Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation fourth quarter 2019 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. Richard Baytosh, Director of Investor Relations for Truist Financial Corporation.
Thank you, Lauren. Good morning, everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the results for the fourth quarter and provide some thoughts for the first quarter and full year 2020. We also have Bill Rogers, our President and Chief Operating Officer, Christopher Henson, our head of banking and insurance, and Clarke R. Starnes III , our Chief Risk Officer, to participate in the Q&A session. We will be referencing a slide presentation during the 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 the course of this call that express management's intentions, beliefs, or expectations. These statements are subject to inherent risks and uncertainties, and Truist's actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary notes regarding forward-looking information in our presentation and our SEC filings. Please also note that our presentations include certain non-GAAP financial measures. Please refer to page three in the appendix of our presentation for the appropriate reconciliations to GAAP. Now I'll turn it over to Kelly.
Thanks, Rich. Good morning, everybody, thank you for joining our first Truist Financial Corporation earnings call. Thanks for your support. What you're going to see is overall fantastic progress in one year. I would say to you, generally, if you liked our company a year ago, you should love us now. As we go through this information, we're going to be completely transparent, but as you would expect, it's going to be messy. We don't know all that you want to know. Our pledge to you is that over the next quarter or two, we'll give you more and more as we go along. Some of the highlights, which you probably already know, but we did successfully close the deal on December sixth. It is interestingly the largest financial transaction in institution transactions in 15 years.
These two iconic companies have 275+ combined years of service, which is huge. We are the sixth largest U.S. commercial bank. We have the number two weighted average deposit market share on our top 20 MSAs, and we're about $473 billion in assets. I think very importantly, before legal day one, which was less than 60 days ago, we had all managers in place. Our entire organizational structure today is set and running. No confusion about who's doing what. That's a really big deal. We've done a lot of work with regard to our culture. I'll talk about that in a moment, but it feels really good. We've made much progress in other areas. I want to spend just a minute on culture, because this is the most important consideration for all of us. Culture drives long-term performance. There's no question about that.
Therefore, it is our number one priority. The way we think about culture is that culture is a function of our purpose, our mission, and our values. There are certain practices, the kind of way we do things around here. There's a whole process of embedding the culture into the organization. The most important thing to think about is our purpose, our mission, and our values. Our purpose at Truist Financial Corporation is to inspire and build better lives and communities. We really believe we can make the world better, and we think that is exactly what major corporations are called upon to do today. We execute our purpose through our mission, which is focusing on taking care of our clients through a really good environment for our teammates, and of course, optimizing long-term value for all of our stakeholders.
Most importantly, all of our mission efforts are guided by our long-standing deep beliefs, which we call values. Our values at Truist Financial Corporation are about being trustworthy. We serve with integrity. It's about being caring. We know that everyone and every moment matters. It's about one team coming together. We can accomplish anything working together as a team. It's about success. We know that when our clients win, we all win. For our teammates, it's about happiness. A sense of positive energy changes lives, and we ultimately want all of our teammates to be happy, because when you're happy, you don't have a job, you have a passion, and we want everybody to be passionately focused on accomplishing our purpose. We know that we are very closely aligned. Early on in this process, we got really good research from our 59,000 teammates.
For example, early on, we gave them 16 words to describe their companies. We got over 10,000 responses from each side. They all picked exactly the same four words. A couple of months later, we had scientific research where we asked again over 20,000 teammates divided between the companies to describe the company in terms of how we operate, and they described it almost exactly the same. Just week before last, we started a series of 39 town halls where Bill Rogers and I went around and started talking to our teammates and answering questions. Week before last, we did 11 of 39. Next week, we'll do another 11 or 12. I will tell you that the responses are fantastic. Our teammates are excited. They love our culture, they love our purpose, they love our brand, they love our colors, they love our logo.
It is off to a really, really good start. I want you to feel confident as investors that this is not two companies struggling, trying to come together. This is two companies that were already deeply aligned in terms of our purpose, our mission, and our values. Everything we've seen over the last year affirms just that. Now there's a renewed level of excitement from everybody as we think about coming together as Truist Financial Corporation and going out and making the world a better place. Let's talk about some of the highlights. If you're following along on page six, our total taxable equivalent revenue was $3.6 billion. Adjusted net income available to common shareholders was $1.46 billion. That's up 29%.
Like all these numbers, you're going to know that they're obviously inflated because of the SunTrust impact on the BB&T numbers as we added 25 days towards the end of the fourth quarter. We won't dwell so much on the specific changes, but we did make over $1 billion. In terms of diluted earnings per share, adjusted, it's $1.12. We'll give you some detail in terms of how that adjustment was arrived at. Return on average assets adjusted 1.4%, very strong. Return on average tangible common equity, 18.6%, which right out of the chute is really good, again, on an adjusted basis. Adjusted efficiency ratio was 57.5%. Both companies, to give you a sense of momentum, grew loans at a healthy pace when you exclude some restructuring, which Daryl will talk about. Underlying growth is very good.
The pipelines are very strong, and we feel very, very good about momentum. Asset quality is great. We've taken some action to optimize our portfolio from a credit perspective. Our capital and liquidity levels are excellent. Daryl will give you detail about that. Our businesses, as I said, have good momentum. We talked to bankers all across the footprint. Pipelines are strong. People are excited about doing business with Truist Financial Corporation . The launching of the Truist brand, colors, logo could not have gone better. I want you to know that we are primarily focused on serving our clients. We are laser focused on making sure our clients have a distinctive, outstanding service quality relationship with Truist. We're going to talk about cost saves, and Daryl will give you a lot of detail that we have available for that.
I want you to know from my perspective, we have made a decision to slow the timing down just a few months. We did that to improve client service quality, to ensure strong client retention, to improve the long-term value proposition. This is about really the digital investments that we're going to be making. We want to get some of those made before we actually roll out the conversion. The branch conversions are delayed some. Part of that was because of the agreement we reached with regulators. Part of that was because we wanted to delay it some to make sure, again, we have a digital value proposition in place. Still, we are very, very confident on our net $1.6 billion in savings, so this should not be viewed as a negative. This is a positive. It's the same number.
We've simply taken just a little bit longer to make sure we do it and do it right. Our non-performing assets were fantastic at 0.14, and net charge-offs were right in the sweet spot of what we've always indicated, 0.40, on a very strong common equity tier one capital of 9.4%. We feel really, really good about asset quality and capital. If you look at page seven, I'll just mention these selected items. They're really just three that are large. The merger-related restructuring charges are $223 million pre-tax, which is $0.19 negative impact on diluted EPS. We had security losses because of our balance sheet restructuring. That was $116 million, which translates into about $0.10 in terms of negative impact on EPS.
We have some expenses that are not technically, from an accounting point of view, designated as merger-related, but they are incremental operating expenses that do have future benefits, but they're not part of our ongoing run rate. You can kind of think about them the same. The main thing is they don't impact future run rate. When you add all that together, you get a net negative impact on our ongoing run rate of $0.37, which is substantially why you see the difference in GAAP and our adjusted numbers. If you look at page eight, just a few comments with regard to loans. We did have an end-of-period balance of about $300 billion. Really good mix. The mix of loans held for investment consists of 56% commercial, 40% consumer, about 2% credit card. Pretty balanced.
Over time, you might expect to see the consumer grow a little faster than commercial to get a little closer to 50/50, but we feel really good about where we are starting out. We did take some actions, which Daryl will give you more color on with regard to the portfolios. I would just point out that the year-end portfolio loans are a little inflated by about $4.5 billion because of the loans that have moved into loans held for sale, and they're sold but haven't closed yet. They'll close very soon. As we think about the overall market, just in talking to an awful lot of our regional presidents and market presidents, I would say that the overall market is pretty good. CEOs are confident in their businesses, but in fairness, they are nervous. They're worried about the macro issues, the trade war, Iran, the coronavirus.
We are 10+ years long into recovery. While we do not expect a recession in the near term, I would say, in fairness, we could sort of talk ourselves into one. It's a little bit of a nervous period right now. I think we need to be honest about that. That's one of the reasons that Truist Financial Corporation always remains strong in terms of capital and liquidity. In the event these existential factors do create an interruption in terms of ongoing business. We don't really predict one now. We really think this will settle down. We certainly hope and pray that this coronavirus does not get out of hand, but we all have to be really concerned about that. There are a lot of people around the world being hurt. A lot of people are dying.
We got to really hope that does not become a global systemic issue. I personally don't think it will, but we have to pay a lot of close attention to that. If you're looking at the slides on page nine, just a couple of comments with regard to deposits. We did end up with non-interest bearing deposits of about $92 billion and total deposits of about $335 billion. If you exclude purchase accounting, non-interest deposits declined just a little bit in the third quarter. Everybody, I believe is seeing a continued shift out of non-interest into time, and we've seen the same thing. It's not any different than anybody else is facing. Our interest deposits did increase a strong 9%, so you can see what's going on. Our total deposit activity is very good. It's just a little shift going on.
We have strong non-interest deposits that total 30.6%, one of the best in the industry. We feel good about that. Our total cost of average total deposits and average interest-bearing deposits respectively decreased 10 basis points from 17. Actually pretty good there, given the relatively flat yield curve. We're very happy to report that we are telegraphing to our clients that virtually all of our clients will not experience any change in their account numbers. Having been involved in lots and lots of mergers over my career, I can tell you that the big issue for the client is change. The main thing about change is, "Don't change my account number." We've worked out a way, and I congratulate our people for virtually all of our clients not to have any changes in their account numbers.
We predict that it will go extraordinarily smoothly for our clients, which is certainly our goal. Overall, even though it's a little hard to see through the numbers, our balance sheet is strong. Strong earnings, tremendous progress in moving Truist Financial Corporation forward. We are very excited, and we're very confident. With that, let me turn to Daryl, who'll give you a lot more detail and a lot more color.
Thank you, Kelly, and good morning, everyone. Turning to slide 10. Net interest income was $2.25 billion. Net interest margin was 3.41%, up four basis points versus the third quarter. Purchase accounting contributed 27 basis points to reported net interest margin. At the end of the year, our final purchase accounting marks included $4.5 billion against the SunTrust loan portfolio, an $83 million upward adjustment to CDs, and a $309 million upward adjustment to long-term debt. These marks were close to the recent estimates that we provided based upon September 30 data. We plan to true up these marks in the first quarter as the final valuation numbers come in from our third-party provider. Core net interest margin was 3.14%, down 15 basis points from the third quarter.
The yield on loans held for investment decreased six basis points, as the effect of lower short-term rates was partially offset by a 37 basis point benefit from purchase accounting. The balance sheet restructuring improved our securities yield by five basis points and achieved our goal of a relatively neutral interest rate risk profile. Continuing on slide 11. This summarizes our balance sheet restructuring, which is focused on improving credit quality, liquidity, interest rate sensitivity, net interest margin, and return on capital. Through the restructuring, we improved the run rate on the investment portfolio, built liquidity to meet our LCR requirements, re-hedged the balance sheet, and managed towards a more neutral interest rate position. We sold loans to manage negative convexity, reduced premium amortization, and enhanced credit quality by exiting $1.4 billion of high-risk credit exposures, of which $516 million was funded at year-end.
About 80% of that sale traded in January. Through the end of January, we lowered interest rates on about $17 billion of institutional deposits by 20 basis points because of our higher credit ratings. We will continue to be opportunistic in optimizing other funding to take advantage of Truist's higher credit ratings. We also estimate that year-end loans held for sale were elevated relative to normalized levels by approximately $4.5 billion and that the securities were elevated by approximately $1.4 billion. This means the balance sheet should settle slightly under $470 billion in total assets. Turning to slide 12. Non-interest income increased to $233 million after excluding $116 million in security losses and $22 million in losses related to the transfer of residential mortgages held for sale. Approximately $215 million of the increase was due to the merger.
The rest was due to a $22 million increase in insurance income due to seasonality and minor changes in heritage BB&T fee income categories. Of note, full year 2019 insurance income had organic growth of 8.8%. Continuing on slide 13. Non-interest expense was up $497 million after excluding $189 million increase in merger and restructuring charges and $49 million increase in incremental operating expenses related to the merger. Approximately $400 million of this was due to core expenses from the merger. The remaining increase was due to $42 million in heritage BB&T incentives and $42 million in amortization due to higher CDI and other intangibles. Turning to slide 14. Asset quality remained strong. NPAs increased $175 million to $684 million.
The increase was due to the merger and included $107 million of acquired non-performing loans held for sale, $63 million of loans and leases held for investment, and $63 million of foreclosed real estate, partially offset by the sale of $69 million of non-performing mortgages. NPLs were 15 basis points of total loans held for investment at the end of the year, down from 30 basis points at September 30. The decrease in the ratio was mostly due to the effect of accounting for acquired NPLs on a pool basis in PCI. This effect on the ratio will reverse with the adoption of CECL and the transition of pool level accounting for PCI. Net charge-offs increased $39 million and were 40 basis points of average loans, down one basis point from last quarter.
The provision increased $54 million due to higher net charge-offs and an increase in the provision for unfunded commitments. Our allowance was 52 basis points of loans held for investment in year-end, down from 105 at September 30, due to the elimination of a SunTrust allowance. We would note that the combination of our allowance on unamortized fair value mark is a very robust 2.01% of total loans. The allowance coverage ratios also remain strong at 2.03x net charge-offs and 3.41x NPLs. Continuing on slide 15. Effective January 1st, Truist adopted CECL, the new accounting standard related to credit losses. As a result, this did not impact our 2019 financial results. However, the impact at adoption was an overall $2.9 billion increase in the allowance for credit losses. The magnitude of this increase was significantly impacted by purchase accounting related to the merger.
We were not required to carry an allowance on the acquired loans from the transaction at year-end due to the related purchase accounting marks. Excluding the impact of purchase accounting, the implementation of CECL resulted in an approximate 40% increase in the allowance for credit losses. This reflects increases that are related to our consumer and mortgage portfolios, partially offset by the decrease in our commercial loan portfolio. In terms of capital, the increase in the allowance due to CECL resulted in a $2.1 billion after-tax reduction to retained earnings. Truist Financial Corporation has elected to phase in the impact to regulatory capital by 25% annually from 2020 through 2023. Turning to slide 16. Our capital ratios decreased due to the merger, but remained strong relative to regulatory capital levels for well-capitalized banks. Our CET1 ratio was 9.4%, down from 10.6% in the third quarter.
The benefits of purchase accounting will be partially offset in the first quarter by a 10 basis point impact from the treatment of MSR risk-weighted assets under the simplification rule and a 14 basis point impact from the CECL phase-in. At December 31, tangible book value per share increased 5.2% from September 30. Earnings during the quarter contributed 3.4% of the increase, and the merger with SunTrust contributed 1.8%, confirming the close was accretive to tangible common equity. Compared to December 31, 2018, tangible book per share increased 18.5%. Continuing to slide 17. We realize 2020 may be challenging to analyze and model, so we are providing more guidance than usual. Our guidance is largely dollar based due to the absence of historical baselines to which growth rates can be applied.
Some highlights from our first quarter 2020 guidance includes average earning assets to be ±$406 billion. We expect reported net interest margin to be in the mid to high 340s and core margin to be just over 3%. Net charge-offs should range from 35-50 basis points, and fee income should be just over $2 billion. Our expense guidance includes $100 million-$150 million in merger expenses. For the full year, we expect the balance sheet to grow based upon our guidance. Net charge-offs should remain relatively stable, assuming no significant deterioration in the economy. Expenses will trend down each quarter until we achieve an annual run rate expense savings of about $480 million in the fourth quarter. Turning to slide 18. We are also providing medium-term performance targets for about three years.
We are confident Truist Financial Corporation can generate peer-leading return on tangible common equity in the low 20s and an adjusted efficiency ratio in the low 50s over the medium term. In terms of capital, we are targeting 10% CET1 ratio for 2020. We are also confident we will achieve $1.6 billion in net expense savings through 2022. We are updating the expected timing of our expense net savings. This is primarily due to our commitment to the regulators not to close overlapping branches for at least the first year, and careful and cautious approach to systems integration to minimize client disruption. By the end of 2020, we expect to achieve a run rate equal to 30% of our net cost savings target. By the end of 2021, 65%, and by the end of 2022, a full $1.6 billion.
All of this will drive positive operating leverage for the next three years. For reference, 2019 combined non-interest expense, excluding merger charges, a one-time charitable contribution, and amortization, was approximately $1.8 billion. We expect to achieve an annual run rate of investment of approximately $200 million by the fourth quarter of 2020. These investments will be directed towards personnel, branding, digital, and technology. Now let me turn it back to Kelly for an update on the merger and closing thoughts and Q&A.
Thanks, Daryl. If you'll take a look at page 19, just to summarize, a lot of really good accomplishments so far. Of course, we closed the deal. We've integrated the financial reporting systems. We've integrated and converted derivatives, Workday, a number of other systems. We have successfully retained our talent and our clients. Any concern about any mass exodus on that is not warranted. We've resurfaced the balance sheet. We've launched our visual imagery, colors, and logo. We've introduced our culture, purpose, mission, and values. I'm happy to say we've added some key leadership in certain areas, particularly in the digital space. Kind of what's coming up in a big picture perspective is that we are now working hard on completing product mapping, which allows us then to go into development. We will be continuing to complete another 28 town halls.
We'll be doing about 12 next week. That continues on. We will continue to focus on deepening our relationship with our clients. We will complete the branch divestitures in a few months. We will complete the purchase of our new Truist Center headquarters here in Charlotte. I just mentioned that because that's a pretty big deal in this market and for our people. Our people are really excited about being in a 47-story iconic building that shows well in Charlotte. We'll be introducing and marketing our Truist Financial Corporation brand, and we'll continue investments in digital and technology. We'll phase into the conversion of the primary systems. Overall, it was a very strong quarter. As we said a year ago, we have two great companies coming together to create a very special company. We are in great markets. We have great economics. We have a very strong culture.
Everyone is excited about our purpose, and we have the opportunity to make the world a better place. You got to love Truist Financial Corporation . I'll turn it back over to Rich.
Thank you, Kelly. Lauren, at this time, if you would come back on the line and explain how our listeners can participate in the Q&A session.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please limit yourself to one question and one follow-up. Again, it's star one to ask a question, and we'll pause for just a moment to allow everyone an opportunity to signal. We'll take our first question from Gerard Cassidy with RBC Capital Markets.
Good morning, Kelly. Good morning, Daryl.
Good morning, Gerard.
Kelly and Bill, Congratulations on doing a monumental deal and coming out of the gates with some really good numbers. Congratulations.
Thank you.
Thank you. We appreciate that.
Daryl, can you share with us on the credit side, the provision for the guidance for 2020 seems pretty robust. Did CECL have an impact on what you guys are looking for? Because considering that you mark-to-market all those loans at the time of closing, without CECL, I would have maybe expected the provision maybe to be a little lower.
Gerard. We basically adopted as the guidance on how CECL operates. Our auditors, PwC, feel very comfortable with what we booked on 1/1 / 2020. In essence, if you back out the purchase accounting, it's a 40% increase of the two banks combined were both around 105 or 106 allowance. We're up to about 147. If you add in reserve for unfunded, it's about 161. That's what the guidance basically told us to do, and that's why we booked that. I do agree, though, there is a double-dipping there. That is definitely positive because we have purchase accounting marks of $4.5 billion on the SunTrust loan portfolio. Now we have a reserve at 147 on their loan book as well.
Very good. Kelly and Bill, when you guys, on slide 19, you listed your accomplishments so far and now the next steps. Can you share with us, is the heaviest lifting ahead of us, or has it already been accomplished? Can you compare and contrast what you've already accomplished with what you still need to do in terms of the degree of difficulty?
Good question, Gerard. I'll take a start and then Bill can add to that. I would say in all honesty, the heaviest lifting is done because pulling two companies together early on to make sure that you don't have any cultural interruptions, that you don't have any clashes in business strategies, that you still feel confident in terms of achieving the expense saves. All of those are, we feel better today than we felt a year ago. I have to say for myself, I think Bill would echo this. A week before last, when we visited 11 town halls, we touched about 6,000 teammates. If you'd have been in that room, number one, you would have said, "These people have been working together for 25 years." Number two, you would have thought the level of excitement was just extraordinarily high.
So much work is going to be done with regard to programming, and I'm not taking anything away from that. That's really hard work. At this point, the organization is settled, strong, focused. We're just now focusing on doing the connectivity work that is big, but is predictable in terms of how well we can do it. Bill?
Yeah, I think, Kelly and I looked at this through the same lens in terms of what's hard and what's easy. The hard part and the most important part is getting the cultural alignment and making sure that's there. I think Kelly has articulated that really well, and I feel the exact same way. If that wasn't there, then that would be some concern and that would make the road ahead harder. I think we've set a really good foundation for the road ahead. That's not to diminish the fact we have a lot of work. We've got a lot of systems integration to do and revenue synergies to achieve and all those things. What I think we would align on is the highest hurdle is it working and is the company culture aligned and are we leaning forward?
I feel great about that.
Again, thank you and congratulations.
Thank you.
We'll take our next question from Saul Martinez with UBS.
Hey, good morning, everybody. Congratulations on your first quarter as a combined entity. A couple of questions. First, on your marks and the outlook for purchase accounting accretion. I think the mark is about $4.5 billion, not too different from in your last filing. Daryl, can you just walk us through whether that calculation has changed at all with regards to coming to its credit, liquidity, and rate marks? The purchase accounting accretion trajectory as well, if you can talk to that, because I think your guidance implies about, I think, $1.6 billion of purchase accounting accretion this year. How does that move forward also beyond 2020? How do we think about the glide path of PAA and how it impacts the numbers beyond this year?
Sure. Thank you for the question, Saul. First, I would tell you that the $4.5 billion that we booked that we're selling from December 6th, that will be marked. About 60% of it is credit related or 1.8%. It came down a little bit, but it's really closely aligned to, our CECL with reserve for unfunded was in the 160s. It's just a little bit more than that, obviously due for a little bit different methodology, but it's very consistent from that impact. The other part, the other 40% is mainly attributable to liquidity and interest rate risk. We did put in one of the slides that the commercial portfolio probably has an average life of around three years, consumer around six. I would say it's going to ebb and flow of how contractual payments come through as well as prepayments.
You will definitely see a downward trajectory on the purchase accounting accretion that's coming through. At the same time, what you're going to see is our cost savings, our net cost savings really kick in and over that same time period. You will actually still see improvement on a consistent basis on our operating leverage number. Just because of the calculation of how efficiency works with expenses over revenue. For every dollar we save, it's worth $2 of revenue that's lost. We still feel very good about the projections that we gained from that perspective.
Okay. Got it. I guess a follow-up there. Adjusting for purchase accounting accretion, the guidance implies about, by my calculation, about $12.2 billion-$12.5 billion of net interest income, exing out PAA. If I look at the combined entity, historically SunTrust, BB&T, the run rate's been about $13 billion. Can you just walk us through what's driving that difference? I know there's a lot of balance sheet restructuring going on, but it does seem to imply that the core NII, there's some degradation there, exing out the PAA. Am I understanding this right? Can you just walk me through what's driving that?
Yeah. If you really look at the balance sheet restructuring, we didn't shrink that much. The mark was $4.5 billion. The loans didn't sell. We just basically wrote down the loans. We did sell mortgages. Mortgages, if you look at it over the last couple of quarters, is down about $10 billion. Pretty much everything else is consistent. The big reason why NII is down, if you go back a year ago and you look at what we were projecting, our models and all of our peers' models had interest rates still rising at the start of 2019. We actually went back and did a little homework. We looked at what estimates were back then, and we compare them to what estimates are right now.
Across the board, the peer average is down 20- 25 basis points, and that's just because of the lower rate environment and the flatter curve that you're seeing.
Okay. It's really just the rate backdrop is degraded NII.
Correct.
All right. I guess I get that, but even if I look at the third quarter, Daryl, combined NII pro forma was about $3.25 billion or $13 billion annualized. This quarter, I guess there's some degradation there, but it seems like a pretty big drop-off.
If you had margin in the second half of 2019 really start to hit as the rate cuts came in. They started in July, and you had three drops. You really aren't seeing the full impact. The last drop was in December. You aren't getting to see full impact until you get to the first quarter. You have to look at that trajectory that we've seen over the last six months.
Okay. All right. Well, fair enough. Thanks a lot.
We'll take our next question from Matthew O'Connor with Deutsche Bank.
Good morning. Thanks for the update on some of the kind of planned milestones that we should be focusing on page 19. I guess I want to focus on just the systems conversions and what are the big ones that we should be thinking about that'll drive the cost savings. It seems like banks have done a pretty good job converting various systems in recent deals, but it can always be a bit of a risk. What's the timeframe for some of the bigger system conversions, and I guess just what should we be looking for to make sure they go well?
Matt, clearly the biggest is the overall deposit conversion because that's what drives the interaction with the clients. Loan conversion is a big deal, obviously. I would say those are the two larger ones. We have about 3,000 programs that have to be dealt with, 100 ecosystems, so there's a lot of them. It's like any other bank. The primary is loans and deposits.
Okay, the timing of those conversions?
Sorry?
Timing of the conversions.
Oh, timing. We will be primarily shooting for about August of 2021. That may seem like a long time, but we're committed to doing it right. Much work is already underway in terms of ecosystem selection. That's virtually all done. We are moving into programming now. The programming takes several months. You have a huge amount of time of testing. You could do it sooner, and we could beat that a little bit. The key is to take plenty of time for testing because you only know through testing if you've done it right. You don't want to put it out there and then go back and have to change it. If I had to give you a specific date now, I'd give you August of 2021.
Separately, Daryl, if you look at, I guess at slide 17 here, the outlook for the first quarter and the full year, it implies relatively stable earning assets throughout the year. It sounds like there's some kind of inflated assets at year-end in held for sale in the securities book that presumably will run off, I would think, also will flip. I'm trying to think about the loan growth that you're assuming for the rest of the year, or maybe along with those kind of inflated assets run off in the first quarter.
Yeah. Matt, what I would say is, the trajectory of loans coming off the books, mainly mortgages, was down third, fourth quarter. We bottomed out. Most of the trades have settled now, just a little bit left to go this quarter. When you look at point to point, when we presented to our board earlier this week our operating plan on a go-forward basis, we're looking to be a little bit better than growth in GDP. I would say in the 2%-3% range point to point in loans over the next year. Favor a little bit heavier in commercial versus retail. I think we have, as Kelly said, momentum that we finished with the year fourth quarter, and the teams are working really well together and feel very positive that we're going to grow and generate revenue as we move forward in 2020.
Okay. Thank you.
Our next question comes from John Pancari with Evercore ISI.
Morning.
Morning.
On the slowing of the timing of the cost saves, of the factors that you said, what was the biggest driver? I just assume a lot of the drivers that you said, like focusing on service quality, the customer retention, the digital, that's stuff that you would have already assumed that you had been doing. What was the change? What surprised you to make that change? Thanks.
John, it's not really a surprise, but it is a difference. We were very committed to picking the best of the systems. We went system by system to look at the best. We picked a number of SunTrust systems, which are really good as surviving Truist systems. It's a little technical, but if you took all of the BB&T systems, you can convert this much faster. You just move all of the data from SunTrust over to BB&T systems programs. When you pick the SunTrust system and you put it on the BB&T equipment, you have equipment changes, and you have the programming to move that SunTrust program over to the BB&T systems. That's really what's driving the time a bit longer than we thought.
It's also a conservative estimate with regard to testing because we're committed to doing an awful lot of testing. Remember when we first talked about our timing, we did not anticipate the branch delay which you alluded to that, but that is a year of delayed savings. It was the right thing to do in conjunction with the approval of the process. We feel good about it. We will be doing closings during the course of the year in non-overlapping markets. We will be doing a lot of work through our retail channel in terms of preparing for the closings. That's a pretty material change in terms of the timing of the cost saves.
Okay, that's helpful, Kelly. Thanks. Separately, back to your 2020 outlook on slide 17. It looks like the share count outlook isn't showing a change. Is that implying that you're not assuming buybacks in 2020? If so, can you give us the rationale for that?
We basically said when we announced the merger, we're going to run it at 10% CET1 ratio until we got through some of the integrations and took some of the risk off the table. We are starting off targeting 10%. When we do our CCAR ask, our CCAR ask that will be coming up in the next couple of months. We will build in capacity such that if we decide to change that and decide to target something less than that after we have some success, we'll have the ability to do that. Right now we're sticking to 10%.
Okay, got it. All right, thank you.
We'll take our next question from Mike Mayo with Wells Fargo Securities.
Hi. Well, the delay in the branch closing is not really new. I guess you just updated the numbers because you said that almost six months ago. I'm just trying to understand better the outlook for expenses. You look to take the efficiency ratio from 57.5% down to what? Like 53% or 54% over three years. That implies a lot of positive operating leverage. I guess the real question is, do you expect positive operating leverage in 2020? As part of that, if you're delaying some of the branch closures and the deposit loan conversions aren't until August 2021, what are the expense savings that you can get more in the near term, such as back office or anything else? Thanks.
We are expecting positive operating leverage for really for the next three years. That's a really good story. There are a lot of savings that we will get. Remember again the overlapping branches closing are deferred. There are a number of branch closings that are not in overlapping areas that are going to be closed in the near term. In addition to that, just because we don't close certain branches in overlapping areas doesn't mean we don't reduce expenses in those areas. Some of these branches are literally side by side, and there are commonalities in terms of staffing that we can integrate even though they are two separate branches. There will be cost save in the branches even before the branches are actually closed. There are a lot of areas.
To be honest, there's still a lot of backroom areas that are not related to the branches that we have overlapping staffing. We didn't deal with all of that day one. As time goes on, we will have additional overlapping redundancy in staffing that we will be reducing. It's kind of a hodgepodge, to be honest. It's pretty clear to see what we've laid out. We think with this modification in terms of the expected time frame with regard to savings, we feel very confident we'll be able to accomplish that.
Hey, Mike, if you look on page 13 on the non-interest expense page that we have, the first five categories that you have there, personnel, all the way down to equipment expense, I would expect those expense items to decrease over the next three years. This year, personnel will drop. We did went through our first RIF more in the management level when we closed the transaction.
Our sourcing group is working aggressively with our third-party vendor suppliers, so we will get savings in those areas. While not a lot of branches today won't close this year, we're working very aggressively in all the major markets in the Mid-Atlantic and Southeast to really focus and consolidate our buildings in all the metropolitan areas. That should come online middle to end of 2020. We feel very good that we're going to get the cost savings in 2020 and in the next three years.
Just, maybe you don't want to answer the question, you're not giving that guidance. When we look at the year 2020, should revenue growth exceed expense growth? Is this really just all back-ended to years two and three?
We believe we're going to have positive operating leverage every year. Can't promise it every quarter because of the seasonality. Every year we will generate positive operating leverage from 2019 to 2020 to 2021, and 2021 to 2022.
Okay. Just a separate follow-up question. Sounds like you really are planning to have a strong long-term company. You've said that you're taking a very measured approach. I guess just maybe a little bit more from Bill on the old SunTrust side. What are you seeing that's not going as well as you expected, that you could do better? Maybe, Kelly, you can chime in, too.
Honestly, everything is going really well, and I don't have any area that I'd say is not going as well as expected. There are a lot of areas that are going much better. To be honest, the integration of our people and our teams, whether it's our Corporate and Institutional Group or our community bank, all of those are integrating extraordinarily well. Personally, I see some real upside in terms of revenue momentum, particularly because of how well our teams are working together. I've had the chance to visit, Bill's had the chance to visit with a lot of our teams in the last 90 days, especially. Again, you walk in the room, you would not be able to detect that this was two companies just having come together. You'd think they'd all been working together for a long time.
Mike, I'd say we entered it in with some good momentum. Kelly outlined some good loan momentum in legacy SunTrust. Coming into that, there was good loan momentum in BB&T as well. That's carrying over into the early weeks of the year. On the investment banking side and the relationship and the teamwork that's going on with the commercial community bank, it's off the charts. I mean, I feel really good about that. Of course, we're one month in, but the things that you want to see in terms of pipelines and teamwork and all that, I feel really good about. I think generally strong momentum in the businesses heading into the merger.
Thank you.
Thanks.
Our next question comes from Ken Usdin with Jefferies.
Hi. Thanks. Good morning. I want to ask a bit about on the credit side. Daryl, you mentioned that you're going to redo the marks again. We're going through CECL. I assume that's in your provision guidance. Can you help us understand when we move to the PCD and non-PCD within the 35-50 basis points of charge-offs, how much of the legacy SunTrust charge-offs are we going to see in that number? Is there any room where just the math ends up looking better than the guidance just because of how the mechanics of the charge-off recognition works with past the book marks?
Yeah. Ken, what I would say is that our guidance between 35 and 50, we believe we can be within that range. There's a little bit of uncertainty in the marketplace right now, so we widened the range out a little bit. SunTrust portfolio is performing very well. We have good marks on it. We did sell a few credits. Nothing of substance, but we did sell some that we wanted to just dispose of. For the most part, their credit profile is really strong as well. I wouldn't say there'd be any impact. When we do convert from PCI to PCD, there will be about $200 million that will basically come out of the purchase accounting mark and go into the allowance out of the $500 million that we have allocated to it. That's a little bit of a nuance.
That's just how the CECL accounting plays out. I don't know, Clarke, you want to add anything?
Yeah. I don't see any big changes. Things look very stable right now. Our guidance around the range depends on the economy and also how fast some of our consumer segments grow. We've got a lot of attractive higher margin consumer opportunities now between the two companies. It's really dependent upon the mix and the economy. As far as stability of asset quality right now and our outlook, it looks good.
Okay. My follow-up just on provision versus charge-offs on this point. You have the wider range of charge-offs, I guess, is it fair to say that the provision pretty much matches? If you just look at your full year guidance versus what the charge-off guide implies for losses, just the moving parts between provision and charge-offs, that'd be helpful. Thank you.
I'll start and Clarke can chip in. In essence, our provision estimate is kind of assuming charge-offs. All of our assumptions within CECL, as you heard from all of our peers, the models are more complex now. You have to look at the market environment, client behavior. There's a lot more variables that you had there. We're assuming all that is static. We're assuming we're going to grow the portfolio. What our assumption is that mix stays the same
Obviously, all that is not going to be static like that, but that's what's built into the assumption.
Yeah. The way I think about it is, we're going to incrementally provide above charge-offs generally at the reserve rate, assuming no big change in our CECL assumption. You'd assume the provision's larger than charge-offs.
Okay. Thank you, guys.
As a reminder, it is star one to ask a question. We'll take our next question from Erika Najarian with Bank of America.
Hi. Good morning. My first question is on synergies once again. Very strong statement on positive operating leverage over the next three years. I'm wondering if that includes any revenue synergies, and how should we think about revenue synergies going forward? The organic growth in insurance is particularly impressive given that the company was combined for only 24 days. Clearly, that didn't have any impact. I wanted to understand what the revenue opportunities for the combined company are. Also, the other question on that, on the cost side, Daryl, could you tell us a little about the pacing during the year in 2020 and 2021 of the cost savings realization, please?
Erika, and Bill alluded to this, we feel very, very good about the revenue synergies. Really, you got to remind yourself of how synergistic this combination is. SunTrust has a fantastic corporate institutional program, a fantastic wealth management strategies, a fantastic national consumer finance business, all of which are complementary, can be leveraged over BB&T client base. Likewise, you alluded to the insurance opportunity from BB&T side, and the BB&T community bank has a broader reach than the SunTrust community bank reach has. They'll be able to expand some of the programs that the BB&T community bank had into the SunTrust bank. All of that, which of course not factored into our numbers, is net very positive and accretive. We can't give you numbers on that today because it's hard to really give you meaningfully accurate numbers.
Intuitively, from talking to our people, we know that all of those businesses are very synergistic, have huge opportunity, and the early response from our people in terms of executing on that is outstanding. Insurance you talked about is real and very easy to kind of talk about. Let's have Chris talk about that a minute.
Erika, I might just also mention to play off of both Bill and Kelly's comments on the community bank and the CIB working together. Just a couple tangible thoughts. When Beau Cummins and I sat down and actually designed the model, we actually designed in the community bank, embedded in the community bank about 200 folks that are capital markets industry specialists, corporate finance specialists. Their sole purpose in life is to integrate with the regional presence of 24 of those to share the client base of BB&T with those individuals. We have, for example, just since December 9th, seven deals that will be sizable enough that will get your attention that we have been involved in with their client, and we have commitments on three of those.
Seven deals doesn't make a future, but seven deals in about 45 days of that nature, I think is pretty good. Both teams, I can tell you from having sat in the regional presidents meetings, are exceptionally excited. It's a natural gravitation, and I'll leave it at that. It's been very, very effective. On to Kelly's point on the insurance side. Two years ago, really said we want to transform this business, and we brought in a consultant to really kind of transform, start with a white sheet of paper. I could not be more proud of what those guys have executed on. We set up 32 initiatives. We're on plan or on our target to improve the EBITDA. Just in two years, for example, we've increased our margin 6%. We've got industry leading organic growth year to date.
I will tell you the three things you want in place are in place. We've got industry leading retention. We've got pricings coming our way, and it's up 5%, another half percent this quarter versus third. Our new business production, which is actually feet on the streets generating business, is up 13%. Not in my career have I seen 13%. All things go in the insurance brokerage business.
Just a follow-up question.
Yeah. I would just tell you, it's hard to call it on a quarter-by-quarter basis. We're trying to give you target estimates of what we would be at the end of each year. That's probably what I would just stay with right now. We're only eight weeks into the merger. We'll have more clarity. We'll close the first full month books next week. Give us another quarter or two, we'll have more certainty down the road. I think we gave you good enough estimates, and feel very confident we're going to get the cost saves.
Got it. Just as a follow-up, I just wanted to make sure I understood how we should treat the purchase accounting over the three years. You mentioned that 60% of the $4.5 billion is credit and 40% is liquidity. I guess the way I just understood the credit part of the mark is the non-accretable difference, which would not accrete over NII. I just wanted to make sure I was thinking about it the right way, or does all of the $4.5 billion accrete back to NII?
Yeah. The nuance, I mentioned this earlier, but I'm glad you called this out. Out of the $4.5 billion, now that we've adopted CECL, about $200 of it is going to go into the reserve, but it's part of CECL, so it's in there now. It's in essence having $4.3 billion accrete in as principal and cash flows come in from the assets, and then the liabilities that you have under those terms.
Got it. Thank you, and great logo.
Thank you.
Thank you.
Our next question comes from Brian Klock with Keefe, Bruyette & Woods.
Good morning, gentlemen.
Good morning.
Daryl, just a quick follow-up. Just want to make sure that I understand the comments on the CET1 10% target and then buybacks. Even though the CET1 came in at 9.4%, which was a little bit lower end versus what you guys initially thought, the accretable yield that's coming through is coming in pretty fast. Does it feel like your timing with the CCAR submission that you guys would probably be able to buy back stock in the second half of the year? Does it still sound like that's on target?
Brian, yeah, we did give guidance that this next quarter, because of the MSR change and RWA and then the CECL adoption, our first quarter ending CET1 ratio will probably be relatively flat to what we have right now in the 9.4 range. After that, I agree with you. We'll start to build pretty quickly as we generate and accrete through the earnings power there. It's really a call on Kelly and Bill's part and the board's part on when we start buyback. Right now we're just sticking with the 10%.
Got it. That's helpful. Thank you.
Yeah. Remember we've said very clearly that over the term, assuming things settle down, there's capital opportunity with regard to Truist. We've also said very clearly that during the first phase of our new Truist life, it's really smart to be conservative. We have a lot of moving parts that need to settle down. We have a lot of existential factors out in the world, we know about that right now with what's breaking from a medical point of view. There's just a lot of sound reasoning in terms of being conservative. As those uncertainties settle down, to your point, in terms of the capital level we have, in terms of the capital accretion that'll occur predictably over the next several quarters, there certainly could be the opportunity of some capital buybacks. I wouldn't be surprised at all if that were to happen.
That's helpful. Thank you. Appreciate it. Daryl, just maybe one little quick follow-up. When I look at slide 17 on the guidance for merger expenses for the full year, the $600 million-$700 million, the footnote says it includes some of the incremental operating expenses related to the merger. How much is in that $600 million -$700 million related to incremental operating expenses? Can you just remind us what that means and why there's a differentiation between the incremental operating and the other restructuring and merger charges?
Yeah, Brian. If you remember at (BAAB), I went through in detail the difference between what a normal merger and restructuring charge is versus this incremental operating. The main primary difference is our definition of merger and restructuring basically has no future benefit. It's just to the transaction. Because of the size of this transaction and the magnitude, there are a lot of things that we are doing that putting things together that will have some benefit. Like in Scott's area, where we're putting the systems together and working on an integration in the ecosystems, the design around putting those ecosystems together. While it has a future benefit, we're doing lots of that, hundreds of millions of dollars of people working on the architecture that we're putting those and calling those out.
For the most part, we have schedules in our tables that break out where to pull those numbers out. For the most part, it's in personnel and professional are where most of those charges exist. As far as the breakdown goes, it's a high-level estimate. I would say about a third of it might be related to the MOE and the operating. The rest would probably be merger charges as a ballpark. It's going to be fluid. It's going to move back and forth.
All right. Perfect. Thanks for your time. Appreciate it.
Yep.
Our next question comes from John McDonald with Autonomous Research.
Hi, guys. A couple quick follow-ups. I guess to start with CET1, Daryl, if you don't do buybacks this year with the share count that you've guided to, does that get you back up to the 10% in your modeling by the end of the year? Are you roughly at 10% or does it take you into 2021 to get back to that 10%?
Our estimates right now, we are ±10% towards the end of the year. It all depends on how fast the balance sheet grows and how the accretion comes in. There's a lot of variables there. We're in the neighborhood of 10%.
Okay. Just to follow up on Saul's question, the purchase accounting is a nice boost for this year. It seems like the difference between the core and non-core margin suggests something like $1.5 billion or so of purchase accounting addition to NII this year. Does that fall off quickly next year? Is it like drop by 20%? Just any idea of the pace that that kind of scales down? I know you've got the merger saves that'll kick in to offset it, but any idea on the pace of that?
Yeah. We gave you the terms of how you would amortize it in. It does fade away over the several-year process. I think you have the right mindset of how to model it. Just know that as you model it and you factor in the cost saves, you will see that you still drive positive operating leverage.
Right. Okay. Last question. On page 18, the annualized 4 Q 2020 investment of $200 million. What are you guys including in that, and how are you characterizing? What kind of investments, and why are you calling that out? Just give us some color on that.
I'll give a couple. Our executive leadership team approved about more than doubling our digital teams that are at work now, and they're assigned to all the different business units, working to make our improvements and enhancements for our client experience. In personnel, there's some key hires that we're putting out into the marketplace, and more teams that have some skill sets that we don't have that we're trying to get more of. Be starting to see some branding in Dontá's world, marketing going back and forth. I don't know if anybody else wants to.
There's a big one, though. The development of our Innovation and Technology Center. That has got a lot of excitement, a lot of focus, and a pretty immediate investment in, so that'll be a big development during this year.
Okay.
Yeah.
I'll add on there commercial onboarding. It's a list of dozens of things that we're seeing that we've got the capacity to do them. They're not opportunistic. They're really client-friendly, client-focused. We're calling it out because these are strategic investments that we think making now are going to really have an incredibly good long-term payback. Deferring them for the point of meeting some quarter just doesn't make a lot of sense. That's the reason to put them in there and call them out.
Okay. All right. Thanks. That's helpful. When you guys talk about merger savings is the $1.6 billion net, that's the kind of investment that you're netting against that, the merger savings is.
That's right. I wouldn't expect the investments to stop at $200 million.
Right.
Our gross save is well north of $1.6 billion.
Yeah. Okay. Thank you.
Our next question comes from Lana Chan with BMO Capital Markets.
Hi. Good morning.
Morning.
Just one quick question on the preferred dividend in the fourth quarter. Was just looking unusual there, and can you give us run rate for the quarters in 2020?
Yeah, Lana, we have a couple preferreds that are semiannual rather than quarterly. That's the nuance that you have to factor in now when you look at the Truist dividend payout schedule.
It was only $19 million, which was much lower than even, I think, the previous run rate.
You remember, though, in the BB&T world, we retired one preferred, and then we reissued another preferred. I think the timing of all that basically had a favorable impact in the fourth quarter. It should level out as we get into 2020 on the schedule. If you want to talk about this offline, I'm sure myself or Rich or Clarke can handle that question for you.
Okay, great. Thank you. Just I wanted to confirm, Daryl, that you said before on this core run rate for the expenses through 2020, by the time we get to the fourth quarter with the cost savings, that we should see a decline in the quarterly run rate through the year?
Yeah. We gave you, if you make all the adjustments baseline for 2019 is $12.8 billion. We are saying that our net cost savings for the fourth quarter of 2020 would be down $120 million, which is annualized 480 run rate number, which is 30%, and it will continue to build year after year on that.
Okay. Thank you.
You're welcome.
Our next question comes from Stephen Scouten with Piper Sandler.
Hey, good morning, guys. Not to beat a dead horse here, but kind of thinking about the delayed expense savings. I'm just wondering, if I calculate that, it seems like the timing's about $0.20 a year in 2020 and 2021. I'm wondering if there's any offsets that you've seen in terms of upside surprises from any sort of revenue realizations or otherwise, as you've gotten into the deal so far.
Yeah, Stephen, we didn't factor in intentionally any of the revenue opportunities in this. What you're seeing now is the worst time, the worst case in terms of the expense delay with no factored in revenue opportunities. As you just heard Chris and Bill say, the revenue opportunities in commercial banking and private banking and insurance across the board are really very substantial. It's not something that's going to take two years to get underway. It's underway as we speak. It's a very conservative view to factor in the expense delay without factoring in the revenue enhancements. That's our nature. We try to be conservative because we'd rather be than miss. That's kind of the way we've tried to factor it together.
Okay, great. Other question for me is just in terms of restructuring business units, loan runoff and things of that nature, has everything in your mind been completed here already or in the process of what's remaining in held for sale? Are there still other decisions to be made about additional business line exits potentially or other loans that you might look to take off the balance sheet?
Stephen, I would say for the most part, we're pretty much over with from a balance sheet restructuring perspective. Everything will settle that we wanted to move off this quarter and move forward from that perspective. We still have our divestiture that's planned later in the year, probably second quarter. That will come out of run rate when that occurs. I think for the most part, we have pretty much everything done.
Great. Thanks so much.
We'll take our final question from Christopher Marinac with Janney Montgomery Scott.
Thanks. I wanted to ask about compensation for the combined companies in terms of just retaining the employees that you have. Is there anything unique that you are doing or that you intend to do just to keep competitors at bay and keep your team focused?
Yeah, Chris, we've been working on that from day one in terms of special compensation arrangements for key players, developing a very aggressive ongoing compensation program for all of our people, whether in staff jobs or in revenue jobs. For example, we did a $1,500 bonus for like 48,000 of our teammates that we just paid out in the last few months, just as a thank you for their hard work. We've done a lot of particular activities to try to focus on that. That's one of the reasons we feel very confident in terms of our low attrition. In fact, what we're seeing is low attrition. Everybody feels good. We've done all the right things.
We will remain aggressive in terms of taking care of our teammates because, ultimately, pardon me, the way the merger works well or not is based on the teammates. Again, all of our teammates today feel very good, very excited, very confident. Again, I'll say it again, the attrition is very low, so we feel very good.
Great. Kelly, thank you and Bill and Daryl for all the information this morning. We appreciate it.
You bet.
Thank you.
Okay. Thank you, Lauren. Thank you everyone for joining us. Hope everyone has a great day.
Thank you. That does conclude today's conference. We thank you for your participation. You may now disconnect.