Earnings Call Transcript
Truist Financial Corp (TFC)
Earnings Call Transcript - TFC Q3 2021
Operator, Operator
Please standby, we're about to begin. Greetings, ladies and gentlemen. Welcome to the Truist Financial Corporation Third Quarter 2021 Earnings Call. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Ankur Vyas, Truist Financial Corporation. Please go ahead, sir.
Ankur Vyas, Head of Investor Relations
Thank you, Allen. Good morning, everyone. Welcome to Truist third quarter 2021 earnings call. With us today are our CEO, Bill Rogers; and our CFO, Daryl Bible. During this morning's call, they will discuss Truist's third-quarter results, and also share perspectives on how we continue to activate Truist's purpose, our progress on the merger, and current business conditions. Clarke Starnes, our Chief Risk Officer, Beau Cummins, our Vice Chair, and John Howard, our Chief Insurance Officer, are also in attendance and are available to participate in the Q&A portion of our call. The accompanying presentation, as well as our earnings release and supplemental financial information, are available on the Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide 2 and 3 of the presentation regarding these statements and measures, as well as the appendix, for appropriate reconciliations to GAAP. In addition, Truist is not responsible for and does not edit nor guarantee the accuracy of any earnings teleconference transcripts provided by third parties. The only authorized live and archived webcast are on our website. With that, I will now turn the call over to Bill.
Bill Rogers, Chief Executive Officer
Thanks, Ankur. Good morning and thank you for joining our call. I hope everyone's well and safe. I'm very pleased by Truist's continued progress on our solid third-quarter performance. Our quarterly results reflect the diversity of our business mix, which drove strong fee income and helped overcome continued softness in net interest income. Credit quality was outstanding, resulting in another provision benefit. Loan growth was modest, excluding PPP, generally in line with our expectations. We also achieved a major integration milestone this past weekend, and we'll share more details on these topics during the presentation. If I move you to slide 4, I'd like to begin with our purpose, which is to inspire and build better lives and communities. We believe our purpose-driven culture is the primary factor behind our success as a company. Our purpose defines how we do business every day and it serves as a framework for how we make decisions. A recent example of this was our decision to remain open during our conversion last Saturday, so we could care for our clients and address any questions. To my knowledge, that's the first for a major systems conversion such as ours. I've said our culture, purpose, performance, teamwork, and a client-first mindset all coexist, and there's no better evidence of that than the extraordinary success our teammates delivered this past weekend in our most significant merger milestone to-date. Details of which I'll cover shortly. Slide 5 describes how we're living out our purpose and highlights some of the notable progress we've made during the quarter. During the pandemic, philanthropic giving was a natural way to put our purpose into action due to the effects of the coronavirus on our clients, teammates, and communities. Our purpose is much broader than philanthropy. We developed this slide around major themes contained in our CSR and ESG report because they're the topics that are most important to all of our stakeholders, including our shareholders. I won't cover every point on the slide. Let me just highlight a few. We continue to make strong progress against our $60 billion community benefits plan, currently at 112% of target, including the ongoing impact that Truist Community Capital provides our communities with regards to affordable housing, access to healthy food and education, and investments and job creation in small business. Truist announced that all elementary school students nationwide will soon have access to Workforce Universe, a digital early literacy program. I'll talk more about this shortly, but we've migrated 7 million clients to the new Truist digital banking experience, which includes enhanced digital investment, money management capabilities, personalized insights, and a holistic personal financial management tool. We committed to increase diversity in our senior leadership roles to at least 15% by 2023. We're currently at almost 14%, and clearly on track. Importantly, long-term, the way we create a more diverse senior leadership organization is by recruiting diverse early talent and then developing, retaining, and promoting over time. And for early career program hiring in 2021, 64% of the seats at Truist were filled by diverse candidates. All of this progress combined with enhanced disclosures has resulted in solid improvements in our ESG scores. Lastly, in a few weeks we'll release our inaugural Truist TCFD report. Our teammates and I are very proud of Truist and all the ways we deliver on our purpose. So turning to the third quarter performance highlights on Slide 7, we earned $1.6 billion or $1.20 earnings-per-share for the quarter on a reported basis. On an adjusted basis, we earned $1.9 billion or $1.42 per share. Adjusted EPS increased 46% versus the same quarter last year, and is largely driven by the provision benefit. Sequentially, EPS declined 8% as we had a greater benefit from the provision last quarter and seasonally stronger revenues last quarter. We had strong returns, including a 22.6% adjusted ROTCE. Excluding the reserve release, adjusted ROTCE was still very good, north of 19%. Revenues totaled $5.6 billion, fairly stable compared to last quarter. On an adjusted basis, year-over-year revenue growth was 2% as much stronger fee income offsets an almost 30 basis point decline in margin, and an 8% decline in loans, a reflection of this unique environment that we're all in. The stronger adjusted fee income, which grew 12% compared to a year ago, did drive slightly higher expenses than expected, but our PPNR is broadly in line with our expectations. Asset quality continues to be an excellent story, as we outperformed our net charge-off guidance with lower charge-offs across C&I combined with strong recoveries. During the quarter, we were pleased to increase the dividend 7%, and we completed the Constellation acquisition, which had a very good first quarter with Truist Insurance. Also, we announced the strategic acquisition of Service Finance, which will close later this year. Daryl will share some additional information on Service Finance, but it's broadly a reflection of Truist skating to where the puck is going, and partnering with a leader in home improvement point-of-sale lending. We also completed our retail mortgage origination conversions and benefits, which Daryl will also highlight later. Last but certainly not least, I'm very excited to report, this past weekend, we completed a major phase of our Core Bank conversion. After a lot of intense, deliberate, thoughtful, and purposeful preparation by our team, we were able to stand up the Truist technology ecosystem and migrate all heritage BB&T retail, wealth, and business clients to it. The event went extremely well and there are a number of notable positive impacts for clients and teammates. Starting this past Tuesday, over 2,500 heritage BB&T teammates were able to log onto the new Truist commercial lending ecosystem for the first time. Because of the conversion, the Salesforce client management and sales pipeline system is now directly connected to the Encino lending origination system, which allows for better communication and workflow across the deal team, and visibility on progress of the loan all in one place. These upgrades also lay the foundation for future digital innovation. We're now able to offer Truist products to new clients and to heritage BB&T clients through our branches and digitally through truist.com, including our new Truist Ready Now Loan, a small-dollar lending solution for existing clients to cover emergency financing needs between $100 and $1,000, consistent with our belief on the importance of emergency savings. We upgraded our ATM, contact center, and digital payment capabilities across a number of dimensions, including more client self service, improved authentication, and operational simplification. While this was not a physical branding event, the conversion places us on excellent footing for the final conversion in the first quarter of 2022 when heritage SunTrust clients will transition to the Truist ecosystem and all branches will become Truist. Again, I want to congratulate our teammates on a job well done. They've prepared with intensity and purpose for multiple quarters. They learned and applied lessons from previous conversion work. They worked non-stop this past weekend, and delivered a seamless conversion. I really could not be more proud. Now, going to Slide 8. We have three significant items that negatively affected earnings during the quarter. First, merger charges totaled $132 million after-tax, lower than last quarter, because higher Voluntary Separation and Retirement Program costs were reflected in the second quarter. This VSRP program is one of the many components of our overall cost-saving goal. Approximately half of our 2,000 teammates who elected to participate left on September 30th, and I cannot thank them enough for their long-standing efforts to build the foundation of Truist by helping create two amazing companies in BB&T and SunTrust, and then helping bring Truist to life during our almost first two years of existence. Incremental operating expenses related to the merger were $147 million after-tax. As a reminder, these are merger-related expenses but don't meet the technical definition of nonrecurring merger charges, and will not be part of our run rate in 2023 and beyond. Also, we had a one-time professional fee accrual that met our disclosure and adjustment threshold, totaling $23 million after-tax. This fee was incurred to develop an ongoing program to identify, prioritize, and roadmap to generate revenue growth and expense saving opportunities as part of the merger and beyond. This helps ensure that we'll achieve our 2022 cost save targets. It's also fuel for creating more capacity for investments in the future, will also improve the client experience, simplify our processes, and create a more engaged and energized workforce. Our teammates generated 5,000 initial ideas, which we consolidated and narrowed down to approximately 1,000, and we're building the execution plan. Ultimately, our goal is for this to be an ongoing way of how we do business at Truist, and powering our teammates to identify and execute on ideas to improve our company. The total impact on these three items was $0.22 per share. Moving to slide 9, as we've noted, Truist is the first large merger in the digital age, so we're highly focused on ensuring a smooth transition for our digitally active clients. Our new Truist digital experience reflects two of our core digital and technology principles: co-creation with our clients and failing fast to learn fast. We built this new platform based directly on client feedback, and we're introducing it in waves, learning from each release and getting better every time. We made great progress in the third quarter, inviting approximately 7 million retail, wealth, and small business clients to migrate to the Truist digital experience through September. About half of those clients have started and are using the platform in lieu of their heritage app. By the end of this quarter, our goal is to migrate all digital clients to the Truist digital platforms. We've received ongoing feedback from our clients and incorporated opportunities for improvement iteratively over the course of the migration, which has resulted in an improved client experience over time. This de-risked our Core Bank conversion and makes Truist the first to de-link the front-end conversion from the back-end, a patented approach we can leverage for future back-end innovation. As you can see on Slide 10, we continue to experience healthy demand for digital banking services as our clients look for more convenient and effective ways to transact and manage their finances. The pace of digital adoption has been especially rapid in mobile. Active mobile users and Zelle transactions are up 11% and 58% respectively, year-over-year. Last quarter, I highlighted that we are creating a common core digital architecture and platform for retail, wealth, and small business clients, which creates agility and seamless client experiences, yet ones that are tailored and designed for the unique needs of each client segment. For our wealth clients, we provide a differentiated digital client experience that reflects their relationship with Truist. An integrated platform will provide a one-stop-shop for their holistic financial picture, including a unified investment portfolio experience that is agnostic to whether the account is a trust or brokerage account, holistic financial planning with external account aggregation, and the ability to secure, store, and exchange documents for their advisor, and the same access to low cost digital and automated investing that we now offer retail clients. Turning to slide 11, on an absolute basis, loans declined $2.4 billion sequentially. However, if you exclude the impact of PPP forgiveness, average loans increased $1.6 billion or 2.3% annualized consistent with our outlook. When you peel back the onion, there's some good trends, but we also have headwinds. PPP declined $4 billion on average in the quarter, and Dealer Floor Plan declined an additional $1 billion. We expect PPP to decline an additional $2 billion or so on average in the fourth quarter. Dealer utilization is about 25%, well below historical averages. We've been somewhat cautious in CRE, although we're beginning to see opportunities in that space that meet our risk appetite and portfolio diversity objectives. Even so, that portfolio declined $1.2 billion sequentially. Excluding these items, Commercial Loans increased $1.1 billion or 0.9% sequentially. So we're seeing some improved momentum. More banking regions are experiencing core C&I growth. Pipelines in the Commercial Community Banking and CRE businesses continue to grow. And our revolver exposure also grew 2% sequentially. Evidence of our relevance that our clients are building capacity for investments and expansion. Big picture, our corporate and commercial clients remain optimistic, but labor shortages and supply chain issues are affecting their businesses no different than Truist. Net-net, we believe there is meaningful upside to the C&I growth story as the economy continues to improve, pandemic-related disruption subsides, and the liquidity-related distortions from ongoing government stimulus abate. But the timing of all this is difficult to predict. On the consumer slide, mortgage has shifted from a shrinking to a growing portfolio, reflecting increased operational capacity, slower prepaid speeds, and our tactical decision to balance-sheet correspondent production. We're also seeing good performance with indirect auto, LightStream, and credit card, all of which are growing versus last quarter. So turning to slide 12, we added this slide this quarter to broaden a little more color on growth and headwinds for average loans since there are several significant moving pieces. Long-term loan growth is an output and highly correlated with economic growth, which we believe is on firm footing, particularly in our markets. We also continue to pursue tactics and strategies to capture more than our fair share of loan growth within our risk appetite and diversification objectives, including deepening our lending relationships with our wealth clients, increasing our digital and point-of-sale lending capabilities, and expanding our wallet share within certain corporate and commercial clients. Turning to slide 13. Average deposits increased $6.5 billion or 1.6% compared to the second quarter, largely due to the continuing effects of recent government stimulus. More importantly, Truist continues to resonate with clients. We continue to make solid progress with quality account growth. Year-to-date, our net new personal DDA accounts grew almost 50,000, significantly higher than last year. Net new business DDA is up 11% year-over-year. In addition, client attrition from closed branches continues to be very low. This performance reflects excellent execution by our retail Community Bank teammates. And with that, let me turn it over to Daryl to review our financial performance in greater detail.
Daryl Bible, Chief Financial Officer
Thank you, Bill. And good morning, everyone. Turning to slide 14, net interest income was down slightly versus the prior quarter. This was consistent with our guidance and reflected two competing factors. Purchase accounting accretion decreased $53 million versus the prior quarter, and contributed 23 basis points to reported margin, down from 28 basis points in the second quarter. However, core non-interest income increased $41 million. This was driven by a larger investment portfolio and strong deposit growth. We have more than offset lower PPP revenue. Core net interest margin decreased two basis points due to higher liquidity and lower PPP revenue. We expect to earn an additional $125 million in PPP revenues over the coming three quarters and for the balance to be recognized by mid-2022. We continue to be asset-sensitive. We estimate that a 100 basis point parallel increase would increase NII by $410 million. A 100 basis point shock would increase NII by $790 million. We're also well-positioned to benefit from rising rates, at both the short and long end of the curve. Two-thirds of our reported asset sensitivity is from the short end, and it assumes a deposit beta of approximately 50%. In reality, over the last few years, deposit betas have tended to be significantly lower than our modeled assumptions during the first few rate hikes. For every 10% decline in deposit beta, our asset sensitivity increases by about 100 basis points. Moving to Slide 15. As Bill highlighted, we had a very strong quarter from a fee income perspective. Fee income, excluding security gains from last year, was up a very strong 12% year-over-year exceeding our initial expectations. Insurance income increased 25% in total. This was due to acquisitions and also a very strong 12% organic growth. Investment banking had its second-best quarter and record M&A performance. M&A results like this do not come in a vacuum; they're the results of years of investment and commitment to our clients. Capital markets revenue was up 22% year-to-date. Wealth management remains very strong, up 10% compared to a year ago as a result of market conditions but also positive asset flows. Markets-related income was down after its record second-quarter performance, but momentum continues to be positive. Residential mortgage was down year-over-year this quarter due to lower refinance activity. However, it increased $62 million sequentially, primarily due to better servicing income due to lower prepayment speeds and the addition of a new servicing portfolio. Production income also improved sequentially as we restored capacity after temporarily reducing it last quarter. Other income of $131 million was another high-water mark, largely due to valuation gains related to our SBIC funds. Our non-qualified plan continues to have positive valuation adjustments and we have now included the details of both the non-qualified plan and CVA in our earnings release tables. Turning to expenses on Slide 16. Adjusted non-interest expense increased 2.4% sequentially compared to our guidance of relatively flat. Drivers included higher-than-anticipated fee income, which pushed incentives above our forecast, in addition to $32 million cost from the non-qualified plan. Excluding the effects of these items, adjusted expenses were only slightly above our expectations. On an absolute basis, adjusted non-interest expense increased primarily due to higher planned marketing costs, as we continue to build our brand awareness, as well as higher technology costs which are reflected in software and equipment expense. Moving to Asset Quality on Slide 17. Asset quality remains excellent, reflecting our prudent risk culture, diversified portfolio, favorable economic conditions, and the effects of stimulus. Our net charge-off ratio was 19 basis points, a post-financial crisis low. Leading indicators remain strong as multi-pay delinquencies and early-stage delinquencies remain low. Our ACL coverage ratio decreased to 1.65% as economic scenarios continue to improve, but still remains above our CECL day-one level of 1.54%. We also had a provision benefit of $324 million. Continuing on slide 18, capital remains strong. Our CET1 ratio of 10.1% was above our near-term 9.75% target. We did not repurchase any shares during the third quarter due to the effects of the recent acquisition activity. We have approximately $1 to $2 billion of potential capital deployment remaining through the third quarter of 2022. We expect to consume approximately $500 million of this capacity via share repurchases in the fourth quarter, reflecting our current capital position and reduced integration risks on the heels of the very successful integration event we discussed earlier. Turning to Slide 19, we provide additional details about Service Finance. We continue to be very excited about Service Finance, and the acquisition is on track to close later this year. Service Finance is strategically attractive because it expands the scale and capabilities of our existing point-of-sale businesses, which is where consumer preferences are shifting. In addition, we believe home improvement is in a secular growth phase, and the professional financing market is highly fragmented. Service Finance is the perfect partner for Truist, given its proven track record of business development and growth, its exclusive focus on home improvement, strong digital client experience, and excellent reputation in the marketplace. From a financial perspective, we have provided a few additional details to help you model the transaction. The vast majority of Service Finance revenue will come in net interest income. The NII is a mix of consumer interest income and discounts provided by the merchants. Loan yields are in the high single-digits from a run-rate perspective, though initially they are somewhat lower due to the impact of promotional periods on an unseasoned loan portfolio. We expect production to grow at a fast pace over the coming years. We expect to allocate $1.1 billion to goodwill and $700 million to intangibles. We also expect to capture approximately $250 million in value over time from a step-up in tax basis. On a standalone basis, the acquisition is 4% GAAP dilutive in year 1. Half of this dilution is driven by the utilization of capital in lieu of share repurchases. The other half is driven by the first-year GAAP net income contribution. Earning streams take time to build as we transition from an originate-to-sell to an originate-to-hold model. But over the long term, it is extremely profitable and accretive to all of our KPIs. We did not model any future revenue synergies, but see many opportunities to better leverage our combined capabilities and accelerate our revenue and growth potential. We have terminated third-party partnerships with certain point-of-sale financing providers. The impact of this is $2 billion of runoff that will begin in early 2022. Moving to the integration update on Slide 21. As Bill highlighted, we achieved a major milestone this past weekend with successful migration of our heritage BB&T retail and commercial clients to the Truist ecosystem. Another milestone in the quarter was completing the migration of our Truist retail mortgage origination platform. Turning to slide 22, we are committed to achieving $1.6 billion of net cost saves, and continue to make progress in each of the five categories. Third-party spend is down 11.2% from baseline levels, exceeding our targeted reduction of 10%. We closed 39 branches during the third quarter, bringing the cumulative closures to 413. We're still on track to achieve approximately 800 total closures by the first quarter of 2022. We are also 7/8 of the way towards our non-branch facility reduction target, which will likely have more reductions to come in 2022. Average FTEs are down 11% since the merger, excluding the acquisitions. We expect further declines in FTEs in the coming quarters due to the VSRP program, where the first wave of departures began on September 30th. Technology savings will materialize after redundant systems are decommissioned in 2022. We have also noted areas where we continue to make critical investments, including digital technology, talent, and acquisitions in select business lines. Turning to Slide 23, we still expect to incur total merger costs of approximately $4 billion through 2022. We have incurred cumulative merger costs of approximately $3 billion through the third quarter, reflecting considerable integration work. We continue to expect these costs to decrease after the first quarter final bank conversion and then drop off entirely after 2022. Continuing on Slide 24. Core non-interest expense was just over $3 billion in the third quarter. As a reminder, this calculation removes the effects of higher variable compensation due to fee income and corporate performance since 2019, asset value changes in our retirement plan and acquisitions since the merger close. As a result, core non-interest expense is more comparable to our baseline expenses at the time the merger closed. Based on the trajectory of ongoing cost-save initiatives, we are on track to achieve the fourth quarter core expense target. I will now provide guidance for the fourth quarter. Reported net interest margin is expected to decrease 5 to 7 basis points, with half attributable to lower purchase accounting accretion, and the other half due to increased liquidity and less PPP revenue. We expect reported net interest income to decline 1% sequentially, entirely due to lower purchase accounting accretion. Core net interest income is expected to be stable. Fee income, excluding the non-qualified plan, is expected to be largely stable from the third quarter as strength in insurance, investment banking, wealth, and CRE is offset by lower mortgage revenue and lower SBIC valuation gains. Adjusted non-interest expense is expected to decrease 3% to 4% from the third quarter. The primary drivers are personnel expense driven primarily by VSRP, occupancy expense, and technology costs such as software and equipment expense. For those that leverage our core expense target for the fourth quarter to build the adjusted expenses, you must add back the impact of acquisitions and higher levels of incentive compensation expense from the higher fees and performance relative to 2019. We expect net charge-off ratio to be 20 to 30 basis points given favorable economic conditions, although we expect some normalization of these levels over time. Finally, we expect further reductions in the ACL coverage ratio, assuming economic conditions remain healthy. Given all this, Truist should have positive operating leverage next quarter when compared to the third. Now I will turn it back to Bill to conclude.
Bill Rogers, Chief Executive Officer
Thanks Daryl. Slide 25 provides an overview of our value proposition. I won't go through the details, obviously we've shared them in the past. But flipping to slide 26 provides some performance highlights that support our value proposition with actual performance this quarter. Our markets continue to have strong in-migration, the data of which can lag. Fee income from insurance, investment banking and wealth was up 20% year-over-year, and up approximately a billion dollars compared to 2019. Our third-quarter results clearly reflect the potential for profitability levels to be industry leading as we come out of the merger. Lastly, we continue to deploy more capital on behalf of our clients and shareholders, and we'll have that capacity to do more over time as integration risk subsides and the economy stays on sound footing. So in conclusion, the effects of the pandemic are moderating, the economy is getting better. We are one major step away from completing our integration process. We're beginning to shift from a more defensive to a more offensive position and from a merger focus to a performance focus. We fully believe that Truist's best days are ahead. So with that, Ankur, let me turn it back over to you and Q&A.
Daryl Bible, Chief Financial Officer
Thanks, Bill. Allen, at this time, if you don't mind explaining 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 so that we can accommodate as many of you as possible today.
Operator, Operator
Thank you, sir. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. And like Mr. Vyas said, please limit yourselves to one question and one follow-up question. We'll first go to Betsy Graseck with Morgan Stanley.
Betsy Graseck, Analyst, Morgan Stanley
Hi. Good morning. I had a first question just around the Service Finance acquisition. And I just wanted to understand how you're thinking about leveraging this acquisition from here, both on the merchant side, as well as on the customer side, talking about opportunities for expansion and integration into your platform, and then on the customer side cross-sell.
Bill Rogers, Chief Executive Officer
Yeah, Betsy, it's a great question. As Daryl mentioned, we didn't model any of that into the basic models. The basic model you saw is for Service Finance as a standalone. One of the really attractive parts of this integration for Truist is the fact that they've developed relationships with 14,000 contractors and 80 manufacturers, many of which are existing clients of Truist. We've got this incredible opportunity to expand those relationships. They are adding a lot of new clients to our base who are single-product clients, who we have an opportunity to expand using things like LightStream and the capabilities that we have there using the prowess of our CIB bankers with the manufacturers, helping expand with the contractors. There's a whole another component to Service Finance, which is really interesting around ESG — what they're doing to create more energy efficiency, and the concept of everything related to home improvement. What we really like about Service Finance is it's a pure-play on the home side. If you think about all of the things that we have related to home — think about insurance that we have related to home, think about home equity, think about mortgage, think about all the products and capabilities we have related to home — we're just starting to explore those kinds of opportunities. This is why we feel so good about this. This to us is where the puck's going, as I said, versus where it is. And to your question, I think those are significant opportunities ahead of us.
Daryl Bible, Chief Financial Officer
And what I would add to that, Betsy, is that the returns on this will eventually be over 300 basis points ROE business in steady state, and our risk-adjusted yield will be really attractive on an annual basis.
Betsy Graseck, Analyst, Morgan Stanley
Follow-up question here, Daryl, on the rate sensitivity. You did give us the first 100 basis points. And I know that the question is going to be, what about that second 100 basis points? The first 100 is really low deposit beta, and I think you mentioned, can you remind us what the deposit beta was like on that second 100? Thanks.
Daryl Bible, Chief Financial Officer
If you go back to the last rate cycle that we went through, it was basically when rates bottomed out the Fed moved up six times for 150 basis points. If you look at the deposit betas, the first two or three moves the deposit beta was probably about plus or minus 20%. And then as it continued to climb, it got closer to 30% to 40%. I'm not sure if it ever really got to 50% in those six moves, but it gradually went up as the moves continued. I don't think we ever reached a 50% beta in that cycle.
Betsy Graseck, Analyst, Morgan Stanley
Okay. All right, thanks so much.
Operator, Operator
The next question comes from the line of Ryan Nash with Goldman Sachs.
Ryan Nash, Analyst, Goldman Sachs
Hey, good morning guys. Daryl, maybe to start on the expenses. So you are reiterating the $2.94 billion and you're calling for adjusted expenses to decline 3%-4%. Can you maybe just talk high level about some of the puts and takes on expenses as we move into 2022? Clearly the core is coming down due to expense saves, but we're hearing about cost inflation is increasing. You have a handful of insurance deals and Service Finance as well as investments in the business. So how should we think about the costs into '22 and maybe can they be down on an absolute or an adjusted basis into next year? Thanks.
Daryl Bible, Chief Financial Officer
Yeah. We're still putting together our plan for 2022, but I'll tell you what I can tell you now. From a cost perspective, we have our five buckets that we talk about. We definitely will see more branch closures in the first half of 2022, with almost 400 more branches closing. There will also be more corporate real estate reductions, so more reductions in that space as 2022 comes along. The big cost savings in technology will happen as we phase through the conversions in the first quarter and as we decommission systems. We're going to reduce about 40% of the application systems and move from six data centers to three data centers; that will be big reductions in cost saves. Bill talked about our continuation of our VSRP that will continue throughout 2022. And then finally, we have that team-led synergies program to basically get synergies on expenses and revenues, and that will play out over the next couple of years. That will assure us to make sure that we get our expense targets and also give us ammunition to make more investments in digital technology and other talent.
Ryan Nash, Analyst, Goldman Sachs
Got it. And Bill, last quarter you were talking about green shoots in loan growth, and this quarter, I think it sounded a little bit more balanced. You are talking about core momentum. Can you maybe just talk about expectations for loan growth over the next few quarters on both the consumer and the commercial side? What do you see as some of the drivers? And could we see something like Service Finance starting to help drive accelerating growth on the consumer side? Thanks.
Daryl Bible, Chief Financial Officer
Before Bill answers, let me add that inflation is real and inflation will be in our numbers. If you look at the last couple of years, we did not really factor in higher inflation in 2020 and 2021. It's not exactly clear what that number will be, but it's probably, give or take, around 2% of the fee expense base. And you also have to factor in acquisitions as well for 2022, and the impact of that would affect both revenue and expense. But at the end of the day we're going to have good overall operating leverage, probably top quartile when it's all said and done.
Bill Rogers, Chief Executive Officer
Thanks for that addition, Daryl. Ryan, that's the focus — to achieve expense targets and drive a business that creates positive operating leverage and industry-leading efficiency. I feel very confident about that. I didn't mean to imply that there weren't green shoots; I still think there are definitely green shoots, and I think they manifested themselves in this quarter. When I think about loan growth as an output, I look at production, paydowns, utilization, and pipelines and try to see where they're headed. On the production side, we're hitting some high points in the quarter for C&I and consumer; our production is strong. Paydowns stayed pretty consistent. Utilization is still pretty flat, but pipelines are strong. In C&I, CRE, and Commercial Community Banking for us, we're at high points for the last several quarters in pipelines. So it's hard to guide precisely. If I had to frame it, medium-term, excluding PPP, low single-digit growth is a reasonable expectation. But our positioning longer term — when liquidity comes out of this — I feel great about our positioning and our capacity to capture growth. We've grown our revolvers, so utilization going up, the markets we're in, the business investments and talent — all create opportunity for growth as we go forward. So yes, I think there are green shoots; it's hard to predict exact timing, but I feel really good about how we're positioned.
Ryan Nash, Analyst, Goldman Sachs
Great, thanks for all the color, Bill.
Operator, Operator
The next question comes from the line of Gerard Cassidy with RBC.
Gerard Cassidy, Analyst, RBC Capital Markets
Thank you. I was on mute. I appreciate it. Good morning, gentlemen. Bill, can you share with us — you've done some smaller acquisitions. Obviously, the most recent one is Service Finance, and then the insurance companies. Can you give us your picture of what you see, maybe, for added bolt-on opportunities that could be on the horizon for Truist?
Bill Rogers, Chief Executive Officer
Yeah. I'd say first, as Core Truist, I think the biggest opportunity is in Truist itself. I see the biggest opportunity to actualize and optimize the opportunity that came from this merger vehicle. But then the bolt-ons — clearly on the insurance side we've had a fantastic track record. It is a really good toggle between organic and inorganic growth when managed well, and I would expect that to continue. Maybe other bolt-ons that add strategic scale; we've been adding a lot of talent. I view adding talent as the equivalent of acquisitions in many ways, and you've seen benefits of that, for example, in investment banking. But I think bolt-ons in areas where we're experienced or where we have opportunity make the most sense, and the primary emphasis is on Truist and maximizing and optimizing the merger.
Gerard Cassidy, Analyst, RBC Capital Markets
Very good. Thank you. And maybe this question could be directed at Clarke. The credit quality for you and many of your peers has been outstanding, particularly in the net charge-off area. Can you give us a flavor of how sustainable are these levels of very low net charge-offs? Is it another two or three quarters and then maybe creeping up to normalization as we enter '23 or end of '22?
Clarke Starnes, Chief Risk Officer
Great question, Gerard. On the longer view for the industry, we had significant stimulus, accommodation programs, and strong asset values, and all of those have been tailwinds. You saw for us almost a historic low loss point for the quarter. Given the current economic backdrop, we would expect to continue to see outperformance with, to your point, a steady return over time to normalization as we go into '22 and beyond. It can go on longer; it depends on the economic scenario. But for us right now, we believe we have an opportunity to outperform and you will see that reflected in our fourth-quarter guidance.
Gerard Cassidy, Analyst, RBC Capital Markets
Great. Thank you.
Operator, Operator
The next question comes from the line of Ken Usdin with Jefferies.
Ken Usdin, Analyst, Jefferies
Hi, guys. Good morning. Hey, Bill. Just when you think longer-term about the points you made about operating leverage, efficiency, maybe there's some inflation, the business mix has changed. How confident are you — do you remain in that low 50s long-term efficiency ratio and how much, if at all, is rates still part of that equation? Thanks.
Bill Rogers, Chief Executive Officer
I would start with the objective of industry-leading efficiency. Given some normalization and higher rates, I feel really confident in the low 50s. Most importantly, being able to achieve positive operating leverage and being top-quartile efficiency is imminently achievable for Truist in the short, medium, and long term.
Ken Usdin, Analyst, Jefferies
Okay. Got it. And then, just on the near-term perspective, Daryl, can you just walk us through, when we take the $2.94 billion in the slides and you kind of add back the add-backs, where approximately does this put us as a starting point for the end of the year on a GAAP basis for cost?
Daryl Bible, Chief Financial Officer
If you go back, you have to add back incentive pieces on the acquisition pieces, as well as whatever non-qualified turns out to be, plus or minus. We gave guidance on an adjusted expense number down 3% to 4% from where we are today. That is your starting point for 2022.
Ken Usdin, Analyst, Jefferies
Okay. Got it. And then we add back intangibles for the all-in.
Daryl Bible, Chief Financial Officer
That's correct.
Ken Usdin, Analyst, Jefferies
Thank you.
Operator, Operator
The next question will come from the line of Matt O'Connor with Deutsche Bank.
Matt O'Connor, Analyst, Deutsche Bank
Good morning. Bill, you took over as CEO about a month ago and also announced changes to the senior leadership team. Obviously, all of these guys have been in very prominent roles since the deal was announced, I wouldn't expect meaningful changes. But any kind of tweak that we should expect or what was the process of picking who does what underneath you given some of the changes? However you want to frame that. Thank you.
Bill Rogers, Chief Executive Officer
The great thing is we have an incredibly strong, skilled, experienced, purposeful team. I'm really fortunate to be surrounded by great leaders. We didn't want to put a lot of change in place because I feel really good about the momentum and where things are going. The leaders responsible for those businesses largely retained their responsibilities. The shift is more about transitioning from merging to operating. That is a function of timing and where we are in the process. Getting this major conversion done this weekend was a big milestone for us. It gives us confidence to shift some of our time and focus to maximizing the opportunities that are true for Truist. So it's more of a shift in emphasis rather than wholesale leadership change.
Matt O'Connor, Analyst, Deutsche Bank
And then just separately, can you talk about retention of some of the front-office client-facing folks across the franchise? I would imagine initially there wasn't that much movement because of COVID, and I think you also had some retention agreements for key people. But just update us on how that's been going more recently as things have been opening up and maybe people in general are more open to looking elsewhere, not just at Truist, but the workplace overall.
Chris Henson, Chief Human Resources Officer
Let me put a global perspective on it and then get a bit more specific to Truist. Globally, there's more activity and more people are moving, and we see that particularly in frontline areas. You don't drive around any place in the country where you don't see help-wanted signs. We and the industry are experiencing some of that. Going into this merger, our retention numbers in the first year to 18 months were actually better than they were at either company individually. They have ticked up a little bit, but they still are, by our measures, below industry averages. For our most senior team, retention has been really solid; we've kept the high performers we want. The places I worry about are frontline — tellers, care centers — that's a tougher environment today. On the other side, our ability to attract talent has been fantastic. People want to join Truist and be part of what we're doing. The opportunity for people here to grow and for us to bring in new talent is very good at Truist, all overlaid with the broader market dynamics.
Matt O'Connor, Analyst, Deutsche Bank
Understood. Thank you.
Operator, Operator
Next question will come from the line of Mike Mayo with Wells Fargo.
Mike Mayo, Analyst, Wells Fargo
Hi, Bill. You've spoken a lot about investing in technology and digital, and I think the expenses were a little elevated before you took over the CEO reins. So it's good seeing that you're guiding for expenses to be 3% to 4% lower next quarter. But can you just talk — I think it was your quote saying, once the hoods open, let's fix the engine a little bit more than we could have otherwise done. Where is the digital dividend, so to speak, going to come from as it relates to Truist and the extra efforts that you're putting in place? We can talk about the back office, with the cloud, or the front office with enhanced digital banking that you maybe didn't have before. Thanks.
Bill Rogers, Chief Executive Officer
Mike, great question. I think about it in two ways: the digital dividend and the avoidance of opportunity cost. We're creating a much more agile platform; the ability to move fast, add capabilities, and create more opportunities for clients and teammates on a more agile platform. We've stood up a new commercial ecosystem, a new mortgage ecosystem, and a new digital platform. Those are investments we don't have to repeat, and they create opportunities to expand over the next few years. Another part is the digital straddle — the approach we used to convert clients digitally — which allows us to leverage the back-end platform through APIs and the straddle to do much more for clients than before. With the hood up, we've been reviewing virtually everything. The best-of-both mentality has allowed us to expand and create a better ecosystem while avoiding major future replatforming costs.
Mike Mayo, Analyst, Wells Fargo
You said you're still committed to low 50s efficiency. It just seems like it's been a long way; the stock underperformed since the merger was announced despite a merger on paper that has the chance to be the best merger ever, and I think part of the reason for the underperformance may have been the pandemic and low rates. Looking ahead, are you able to commit to positive operating leverage next year? Given the investments, the technology savings, and everything, how much can you give us confidence about positive operating leverage and more visible digital dividend?
Bill Rogers, Chief Executive Officer
I can say with confidence it's reasonable to expect positive operating leverage for next year in the middle of this merger. That's despite inflation and ongoing investments. We're committed to having a business that delivers positive operating leverage and industry-leading efficiency. I feel more confident about that today than the day we announced the merger. It's sometimes hard to peel back one-time merger costs to see underlying performance, but our underlying capacity to deliver is there.
Mike Mayo, Analyst, Wells Fargo
All right. Next year, positive operating leverage. And this is your first earnings call as the CEO — did I hear that correctly?
Bill Rogers, Chief Executive Officer
That is absolutely what will be in our plan for next year.
Mike Mayo, Analyst, Wells Fargo
Got it. Thank you very much.
Operator, Operator
Next, we'll go to John McDonald with Autonomous Research.
John McDonald, Analyst, Autonomous Research
Morning, Daryl. I just want to clarify the outlook for net interest income next quarter. I think you said on a reported basis down 1% on a core net interest income flattish. Just clarify if that was the guide and then how does that set you up more broadly for growing NII into 2022 when you think about all the puts and takes there.
Daryl Bible, Chief Financial Officer
Yes, you are correct. We expect reported net interest income to be down 1% sequentially, and core net interest income to be stable in the fourth quarter, with the decline driven by lower purchase accounting accretion. When I look at 2022, the three drivers will be loan growth, deposit growth (depending on balance sheet size and liquidity), and interest rates. When I look at all that, I think it's very possible that core net interest income will grow. It doesn't take a huge amount of loan growth coupled with a modest move in rates to offset purchase accounting runoff. Even a 25 basis point steepening of the yield curve would add about $100 million for the year next year. There are many variables, but we feel pretty good that the trajectory of core net interest margin will rise in 2022, and that reported net interest margin should be relatively stable if we can offset the accretion decline.
John McDonald, Analyst, Autonomous Research
And Bill, just a bigger picture question in terms of the capital target and what you need to run the company. You brought down the capital target CET1 to 9.75%. It seems like you'll get there with the Service Finance acquisition soon. So longer-term, what will be the factors as you think about lowering that capital target closer to what peers target on CET1?
Bill Rogers, Chief Executive Officer
John, we also announced that we'll do some more share repurchases to get there faster. We went into the merger with a slightly higher capital base intentionally. As merger risk decreases and economic clarity increases, we believe our company profile — lower-than-average credit risk and higher-than-average PPNR — supports moving to a more normalized capital target. We don't want to do this quarter-to-quarter; it's a long-term strategy and philosophy. This weekend's conversion was a good milestone for reducing merger risk. We'll be thoughtful in moving to the existing target, and we'll continue to evaluate our capital position over time.
John McDonald, Analyst, Autonomous Research
Got it. Thank you. Getting through the conversions will be a big factor as you think about lowering that target over time.
Ankur Vyas, Head of Investor Relations
Allen, that completes our call. Thanks everybody for joining. We appreciate it. If you have any additional questions, please feel free to reach out to the IR team. We hope everybody has a great day. We appreciate your interest in Truist. Allen, you can now disconnect.
Operator, Operator
Thank you, sir. And once again, everyone that does conclude today's conference. We thank you for your participation. You may now disconnect.