Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Second Quarter 2020 Earnings Conference. 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.
Ryan Richards, Director of Investor Relations for Truist Financial Corporation. Please go ahead, sir.
Thank you, Alan, and good morning, everyone. We appreciate you joining us today. On today's call, Our Chairman and Chief Executive Officer, Kelly King and our Chief Financial Officer, Gerald Beibold, will review our 2nd quarter results and provide some thoughts for the Q3 of 2020. We also have Bill Rogers, our President and Chief Operating Officer Chris Henson, our Head of Banking and Insurance and Clark Starnes, our Chief Risk Officer to participate in the Q and A session. We are conducting our call today from different locations to help protect our executives and teammates.
We will reference the slide presentation during today's call. A copy of the presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website. Please note that Truist does not provide public earnings predictions or forecasts. However, there may be statements made during this call that express management's intentions, beliefs or expectations. These statements are subject to inherent risks and uncertainties.
Insurance's actual results may differ materially from those contemplated by these and forward looking statements. Please refer to the cautionary notes regarding forward looking information in our presentation and our SEC filings. Please also note, our presentation includes certain non GAAP financial measures. Please refer to Page 3 in the appendix of our presentation for the appropriate reconciliations to GAAP. And now I will turn it over to Kelly.
Thanks, Ron. Good morning, everybody. Thank you very much for joining our call, and I I hope you and your family are safe and well. Given the challenges that we face, I think this was a really strong quarter, Primarily because we lived our purpose. And I'll say I'm really, really proud of our team.
Our purpose is to inspire and build better lives in communities And that is really, really important in the challenging environment that we are experiencing today. We focused intensely on taking care of our clients, I've been really, really involved with our teammates creating an inclusive and energizing environment, really focusing on trying to empower teammates to learn and grow and have meaningful careers. And I think we've done a good job across the board with regard to all of our stakeholders and optimizing their long term returns. We do all that consistent with our values of trustworthy, caring, one team, success and ultimately trying to provide a sense of happiness for our teammates and all of the people that we have a chance to inspire and support. If you're following the presentation on Table 5, I just want to point out some of the things that we've done because I think in today's world, this is as important, if not more important than the actual numbers Because our communities need a lot of help.
We've been really focused on living our purpose. You've heard about our Truist Cares philanthropic Initiative where we placed $50,000,000 to rebuild communities. Some of the things we're doing are really, really exciting. For example, we're doing Technological support in areas that are unserved or underserved with regard to Internet and Wi Fi capabilities. We're using that to support automated reading capabilities in these areas because these kids are sheltered in place at home and don't have access Easily to learning.
We're supporting our communities, doing a lot of work with CDFIs in terms of Supporting small businesses, minority owned businesses, women owned businesses, feel good about that. Just to give you a perspective, over the last Few years on our on up movement, we provided about 6,000,000 people with tools to provide their financial confidence. Since 2009, we've done over 12,000 community projects. We've touched over 18,000,000 people through our financial foundations program, which focused on financial literacy. In high schools, we've reached more than 1,000,000 high school students.
And since the merger of Equals, in Very short period of time, we provided $440,000,000 in financing to support 2,200 affordable housing units, Creating 1400 new jobs across our footprint. We've been really focused on addressing racial and social inequity. We are expanding our efforts to advance equity, economic empowerment and education for our clients, our communities and our teammates. I'm very proud to say we observed Juneteenth holiday by giving our people time off. We had a virtual town hall with over 3,000 of our teammates I was able to co host along with Ben Krop and it was a really, really good dialogue, good discussion.
We've had over 200 Days of understanding where we bring together teammates and give them an opportunity to just dialogue and talk about what's going on, Challenges that they face, those have been really, really great sessions. I participated in some and found them to be very, very informative and helpful. We're in the process of doing even more town halls. We've conducted unconscious bias training. So we're doing a lot to try to help Our communities and our teammates weather through the storm and get better through the storm.
And I feel really good about that. I'll show you how this is playing out with regard to our 2nd quarter highlights on Slide 6. We're very pleased that we had taxable equivalent Revenue of $5,900,000,000 It was up 7%, but as you know, that was merger timing affected. We did have adjusted net income of 1 point $1,000,000,000 felt good about that. Our diluted earnings per share on a GAAP basis were 67, But our adjusted basis earnings were 82, which was very, very strong relative to the environment.
Our return on average Common equity on an adjusted basis was 7.26 percent, return on average tangible common adjusted was 14.17 And I was very pleased that our adjusted efficiency ratio was 55.8%, which is very strong in this environment. Our asset quality in terms of actual metrics, which you can get more detail on from Clark, were actually fantastic. As we all know, that was substantially impacted by a lot of the CARES Act decisions around forbearances, Etcetera. So we know that we'll get worse, and that's why we're prepared well in terms of our reserving for our future allowances. We felt good about our fee income, robust capital markets activity, residential mortgage was fantastic, Insurance brokerage operation, which really, really is important in times like these had a record quarter.
We continue to have very good expense discipline on a core basis. And our common equity Tier 1 increased by 0.4 to 9.7. So we felt very, very good about that. If you look on Page 7, I just want to hit a few of these material Special items that affected the quarter, we did have securities gains. So these were non agency mortgage securities that we'd had for a while.
They had special gains and some risk of downside loss for those gains. And so it was a good opportunity for us to take those. That did provide $300,000,000 of pre tax gain or $0.17 diluted share. Now we use most of that to Extinguished debt, we took a loss on that of $235,000,000 before tax. That improves forward run rate, Well, Derek can give you detail on, but that was very good.
That was a negative $0.13 We did have substantial merger related restructuring charges of $209,000,000 that was $0.12 negative. And then as we've explained to you, we do have incremental The expenses that are related to the merger, they're not technically merger related that we call out in a category, but they're not a part of our run rate going forward. So we consider those to be unusual and that's $0.07 So when you net through all that, it would be a positive impact of about 0.15 pennies. If you look at Slide 8, just a few comments with regard to loans. It was a very interesting quarter for loans.
I mean, at the beginning of the quarter loans were booming. We were having line draws like everybody else that were substantial. We were engaged in PPP, Where we were the 3rd largest PPP producer producing about $13,000,000,000 in those loans. We're happy to do that, although it was very hard in terms of supporting our small business clients. There was not much normal loan activity in the quarter.
So it was just kind of an unusual quarter. Our average Balances were $322,000,000,000 versus a $315,000,000,000 end of period. So you can see what happened. We advanced up all the lines and then they started paying down. So now 80% of the COVID related line advances have already been paid.
So that activity was kind of a roller coaster. It's settled down now and we feel good about where we are. Consumer loans decreased slightly in distressed environment just because people broadly speaking are spending less. We did see a decrease in residential mortgage on the loans that we hold, but our mortgage business in general is booming. We had mortgage applications of $21,300,000,000 in the 2nd quarter, and we originated $14,600,000,000 in In the quarter.
So, we were really, really active in that and frankly moving resources into the mortgage area Because that's a very, very important area for us. We did have substantial activity increasing loans in indirect, Which was primarily due to huge demand for loans to finance recreational and powersports. So we are seeing Robust activity in some categories, some temporary robust activity in others. The underlying normal activity is, I'd say, relatively Stable, not going down, not going up. It's just not much going on right now for reasons you would understand.
So we feel overall good about our Our loan book and loan activity, and we think we're well positioned as we go forward when confidence returns, to be able to meet the needs of our clients. Just a couple of comments with regard to deposits on Slide 9. Deposits are booming. Our non interest bearing deposits We're $113,000,000,000 up $20,700,000,000 on a linked quarter basis. Total deposits were up $36,000,000,000 on a same linked quarter basis.
I would tell you that the majority of that is core, but there are surge balances related to line draws, PPP loans and government stimulus. We believe there continues to be a flight to quality and we're the beneficiary of that. Business accounts drove about 80% of the growth in DDA. So that was what you would Back business is drawing our lines, investing into deposit accounts, etcetera. Our deposit mix for the 2nd quarter consisted of 30.7 non interest bearing deposits, which Very strong, 26% on interest bearing, 34% on money market and savings were 8.9%.
Our cost of average deposits and average interest bearing deposits decreased 29 basis points and 38 basis points respectively, Down to $22,000,000 $32,000,000 respectively. So it's a very, very strong story for deposits. I will say that we have Real opportunity in terms of our interest bearing deposits at 32 basis points. We didn't move them down as aggressively in the 2nd quarter as maybe some did. Good morning, our clients have time to adjust.
We see there's a real opportunity for us as we move into Q3 and we're already taking very bold and decisive action With regard to that, so let me turn
it now to Daryl for some more detail. Thank you, Kelly, and good morning, everyone. Today, I want to cover key points from the Q2, Discuss current business conditions and provide an update on cost saves. Turning to Slide 10. Net interest margin was 3.13%, down 45 basis points.
Purchase accounting contributed 46 basis points to reported net interest margin versus 52 basis points last quarter. Core net interest margin was 2.67%, down 39 basis points, impacted by lower benchmark interest rates, higher Fed balances and COVID related deferred interest. The yield on loans and leases held for investment decreased 81 basis points due to lower interest rates, lower purchase accounting accretion and deferred interest on loans with forbearance. The yield on the securities portfolio decreased 25 basis points, primarily due to higher premium amortization. Asset sensitivity moderated as a result of higher fixed rate assets, Lower fixed rate Federal Home Loan Bank advances and lower benchmark interest rates mitigating down rate scenarios.
We're projecting loan yields with rate force on new commercial obligations and modifications and we'll continue to manage down deposit costs. We expect to report net interest margin to be flat for the remainder of the year. Turning to Slide 11. Non interest income includes $300,000,000 in security gains related to the sale of non agency MBS. Excluding these gains, core non interest income was up $160,000,000 Investment Banking and Trading income increased $156,000,000 on strong core trading activity and elevated counterparty reserves in the prior quarter.
Residential mortgage income was up 96 on strong volumes and improved margins, partially offset by lower servicing due to higher prepayments. Refi was 65 percent of originations and gain on sale was 3 19 basis points, reflecting very favorable conditions in mortgage. Insurance income increased $32,000,000 up 5.8 percent to record levels, primarily due to seasonality and pricing. Organic revenue grew 2.1% versus like quarter. Service charges on deposits decreased 103,000,000 mostly due to reduced incident rates.
Card and payment related fees were affected by lower transaction volumes due to lower consumer spend. Wealth income decreased $43,000,000 as market devaluation impacted wealth fees. Turning to Slide 12. Non interest expense increased $447,000,000 mostly due to a $235,000,000 loss On debt extinguishment, dollars 102,000,000 increase in merger and restructuring charges and $55,000,000 increase incremental operating expenses related to the merger. Higher merger related expenses reflected professional services associated with integration and increased severance charges.
We remain highly disciplined around core expenses. Excluding the above mentioned items, Adjusted non interest expense increased $55,000,000 This was mostly due to higher COVID related operating costs and performance based incentives, partially offset by lower marketing and client development expense. We anticipate COVID related operating expenses will decrease as we continue to take measures to protect teammates, clients and communities. We identified areas where cost savings can be accelerated, including personnel expense, corporate real estate and third party spend. We now believe we can accomplish 40% of the $1,600,000,000 in net cost saves by the Q4 of this year, up from 30% we previously shared.
Our FTEs declined 7.35. We expect further reductions throughout this year. We also closed 42 branches in non overlapping markets. Turning to Slide 13. Asset quality remained relatively stable, reflecting moderate deterioration in certain asset quality ratios and improvement in others.
Our NPA and NPL ratios increased 2 and 3 basis points respectively to 25 and 35 basis points. Most of the NPL increase was in CRE, commercial construction and leasing portfolios. Net charge offs increased 3 basis points to 39 basis points on average loans and leases. Our provision for credit losses totaled $844,000,000 reflecting stress, environment and the allowance build of $522,000,000 For the Q2 in a row, This allowance build was essentially self funded by purchase accounting accretion. The allowance was 1.81 percent of loans and leases, up from 1.63%.
Our coverage ratios remained strong at 4.49 times net charge offs and 5.24 times NPLs. A combination of our allowance and unamortized fair value mark is very robust at 2.76 percent of total loans. Our asset quality ratios were tempered by relief from the CARES Act. Our teammates have been very responsive to our clients, helping them navigate the pandemic. As of June 30, client accommodations totaled $13,800,000,000 in consumer loans, dollars 21,200,000,000 in commercial loans and $211,000,000 in credit card balances.
This represented an 11.2% increase in the loan portfolio. About a quarter Other clients who received an accommodation continue to make payments on their loan. We expect 3rd quarter asset quality metrics to deteriorate in response to COVID stress across the loan portfolios. Turning to Slide 14. As you can see on the table on the left, our exposure to vulnerable industries remains low and reflects diversification we achieved from the merger of equals.
Outstanding loans to sensitive industries totaled $30,100,000,000 versus $28,400,000,000 However, 1.1 $1,000,000,000 was increased due to PPP loans. Excluding PPP loans, sensitive industry outstandings increased Only $200,000,000 or about 1%. Energy related balances were essentially flat, and our oil and gas portfolio continues to be weighted for its lower risk sectors. Hotel, resort and cruise line outstanding increased to 2.4% of loans held for investment from 2.1% last quarter. This reflects the inclusion of hotel REITs and real estate secured by hotels, which were not previously included.
Outstanding balances to restaurants increased modestly to 1% of loans held for investment from 0.8% at the end of March. Outstanding balances on leveraged loans totaled $9,500,000,000 down 10% from last quarter. We are actively managing our sensitive industry portfolios. This includes deep Segment reviews and reflecting credit adjustments in our risk rates. Turning to Slide 15.
The allowance increase of $522,000,000 to reflect the consideration of increased economic stress, the sensitivity to affected industries and the proactive grading changes to reflect the current environment. The estimation process incorporates multiple economic scenarios, including assumed likelihood of worsening conditions. Our assumptions include double digit employment followed by sustained high single digit unemployment as We extended GDP recovery throughout 2 year forecast period. We also considered the effect of government relief packages and payment accommodations on expected losses and made adjustments as needed to address model limitations. Taking into account the ACL amount of $6,100,000,000 and dividing it by the Truist and To heritage companies net charge offs for the past 12 months, we come up with a 5.7 times coverage ratio, which we believe is strong.
Turning to Slide 16. Truist is very well positioned relative to peers in a strained credit environment. The table on the left utilizes DFAST's 2020 results. This shows our estimated loan loss rate of 5.1% ranked 3rd best among peers and is 60 basis points better than the peer average. We also have significant loss absorbing capacity of $9,200,000,000 due to the combination of the ACL and the unamortized loan marks.
Our loss absorbing capacity represented 2.9% of end of period loans and 60% of $15,300,000,000 2020 DFAST stress losses. This slide shows how the merger Enhance the risk profile of both companies and produce a resilient and more diversified balance sheet. Turning to Slide 13. Our capital ratios improved nicely across all ratios and remain strong. Reported CET1 ratio improved to 9.7 from 9.3% in the 1st quarter.
CET1 ratio benefited from current earnings, Lower risk weighted assets and purchase accounting accretion. We issued $2,600,000,000 of preferred stock during the 2nd quarter to further improve our capital position. Our 2nd quarter dividend and payout ratios were 67%. The Truist Board will vote on a resolution to approve the 3rd quarter common dividend of $0.45 at the July meeting. Turning to slide 18.
We continue to see strong liquidity and we are prepared to meet the funding needs of our clients through this challenging environment. 2nd quarter average LCR was 1.16% and our liquid asset buffer was 17.8%. Our access to secured funding sources remains robust with over $200,000,000,000 in cash securities and secured borrowing capacity. Holding company cash is sufficient to cover 21 months of contractual and expected outflows with no inflows. Turning to Slide 19.
We continue to be encouraged by the acceleration we've seen across the digital platform. Digital Commerce grew 11% during the year to date period through May. We also saw a 10% increase in the number of active mobile app users over the past year. Digital transactions also increased nicely. Mobile check deposits were up 23% from last May to this May.
The acceleration in the digital has resulted in increased paperless adoption as statement suppressions are up 5%. One of the motivations of the merger was to combine technology with touch to generate trust with our clients and to be able to meet their needs. That is why we are really pleased that the legacy BB and T mobile app, you earned the number 1 JD Power ranking in the 2020 U. S. Banking mobile app satisfaction study.
In addition, LightStream, Legacy SunTrust National Online Lending Division 1, the number one wanking and J. D. Power 2020 U. S. Consumer lending satisfaction study among personal loan lenders.
These are great examples of the best of both capabilities as Truist advances its diverse digital and online capabilities. As it relates to guidance, we withdrew our 2020 annual guidance due to the uncertainty going forward. For the Q3, we are providing limited guidance based on the 3rd quarter linked quarter changes versus 2nd quarter. We expect taxable equivalent revenue to be down 3% to 5% after excluding one time security gains from the sale of non agency MBS. Factors impacting revenue include a reduction in earning assets, mostly due to the line draw repayments, seasonally lower insurance income and lower residential mortgage spreads and servicing income.
In addition, Investment Banking and Trading faces a robust second quarter comp. We expect the reported net interest margin to be flat and core net interest margin to increase modestly. Core non interest expense adjusted for merger costs and the amortization is expected to be down 1% to 3%. We also anticipate net charge offs to be between 45 65 basis points. Now let me turn it back to Kelly for an update on the merger closing group thoughts and Q and A.
Thanks, Daryl. So if you follow along on Slide 20, I just want to mention a few things about how we're doing. The good news is, our cultural development is fantastic. In fact, I would say that it is accelerating because of the challenges, because people are facing some extremely difficult Challenges day to day and that really kind of pulls groups together. The sense of team play in the organization today is phenomenal, far better than I could have ever hoped for.
So we feel great about how we're doing in terms of the organizations coming together. Had some really good recent developments. We branded Truist Insurance and Truist Foundation. We introduced Advisor Desktop to Heritage BB and T Financial Advisors and we were able to consolidate social media platform leveraging truist.com. Our conversions are in many cases right on schedule.
For example, our institutional broker dealer, our mortgage origination and wealth All right. On schedule for the second half of this year and the first half of next year, we did tell you last quarter and throughout the quarter We were reassessing the core bank conversion because of all of the challenging circumstances that we've all faced. Those include amongst others, a strategic reallocation of resources for the COVID response. When all of this hit, We had to focus on what was the most important at the moment. For example, we spent a lot of our IT and other support resources in the PPP program And developing portals for our clients to do automatic deferrals and developing automatic portals for automatic scheduling, so people could schedule Appointments with our people remotely.
We had work from home transitions for Truist and our offshore spend vendors. That vendors as we We've got all of the computers into everybody's homes. That just takes a little bit of time. And we did experience some critical vendor disruptions That hampered our conversion activities. So we want to take all that into account.
We want to make sure we do it right, do it well, that's most important. So we now anticipate the core bank conversion will be in the first half of twenty twenty two versus the second half of twenty twenty one. It's not a dramatic change, But it is one we wanted to report out to you, and we think it's the best way to continue to provide the highest quality service for our clients. Still, we are committed to our $1,600,000,000 of net cost saves as Daryl described, and we're very pleased that we're able to pull forward Expense savings around facilities, vendor spend, personnel costs, so we now expect 40% off and 1.6 On an annualized basis to be available to us this year by the Q4. And then we stay on track with 65 For the Q4 of 2021 and then the full 100% of Q4 2022.
So it's just a little bit of pulling forward in 2020 versus a little bit less than 2021. We feel good about all of that and think that will go very, very well. Wrapping up on Slide 21, just a couple of comments with regard to the value proposition we offer. You've heard me say before and I still continue to believe This is a fantastic organization. The combination is excellent.
It is fantastic for our shareholders. And the reason is this, It is an exceptional franchise with diverse product services and markets. It's the 6th largest commercial bank in the United States. We have strong market share and vibrant fast growing MSA markets. None of that has changed.
We have a comprehensive business mix with distinctive capabilities in traditional banking, capital markets and insurance. And clearly coming together, we've already experienced what we thought would happen, which is that together we get the best of breed, best talent, best technology, best strategies, best processes. And we really saw that this quarter with a strong performance in investment banking and insurance. 1 from SunTrust, 1 from BB and T came together beautifully
Just like we
thought it was. We have a unique positioning to deliver best in class efficiency and returns. We feel very strong about the cost saves as we said and the projected efficiency ratios That we talked about, we feel very confident about medium term targets of ROTCE in the low 20s, adjusted efficiency in the low 50s, a common equity Tier 1 ratio of Gen. We're So this is going to be a best in class efficient highly profitable organization. And largely that's because we have strong capital and strong liquidity and we have a very resilient risk profile, very strong, prudent, experienced risk Management team, conservative risk culture, diversified benefits from the merger.
We stress very well, which you just saw. And so we have a very defensive balance sheet, which is insulated by purchase accounting marks combined with CECL credit reserves. So all of that, We knew it would be true. We didn't know it would be tested as much as it is being as environment, but it really is proven to be The kind of underlying or girdling support that we need to be a very resilient organization in this environment. And this is a very challenging environment.
I will say to you that as difficult as it is, as difficult as it is to predict what's going to happen in the future, I believe the economy is resilient. I believe ultimately we will be okay. I believe the American people will do the right thing to create an equitable Society with hope and opportunity for everyone. Everyone wins when we have an opportunity for everybody to have at Equitable Future and that's what we're working very, very hard to. Personally, I believe we'll be a lot better off
All right. And we'll take our first question from Betsy Graseck with Morgan Stanley.
Kelly, I just wanted to dig in a little bit on the expense side. You mentioned that you're pulling forward the cost saves Over the next couple of quarters. And maybe you can remind us how far along on that $640,000,000 you are already as of 2Q? And then give us some sense In the discussions you had to accelerate that in 2020, what else you found that maybe you could Add to the profitability opportunities here in 2021 as well. I know you kept the 65% flat, but Knowing you, I'm sure you unearthed a few other potential items of cost saves.
Yes, Betsy. As you would expect, we're doing a deep dive in all of those areas to be sure that we can continue to provide high performance Profitability metrics, even as we orchestrate through this difficult environment. The pulling forward is just frankly getting more aggressive than we had even originally planned with regard to vendor renegotiations. We've got a ton of buildings, as you might expect, duplicative buildings, some small, some large. We've got a major task force working on that and we've decided to be very aggressive in terms of consolidating And eliminating a lot of those buildings.
And that's pretty immediate cost reductions when you do that. We have a very aggressive personnel rationalization plan in process and a good bit of that is already underway in 2Q, as you alluded to, it will begin to slow down to the bottom line more in 3Q and 4Q as we get executing on that. The plans are well developed now it's just a matter of executing on the plans. Now keep in mind that while we're not calling this out, as we head into the remainder of this year 2021, We also have some really good opportunities in terms of revenue. Our integrated relationship management program is going extremely well And we are redoubling our efforts with regard to that because this is a time when our clients need us more than ever.
And so we are across the organization focusing on generating opportunities to help our clients. And of course, in the so doing, we generate additional revenue for us. So we've got all of these expense initiatives, But they're huge revenue initiatives as well, which gives us great confidence. We're focusing on the expense with you. From day 1, we didn't add in revenue opportunities As a part of projecting, but I can just tell you that the development along the way in terms of realizing those revenue synergies It's going far better than I would have ever expected, including all of the COVID difficulties related to that.
The only thing I would add to that, Betsy, is that In the first or second quarter, we had some COVID related expenses. We talk about them, but we don't carve them out. We believe that those COVID expenses will moderate over the next quarter or so. So you'll be able to really see those cost saves as they've moderated. We're probably in the 15% to 20% range right now.
And with the cost savings that Kelly said that we are actively working on by 4th quarter, We'll have 40% of it, we believe, in full.
Yes. And I also didn't mention too, Betsy, we in addition to those items Daryl mentioned, We had COVID related reductions in income, including money back on credit card purchases, The other types of incomes, NSF reductions, Waivers, so pretty big number. We haven't been trying to call it out because I think most people are trying to kind of do the same thing, but it is material.
Right. So maybe you could just, as a follow-up to the question, just talk a little bit about how you're anticipating The forbearance programs that you have in place fading from here, I'm not sure are you going to be Retaining people in forbearance, until further notice, do they roll off at a specific point in time and maybe speak to both the loan side as well as the fee waivers that you just mentioned?
Betsy, this is Clark. I'll take the credit accommodations. I know Daryl and Kelly gave you the statistics there. I would tell you this, we are seeing substantially lower new incidents of client accommodation requests. I think much like others, The big wave was early on.
And so our focus now is actually on the expiration of the initial forbearance that we've granted And whether they're going to need additional relief or not. So what we have been doing on both the wholesale and the consumer side, we've marshaled substantial resources. We're actually reaching out to these borrowers, whether they're individuals or whether they're businesses and trying to anticipate what they think their needs are, what their Current financial situation and outlook is so that we can get a sense of what lies ahead. And I can just tell you, It depends on the individual situations. We're seeing anywhere from 0% ask think they'll need another accommodation to some asset classes that might be So we're trying to take all that into consideration, be compliant with the CARES Act, but we're going to be much more thoughtful about the second to make sure that we're not kicking the can down the road.
And so as we're doing these reviews, we're also effectively, Where it's appropriate deferring the interest accrual and Daryl talked about that. We're actually got a reserve there if we think there's higher Probability of REIT of fall and then we're also through this regrading that's definitely included in our modeling in the reserve in our loan loss reserves.
Okay, thanks. And on the fee waiver side, is that something that will sunset at some point?
Yes. So, Betsy, on the fee waivers, we think it's about time to kind of eliminate Bose, to be honest, we had a lot of discussion about it. But we've concluded that We've got to let our clients ease back into normal life planning and financial planning. And so we've terminated that.
Yes, Betsy, this is Chris. I would add, under Truist Cares, we did things like 5% cash back for grocery pharmacy, ATM fees for waivers and for clients and non clients we did. For the EIP, a 30 day relief credit for those who Did not have balances. And so all those things to the point I think Kelly and Daryl will make and will come back to us. We also had some service charge, bank card, check card challenges, which will come back at least certainly a large portion of that will come back in 21 as well.
Okay. So this should be over starting in 3Q into 4Q and really full run rate by 1Q 2021 type of concept, is that?
It's certainly not full run rate in 2020. Yes.
Okay.
All
We'll go next to John Pancari with Evercore ISI.
Good morning. Good morning. Good morning. On the core NIM, I know, Daryl, you mentioned that the core NIM should be up modestly in the Q3. Can you discuss what the drivers of that would be and if you would expect similar moderate expansion quarterly thereafter on the core side?
Thanks.
Yes. So, John, We're doing several things around that. Obviously, you saw us exit $20,000,000,000 of advances from the home loan bank. They had rates north of 1%. We eliminated the negative carry that we had at the Fed at earning 10 basis points.
So that was an immediate lift Run rate that's happening as we speak now. Kelly touched on earlier, we are continuing we have opportunity to continue to cut Our core deposit rates, we think that will come down substantially over the next two quarters. So we feel good about that. If you look at on the commercial area, 75% of all new originations and modifications got floors embedded into their loans. We think that will protect some of the yield from that perspective.
And the other things we're looking at right now, it's kind of tricky on what assets you can grow At this time, it helps run rate and capital, but there are strategies like the Ginnie Mae buyout program where we are adding to that. We're looking at maybe adding back our jumbo correspondent production that will add more earning assets They're 90% held TV, so you still have favorable risk weights. The student lending that's government guaranteed. So all those that are capital friendly that help run rate will be positive. We're also looking at moving some of the mix out of the Fed balance into the investment portfolio to some extent.
So all those I think will Increase our core margin, which will help offset the slowdown as you have your reported margin. We have less fair value accounting coming through every quarter. We're trying to offset that with all these actions that we're taking so we can keep our margin flat.
Okay, good. All right, that's helpful.
And then on the, I guess, I'd say on the expense side, I mean, first, I know you indicated that You pushed back the core systems conversion and you cited vendor disruptions, have you chosen a vendor for the core systems and will you be announcing that? And then Separately on the efficiency side on the medium term targets of the low 50s, just want to see like how much higher
do rates need to be
to make that a reality and type of timeframe, I guess?
So on the conversion, We have the full plan developed. We have timelines developed. We have all the parties lined up in terms of executing. And as I said, we're executing literally as we speak in terms of the non core bank conversions. But for the core bank, all of that is lined up And moving forward, it's a big deal, so it's challenging, but we're very confident in terms of moving forward in the timeline we've We talked about and Daryl can comment, but when you go to the efficiency ratio, you've heard me say over the years, that's just a tough ratio, You got a numerator and a denominator.
But look, we're at 55.8% in adjusted in this environment Without getting the benefits of the expense cuts from the conversion materially and the revenue enhancements. So that's why we feel very, very confident getting into low 50s from where we are today. The adjusted efficiency ratio will watch out to the normal efficiency ratio because the all the merger unusual costs and all will go away. And so we feel very confident about that. So even if rates stay relatively low, I'm optimistic we can get down to that final level.
Obviously, if rates go up, And that really helps.
Yes. I mean, the only thing I would add to that, John, is that no matter what environment we're With putting the 2 companies together and the scale and efficiency we have, we believe we'll be a top tier provider in Efficiency in any market condition that you have there. So rates are higher, it will have lower efficiency numbers. If rates stay lower, Maybe they won't be quite as low as what we're saying, but we still should be in the top couple of our peer group from that perspective. So we feel very good about that.
Hey, John, this is Bill. Maybe just a John, Bill, just a little clarification maybe on the provider is the vendor disruptions that we've had really So our core providers that we've selected for all the conversions that we've talked about trust and Brokerage and deposits and all those, those are all in great shape and we're proceeding well. And so the challenge has really just been in the tech support.
Got it. That's helpful. Thanks, Bill.
Okay.
Your next question comes from the line of Michael Rose with Raymond James.
Hey, good morning. Thanks for taking my questions. Just wanted to dig into some of the fee income businesses. Obviously, insurance was very strong. I think last quarter you guided About up 3% to 3% year on year.
Can you give some color there and just maybe if you'd expect any momentum to continue on the high banking trading side? Thanks.
Sure. Happy to, Mike. This is Chris. Yes, really excited about the quarter. It was a record quarter as Kelly alluded to earlier.
And the three drivers of organic growth really pricing retention and new business. And so the Prior to COVID, they were all kind of hitting all cylinders and what you have now is new businesses driven by GDP and uncertainties of COVID are down a bit, but pricing is really robust. So what we had in the quarter was pricing last quarter was up in the 4.5% range closer to 5% this quarter. And it's anticipated we'll continue to see acceleration for the remainder of this year and into 2021. I'll touch on why in just a minute.
Client retention was in retail 90.3%, 84.1% and wholesale also very strong. But what you're seeing there It's a bit of a shift with the COVID uncertainties. You're beginning to see some of the standard carriers that support retail To really sort of pull back and refer to wholesale which gets underwritten into E and S market that supports the wholesale. So Over a period of the year, you're seeing a little bit of maybe a couple percent down in retail, but up about 4% in wholesale. And that really underscores Sort of the power of our diversified model because we play in both channels.
In fact, in wholesale, you might even get just a touch more margin in today's world. So That we actually benefit in that situation. New business production where we were up maybe Double digits last quarter, we're down 4%. But what I would say there is while and that's really driven by GDP, what's going on in the economy, uncertainties of COVID. But I would tell you that our overall outlook is much more positive because of the price firming I just talked about.
And we also saw in the quarter more stable exposure units than we'd expect. We just did not see the business failures. It was just a limited number of business failures also the growing excess and surplus lines volume, the shift from retail to wholesale that I had commented on in just a minute. So in the quarter, what all that gave us was organic growth in the 2.1% range. And I think what I had said was sort of Flat to 2 and we were right on the upper end of that range.
So felt very, very good about it in a market that I think some might would have expected Flat to slightly down. Just another touch on pricing. You really are seeing Upward momentum. I think we're going to continue to see all coverage types were up except workers' comp. All sizes were up at least in the sort of 4.5%, 5.5% range.
These are things like D and O up 9.3%, liability, professional liability up 6%, 7%, business interruption up 6%. I mean, Those are big numbers. So what we would expect in the Q3 because of what Daryl had said earlier Well, we're going out we're coming out of the 2nd quarter, which is our strongest quarter of the year to our weakest quarter of the year and quarter which is purely seasonal. So you'll see something down in the 13%, 14% range. But for the year we're still Forecast and organic growth, while it'd be soft in 3rd, Q4, we're still seeing it in low single digits for the remainder 2020.
It's really pricing sort of leading the way. So feel really strong, really good about it.
And this is Bill. I'll take the investment banking And trading side, we had a good quarter in Investment Banking, things that we want to see, Equity origination, investment grade were all really strong. I think as Kelly noted, it really is highlighting the value of the franchise and I feel really good about the relationships with the Commercial Community Bank and the pipelines that we're building and the Dialogues that we're having with clients. All that being said, it's hard to predict quarter to quarter just because there's just more volatility and there's some But overall momentum in that business, I think it's just a real strength of the Truist merger. On the trading side, we just have a lower risk client driven trading business that just That's lower betas than these other businesses.
So our core trading business was good in the areas of but we wanted to be good in derivative market Trading again value of the franchise, value of the relationships, taxable fixed income sales and trading. And the real The CBA recognition was just much lower in this quarter than it was last quarter and Presuming a rate environment and a credit environment that's stable that could continue. So just really good long term momentum Quarter to quarter a little harder to predict.
Mike, it's Chris again. I might just comment on mortgage. We had as Kelly alluded to just an exceptional mortgage Quarter this quarter and Daryl said that we might expect it to tail down and touch. I would tell you production we think is going to be just as Maybe even a little stronger. It's just that as the industry brings on more capacity, the margin is going to tail down a touch.
So I We're in a 3.19 kind of range this quarter and that combines retail at 4.50 and corresponded a touch lower. But you're still going to probably have in the mid to upper twos kind of margin. And you've got additional servicing As Daryl pointed out, but still going to be a very strong year. I mean the kind of year that would have been frankly, I mean kind of quarter that would have been a year to the old BB and T. So Very substantial kind of numbers overall.
Very helpful. Just one follow-up question. If I exclude the items You called out for non interest expense on a core basis. It looks like expenses were $3,300,000,000 Given the pull forward of some of the cost savings and lower incentive Is it safe to assume that expenses would be down in the Q3? Thanks.
Yes. So in my prepared remarks, Mike, I said that we'd be down 1% to 3% linked quarter on Excluding those items that I mentioned there. So we definitely believe it's going to have a trajectory down 3rd quarter and probably pretty good in the 4th quarter as well.
Sorry, I missed that. Thanks for taking my questions.
All right. Your next question comes from Dave Rochester with Compass Point.
Hey, good morning guys.
Good morning. Good morning.
On your just back on the margin, I appreciate your comments on the drivers going forward. I was just wondering what your assumptions were for the curve, the premium amortization there? And then on your opportunity to lower deposit costs, if you were assuming you can sort of hit that pre cycle low for the cost if you're thinking you could actually take those even lower given all the liquidity you have, which would seem like a fairly reasonable assumption?
Yes. So what I would tell you is that we're at 32 basis points right now. If you looked at what our average in June was, we were at 25%. So we will probably be In the low 20s, maybe peers through 20% or 20 basis points in the Q3. Probably by Q4, we'll be in the teens.
On Heritage BB and T side, the lowest we got in the last crisis was 20 basis points. I don't have with me what Heritage SunTrust was handy. But We're clearly headed lower. I think we're going to be lower than before. There are assumptions on the margin outlook.
We use the forward curve. Forward curve basically has no rate movements for the next couple of years, pretty flat curve. So we are not anticipating any Increase. We're just trying to take actions that we think are prudent that we can take in the stressed environment to help improve core margin, which should help alleviate some of the offset of the fair value accounting accretion runoff.
And any help on reduced Securities premium going forward or should that say elevated?
We always tend to buy securities with a 2% premium or less. We've done that for many, many years because we don't like to have a lot of weak year volatility. But you're seeing CPRs In the marketplace now of 30%, so they're prepaying pretty fast. If you look at our investment portfolio, we're in the mid to high $70,000,000,000 range. Our cash flows coming off are about $4,500,000,000 to $5,000,000,000 a quarter right now.
So you are getting some of that amortization That we're seeing there. So we're reloading and trying to add to it, but it's hard to find securities that don't have big premiums. So we're being as selective as We can from that perspective.
Are you seeing other opportunities to move the needle with more FHLB pay downs?
We are almost all out of Federal Home Loan Bank pay downs. I think we have $1,000,000,000 left or whatever that's going to roll off, I think, or later this year. So if we were to do anything right now, I'm not saying we would, but the only thing left you can really do from a liability perspective Tender any outstanding debt. We have not made a decision to do any of that, but that's the only thing left. And As we aggressively push down deposit rates, we will be good to our clients.
But non clients, we're going to push them down really, really low. And if they leave, that's okay because we have huge balances at the Fed.
Great. And then maybe just one switching to credit. You have some acceleration of the pandemic in your markets. Did you guys make any overlays in your CECL process for that? And what that can mean for the reserving next quarter if you see that accelerate or you're already assuming that in your base case that you'll get further acceleration?
Hey, Dave, this is Clark. We did consider that. And as we've gone through, I mentioned these deep dive reviews by segments That would include geographies as well and even things like individual property levels in submarkets. So we have considered that and tried to Take that into consideration in our estimates, which obviously did assume further deterioration.
Great. And then just maybe as a last follow-up to that, what are you guys hearing from business customers on the ground on how they're feeling about the pandemic in the background? And Is there any outside caution there? Does it mean more deposit growth and less loan growth going forward? Just any thoughts there would be great.
Yes. So
from what we're hearing from clients, I would say pandemic wise, our clients for the most part, our small business clients are probably the ones most impacted right now Because they don't have the same reserves that larger companies do. So larger companies depending on what scenarios you're in, some are Under stress, some are actually doing really well. It's a really broad spectrum there from that perspective. From a Clark's perspective and his team, they've been actively grading down the more stressed credits. So you're seeing that reflected and that's showing up in our allowance numbers from that.
But from a deposit, we have huge deposit growth. The DDA growth that we got, the $20,000,000,000 that Kelly mentioned, 80% of that was coming from businesses. That will probably moderate over time. And if you look at the growth that we've gotten from our interest checking and MMDA, most of that is coming from personal. And I think that will also get spent and moderate over time.
It all depends on the government comes up with more stimulus checks, Then that might add back to the balances there.
Yes. One of the interesting things we're finding that I must admit, I was a little bit positively surprised about is the resiliency of our clients. When we talk to our regional presidents and our people that are dealing directly with clients, in many, many cases, they're saying, Well, the clients feel pretty good given the environment and the reason is because they learned their lesson 10 years ago in the Great Recession, and when this hit, they acted fast. They cut their expenses. They try to be creative in terms of generating other revenues and they're hanging on much, much better than I might have expected.
Now there Some of the tiniest micro small businesses are having the hardest time because they don't have hardly they don't have any rainy day fund. They live Kind of day to day. But for most of our small business clients, they have some resiliency, but mostly they responded very fast. So Now if it hangs on a long time, it's just going to be hard. But if this recovers reasonably quickly, I think we may be pleasantly surprised And how well our business community actually performs?
And this is Chris, Kelly. Just to reinforce your point, Over half our 24 regions are actually on goal for the lending business today. And what's really good to see is 2 of the top regions are like West Virginia and Virginia West, some of our core core regions. And so I absolutely agree with what you're saying.
All right. And your next question comes from the line of Ken Usdin with Jefferies.
Hey, guys. This is Amanda Larson on for Ken. You mentioned that the COVID-nineteen related deferred interest reduced NIM by 5 basis points. Was that just accounting or was that a choice that you guys made for Prudence to not accrue interest Customers that are experiencing DuraP.
Yes. So just based on our prior experience, Amanda, in the last crisis, We know that some of the people that are on payment deferral are going to end up in charge off and we don't want to have any Surprises. So we're using a lot of metrics depending on portfolio specific on which percentages people will carry through and You might not be able to make their payments and it varies by each portfolio, but this quarter was around $50,000,000 for us And that's what we backed out of our net interest income from accruable basis. So we did a little bit in the Q1. We're continuing to manage and monitor that, but we think it's prudent accounting just to basically make sure that we are So we're going to accrue what we think we're going to get paid back on.
Okay, great. And then separate question. Can you provide updated thoughts on the capital stack? You guys issued $2,500,000,000 of preferred, bringing your preferred to ROAs Up to like 185. Do you expect to continue to run with this bucket kind of oversized relative to 1.5% sort of optimization level?
Like what's your thought process here and how does it tie in with the strategy of the overall funding bid?
Yes. So Amanda, we are just Taking it day by day and as we know certain things. So right now, we're still in a stress period. So we're going to keep our capital stack pretty strong. We do have the ability to call some of the preferred out over the next year or 2.
If things were to Lighten up, that would be about $1,500,000,000 or so. But right now, I think we want to keep our capital really strong. We continue to evaluate Make sure that we have enough. We're managing the capital for stress and what could come our way from that perspective. But we have a lot of flexibility and We will make prudent decisions and we'll let you know when we make those decisions right now.
But right now, we're happy with the capital that we have.
Okay, great. Thanks for taking my questions.
Yes.
All right. Next question comes from Erika Najarian with Bank of America.
Hi, good morning. Just one follow-up question, if I may. As we think about $5,700,000,000 in terms of your loan loss reserve. Is the majority is reserve building behind you?
Yes. Eric, this is Clark. Obviously, I'm sure you've heard this from others. We follow our process. We look at our models, our economic scenario assumptions, our client behaviors And the deep dives around these specific industries and we do everything we can in the CECL process to estimate what we think those Lifetime losses are.
So obviously, if those scenarios play out differently, our clients differently than we had forecasted, then that would adjust what we would need to do in the future. So for now, we think we've done the very best estimate we And with the information that we've been able to evaluate.
Got it. Thank you.
All right. Next question will be from Gerard Cassidy with RBC.
Good morning, Kelly. Good morning, Daryl.
Good morning.
Hey, Jordan.
Clark, can you share with us, when you look at the portfolio today, and I know this is Going to take some guesswork, but 18 months from now when we're following through this crisis, Do you think the greater credit losses may show up in the consumer side of the house or the commercial side? And when I think of commercial, we're in the commercial side of the house and the greatest stress is a commercial real estate? It's
a great question, Gerard, and we debate that every day. Certainly, for us right now, While we're concerned about the consumer, we're watching it very closely with all the stimulus support and The savings and different things, it's holding up relatively well even if you take out the forbearance benefit that we've Provided. I think our concern right now is more on the commercial side. If you look at our reserve allocation, even again for this quarter, it was 80% plus On the wholesale side, so I think that's what we're looking at things like, what does how does the hospitality or some of these Are there structural changes in office or other property types? So I think the wholesale side Based on various certain industry segments and CRE types are where we're putting most of our focus right now.
Very good. Daryl, when we looked at the DFAST results, it seemed like your results Weren't as strong as they should have been in PPNR and even some of the credit losses. Is there any way of addressing that with the Fed or you just really have to just take what they give you and just work your way through it?
Gerard, we did do a press release earlier that week when after the numbers came out on Thursday. We said that we thought potentially that our numbers on provision, we thought should have been a little bit lower. It's hard to know when you're doing incurred method, you have to really know when the loans come off and When they stay on the books and to know when it has to get reloaded with the new originations. And you don't have that data. I think it's hard to actually forecast that.
I think in their model methodology, they say they try to account for it, but you really need to have good instruments and forecasting to know what Those are coming on and off. Then on fair value accounting, if you have PPNR models that are based upon historical results, This was probably the worst time you could model PTNR because the company just came together in December. We Had maybe 3 weeks of purchase accounting, so you really didn't have anything. You did have 1 year of non interest expense and that appropriately got loaded into our run rate We're going to have that for the next year or 2 and that will fade away. But fair value accounting is real.
It's alive. I mean, we had over Almost $1,000,000,000 in the 1st two quarters of this year that we basically were able to use that from an earnings perspective. And We kind of think of it that it kind of helped fund our allowance bill. It wasn't exact, but it was like 90 plus percent What the amount was, it just happened that way, but didn't really have any earnings impact off of our core earnings because of that. So we feel over time that Our history will be loaded with fair value accounting and that will get done appropriately.
We are actively meeting with the Fed. They're here as you know constantly and We're giving them all the information, sharing everything that we have. And we hope down the road that we will get better results and we still think long term our MOE, we should be top tier performing not just on the loss rate, but also on the PPNR and on the capital resiliency, it might take 2 or 3 years to get the expenses out of our run rate, but Hopefully, by year 3 from now, we're going to be in the top quartile or what if not the best in our peer group.
Thank you.
Our next question comes from Brian Klock with Keefe, Brea and Woods.
Hey, good morning, gentlemen.
Good morning.
Hey, and thanks for going over the hour and Just a real quick credit follow-up for Clark. I guess, can you talk about the reserve build for the second And kind of how much of that could be related to either the downgrades that you mentioned earlier? And maybe you can talk about The change in criticized assets quarter over quarter, please.
It's a great question. You'll see Our CNC assets when we file the Q, but I mentioned this Deep dive and regrading process we went through. So effectively on the wholesale side, we've actually in sensitive industry areas, we've done deep As an example, in the hospitality area, we covered 90% of our total exposure there on a borrower by borrower basis and re underwrote every one of those and done that for a similar process for the other sensitive industries and then for any Client just had an accommodation and so we've marshaled a ton of people to do that and so we're getting real time information. That has Certainly impacted our grading and so we proactively downgraded a good number of credits. The biggest stress we've seen in the downgrades has been in hospitality and things Like CRE Retail.
So all of that is baked into our 2nd quarter estimate. And as I mentioned, about 80% plus So the additional increase is related to those to wholesale and particularly to those sensitive industry areas.
That's great color. Thanks for your time guys. Thanks.
All right. We'll next go to Christopher Marinac with Janney Montgomery Scott.
Thanks. Just a quick one for Daryl on the PPP forgiveness. Is that something that you can kind of have any certainty about in terms of how it might at year end and first part of next year?
I can tell you our assumptions, Chris. This is obviously a new product and we'll see how it all plays out. But if you look at the fees, obviously, we set them up on the loan system And they get amortized to go over a 2 year time period. But as they get the forgiveness and then get paid back, All that left accretion to that loan would actually come into earnings in that time period. So our assumptions are that We believe 75% of our production in PPP will get forgiveness.
We believe that know this is the timing that we put in our models. In the 4th quarter, 30% of the 75% will get forgiven, 65% of the 70% will get forgiven in the Q1 of 2021 and then the remaining 5% of the 75% in Quarter 2 of 2021. The other 25% we think will go all the way to term and from that perspective, that's our estimate. It's our best guess. They did modify it, so we pushed out a little bit.
PPB is very fluid. It tends to change a lot. So we'll see How things would react, but this is our best estimate right now.
Got it. And that will impact the margin when it happens, But I imagine you'll break that out, so it'll just be a one time event in each of those quarters.
Yes. We'll mention that. I mean, it's in our run rate now a little bit because you're still amortizing Basically, the fee over that 2 year time period. So like for this quarter, it was worth about $49,000,000 of our net interest For the Q2.
Okay, great. That's helpful. Thank you very much guys.
Thank you. Have a great day.
And it looks like we have no further time for So I'd like to turn it back over to Ryan for any additional or closing remarks.
Thank you, Alan, and thank you everyone for joining us today. All of that is for those questions we didn't have time to get to. We will certainly reach out to you later today and we wish you all the best. Goodbye.
That does conclude today's conference. We thank everyone again for their participation.