Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation's Second Quarter 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. Brad Milsaps, Head of Investor Relations, Truist Financial Corporation.

Thank you, Tarren, and good morning, everyone. Welcome to Truist's second quarter 2023 earnings call. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Mike Maguire. During this morning's call, they will discuss Truist's second quarter results, share their perspectives on current business conditions and provide an updated outlook for 2023. Clarke Starnes, our Vice Chair and Chief Risk Officer; Beau Cummins, our Vice Chair; and John Howard, Truist Insurance Holdings ' Chairman and CEO are also in attendance and 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 slides two and three of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP. With that, I'll now turn it over to Bill.

Thanks, Brad, and welcome to the team. Good morning, everybody, and thank you for joining our call today. I don't think it's a surprise to anybody on this call that the increasing levels of uncertainty in our economy, the impact of interest rates on funding cost, and a new sort of post-March operating environment for our industry are impacting our results and plans. Truist was specifically built to increase our flexibility to respond to any condition to fulfill our purpose and commitment to all stakeholders. Capital and liquidity have taken on an increased focus and although Truist is currently well-positioned. We're also intensely building future flexibility. This environment also challenges us to move faster with greater intensity to tighten our strategic focus and rightsize our expense chassis to reflect the new realities. We also have flexibility in strengthening our balance sheet to support our focus on our unique core client base and market opportunity. These decisions are less incremental and more time-bound than the ones previously made during our shift from integrating to operating. Mike will highlight some of these decisions in his comments and I'll close with some of the underlying momentum. While these changes will be manifested over time, this is not business as usual and reflects an important and significant pivot for Truist and for our leadership team. We'll provide more details about these topics and our second quarter results throughout the presentation. Before we do that, let me start where I always do on slide four on purpose mission and values. Truist is a purpose-driven company dedicated to inspiring and building better lives and communities. I'd like to share some of the ways we brought that purpose to life last quarter. In May, we announced the launch of Truist Long Game, our mobile app that leverages…

Great. Thank you, Bill, and good morning, everybody. I'll begin with net interest income on slide 10. For the quarter, taxable equivalent net interest income decreased 6.1% sequentially as higher funding costs more than offset the benefits of higher rates on earning assets. Reported net interest margin decreased 26 basis points to 2.91% due primarily to an acceleration of interest-bearing deposit betas and mix-shift out of DDA into other high cost alternatives. The lower net interest margin also reflected our liquidity build late in the first quarter, while liquidity remained elevated throughout April and May, it has normalized by June and will provide some modest boost in NIM going forward. On a year-over-year basis, net interest income is still up 7.1%, and core net interest margin is up 13 basis points. This reflects the cumulative benefit we've seen from the rising rates during the cycle, particularly throughout 2022, but now we are losing some of that benefit in 2023. Moving to fee income on slide 11. Fee income rebounded 2.6% relative to the first quarter. Insurance income increased $122 million sequentially to a record $935 million, demonstrating the strength of Truist Insurance Holdings. Year-over-year organic revenue grew by 9.1%, the highest in four quarters, driven by strong new business growth, improved retention and a favorable pricing backdrop. Other income increased $65 million primarily due to higher income from our non-qualified plan and higher other investment income. In contrast, investment banking and trading income decreased $50 million, reflecting lower bond originations, loan syndications and asset securitizations as well as lower core trading income from derivatives and credit trading. Finally, mortgage banking income increased or may decreased $43 million, with most of the decrease related to prior quarter gain on sale of a servicing portfolio. Turning to non-interest expense on slide 12.…

Great. Thanks, Mike. So let's conclude on slide 17. We're on the right path and I'm highly optimistic about our ability to realize our significant post-integration potential as summarized in our investment thesis. Our goal financially is to provide strong growth and profitability and to do so with less volatility than our peers. Our strategic pivot from integrating to operating is well underway. And while the financial benefits of our pivot have been masked by the rapid increase in funding costs and related revenue pressure, we've made significant strategic progress over the past year and showing up in a number of operating metrics across our business. In our Consumer Banking and Wealth segments, Retail and Small Business Banking net new checking production has been positive during four last five quarters, reflecting the success of Truist One and improved retention associated with our increasing client service metrics. Truist One also has many features that appeal to millennials and Gen Z represent 70% of the new client applications. Our Wealth Trust and Brokerage business continues to build momentum as net organic asset flows, which exclude the impact of market value changes have been positive eight of the last nine quarters. We've also steadily improved client satisfaction through the distinctive service provided by our branches and care agents as well as improvements to our digital processes and procedures that originated in our client journey rooms. As a result, our client satisfaction scores were stable to improving across most of our channels during the second quarter, but have been consistently rising over the past year since the integration. In Corporate and Commercial, we continue to focus on left lead loan transactions and the synergies between our CIB and CCB businesses. During the first half of the year, 25% of the left lead transactions closed…

Thank you, Bill. Tarren, at this time, will you please explain how our listeners can participate in the Q&A session, as you do that, I'd like to ask the participants to please limit yourselves to one primary question and one follow-up in order that we may accommodate as many of you as possible today.

[Operator Instructions] We'll take our first question from Ken Usdin with Jefferies. Please go ahead.

Thanks. Good morning, everyone. So I just wanted to follow-up, of course, it makes sense that the funding cost and slower loan growth is part of the change in the revenue outlook. I'm just wondering as you look forward and you think about that deposit mix and deposit cost trajectory as far as funding cost looking past the second quarter, how do you see that affecting the NII trajectory within that new revenue guide for the third and fourth? Thanks, guys.

Hey, good morning, Ken. It's Mike. I'd say as we think about the rest of the year, the same factors that have been driving, I'd say just Average Balance QT primarily in the second quarter, we had a little bit more of an impact from tax payments will continue. The mixing has been pretty consistent too from a noninterest-bearing demand perspective into higher-cost alternatives. We saw a little bit of an acceleration in the first quarter as you'll recall, but this quarter that stabilized a bit. We were down about 5.5% on those balances and remix from I guess 32% to 31%. We would expect that trend to continue as well. I think really the factor as we think about NII trajectory for the third and the fourth quarter has much more to do with sort of the Fed policy track, right, where we had about call it close to 50 basis points average increase in the Fed funds rate in the second quarter which really did have an impact on our betas, in our funding costs, we would expect that to be about half that in the third quarter and further moderating from there.

And just on the follow-up, what do you think that means for kind of the view of where you think terminal interest-bearing beta might land?

It's tough. We're at 44% today, that's higher than where we expect it to be. I think we -- as recently as a month or so ago expressed an expectation that maybe mid-to-high 40s would be the case. I think certainly piercing 50%, but really hard to pick a number at this point, Ken, to be honest with you, a lot of it I think has to do with how long we're higher for longer.

Yeah. That makes sense. Okay, thank you.

We will take our next question from Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning. I guess maybe the first question, Mike, just following up on what -- your response to Ken around just the change in deposit beta expectations even relative to last month. Are they -- like when we think about what you said on deposit beta outlook, are there any real signs that are suggesting that deposit trends are in fact slowing down and the likelihood of the beta -- deposit beta update you provided today is more likely to play-out versus having to change this again next month. I'm just wondering are you seeing any tangible signs on the ground that suggest things are getting better?

You know it's -- we look at it on a weekly, monthly basis, Ebrahim. And so, I think, yeah. I mean I think history would say that as we approach and reach this terminal policy rate, we should start to see some moderation in the beta creep. We're starting to see that a little bit, but a month or a few weeks the trend does not make, and so, just being very cautious on the outlook there. I mean at 5.25 going to 5.50, the degree of rate awareness across our client set is very, very high across the industry is very, very high. And so, look I -- and I think that's probably as much as anything driven the miss on betas for the sector so far.

Got it. And I guess, a separate question, you've talked a lot -- both you and Bill, throughout the call around wanting to bend the cost curve and the expense focus. I know you're not giving '24 guidance today, but as we think about the opportunity there, I'm just wondering if you can put some framework around what we should expect around what this entails with regards to just quantifying it.

Yeah. I'll take that. And without again trying to sort of provide specific guidance because we have a lot of things that we're working on. If you think about sort of the buildup, so the buildup was related to things that are investing to build a large financial institution, and then we had some unique onetime things to us, that are things like pension accounting and then we had acquisitions and part of that. So to say a couple of things, I mean, we're clearly at an inflection point in the growth rate. So the growth rate is going to change materially and you can sort of see that by our guidance for the year relative to where we are right now. So that will give you an impression of where we think the third and fourth quarter will be from a growth perspective. And I think similarly sort of on an absolute basis for the balance of this year, we'd expect to see some of that absolute level of expenses coming down, but the real change comes in the structural opportunities that Mike talked about, the things that we're working on. So we can bend the curve in lots of ways that are incremental, but I think the big opportunity for us is sort of the fundamental components in terms of how our company is structured, how it runs, what the chassis looks like, what are the businesses that we're in. And that's the work that we're doing, and that's the big work of post-integration to running the company in a way that reflects the current environment. So, what I would say, maybe I'll use the word appreciably. So expenses will be down appreciably. And as we get into this latter part of this year, we'll provide a lot more guidance and thought about 2024.

Thanks a lot. Appreciate it.

For our next question we'll turn to Erika Najarian with UBS. Please go ahead.

Hi, good morning. And I apologize in advance if it feels like everyone's asking the same question, but I think it's important for investors to have clarity. Mike, just on the net interest income trajectory, I apologize that we're asking you to spoon-feed it to us, and for everybody could model it later, but investors are really thinking about what the exit rate for the fourth quarter will be -- and potentially overlay your net interest income sensitivity that you disclosed in your Q which at down 100 basis points, just down 70 basis points would imply pretty good stability from fourth quarter levels. So I guess I'm wondering from the 3, 6, 7, and 9, what is the range of NII outcomes that you expect for the fourth quarter and do you agree with -- that notion that if the Fed does cut 100 basis points, which a lot of investors are putting in their models, there is going to be relative stability in terms of your net interest income power next year?

Yeah. No, Erika, don't mind at all -- the follow-up question here. So a couple of things, yes. I mean, look, we are according to our NII sensitivity disclosure, relatively neutral and I'd say based on where we are in the cycle and how in particular betas are performing, we're probably even a little bit more liability sensitive to that then that and you see that in our results. We're not currently contemplating a cut this year, and when we talked about our expectations in the middle of June, we were thinking about a cut as early as this year, we've updated our rate view to a -- up 25 at the next meeting and then holding until probably mid '24. So that probably is what's influencing our revenue guide for the rest of this year and especially the NII component, but yeah, I mean, just to get to your question, if we saw it down 100, that would absolutely be a stabilizing force and would be a nice tailwind for our NII based on how we're positioned.

And within guide -- go ahead, Bill.

Hey, Erika. No, let me just add a couple of things, because we're really talking about sort of betas and NII and we also need to shift talk about client and client activity, which is also an important part of it. So the tailwind that we're creating about net, net deposit growth expansion, IRM, primacy with relationships and then on the pricing side, I mean we're starting to see some of that pricing flexibility, particularly on the commercial side. So spread over SOFR probably 20 some plus basis points quarter-to-quarter. So the ability to be more relevant to our clients reposition our portfolio to reflect that be in higher returning, quite frankly taking some market share, where others are backing off, we're leaning into some opportunities that have a greater return for. So in addition to all the betas and the other components, there's just a lot of really good underlying client activity that's tailwind.

Got it. And just a follow-up question and then I'll step aside. Mike, I guess, let me ask this a different way within the down or up one to two in terms of adjusted revenue, what is the NII outlook there -- embedded there?

Yeah. No problem. So, our expectation is that in the third quarter with a single rate hike -- our -- it will continue on a downward trajectory but at a much more moderate pace, call it half of what we saw in the second quarter. And I think you would expect the pressure to decline even further in the fourth quarter.

Perfect. Thank you.

Talking about NII, yeah. You got it.

Our next question comes from Betsy Graseck with Morgan Stanley. Please go ahead.

Hi. Thanks so much. Just one quick follow-on to this discussion regarding the noninterest-bearing component. I know you mentioned earlier that you expect the noninterest-bearing to remix just to stabilize here and I'm just wondering in your NII outlook where are you expecting noninterest-bearing to trend and where do you feel that, that will stabilize? Thanks.

It's been remixing at about 1% a quarter for us that was about $7 billion in average balance, and 5.5% in the quarter. I would expect that trend to continue at that rate. We spent a lot of time last quarter talking about where that might ultimately land. I think there's a chance that that rate of a percent or whatever 5% to 6% a quarter does begin to moderate some here. Bill and I both talked about sort of maybe it's a mid-20s terminal mix of DDA, but even now I think is in many respects and estimate and trying to rely on pre-pandemic and even pre -- back to the pre-GFC proxy. So, Betsy, I don't know that helps or not, but we are assuming that DDA will continue to decline in the third and the fourth quarter, again, the second quarter is a little tougher because of the tax payments and the likes.

Right. Got it. Okay. Thanks. And then just shifting the conversation a little bit towards the capital. I see -- your slide 15 on the significant capital momentum and flexibility that you've got, maybe you could just frame for us how you're thinking about what's the right level for you as we're thinking through what regulation could come through here next week supposedly, we're going to have some new proposals come out and then give us a sense as to buyback capacity and where you're thinking about that at this stage? Thanks.

Yeah, Betsey. This is Bill. So I think the position right now as we continue to build. And so, the targets are developing, more information is coming, and we'll know more over the next 90 days in terms of different proposals and impact on us. And really what this slide was meant to do rather than show sort of an absolute level or a target was really to show the flexibility and the organic creation of capital that we have. So we start from a good position of 9.6 will be organically at 10 end of this year without sort of doing anything dramatic related to risk-weighted assets sort of staying on the process that we're on. And then we just have a lot of flexibility that the AOCI sort of runs off, and then we have -- and we just have other flexibility. So we'll know more as it develops. But I think we're in left lane of capital accretion and we'll stay in that mode until we're not. And that same thing applies to any buybacks or whatnot. We sort of have to understand where the stopping point is before we make any comment about buybacks. And today, that would be short-term, not on the table as we're building capital.

Okay. Thanks and appreciate that AOCI burn down. Very helpful. Thanks.

Yeah.

We'll take our next question from Mike Mayo with Wells Fargo Securities. The floor is yours.

Hi. I want to recognize that accelerated capital pass CET1 10% by year-end. So certainly progress with capital. But otherwise, Bill, I need help in understanding how you can say you're on the right path. One, you had a merger, an end-market merger, an end-market merger predicated on cost synergies, and here we are over three years later and your efficiency ratio in the second quarter is 63% worse than peer. Second, your new guide is for '23 operating leverage -- negative operating leverage of 500 basis points to 600 basis points and to build the revenue guide was lowered by 500 basis points in your expense guide, what's the high-end of your prior range, your personnel expenses are up 3% quarter-over-quarter and 7% year-over-year. And then three, you talked about bending the cost curve, but over the past three years, you've mentioned when I hood was open, you said let's invest more than it was investing more for growth. Now I hear you say you're investing more in enterprise tech. So, from the merger is predicated on cost synergies, the guide is for big negative operating leverage, you are still spending more. So I understand the employee should be happy. They are being paid more. The customers are happy. You have strong relationships. The communities are happy. You're immersed in them. But the shareholders, I think, I can safely say are not happy, I mean, not happy about the expense growth, and they're not happy about the negative operating leverage. And it just seems like -- I love you personally, but I just wonder if you've just been a little too soft and not taking the tougher actions like some of your peers have. So correct my logic or thinking or my observations, if you would.

Thanks, Mike, and appreciate the love, but right back at you. So I think -- so a couple of things. One is maybe a challenge a little bit the merger was predicated on cost saves alone. Remember the merger was predicated on opportunity as well, an opportunity in our markets, and we want to make sure that we're well positioned to take advantage of those. So when I talk about sort of being on track, I don't want you to think that, that satisfaction about where we are from an expense side. Building the infrastructure for a large company in this environment was more expensive than we anticipated, so there's just no doubt about that. And, but to that point, I think we're at a really good inflection point. And that inflection point is a pivot. The intensity I can assure you hear around expenses, but not just expenses, but just redesigning the chassis. I mean, there are lots of easy things you can do. You can do hiring freezes and those type of things and we're underway on all that, and you'll start to see some of that in the next couple of quarters, but our commitment is to really underchange the fundamental structure and the business model that results of this. So there are certain businesses. We talked about student loan would be an example that we're we've been supporting from an expense standpoint that just doesn't fit into our strategy and doesn't make sense, so we'll evaluate other parts of our business and other parts of our support structure that are part of that. You could argue we should have been doing that faster. I think that's a legitimate push, and I accept that, but I don't want to think that it's not happening. And that focus is intense, but it is about trying to create more permanent change than structural. I mean let's make the next quarter lower. Let's really change the fundamental structure of the company from an expense standpoint. You've seen me do it before, and you know we can do it again. So my confidence comes from the fact that we've got a team that's committed to this, and the plans that I see and the focus that we have. This is an inflection point from that standpoint in this quarter.

So you mentioned you'll come back with some plan for 12 to 18 months. And I know, look, I know you wanted to have positive operating leverage in the environment worked against you partly and you acknowledge there are some other things internally. But it looks like it's going be tough to get positive operating leverage in 2024. Is that something you're going to shoot for? And when do we hear about these new expense plans over the next 12 to 18 months? You gave us a laundry list earlier and what sort of magnitude might that be?

Yes. We'll start talking about that in the next couple of quarters, Mike, and how they fit into the overall structure. As I've said to you before, I mean we have -- every business unit has a positive operating leverage plan. I mean that's what we've asked them to do is to create plans that are unique to their businesses, but what we need to do in addition is that sort of the enterprise positive operating leverage focus. 2024, we'll just have to see how it plays out. I mean there's a lot of economic factors that will determine that. So I'd say, not throwing in the towel, so to speak, but we just have to see where some of the economics layout as it relates to that. So if we're in a different rate environment, we're in a different investment banking environment, we're in a different -- then I'll have a different view on that. But as we sit here today, that's -- it's a tough climb, but what we want to do is build that capacity for the long-term.

And then last short follow-up. I asked this with everybody, the NII guide is much lower for you and for others. Do you think you've captured it all here? I mean do you lead the year at that kind of fourth quarter level and that say? Or do you see more downside after that?

As far as the year is concerned, look, we've flipped to this higher for longer. The new guide reflects how betas are performing. So I think we feel like we've got it for the year. As far as trajectory and trough and '24, it's just -- I think it really is going to be rate path and policy dependent, so long as we're at these rates and for longer betas are going to keep creeping. Now the good news is we are seeing -- and Bill mentioned there's some improvement on things like credit spreads and repricing assets, et cetera. But I think so long as we stay at whatever 5.25%, 5.5% or there's risk, if there's a second hike for sure, Mike, to our outlook. But no, I think we've got Q3 and Q4 pretty well pegged.

All right. Thank you.

Our next question comes from John McDonald with Autonomous Research. Please go ahead.

Hi. Good morning. I wanted to ask a little bit about credit. Could you talk a little bit about the asset quality trends you saw this quarter? What drove the increase in nonperformers, particularly around C&I and CRE?

John, I'll turn it over to Clarke, but just -- there's not a trend. So a lot of idiosyncratic things, but let me turn it over to Clarke to do a little more detail.

Yes. Thanks, Bill, and thanks, John. So I would just say we had a number of moving pieces this quarter from a credit perspective and a lot of that was an intentionality around actively managing the portfolio. So the takeaways I would give you are. First, we had really solid consumer performance overall with lower NPLs and losses versus our forecast, so the consumer is holding up really well. So where we did see some of the impact, to your point, is in the C&I and CRE books. From a C&I standpoint, we did see some uptick in NPLs and losses, but what I'd tell you is it's more episodic. There's no particular trend or segment issue, as Bill said, and we're coming off really low historical numbers, and so even where we are today would be lower than our long-term numbers. But as far as the NPL increase, most of that was driven by an intentional focus on CRE office. So what we did is we did an intense loan-by-loan review of our -- almost our entire book. So I would just give you some color on Q1 and our community bank, we looked at every -- we looked at all office loans greater than $2 million and in Q2, we looked at everything over $25 million, so we've done a loan-by-loan review with the vast majority of all of our CRE office. That included updated risk assessments and view evaluation. So we work really, really hard to make sure we're not kicking the can down the road and we understand where we are. So as a result of that, we put a few loans on nonaccrual. I would tell you that the predominance of those loans are actually current . They're swapped to maturity from a rate standpoint, and they've got good economic risk. But we're trying to stay focused on their ability to exit at maturity, and so we're looking and making sure we fully understand that, so that drove the increase in NPLs. And then we did recognize that with six bp increase in our allowance. And so our office allocation is up six point overall, so we feel really good about that. So again, I would say the takeaway is worked really hard to make sure we have good visibility in the portfolio. And the good news is our overall guidance for losses really didn't change. We included our student loan impact for Q2, but we maintain otherwise, our loss guidance for the year.

Got it. And maybe just as a follow-up, Clarke. What should we think about in terms of maybe the charge-off trajectory in the back half of the year that's embedded in the guidance relative to the 42, I guess, jumping off point here.

Yes. Again, we're very confident we'll be within the range of 40 to 50 for the entire year. And I would just remind you all that the second half of the year is always seasonally high in our Consumer businesses, particularly in our subprime auto, and so that's why you see the range stay in the 40 to 50 range, so it will be higher than Q2, but within the guidance we've given you.

Okay. Thank you.

We'll move to our next question from John Pancari with Evercore ISI. Please go ahead.

Good morning. On the efficiency side of things, I know I heard you around the efficiency program that you're working on and looking to bend the cost curve. How should we think about long-term efficiency for the company? As you're looking at this program, as you're looking at this quarter being the inflection and the -- you're apparently clearly looking at across businesses. How should we think about what the prudent, what the appropriate efficiency ratio is from a long-term perspective that you're likely to target here? Thanks.

Hey, John, this is Bill. I'll take that. What I said was, obviously, is that the expense growth is going to decrease materially, so that's what we're going to see. And then the absolute expense base related to our businesses. I think the way to think about it, and this was very similar sort of how we came out of the merger is we should be sort of top quartile efficiency ratio. So the efficiency ratio is kind of be a bit determined by a little bit of the market conditions where rates are. But our business model, our construct, things that we're engaged in, I think rather than sort of honing in on a specific number because I think that's sort of boxes you in, so to speak, in terms of business mix and those type of things. I think really hone in on the expectation from shareholders ought to be that we ought to be sort of top quartile from an efficiency ratio given the opportunities that we have, both on the revenue side, and then the diversity and construct of our business mix.

Okay. Thanks, Bill. That's helpful. And then on the credit side, I appreciate the color you just gave around the non-accruals. Can you give us your thoughts around additional reserve additions here? Is it likely that you still see some incremental build there? And then what -- where does the commercial real estate reserves stand right now, the ratio and the same for the office commercial real estate reserve? Thanks.

Hey, John. This is Clarke. While we're comfortable with our reserve levels right now based on what we know today, obviously, CECL's life of loan, given what you know today, obviously, if the economic outlook deteriorates any further or we do see additional deterioration beyond what we believe we've seen and forecasted today around the portfolio performance or risk attributes. You could see some additional incremental build, but I would not expect to see any sort of large build or hockey stick type. So I think it would be more incremental if we see some. And then as far as did say the CRE office reserve is 6.2% overall, I would remind you all, we have about 40% of our portfolio with our small loans and our wealth and CCB segments, which carries higher reserves. So we've got -- but I think are really strong reserves against where I think the fundamental risk is in the office side and then our total CRE allocation right now is 240.

Okay. Great. Thank you.

We'll move to our next question from Gerard Cassidy with RBC. Please go ahead.

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

Good morning.

Clarke, you were talking about what's going on here in commercial real estate. And can you give us some further color on when you look at the nonaccrual increase in commercial real estate? Is it because the owners of these properties are losing tenants? Is it more the value of the properties have fallen and therefore the loan to values are out of sync? And then as part of the answer, how are you guys working to resolve working with your customers to resolve these issues?

Great question, Gerard. I would say for us, we take a very strict view of accrual status when we think about whether a loan needs to be on nonaccrual or not. And I would just remind you what I said but majority of the loans that we placed on nonaccrual this quarter in the CRE office segment and C&I, but in the CRE office segment are actually currently -- current from a contractual basis right now because they still have good economic rents. They're hedged on the rate side, and so they're performing on their payments. But we're looking at what might happen at the end of term as the rate impact fully hit after the swaps go off and whether there's any risk in leasing activity and then what it costs to, for example, reposition the property from an operating standpoint or structurally to be sure the loan could be resized at maturity. And so that's what's driving our view of accrual status, so a lot of it is the valuation side unless the sponsor of principle can address these risks. The good news is we're working with our sponsors. We don't see our clients in any way just walking away from the loans. We have long-term relationships there. And so we're looking at things like asking them to refit, bring in more equity, give us an LC, bring us some interest reserves. We may do some AB note splits while as they attempt to sell the property. So we've got a lot of tools in the tool chest and we're working all of those. Our goal is to be early on this and work with as many borrowers as we can. And hopefully, the market will improve and will have good success.

And then not to minimize the focus because, I mean, it's acute, but just also remember, 75% of this portfolio is sitting in our markets, so we're sort of a net in migration market. So while they're dealing with current tenants, people are consolidating their office space, all that's happening, we're experiencing that with all of our bars. We also have markets in which there's a lot of in migration, so there's also more new tenants and more opportunities. And it's idiosyncratic, you've got to be in the right building, the Class A, the opportunities and our portfolio arcs to Class A and end market migration market. So again, not to minimize it, but we got -- we have some better opportunities from that side.

Very good, Bill.

One more question, Bill. Yes. Just as a quick follow-up. Mike, when you look at the AOCI burn down, what would accelerate that in terms from an interest rate standpoint, the forward curve is looking for some short-term interest rate cuts early next year. What would bring that number down even faster from an interest rate environment standpoint, what would you have to see?

Well, a couple of. I think the positive catalyst even away from rates would be, I guess, in connection with rates would be speeds increasing in terms of the actual cash flow profile. But if you're looking at the rates, we would need to see the long end rally and we'd actually need to see a parallel benefit from mortgage spreads as well. So some of the, for example, rate rally you saw even from the end of the quarter to this to where we are 20, 30 basis points on the 10-year. If mortgage spreads don't come with it, it can lag a bit. But that would be the -- and Gerard thanks for the question because what we tried to lay out on the right-hand part of that slide, frankly, was a pretty conservative burn-down analysis based on today's speeds, which are quite slow and with no benefit from yield curve normalization.

Thank you.

We have time for one more question from Matt O'Connor with Deutsche Bank. Please go ahead.

Hi. Thanks for squeezing me in. Just one more on costs here. I guess how are you thinking about organizing the effort in terms of who's kind of taking responsibility for running it? Are you thinking about bringing in any outside consultants to get kind of a fresh perspective? Or talk about the organization of it. Thank you.

Matt, maybe at its simplest form, it's me in terms of sort of who's responsible, but our executive leadership team, and we've got a really good focus on this. We've got -- and by the way, we have different third parties helping us with different elements, so they're not an Uber approach because I actually think we need to own it. It needs to be part of the work that we do as a leadership team. But we have a variety of consultants looking on specific areas, so they may be focused on or consolidation of a specific technology or an outsourcing of a particular thing, so they exist as part of the process. But this is an overall leadership team, sleeves rolled up, everybody is in it. Not only line of business up, but most importantly, enterprise across where I think the real efficiencies are achieved and are more permanent as we think about the company.

And in terms of how you think about the timing, is this going to be like a one year effort or several year effort, a continuous improvement effort. How are you thinking about that so far? Thanks.

Yes. I mean it's already underway, and it's a continuous improvement. I mean, I think the mentality of structuring the company around our strategic focus and creating a chassis that attaches to it is not a onetime thing. I think that's something that we're constantly doing, constantly looking at again, back to that commitment to sort of be top quartile in terms of how we run the company from an efficient standpoint, so that's both the revenue and the expense part that comes along with that. So it's not a onetime big bang thing because I actually don't think those are permanent. I don't think they stick. This is a philosophy of how we run the company and the approach that we take long-term.

Okay. Thank you.

That concludes our question-and-answer session for today. I'll turn the floor back over for any closing remarks.

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

This concludes today's call. Thank you again for your participation. You may now disconnect and have a great day.