Truist Financial Corporation (NYSE: TFC) Q3 2021 earnings call dated Oct. 15, 2021
Corporate Participants:
Ankur Vyas — Head of Investor Relations
William H. Rogers — Chief Executive Officer
Daryl N. Bible — Chief Financial Officer
Clarke R. Starnes — Chief Risk Officer
Analysts:
Betsy Graseck — Morgan Stanley — Analyst
Ryan Nash — Goldman Sachs — Analyst
Gerard Cassidy — RBC — Analyst
Ken Houston — Jefferies — Analyst
Matt O’Connor — Deutsche Bank — Analyst
Mike Mayo — Wells Fargo — Analyst
John McDonald — Autonomous Research — Analyst
Presentation:
Operator
Greetings ladies and gentlemen, welcome to the Truist Financial Corporation Third Quarter 2021 Earnings Call. [Operator Instructions] 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, Alan. 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 third quarter results and also share perspectives on how we continue to activate Truist 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 our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcast are on our website.
With that, I’ll now turn the call over to Bill.
William H. Rogers — Chief Executive Officer
Thanks, Ankur. Good morning and thank you for joining our call. Hope everyone’s well and safe.
I’m very pleased by Truist’s continued progress and 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 milestones 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 a first for a major systems conversion such as ours. I’ve said in our culture, purpose, performance, teamwork and a client-first mindset all coexist and there is 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 are 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. For purposes much broader than philanthropy, we developed this slide around major themes contained in our CSR and ESG report because they are 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 in job creation and small business.
Truist and EVERFI announced that all elementary school students nationwide will soon have access to WORDForce Universe, a digital early literacy program. I’ll talk more about this shortly, but we 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 202, 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 probably 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 a retail mortgage origination conversion from 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 on to the new Truist commercial lending ecosystem for the first time. Because of the conversion, the sales force, client management and sales pipeline system is now directly connected to the nCino lending origination system, which allows for better communication and workflow across the deal team and visibility of 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 the 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 $1000 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 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 let’s go into Slide 8. We had 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 cost 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 30 and I cannot thank them enough for their longstanding 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 a merger-related and restructuring 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 teammate-generated 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 and will also improve the client experience, simplify our processes and creating more engaged and energized workforce. Our teammates generated more than 55,000 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, empowering 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’ve built this new platform based directly on clients 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 use 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 improved client experience over time. This de-risks our core bank conversion and makes Truist the first to delink the front-end conversion from the back-end; a patent 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 with 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 are some good trends where 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 bank 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 disruptions subside, and the liquidity-related distortions from ongoing government stimulus abate. But the timing of all this is difficult to predict.
On the consumer slide [Phonetic], 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, Sheffield and credit card, all of which are growing versus last quarter.
So turning to Slide 12. We added this slide this quarter to provide a little more color on growth and headwinds on average loans since there are several significant moving pieces. Long-term, loan growth is an output and highly correlated to 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 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 N. Bible — Chief Financial Officer
Thank you, Bill, and good morning everyone.
Turning to Slide 14. Net interest income was down slightly versus prior quarter. This was consistent with our guidance and reflected two competing factors. Purchase accounting accretion decreased $53 million linked quarter and contributed 23 basis points to reported margin, down from 28 basis points in the second quarter. However, core net interest income increased $41 million. This was driven by a larger investment portfolio, which resulted in strong deposit growth, we have more than offset lower PPP revenue. Core net interest margin decreased 2 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 de minimis by mid-2022.
We continue to be asset sensitive. We estimate that 100 basis point ramp increase would increase NII by 4.1%. A 100 basis point shock would increase NII by 7.9%. We’re also well-positioned to benefit from rising rates at both the short and long ends 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, we have experienced over the last few years ago, deposit betas are likely to be significantly lower than our modeled assumptions when 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% like-quarter, 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 best — had its second-best quarter and record M&A performance. M&A results like this do not come in a vacuum. They’re results of years of investment and commitment to our clients. Capital markets ERM revenue was up 22% year-to-date. Growth remains very strong, up 10% compared to a year ago as a result of market conditions, but also positive asset flows.
CRE-related income was down after its record second quarter performance, but momentum continues to be positive. Residential mortgage was down, like-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 temporary reducing it last quarter. Other income of $131 million was also another high watermark, 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 CBA in our earnings release tables.
Turning to expenses on Slide 16. Adjusted non-interest expense increased 2.4% sequentially compared to our guidance of a relatively flat. Drivers included higher-than-anticipated fee income, which pushed incentives above our forecast in addition to a $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 pro forma post-financial crisis low. Leading indicators remain strong as NPLs and early-stage delinquencies remain low. Our ALLL coverage ratio decreased to 1.65% as the economic scenarios continue to improve and — but still remains above our CECL Day 1 level, 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 billion to $2 billion of potential capital deployment remaining through the through quarter of 2022. We expect to consume approximately $500 million of this capacity via share repurchases in the fourth quarter, reflecting our own capital position, reduced integration risk on the heels of a very successful integration event Bill 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 the 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, it’s exclusive focus on home improvement, strong digital client experience and an 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 the step up in tax basis.
On a standalone basis, the acquisition is 4% GAAP dilutive in year one. 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 for 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 run-off 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 the baseline levels, exceeding our targeted reduction of 10%. We closed 39 branches during the third quarter, bringing the cumulative closures to 413. We are still on track to achieve approximately 800 total closures by the first quarter of 2022. We are also seven-eights 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 quarter wave of departures began on September 30. Technology sales 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 cost of approximately $4 billion through 2022. We have incurred cumulative merger costs of approximately $3 billion through the third quarter, reflecting the considerable integration work on Slide 21. 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 acquisition since the merger of equals. As a result, core non-interest expense is more comparable to our baseline expenses at the time of 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 of 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 ALLL ratio assuming economic conditions remain healthy. Given all this, Truist should have positive operating leverage next quarter when compared to the third.
Now, I’ll turn it back to Bill to conclude.
William H. Rogers — Chief Executive Officer
Thanks, Daryl. Slide 25 provides an overview of our value proposition, meaning the details, obviously, we’ve shared in the past.
Flipping to Slide 26, that provide 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 is up 20% year-over-year and up approximately $1 billion compared to 2019. Our third quarter results clearly reflect the potential for our 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 subside 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, they are beginning to shift from a more defensive to a more offensive position and from a merger focus to performance focus. We fully believe that Truist best days are ahead.
So with that, Ankur, let me turn it back over to you and Q&A.
Ankur Vyas — Head of Investor Relations
Thanks, Bill. Alan, 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.
Questions and Answers:
Operator
Thank you, sir. [Operator Instructions] We’ll first go to Betsy Graseck with Morgan Stanley.
Betsy Graseck — Morgan Stanley — Analyst
Hi.
William H. Rogers — Chief Executive Officer
Morning.
Daryl N. Bible — Chief Financial Officer
Morning.
Betsy Graseck — Morgan Stanley — Analyst
Hi, good morning. Thanks. 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.
William H. Rogers — Chief Executive Officer
Yeah, Betsy it’s a great question. As Daryl mentioned, we sort of didn’t model any of that into the basic models. I mean, the basic model you saw is sort of Service Finance as a stand-alone. One of the really attractive parts of this integration for Truist, it was the fact that they’ve developed relationships with 14,000 contractors, 180 manufacturers, just sort of think about that in context, or 80 manufacturers, think about that in context, many of those which are existing clients of Truist. So 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’ve got an opportunity to expand using things like LightStream and the capabilities that we have there, using our — the prowess of our CIB bankers with the manufacturers, helping expand with the contractors. There is a whole another component to Service Finance, which is really interesting. It’s the whole ESG piece of what they’re doing to create sort of more energy efficiency and the concept of just everything related to home improvement.
I mean, what we really like about Service Finance is it’s a pure play on the home side. So if you think about all the things that we have related to home, so think about insurance that we have related to home, think about home equity, think about mortgage, think about all the prowess and product and capabilities we have related to home. We are just starting to explore those kind of opportunities. So this is why we feel so good about this. I mean, this is just 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 N. Bible — Chief Financial Officer
The only thing I would add to that, Betsy, is that the returns on this, it will be eventually over a 3% ROE business and our risk adjusted yield will be really attractive.
William H. Rogers — Chief Executive Officer
Yeah, just on the stand-alone.
Daryl N. Bible — Chief Financial Officer
Yeah, exactly, stand-alone basis.
Betsy Graseck — Morgan Stanley — Analyst
So follow-up question here, Daryl, on the rate sensitivity. You did give us the first 100 basis points. And I know the question is going to be what about that second 100 basis points? So the first 100 basis points is a really low deposit beta, 15% historically, I think you mentioned. Can you remind us what the deposit beta was like on that second 100 basis points? Thanks.
Daryl N. Bible — Chief Financial Officer
If you go back to the last rate cycle that we went to, it was basically when rates bottomed out that Fed moved up 6 times, 150 basis points. If you look at the deposit betas, the first probably two or three deposit betas was probably about plus or minus 20%. And then as it continued to climb, it was getting closer to 30% to 40% and not sure it ever really got to the 50% in the six moves that you saw there. But it kind of gradually went up as every couple of moves happened in the last rebound with the Fed.
Betsy Graseck — Morgan Stanley — Analyst
Right. So you never got like over 100 basis points or anything like that on those last couple of moves?
Daryl N. Bible — Chief Financial Officer
No, I don’t think we ever got to 50% beta on any — even move six.
Betsy Graseck — Morgan Stanley — Analyst
Okay, all right. Thanks so much.
Operator
Your next question comes from the line of Ryan Nash with Goldman Sachs.
Ryan Nash — Goldman Sachs — Analyst
Hey, good morning, guys.
William H. Rogers — Chief Executive Officer
Morning, Ryan.
Ryan Nash — Goldman Sachs — Analyst
Daryl, maybe to start on the expenses. So you’re reiterating the $2.94 billion and you’re calling for expenses to decline 3% to 4%. Can you maybe just talk high level about some of the puts and takes of — on the 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 had a handful of insurance deals and insurance finance as well as investments in the business. So how should we think about costs into ’22 and maybe can they be down on an absolute or an adjusted basis into next year? Thanks.
Daryl N. Bible — Chief Financial Officer
Yeah. So 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. We also will have more — less corporate real estate, so more reductions in that space as 2022 comes along. The big cost savings in technology will happen as we finish through the conversions in the first quarter, the decommissioning. We’re going to reduce about 40% of the application systems and move towards 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 in 2022. And then finally, we have that teammate-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 — Goldman Sachs — Analyst
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 N. Bible — Chief Financial Officer
[Speech Overlap] That’ll be for you, sir. Can I finish that? So, Ryan, from a still ’22 expenses, inflation is real and inflation is definitely going to be in our numbers. If you look at the last couple of years, we did not really factor any inflation in ’20 and ’21 and not sure exactly what that number is, but it’s probably, give or take, around 2% of our fee expense base. And you also have to factor in acquisitions as well for ’22 and the impact that, that would have on both revenue and expense. But at the end of the day, we’re going to have a good overall operating leverage, probably top quartile when it’s all said and done.
William H. Rogers — Chief Executive Officer
Yeah, thanks for the addition, Daryl. But I think back to that question, Ryan, that’s the focus. I mean, there are tons of puts and takes. But we’re going to hit the expense targets that we committed to. I mean, I feel very, very confident about that and have a business that creates positive operating leverage and industry-leading efficiency. I mean, that’s the shift and the target that we’re headed to. 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, as we highlighted. When I think about loan growth as an output, I look at production, paydown, utilization and pipelines. So those four elements and then trying to see where they’re going.
So on the production side, we are hitting some high points in the quarter for C&I and consumers. Our production is strong. Paydowns are staying pretty consistent. Paydowns are about where they have been. Utilization is still pretty flat, you could say grinding up in certain areas, but in fairness, probably pretty flat. But pipelines are strong. I mean in CIG and CRE and CCB, for us, we’re sort of at high points over the last several quarters in pipelines.
So it’s hard to guide. If I said — if you ask sort of medium term ex-PPP, I think low-single-digit kind of growth is at the forefront, but our positioning sort of longer term when liquidity comes out of this, I just feel great about our positioning. I mean, our capacity to — we’ve grown our revolver. So, our utilization going up, the fantastic markets we’re in, the business investments that we’ve made in talent, the consumer businesses, as you pointed out, point-of-sale businesses; things that are just adding capabilities and adding more opportunity for us to capture growth as we go forward. So yes, I think there are green shoots, hard to predict, sort of, when they’re going to grow. But I feel really, really good about how we’re positioned.
Ryan Nash — Goldman Sachs — Analyst
Great, thanks for all the color, Bill.
Operator
All right. Next question will come from the line of Gerard Cassidy with RBC.
William H. Rogers — Chief Executive Officer
Go ahead.
Operator
Gerard, your line might be on mute. Please go ahead.
Gerard Cassidy — RBC — Analyst
Thank you, I was on mute. I appreciate it. Good morning, gentlemen.
William H. Rogers — Chief Executive Officer
Morning.
Gerard Cassidy — RBC — Analyst
Bill, can you share with us — you’ve done some smaller acquisitions, obviously, the most recent one is the finance company 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?
William H. Rogers — Chief Executive Officer
Yeah, I’d sort of say, first, as core Truist, I think the biggest opportunity is with Truist. I see the biggest opportunity to actualize and optimize the opportunity that came from this fantastic merger of equals. So let me sort of say that as it’s primary where we’re going. But then the bolt-on clearly on the insurance side, I mean, we’ve had a fantastic track record on the insurance side. It is a really good toggle between organic and inorganic growth and managed well and I would expect that — I would expect that to continue. Maybe other things that look around and sort of bolt-on that are important to us strategically and add some scale. We’ve been adding a lot of talent. I view that as the equivalent of an acquisition. So we’ve been adding talent and you see the benefits of that, for example, in the investment banking side. But I think if you sort of think bolt-on and the places where we’ve — where we are experienced or where we have opportunity and then primary emphasis on Truist and maximizing and optimizing this merger.
Gerard Cassidy — RBC — Analyst
Very good. Thank you. And maybe this question could be directed to Clarke. The credit quality for you and many of your peers has been outstanding, particularly in the net charge-offs area. Can you guys give us a flavor how sustainable are these levels of very low net charge-offs? Is it another two or three quarters and then maybe a creeping up to normalization as we enter ’23 or end of ’22?
Clarke R. Starnes — Chief Risk Officer
It’s a great question, Gerard. I know it’s the lower longer question for the industry. And I would say for us and the industry, we had significant stimulus, the accommodation programs and, frankly, strong asset values and all of those have been tailwinds and you saw for us almost really historic low lost point for the quarter. So we feel really good about where we are and, given the current economic backdrop, we would certainly expect to continue to see outperformance with, to your point, a steady return over time to normalization as we go into ’22 and beyond. And so I think it can go on longer and it again depends on the economic scenario. But for us right now, I think we would believe we have an opportunity to outperform, and you see that reflected in our 4Q guidance.
Gerard Cassidy — RBC — Analyst
Great, thank you.
Operator
Your next question comes from the line of Ken Houston with Jefferies.
Ken Houston — Jefferies — Analyst
Hi guys, good morning.
William H. Rogers — Chief Executive Officer
Morning
Ken Houston — Jefferies — Analyst
Hey, Bill, just when you think longer-term out about the points you made about operating leverage efficiency, maybe there’s some inflation, the business mix has changed, how confident are you to remain in that low-50s long-term efficiency ratio? And how much, if at all, is rates still part of that equation? Thanks.
William H. Rogers — Chief Executive Officer
Yeah, I mean, I would start with industry-leading efficiency. So let me sort of start with that as a concept. I think, given some normalization of rates, I feel really confident in the low-50s. But most importantly, being able to achieve positive operating leverage, being able to sort of be industry-leading top or top quartile efficiency, I think, is imminently short, medium and long-term achievable for Truist.
Ken Houston — Jefferies — Analyst
Okay, got it. And then just on a — in a near-term perspective, can you just — Daryl, can you just walk us through, when we take the $2,940 million in the slides and you kind of add back, the add-backs wouldn’t [Phonetic] approximate just as to put us as a starting point for the end of the year on a GAAP basis for costs?
Daryl N. Bible — Chief Financial Officer
Yeah. So if you go back, you have to add back in incentive pieces, the acquisition pieces as well as whatever non-qualified turns out to be, plus or minus. You probably get to — we gave guidance on an adjusted expense number down 3% or 4% from where we are today. That, kind of, is your starting off point for 2022.
Ken Houston — Jefferies — Analyst
Okay, got it. And then we had back intangibles for the all-in. Okay.
Daryl N. Bible — Chief Financial Officer
That’s correct.
Ken Houston — Jefferies — Analyst
Thank you.
Operator
All right. Next question will come from the line of Matt O’Connor with Deutsche Bank.
Matt O’Connor — Deutsche Bank — Analyst
Good morning. So, Bill, you took over as CEO about a month ago and also announced some changes to the senior leadership team. Obviously, all of you guys have been in very prominent roles since the deal was announced. I wouldn’t expect meaningful changes. But any kind of tweaks that we should expect or kind of what was the process of picking who kind of does what underneath you, given some of the changes, however you want to frame that? Thank you.
William H. Rogers — Chief Executive Officer
Yeah, I mean the great thing, Matt, is we have an incredibly strong, skilled, experienced, purposeful team. So I’m really fortunate to be surrounded by really great leaders. As you noted, I mean, we didn’t want to put a lot of change in place because I actually feel really good about the momentum and where things are going. So the leaders who are responsible for those businesses, we shifted a couple of things around, but they still have the primary responsibility that they had before. I’d say the shift was more — what I talked about in my opening statements, it’s more of a transition from merging to operating. That doesn’t have anything to do with me or anything, it just has to do with the timing of where we are in this process.
Getting this merger — major conversion this weekend was just a shot of adrenaline for us, to be fair. I mean that’s a big significant milestone for us and just gives us more confidence to be starting to shift some of our time, some of our responsibility, some of our focus to maximizing the opportunities that are Truist. So I would say, if I were to describe the transition and what it feels like, maybe different now, is that it’s more of that and I just think that’s a function of timing and where we are and our confidence building.
Matt O’Connor — Deutsche Bank — Analyst
And then just separately, can you talk about the retention of some of the, kind of, front office, client-facing folks really across the franchise? I would imagine initially, there just wasn’t that much movement because of the COVID and I think you also had some retention agreements for key people. But just update us on how that’s been going, kind of, 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.
William H. Rogers — Chief Executive Officer
Yeah, let me put maybe a global perspective on it and then try to get a little more idiosyncratic to Truist. So globally, there is more activity and more people are moving and we see that particularly in some of the frontline areas and you don’t drive around any place in the country where you don’t see a Help Wanted sign and we’ve got several million people out of the workforce right now. So 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. So our retention numbers were really, really good. They’ve — turnover has spiked up a little bit, but it’s still, I think, below where the industry is from everything that we can determine.
As it relates to some of our most senior team and what we sort of look at, high performer turnover is one of the things that we look at in our senior team. I’ve been really pleased. I mean, we’ve been really solid in keeping the kinds of players we want. The retention on those have been — has been really good. The places that I worry about are frontline, teller, care centers, all of those things. That’s just of a more challenging environment today than it was before. And the other side of that is our ability to attract talent is fantastic. I mean we — the people that wanted to join our company and want to be part of what we’re doing at Truist, has exceeded any expectations that I might have had and they were really, really high. So the opportunity for people that are here to grow and expand their careers and the opportunity to bring new talent in, I think. is just really, really good at Truist; all that again with that sort of global overlay of what’s going on in the market and the world.
Matt O’Connor — Deutsche Bank — Analyst
Understood. Thank you.
Operator
Okay. Next question will come from the line of Mike Mayo with Wells Fargo.
Mike Mayo — Wells Fargo — Analyst
Hi, Bill. You’ve spoken a lot about investing in technology and digital, and I think the expenses were a little elevated before you had taken 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 a little — 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.” So 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? So you can talk about the back office with the cloud or the front office with enhanced digital banking that maybe you didn’t have before. Thanks.
William H. Rogers — Chief Executive Officer
Yeah, Mike, it’s a great question. And I think about it in two ways. One, a digital dividend, as you put it, but also the avoidance of opportunity cost, and that’s really what’s happened with this merger. So if you think about it in sort of the core basis, we’re creating a much more agile platform; so the ability to move fast, to add, to create more opportunities for our clients, our teammates on a more agile platform. So the base is really important. Then think we have a new state-of-the-art commercial ecosystem, we have a new state-of-the-art mortgage ecosystem, we have a new state-of-the-art digital platform. All of those, in my mind, are opportunity costs. So those are things we don’t have to invest in disproportionately going forward and then create the opportunity to expand and add to, as we go into the next few years.
The other part of that is something we call the digital straddle; this thing that we did to convert our clients digitally. I think it’s actually fairly unique and what that allows us to do again, from an agility standpoint, is to leverage that back-end platform and we can, through the use of APIs and the straddle, we can do a whole lot more for our clients than we could before. So when the hood is up, yeah, we’ve been looking at sort of virtually everything. So the hood up and the best of both mentality has allowed us to not only expand and create a better ecosystem, but I also look at it as a board to a lot of opportunity cost in the future of having to do these major, major changes.
Mike Mayo — Wells Fargo — Analyst
So, you said, you’re still committed, I guess, to low-50s efficiency. It just seems like it’s been a long way. I mean the stocks underperformed since the merger was announced despite a merger on paper that has the chance to do one of the best mergers ever. And I think part of the reason for the underperformance may have been, you had the pandemic, you had the low rate, so there are some excuses there. But looking ahead, are you able to commit to positive operating leverage next year, given the way — given all these investments? I mean it’s — you’re avoiding cost, you’re getting gains from the technology investments. I think it’s — investors are kind of thinking, okay, let’s see more of that digital dividend and let’s see more of that pay off. How much can you lead us or give a little bit more hope as it relates to your positive operating leverage?
William H. Rogers — Chief Executive Officer
Maybe I have a little more than hope. So — no, I think, it’s totally reasonable to expect us to have positive operating for next year in the middle of this merger. And that’s against investments we want to make that’s overcoming inflation, that’s overcoming all the other things that exists, rate environment, pandemic, all those type things. Now, we’re committed to having a business that has positive operating leverage and has industry-leading efficiency. I mean, there’s no — I feel more confident about that today than I did the day we announced the merger. So it’s sometimes hard to peel back the clouds and the merger cost and the one-times and all that to see that, but the underlying capacity of our company to deliver positive operating leverage growth on the topline and world-class efficiency is absolutely there.
Mike Mayo — Wells Fargo — Analyst
All right, so next year, positive operating leverage and you’re committed to that and this is your first earnings call as the CEO. So did I hear that correctly?
William H. Rogers — Chief Executive Officer
That is absolutely what will be in our plan for next year.
Mike Mayo — Wells Fargo — Analyst
Got it. Thank you very much.
Operator
All right. Next we’ll go to John McDonald with Autonomous Research.
John McDonald — Autonomous Research — Analyst
Morning. Daryl, I just wanted 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 how does that set you up more broadly for growing NII into 2022 when you think about all the puts and takes there?
Daryl N. Bible — Chief Financial Officer
Yes. So you are correct, we will have stable NII on the core basis in the fourth quarter, will be down 1% just because of purchase accounting accretion. As ’22 plays out, when I look at ’22, as we put this together, there are three big drivers of NII. The impacts will be loan growth, deposit growth, depending on how large the balance sheet gets and how much liquidity we invest, and then interest rates. When I look at all of that, I think it’s very possible that — I’m very sure that the core net interest income will grow. I think we have a chance of having an offset overall with that run-off of purchase accounting. It doesn’t take a huge amount of loan growth coupled with a Fed move that’s not in the implied right now. But even a steepening of the yield curve would add. So if you just steepen the yield curve like 25 basis points, that would give us another $100 million in for the year or next year. So I think there’s a lot of variables that could play out, but we feel pretty good that the trajectory of core net interest margin will rise in ’22 and that our reported net interest margin should be relatively stable if we kind of offset that.
John McDonald — Autonomous Research — Analyst
Okay. 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 to maybe something closer to what shares that look like you target on CET1?
William H. Rogers — Chief Executive Officer
Yeah, and John, remember, we also announced we’ll do some more share repurchase this quarter to get there faster. I mean, we said all along, I mean we went into the merger with a little bit of a higher capital base very intentionally and what we said was, as the risk of the merger decreases and the solid definition of the economy increases, we have a company that has a lower than average risk profile and a higher than average PPNR profile. So I think we’ll start thinking about capital positions that reflect that. We don’t want to do this on a quarter-by-quarter basis. I mean, this is sort of a long-term strategy and philosophy. But this weekend was a good milestone for us in terms of reducing the risk of the merger and our confidence of where we are in the first part of next year. We’ll get that behind us and we’ll continue to evaluate where we are from a capital standpoint. No reason to think we’re going to change the profile of our company. Our diversifications, our risk profile is going to stay strong and we’re confident in the PPR components of the growth in our business.
John McDonald — Autonomous Research — Analyst
Got it. Okay, great. So, yeah, not quarter-to-quarter but getting through the conversions will be a big factor as you think about lowering that target over time.
William H. Rogers — Chief Executive Officer
Yeah, I think you’ve got it. I think we’ve got to be in the first part of next year to have another conversation about this, but we’re going to be thoughtful and moving to the existing target quickly.
John McDonald — Autonomous Research — Analyst
Got it. Thank you.
Ankur Vyas — Head of Investor Relations
Alan, that completes our call. So 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. Alan, you can now disconnect.
Operator
[Operator Closing Remarks]