basis points for the full year, which includes the impact of the student loan sale. 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.

[William Rogers, executive]

Great. Thanks, Mike. And I'll conclude on Slide 18.

So looking beyond the third quarter, 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 and 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 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 million cost 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. Net new checking account production has been positive for the first 3 quarters of this year, and we're on track to continue positive net news for the whole year.

During the quarter, we acquired more than 39,000 households through our digital channel. 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 third quarter. In the 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, 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 end game rules with the proposed phase-in periods, while preserving our strategic flexibility with TIH.

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 8 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. 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 look forward to the Q&A.

[Bradley Milsaps, executive]

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, [Operator Instructions]

[Operator]

[Operator Instructions] Our first question will come from Ken Usdin with Jefferies.

[Kenneth Usdin, analyst]

I just -- Bill, just coming back to the independence preparation for TIH and articles that were in the paper, I know you're still -- I'm talking about the optionality. Can you just give us an updated sense of just how you're looking at the value of the business financially versus strategically? And what would change here to make you guys move forward with some type of transaction to move it forward?

[William Rogers, executive]

Yes, Ken, 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 Stone Point. 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 TIH. 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. We wanted to make sure that the insurance business had flexibility to continue to grow and then that Truist had an opportunity to respond so 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, 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.

[Kenneth Usdin, analyst]

Yes. And I guess just a 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, et cetera. So 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?

[William Rogers, executive]

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.

[Operator]

Our next question will come from John McDonald with Autonomous Research.

[John McDonald, analyst]

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

[Michael Maguire, executive]

Yes, John. We 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. 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 the rate path. We have an expectation that 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.

And so 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 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 nice progress as it relates to new and renewed credit spreads. We're repricing some of the fixed rate loans. So the good news is, is while there's pressure, it's moderating, but we still do see that pressure into early next year.

[John McDonald, analyst]

Got you. 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 million gross are you expecting it next year and whether you might also have TIH readiness costs go into next year, too.

[Michael Maguire, executive]

I can start there, John. I think Bill may want to weigh in, too. Hard to say. I mean, we said on the 750% million, it's kind of 12 to 18 months. I mean, I think if you think about 2/3 plus or minus, being recognized next year, maybe it's a little more than that. That's how we're thinking about the math there. And that would again, John, give us the confidence that we have to make sure we manage expense growth to less than 1%. You asked about TIH readiness costs as well. We're not ready to talk about '24 yet there. We will give you more visibility to that when we guide for the full year in January.

[Operator]

Our next question will come from Ebrahim Poonawala with Bank of America.

[Ebrahim Poonawala, analyst]

I guess maybe, Mike, just following up on the expense savings. One, 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 from when we are thinking about exit 2024, second half '24 expenses will be lower than first half '24? Is that just from a construct standpoint, the right way to think about how these flow through relative to your offsetting investments?

[Michael Maguire, executive]

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 fourth quarter and early next year around, for example, some of the 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 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 the course of next year. And then technology spend which, as you'll 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 '23 and enter '24. And you'll see, I think, just sort of continuous improvement throughout the course of the year.

[Ebrahim Poonawala, analyst]

That's helpful, 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? 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.

[Michael Maguire, executive]

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&I business, for example, that we didn't feel like we're 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 opportunities, how we price opportunities. 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.

[William Rogers, executive]

Maybe the only thing to add to that, Mike, is that just particularly in the areas that we've seen really good growth, think Sheffield and Service Finance, we'll do more securitization. So we'll create more velocity around those things on our balance sheet, which I think are great. So continue the production, continue to acquire new clients, but increase the velocity.

And we'll look at that with other parts of our portfolio. So I think Mike said it right. 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 move forward. And you saw that reflected in the NIM this quarter.

[Operator]

Our next question will come from Erika Najarian with UBS.

[L. Erika Penala, analyst]

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 in February, right? The world didn't change in until March. And so my question for you is that you have this monetization opportunity for Truist 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 portfolio is a very, very slow lead versus if you do that, you're essentially making the same call you did in 4Q '20, 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.

[William Rogers, executive]

Erika, I think you've been in all our meetings. These are all the things that we're evaluating. Everything is in a bucket to discuss. And 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 independence question, remember, we sort of got this large capital benefit. But we always have this -- part of getting that capital benefit was the expense of creating the independents 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 their trade-offs to every single one. There's not one perfect path. 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 will exist today, and that will exist tomorrow with everything that you put into your question.

[L. Erika Penala, analyst]

And my second question is far more boring. On the service charges, Mike, it went down to $150 million from like a $240 million handle and $249 million in the previous quarter -- the previous March quarter. Was that a onetime 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.

[Michael Maguire, executive]

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

[Operator]

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

[John Pancari, analyst]

On the commentary you gave to John McDonald's question regarding some incremental pressure in margin and NII in the fourth quarter 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?

[Michael Maguire, executive]

John, I'll just maybe give you a sense for the outlook on NIM for the fourth quarter. I think we're -- again, as I mentioned, with the deposit betas creeping, we're at 49%, as you know, as of the third quarter; we were at 44% in the second. We would expect that to continue to worsen a bit just as customers continue to reprice a bit, that's obviously slowing. And for the most part across, say, about 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.

As far as the balance sheet sizing, we had a much more significant decline in earning assets during the third quarter, around $18 billion. We would expect that to be much, much smaller in the fourth quarter. So maybe closer to the tune of $5 billion or so. You've got the securities portfolio that's cash flowing at about $3 billion and maybe just a little bit of pressure on loans. So I think that's probably the math you need.

[John Pancari, analyst]

Okay. Great. That's helpful. And then secondly, you had a pretty solid remix of the funding base that you discussed a bit on Slide 11 in the third quarter given the some of the paydown or reduction in the club advances, et cetera. 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?

[Michael Maguire, executive]

Yes, I think the third quarter 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. We took cash down by close to $5 billion. So if you think about that stuff as sort of right at SOFR, 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 fourth quarter, you're going to see 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 be successful as we have been around. Thinking about rate paid, I mean, I'm really pleased by how the business has been performing. I mean, we've been testing different rate strategies. We've been looking at promo rates. 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 driver that we saw in Q3 is really a Q3-only opportunity.

[Operator]

Our next question will come from Mike Mayo with Wells Fargo Securities.

[Michael Mayo, analyst]

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

[William Rogers, executive]

Yes. Mike, thanks. The intensity is -- 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 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, getting in front of it. And they're making decisions at a much, much faster pace.

So I outlined a bunch of the different consolidation and those type of things. Those would have been more 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. One of them stated 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 of bringing these businesses together, optimizing the balance sheet, 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. 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.

[Michael Mayo, analyst]

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, 1/3 less bank region, One payment business. Any other color you can give on the efficiency.

And when you say simplification, I mean, you guys aren't Citi Group, right? It's not like you're 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 optimal leverage, improvement in efficiency next year, is this really, as you say, a long-term plan?

[William Rogers, executive]

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 first part of next year. I mean, as you know, I mean, you're sort of running off an NII comparison. So that's just the 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.

So I can't -- without sort of a rate forecast and all that, particularly, I can't comment exactly. But I can comment that during the second half of next year, you're going to start seeing a lot of improvement on the operating leverage and going into '25, 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. 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 the transom and have them perform well. 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 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.

[Operator]

Our next question will come from Matt O'Connor with Deutsche Bank.

[Matthew O'Connor, analyst]

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?

[William Rogers, executive]

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 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 creating this clearer path as possible for next year and the continuous improvement we want to make in our business.

[Matthew O'Connor, analyst]

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 to $152 million. But I guess I would assume it's lower than previous quarters if you implemented changes going forward?

[Michael Maguire, executive]

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 safely assume that the $87 million that we've noted here during the third quarter was a third quarter 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 trending in the industry and for Truist. But this particular event wasn't sort of a step functional driver.

[Matthew O'Connor, analyst]

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?

[William Rogers, executive]

Yes, I think we've got a great product in Truist One and that really reflects where we're going. And so we're adding almost all of our new clients to Truist One. I highlighted some of the benefits, some of the things we're doing that. And then we're migrating some of our back book to Truist One. So I don't know how to characterize conservative work, 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, 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.

[Operator]

Our next question will come from Gerard Cassidy with RBC Capital Markets.

[Gerard Cassidy, analyst]

Bill, can you share with us -- when 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 this 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 commercial and consumer customers, loans, deposits, et cetera?

[William Rogers, executive]

Yes, Gerard. I'm unfortunately maybe of the age to have operated in this environment in the past.

[Gerard Cassidy, analyst]

Same here.

[William Rogers, executive]

Yes, exactly. So I have some familiarity. This is not unprecedented or new territory. And I think sort of a couple of things. 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 you 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 a product like Truist One that's really responsive. We're winning the battle 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 capabilities. 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 life cycle, 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 clients. We're in the first call perspective where you want to be. So I think the changes are just this relevance is so much more important to start with the market share that we enjoy in our core markets, 20%, all the ubiquity and efficiency that comes with that. So this is not new work, but it's a double down on you have to be really good at the job. You have to be really good at advice. You have to really be good in product and capability and the -- which, by the way, I think that's going to really work well for Truist. The new definition of winning, I think, fits perfectly into our strategy going forward.

[Gerard Cassidy, analyst]

I appreciate 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 -- we're not worried about you folks. You guys have a good track record of credit underwriting. But can you make any comments about what others might have been doing over the last 2 or 3 years, whether it's nondepositories 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 as first compared to prior cycles?

[Clarke Starnes, executive]

Yes. 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 credit approach despite the low rate environment, I think the industry in general is in a much better place than we were prefinancial crisis, and even the nonbank 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. 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 your underwriting well, how sustainable will all that be. And we feel really good about where we are. And I'd say generally, the industry as well.

[Operator]

We will now take our final question from Ryan Kenny with Morgan Stanley.

[Ryan Kenny, analyst]

So I 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?

[Michael Maguire, executive]

Yes. Ryan, on the security side, we've -- on average, we see $2.5 billion to $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 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 of 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.

We did -- I'd just say, 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, in an effort to manage that potential volatility in the future, we did add some pay-fixed hedges during the third quarter, which we'll see some benefit from to the extent that kind of rates hang where they are or worsen a bit. So we've got about 1/3 -- a little less than 1/3 of the AFS securities hedged.

[Ryan Kenny, analyst]

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.

[Clarke Starnes, executive]

Yes, Ryan, it's a good question. First, I'd say we haven't established our '24 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 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 on what Bill spoke of earlier and Mike, 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. 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 3 factors that will impact where losses go.

[Operator]

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

[Bradley Milsaps, executive]

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 has now concluded. Thank you for attending today's presentation. You may now disconnect.