Ladies and gentlemen, and welcome to the BB and T Corporation's 2nd 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, Rich Petosch of Investor Relations for BB and T Corporation.
Thank you, Orlando, and 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 Chris Henson, our President and Chief Operating Officer and Daryl Beibel, our Chief Financial Officer, all who will review results for the Q2 and provide some thoughts for the Q3 of 2019. We also have Clark Starnes, our Chief Risk Officer to participate in the Q and 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 BB and T website. Before we begin, let me remind you, BB and T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this presentation that express management's intention, beliefs or expectations. DD and T's actual results may differ materially from those contemplated by these forward looking statements. In addition, in connection with the proposed merger with SunTrust, BB and T has filed with the SEC a registration statement on Form S-four to register the shares of BB and T's capital stock to be issued in connection with the merger, which contains a joint proxy statement and prospectus that has been sent to shareholders of BB and T and SunTrust seeking their approval of the proposed transaction.
Please refer to the cautionary statements on Page 2 regarding forward looking information in our presentation, our SEC filings and the legend on Page 3 that relate to additional information and participants in the solicitation. Please also note that our presentation includes certain non GAAP disclosures. Please refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP. And now I'll turn it over to Kelly.
Thank you, Rich. Good morning, everybody, and thank you for joining our call. We are really pleased where we had overall a very strong quarter, strong results with record earnings, really driven by strong loan growth, improved revenues, especially in insurance, but also very strong Investment Banking revenue and very solid mortgage rebound. Excellent asset quality once again, Clark will give you detail on that. And we're making excellent progress with regard to our MOE with SunTrust.
So if you're on Slide 4, net income was a record $842,000,000 which was up 8.6% versus the Q2 of 2018. Now that if you look at net income excluding merger and restructuring charges and this quarter, we're also calling out incremental operating expenses related to the merger. It was a record $868,000,000 up 9.7 percent versus the 2nd quarter. Diluted EPS was record $1.09 up 10.1% versus the 2nd quarter of 2018. Adjusted EPS was a record $1.12 up 10.9% versus the 2nd quarter of 2018.
Our adjusted ROA and ROCE and ROTCE were very strong at respectively 1.59%, 12.34 percent 20%. Our record revenue was $3,100,000,000 up 19.8 percent annualized on the Q1 and up 5.7% versus the Q2. So we really have overall strong fee income that really helped offset the negative effects of the curve flattening. We had fee income was a record $1,400,000,000 up $150,000,000 from the Q1. Really strong revenue performance in every regard in insurance.
Kristen will give some real detail on that. Investment Banking and Brokerage also had strong quarters, up 20% like quarter and annualized 72% linked quarter. And interestingly, every fee category grew during the quarter. Now NIM did decrease 9 basis points to 3.42 and core NIM decreased 10 basis points to 3.34. There's a lot going on with regards to the yield curve, as you well know.
Daryl is going to give you a lot of detail on that in just a bit. Our expense management continues to be very strong. As you know, we've been focusing hard on that for the last several years. So our adjusted efficiency ratio came down to 5.1%, which has been kind of a long term target for us. That's a result of excellent performance coming out of our disrupt to thrive strategy, which was the last 3 years of focus on expenses.
Our adjusted expenses were 1,720,000,000 dollars up versus last quarter and like quarter. That was due primarily to incentives based on related strong fee performance and somewhat offset by lower payroll taxes. Credit was just great. NPA ratio was 0.23, a decrease of 3 basis points. We think it's the lowest we can remember or we can find any records of, so it's really good.
Charge offs were 38 basis points versus 40 basis points in the 1st quarter and 30 basis points in the Life quarter. We continue to have made great progress in combining BBT and SunTrust and our merger of equals to create Truist, a premier financial institution. I'll talk more about that in a little bit. But we did announce our new headquarters building in Charlotte, which is one of the tallest buildings in Charlotte. You're familiar with Charlotte, it's the old Hearst building.
We did just this week announce a $60,000,000,000 community benefits agreement, which we're very excited about in terms of working with our communities. But one of the most important reasons we're doing this merger is to be more of a leader in making the world a better place to be and lightweighted financial well-being, and we're very excited about that. We're making really good progress in terms of laying out the management structure. So we've had 2 rounds of higher level management announcements. So we've already announced about 900 positions, and the next layer will be out by the end of August.
And by the end of August, we will have announced about 75% of the management layers, which gets us way down into the organization. We do have a special shareholder vote set for July 30 by BB and T and SunTrust, and so we're very, very excited about that. I'll give you a little bit more color on the MOE in just a bit. We are selling 4,000,000,000 miles worth of residential mortgages to respond to the changes in interest rate environment, which Dale will give you detail on. On.
If you look at Slide 5, we did have 2 categories of selected items to call out to you. A regular merger related and restructuring charges was $23,000,000 pre tax, dollars 19 after tax, so about $0.02 diluted EPS impact. And again, we're calling out what we're going to just refer to you for the next few quarters, incremental operating expenses related to the merger, which is $9,000,000 which is another $0.01 These are expenses that don't meet our definition of merger related charges because they do provide future benefits, but they will not be a part of our expense run rate. We simply want to be very transparent with regard to this because we want you to be able to have good information to consider as you determine our run rate as we go forward. If you look at Slide 6, it's a really good loan growth quarter.
The aggregate loan growth was 6.5%, which was very strong given the market environment we're in. C and I, we're really pleased about, which was 7.8%. Our CRE, pardon me, was down 3%, but that was frankly by design. We've talked to you about the fact that there's a lot of really stretched underwriting going on out in the marketplace, particularly in the CRE space. We choose not to participate in that.
So we're actually very pleased with that metric. Our auto portfolio, we're really excited about. We've been talking to you about that optimizing portfolio. It has now turned the corner as we projected, and it did grow a small amount, 0.5%, but it did grow and that's largely due to some product changes we made into branches, particularly our auto branches and auto loans that we're making in the branches. So overall, really strong loan growth.
And we feel really good about it. There's a lot of talk about what's going on in the economy. I can just tell you what we see. The market is pretty good. Activity is very good.
When we talk to clients, I talk to them directly, I get direct feedback from our people in our commercial and our community bank. There's no sign of any kind of imminent slowdown. Not to say that overall talk about tariffs and trade wars and all that won't eventually have some impact. We keep talking about it enough. But for now, most people are pretty resilient.
The businesses are good and underlying activity is flowing through and getting the kind of loan growth that I just reported. So we actually feel pretty good about the economy and believe it has led to continue as we go forward. If you're following along on Page 7, we were very pleased with our overall deposit performance given the environment that we're operating in. So our total deposits were down significantly 4%, but very encouragingly, our non interest bearing deposits or DDA was up 3%. Our client deposits, because of those national market funding sources, increased 2 point 6%, which is very strong.
Our percentage of non interest bearing deposits was 32.9% compared to 32.7% in the 1st quarter. So that's encouraging. The cost of interest bearing deposits was 1.02%, up 7 basis points, but that was slower increase than last quarter. And the cost of total deposits was 0.68, which was up 4 basis points. So it is a very challenging time with the rate shifts and the deposit disintermediation that is going on.
And Darryl will provide you with some really good color on that area because we know you're very focused on it and it is very, very important. Darryl?
Thank you, Kelly, and good morning, everyone. Today, I'm going to talk about excellent credit quality, margin and fee income dynamics, improved efficiency and provide guidance for Q3 and full year 2019. Turning to Slide 8. Credit quality remained strong. Net charge offs of 142,000,000 dollars were down 2 basis points as a percentage of average loans.
Our non performing asset ratio was 23 basis points and is below our previous lows seen in 2,006. Continuing on Slide 9, our allowance coverage ratios remained strong at 2.8x net charge offs and 3.46x to non performing loans. We recorded a provision of credit losses of 172,000,000 dollars which exceeded net charge offs of $142,000,000 The $30,000,000 allowance build was in line with loan growth, keeping our allowance to loan ratio flat at 1.05%. Turning to Slide 10. Reported net interest margin was 3.42%, down 5 basis points after adjusting for dividends on non qualified plan assets received in the Q1.
Our core margin was 3.34 percent, was down 6 basis points after adjusting for the Q1 non qualified plan dividends. Net interest margin was impacted by lower rates that slowed and increased in the loan portfolio yields. In addition, faster prepayments on residential mortgage loans increased premium amortization resulting in a 2 to 3 basis point negative impact on 2nd quarter margin. The cost of interest bearing liabilities increased 8 basis points in the 2nd quarter versus 13 basis points in the 1st quarter. We are still seeing mix changes in our core deposits that are offsetting a decrease in interest rates.
Note that BB and T plans to sell approximately $4,000,000 of residential mortgages, which will reduce our asset sensitivity and negative convexity. The proceeds from the mortgage sale will be reinvested in high quality securities to provide improved liquidity for the upcoming MOE. Continuing on Slide 11. Non interest income was a record $1,400,000,000 up 10.6% versus like quarter, resulting in fee income ratio of 44.4%. Record insurance income increased $56,000,000 reflecting solid organic growth and P and C seasonality.
Regents Insurance contributed $32,000,000 to insurance income. Excluding Regents, insurance income rose 11% from a year ago on strong organic growth. Looking ahead, recall that insurance income is seasonally lower in the Q3. Investment banking and brokerage fees and commissions increased $20,000,000 on greater deal activity and increased managed fee accounts. Mortgage banking income increased $50,000,000 and included $29,000,000 of net MSR valuation adjustments and seasonally higher mortgage sales volumes.
Service charges on deposits increased $10,000,000 due to the mortgage in the quarter. Other income was down $5,000,000 mostly due to a $20,000,000 decrease in SBIT private equity investments that was partially offset by client derivatives. Turning to Slide 12. Our efficiency ratio improved. We generated positive operating leverage on a GAAP and on an adjusted basis versus linked and like quarters.
We reported $1,800,000,000 in operating expenses, a 1.8% increase from a year ago and a 3.9% decrease from the prior quarter. Included in the operating expenses were merger and restructuring charges of $23,000,000 and incremental operating expenses related to the merger of $9,000,000 which will have a recurring benefit to the company. Incremental operating expenses related to the merger include items such as retention bonus payments, professional services related to the design and planning of Truist. Excluding the merger restructuring charges and the incremental operating expenses related to the merger, our adjusted non interest expense increased 1.4% from a year ago to 1,700,000,000 Of note, personnel expense increased $33,000,000 due to a $43,000,000 increase in incentive related compensation, partially offset by a $14,000,000 decrease in payroll taxes. There were 5 63 fewer FTEs versus the Q1.
Continuing on Slide 13. Capital and liquidity remained strong. Our CE Q1 ratio was 10.3% flat with last quarter. Our dividend and total payout ratios were 36.8%. Our modified average LCR ratio was 100 and 29%.
In addition, our Board will consider increasing our quarterly dividend by 11% to $0.45 per share at the July meeting. Now let's turn to Slide 14 to review our segments. Community Bank Retail and Consumer Finance net income increased $66,000,000 to $445,000,000 The increase was driven by higher loan volume, more days in the quarter, improved deposit spreads, seasonality in higher mortgage volume and net MSR valuation adjustments of $29,000,000 Improved loan production was driven by strong growth in mortgage and indirect lending. In residential mortgage, originations were about 70% up from last quarter. The production mix was 68% purchase and 32% refi and the gain on sale margin was 1.65% versus 1.60% last quarter.
Continuing on Slide 15. Q and A Banking Commercial net income was $319,000,000 The $9,000,000 decrease was due to a $20,000,000 increase in provision, partially offset by an $8,000,000 increase in net interest income and a $5,000,000 increase in non interest income. Loan production increased 15.4% mostly due to seasonality. Turning to Slide 16. Financial Services and Commercial Finance net income was $169,000,000 The $13,000,000 increase reflected $45,000,000 increase in non interest income attributable to higher deal activity, managed account fees, client derivative fees and commercial mortgage banking income.
Higher revenue was partially offset by an increased non interest expense and higher provision. Average loan balances grew 8.6 percent annualized aided by corporate banking and equipment finance. Turning to Slide 17. Insurance holding net income was $111,000,000 an increase of $23,000,000 Total revenue increased $57,000,000 as the seasonal pickup in P and C commissions were partially offset by higher incentive based compensation. Organic revenue was 11.6% from a year ago quarter.
Now I'll turn it over to Chris to provide more perspective on insurance holdings performance this quarter. Thanks, Daryl. Purpose of
the two slides on 2018 2019 really to show the transformation plan that John Howard and his team implemented and also shared at Investor Day last fall really continues to gain momentum. The plan, as a reminder, was developed with the system to BCG a little over a year ago and is really in full swing. It's built around 31 initiatives, includes implementation of new operating models for both retail and wholesale as well as numerous revenue growth and expense reduction initiatives. And as a result, I think you see business continues to gain significant momentum. And we're really seeing the results across all lines of business.
If you look on Page 18 at the upper left hand graph, you can see revenue of 17.6% or 89,000,000 dollars If you exclude the $32,000,000 that Daryl mentioned from regions, we've now had regions a full year. We still, excluding regions, had organic revenue improvement of $57,000,000 And look at organic growth, really three drivers of organic growth and really we're hitting on all three cylinders there. Pricing is 1. And recall, we are post 2 of the largest insured loss years in history in 2017 2018. So we actually saw pricing bump in the first quarter to sort of a flattish to up 2%.
And in the second quarter, we actually saw a move to up plus 3.5%, which is very helpful. New business, which is producing new units, is far and away the largest driver of organic growth, and that's really abled by a strong economy. We see that continuing. And then we've got really high retention rates, which have actually improved since Q1, retail is up to 92.1%, wholesale at 79.6%. So what that gives you is really in the lower left hand corner, which is substantially improved organic growth.
And I think probably the best numbers that we've posted in our history, If you look at the light quarter comparison, we moved from 5.2% to, as Daryl said, up to 11.6%.
And I believe when all
the numbers roll in for the quarter, we'll probably see the industry probably averaging in the 5 4% to 5% range. Economic fundamentals are still really favorable for this business. As businesses grow and add equipment and expand buildings and add people, those are all insurable items. The industry refers to the exposure units. We see that continuing to grow.
And then also market conditions are stable. I alluded to pricing. We're seeing some specific markets where there have been insured losses begin to harden a bit. For example, commercial auto is up about 6% and commercial property, which we had a disproportionate large shares, is up 3.5%, bumped up 4% this quarter. If you turn to Page 8 19, excuse me, again another major focus is on margin improvement.
And if you look at the upper left chart, you'll see our adjusted EBITDA, adjusted meaning we pull out merger related charges. You can see from like quarter up from $120,000,000 to $171,000,000 so up $51,000,000 We're still very much on track with regions now that we've had for full 12 months to achieve our target expense and revenue synergies throughout by the end of 2019. Organic growth and strong expense control, however, are really the drivers of improved margin. As it relates to organic growth, as I said a moment ago, the primary is new business growth and that's really hinging on the economy. And we're up 9% year to date there, which is substantial.
And then on the expense control side, certainly, we mentioned regions, but we also have FTE savings really across all business lines. And we've got new systems implementations, which have cost implications, in some cases, revenue and speed to delivery, really in probably 75% to 80% of the businesses. So if you look at the EBITDA margin, the lower left hand corner, we have this quarter posted the best margins that we have ever posted. Now this is our strongest seasonal quarter of the year. We won't maintain this, but we went from 23.7% up to 28.8%, which is we haven't seen those numbers in our history.
So we're
going to continue to optimize operations looking forward, and we're going to begin to shift and differentiate with the use of data and analytics really to enhance client experience and knowledge of the client. And we're doing that especially today in wholesale. So in summary, I'll just tell you, really proud of the transformation we started 15 or so months ago or 18 months ago really is really beginning to kick in and work. And I see really a bright remainder of 2019 in terms of environment for this business and expect it to continue to perform strongly.
So I'll turn it back over to Dale.
Thank you, Chris. Continuing on Slide 20, you will see our outlook. Looking at the Q3, we expect average total loans held for investment to be down 4% to 6 percent annualized versus 2nd quarter. Excluding the mortgage sale, loans are expected to be up 4% to 6% annualized. We expect net charge offs to be in the range of 35 to 45 basis points and the provision is expected to match charge offs plus loan growth.
We also expect both the GAAP and core net interest margin to be down 4 to 8 basis points versus 2nd quarter. We have pre invested the proceeds from the mortgage sale into high quality securities. Since the securities settle before the mortgage sale, there will be a temporary increase in earning assets during the quarter. This will negatively impact net interest margin by approximately 3 basis points in the Q3. The sale of residential mortgages and the reinvestment into securities will not have a negative impact on the go forward net interest income.
Excluding this temporary increase in earning assets, we expect the net interest margin to decline 1 to 5 basis points in the Q3. We anticipate fee income to be up 2% to 4% versus like quarter. We expect expenses to be flat versus like quarter. Incremental operating expenses related to the merger may increase from 2nd quarter levels, which is why we created this category. And finally, we anticipate an effective tax rate of 20% to 21%.
Our previous full year guidance remains unchanged. In a challenging rate environment, we will continue to grow revenue faster than expenses, driving positive operating leverage as we move towards the MOE close with SunTrust. In summary, the quality of our earnings this quarter was excellent, resulting in record earnings, positive operating leverage versus last quarter last year, strong loan growth and excellent credit quality. Now let me turn it back to Kelly for an update on the merger of Equals and SunTrust closing costs and Q and A.
Thanks, Daryl. So if you're following along on Slide 21, we just wanted to give you a bit of detail with regard to where we are because obviously, it's the major focus in terms of our 2 companies going forward. First, let me just say that Bill Rogers and I are very pleased with where we are. He and I are working very, very well together. We've known each other a long time.
We have a complete meeting of the minds in terms of the industry dynamics that are going on, which led to the merger and causes us to have a consensus view in terms of where we are going forward. The new proposed executive management team is working great. We are meeting weekly as a whole team and have since we announced the combination. Making really good progress in terms of the regulatory process. We did have the regulatory held hearings on April 24 in Charlotte, May 3 in Atlanta.
I will tell you that we've had over 1,000 public comments and 95 plus percent of those are positive and very much in support of the merger. So all of that is going very, very well. We submitted our capital plan, which is going well and we feel very good about that. As I indicated, we've already announced about 1000 of our key management positions. And by the end of August, we think we'll have north of 75% of our announcements made.
And that gets you way down into the organization in terms of people that will be leading the new company. We did announce recently some enhanced investments. As we said in the beginning, in terms of the Greater Atlanta area and the Greater Piedmont Pride area in North Carolina. We also announced our headquarters bill. As I mentioned, we announced our new name Truist.
We feel very good about the name. I know some people were kind of scratching their heads and how the world did you come up, pardon me, with that name. But what we really wanted was what we were trying to accomplish in the merger. When Bill and I talked about this merger, we didn't want to be looking backward. We wanted to be looking forward.
We wanted to have a merger. We wanted to have a company that could look forward to help clients and prospects think about how they could meet their dreams and goals and hopes in life looking forward. And so in that regard, we wanted a name that speaks to the essence of the companies that reflects a go forward mentality in terms of growing with our clients, helping our communities become better places to be and of course, doing a really good job for our shareholders and our associates. And we think Twist does that. And we think as time goes on and we build the branding around that, we think it will be an outstanding name.
We feel very, very good about it. We have mailed the merger proxy segments to BB and G and SunTrust shareholders, and we will have shareholder approvals jointly and separately, but on the same day on July 30. We did announce recently the $60,000,000 community benefits plan, which is very, very good. On July 10, we did receive regulatory approval from North Carolina Commissioner Banks. So that's a substantial positive for us.
So we're making great progress kind of looking forward. Here's what you can expect. We'll continue to do a lot of work in terms of building our integrated culture together. So far, we feel really good about that. We do not see any substantial cultural issues in our companies.
But there's obviously work to be done in terms of being sure that we have day to day, what I call, operating cultural processes and procedures that are synced up and we're working on that. It's going very, very well. We'll be continuing the brand development process. In the fall, you'll see more rollout with regard to logos, etcetera. We'll be continuing the organizational design, naming the final staffing.
So that on legal day 1, we will be organized and staffed and ready to go. And that's very, very important because you can't wait until legal day 1 to figure out how you're going to run the company. So we are heavily immersed in the planning for the combined company and we will in fact be ready on legal day 1 to run the company effectively. We do have on July 24 a hearing with the United States House Committee on Financial Services, which we expect to go well. And then we would wait for the remaining regulatory approvals, and then we would be in a position to close.
I would say to you that we still feel very confident about our projected $1,600,000,000 of net cost synergies, cost savings. And again, that's net of investments we'll make back into business like technology and innovation and other investments. So overall, as Daryl said, it was a strong quarter, solid economy out there, great progress on MOE. Truist will be, in my view, a great company. And we absolutely believe that our best days are clearly ahead.
I'll turn the call over to Richard.
Thank you, Kelly. Orlando, at this time, if you would come back on the line and explain how our listeners can participate in the Q and A session.
And we'll take our first question from John Pancari with Evercore ISI.
Good morning. Good morning. Sorry if I missed it, but could you just tell us what do you assume for Fed cuts in your current outlook? And then separately, if the if you could just give us a little bit of color on how you're thinking about the NIM beyond the Q3 color that you gave, how do you view the NIM trajectory through the end of the year? Thanks.
John, this is Daryl. So in our forecast, we had one rate in decrease in July of this quarter, Q3 and then another one in the Q4 in October is what we're forecasting out. Guidance for Q4, I want to it all depends on how our deposits react and how they reprice with everything and competition. My guess is since we get basically 3 basis points back from the Q3 of gross margin because of the increase in earning assets temporary from the investment purchase or probably going to be flat to maybe down slightly in the Q4.
Okay. Thank you. And then longer term, in terms of the NIM, I know you had previously indicated or talked about a core NIM in the ballpark of about 3.30 plus or minus post the deal. Just given the rate backdrop, I got to assume that may have changed. Can you give us your updated thoughts on that?
Thanks.
It's obviously with rates potentially going down in the flatter curve that does put pressure on net interest margin. I would update you once we get the deal approved and closed on what core margin will be and what GAAP margin will be at that point in time. But definitely, you're going to see some tighter margins if the rate scenario stays where it is. And if you see 4 rate cuts, potentially, which we don't think is going to happen, but if you see that, that would put pressure on margin. But we'll have an opportunity at close to reposition the balance sheet and we can get the balance sheet to be more neutral, to be more insulated from lower rates.
But at the end of the day, as rates come down, you can't lower your cost of funds below 0 right now. So you'll be limited on the actions you can take.
John, this is Kelly. I would just say one person's opinion. I think the market is overreacting to what's going on in the world. I think the world I mean the market is overstating the decline in interest rates. Not to say that we won't have 1 or 2, but the sentiment out there is that things are really collapsing, basically cutting rates like crazy.
I think that's completely overblown. And we will see some slight decline in the economy. We will see some slight decline in rates. But what you're seeing now and is being projected going forward in my mind is overstated. Got it.
All right. Thank you. If I could just do one more follow-up. On the insurance front, you had a really good quarter in the insurance revenue, and I know Chris gave some good color there. What is the outlook?
What type of growth rate do you think is sustainable longer term as you focus on the improvements in the profitability of the business?
Yes, John, I appreciate the question. When the near term remember, the 2nd quarter is our strongest quarter, 3rd quarter is our weakest seasonal quarter of the year. So what you can expect in the near term is probably down in the 15%, 16% range in the Q3. But if you look out for the balance of this year and from everything I can read, the industry is really projecting something in the 4% to 5% range. We're currently probably more in the 5.5% to 6.5% kind of range as our sense.
And our current year to date organic growth is at 9.3%. And again, industry expectations is probably in the 4% to 5 What has happened is post these the 2 largest insured loss years in our history, we're actually seeing rate begin to bounce. And to Kelly's point, as long as the economy holds, that's going to really drive new business growth, which is the largest driver of our situation. We're going to do a good job in client retention. So I really think we've we're in that kind of 5.5%, 6%, 6.5% range for the year, which is for us would be the best numbers we've ever posted in organic growth, and I think well ahead of the industry.
We are just very, very pleased with the momentum and the transformation that's taking place in our business. We couldn't be more happy.
Got it. All right. Thanks, Chris.
Sure.
Next up, we'll hear from John McDonald with Autonomous Research.
Good morning. Daryl, just want
to follow-up on John Pancari's question regarding the NII dynamics. What kind of outlook do you have for net interest income in the back half of the year? And then if we wanted to isolate the impact of 1 25 inches point Fed cut, what would that be?
So in the Q3, we only have one rate cut in there and our NII will probably be down slightly on a linked quarter basis. So we were $1,690,000,000 this quarter and we'll probably be a little bit lower than that, maybe $5,000,000 to 10,000,000 dollars just because of the pressure that we're seeing in our funding side. As you go out into the next Q4, I would say that our net interest income will be relatively flat to down a little bit. It all depends on if we get another rate cut in Q4 or not and what happens to the shape of the curve. We do anticipate another cut there, which would put more pressure on margin.
But we think overall, it will be relatively holding there pretty well.
And any changes in your rate sensitivity, the mortgage sale will impact that? But and maybe is there a way to just quantify what one cut would do if we wanted to isolate that?
So if you look on the chart on Page 10 in the table and you can see the down 25, and if you look at the numbers for 6.30, it's 0.87. That basically assumes over a year, it's a $60,000,000 hit to NII. Now it's not evenly distributed over the Q4. I would say it's truck loaded a little bit. So maybe call it about $20,000,000 for our Q1 and then it kind of moderates out on the second, third and fourth quarter.
And we are trying to keep our position to be less asset sensitive and we are moving in that direction with some of the actions that we are taking, and we were trying to minimize that as much as possible. But we don't anticipate having that the floor moves down that's going into the forward curve right now. But we have to also protect which direction the rates could go. So we're risk managers from that perspective.
And John, keep in mind that right now it's hard to figure. Daryl has talked about this disintermediation shift in deposits. But there's a tipping point concept with regard to interest rates and the way clients respond. So as rates went up over the last several quarters, we hit a tipping point and people got more sensitized to rates. And so all of a sudden, they had extra money in their checking accounts and they said, well, might as well put it to work.
The same thing happens when rates go down. So as rates go down, all of a sudden, the amount of interest that you get by shifting it becomes less attractive to you. So it's just it's less elastic. So I personally think as if we see these continued declines in rates, there'll be less sensitivity and we'll see less of that shift in this intermediation.
Got it. And maybe just a broader picture, when you think about the longer term projections for Truist, obviously, it's early days, but any changes in terms of the financial goals and the longer term efficiency of 51 and how you think about running the company at 10% capital, Kelly, at least in the early days? Just any broad strokes of how things have changed since the original announcement on the longer term financial projections?
John, interestingly, not much of a change. Even with all the things that Daryl just talked about, we still feel good about the 51% efficiency. And obviously, that's the ratio. And so to the extent that revenue change, that has some impact. But what we can feel very confident about is the expense reductions.
That's why I highlighted we're very confident we'll get the $1,600,000,000 net. Obviously, depending on what happens to the denominator, that will move that around a little bit, but not materially. So we still feel really good about that. We think we'll be best in class terms of efficiency. In terms of our internal intangible common equity in the 22%, we're already 20%.
And so I feel very, very confident about that. In terms of the synergies, we didn't remember in our model, we didn't even build in any revenue synergies in this. But the more we talk about it, the more we get to know more about each other and how complementary and synergistic our businesses are, we don't want to project it because we're conservative, but there will be clear revenue synergies out of this. And so this is going to be a really high performance company.
The other point I would add to that, John, is that with rates falling, we really don't know what our capital levels will be at close. But with rates coming down where they are, our capital ratio might actually close north of 10%, which means assuming the Fed gives us a non objection to our capital ask, which we should hear shortly about that, we could actually be in the buyback business sooner rather than later.
So the way to think about that, John, is that we've said, we're concerned with regard to capital and particularly going through a major combination like this and there are uncertainties in the global market that are existential factors that could surface, etcetera. That's why we said we want to hang around that 10% common equity Tier 1 level. There's certainly some opportunity down the road with regard to that being lower. But for now, we want to plan on that. But as Daryl said, I mean, the rates stay low and the margins tend to be what we think they now may look like, we could be pretty immediately in buying back and staying at 10%.
So that can we're not promising, but it can be very encouraging.
Got it. Great. Thank you.
And next, we'll take a question from Mike Mayo with Wells Fargo Securities.
Hi. Could you elaborate a little bit more on the management announcements in relation to the merger. So by the end of August, you'll have named 75% of the managers. How many in total is that? And what are you concerned about in making these announcements?
What are you trying not to do? And how is the cultural integration going?
So Mike, the managers, it's kind of a cascading process kind of going down from the direct report to executives and then layer by layer by layer. So by the time you get to the end of August, we'll be down to the lowest level of operating managers, think down to branch managers, that kind of thing. And so all of that is going really, really well. And in that process, of course, what we're trying to do is, number 1, make sure we're picking the best players. One of the beauties, as you know, about an MOE is you get to pick the best systems, processes and franchise the best people.
So we've got an eye on the best performance because that's fair. That's just at but at the same time, we've got a strong eye on equality in terms of it being an MOE and on diversity and inclusion. And so all of those factors go into these organizational decisions. But so far, I would say that we feel really good about the team that is being put on the field, the mix in terms of diversity, the mix in terms of SunTrust BB and T, it's going extremely well. In terms of the culture process, we obviously are learning more about each other's cultures as we meet more, not just the executive team, but there are lots and lots of meetings going on down through the organization.
I'll keep in mind planning for the future. We have to be very careful. We can't make decisions about the future from a regulatory perspective. We are CO2 competing companies, but we can plan. And there's a whole lot of planning meeting going on.
So there's a lot of interaction.
And the feedback that Bill
and I both get from our teammates and associates is, it's going really well. There's just not any fundamental differences here. I take a lot of comfort in the fact that when we were getting feedback from our employees with regard to the new name, I think we reported to you, we got 10,000 responses from both sides identifying names that characterize words that characterize our companies and all the 10,000 on each side picked the exact same four words. Bill Rogers and I sat through 2 8 hour days of listening to community groups talk about our 2 companies. And as I said, over 95% of their comments were extremely positive and it was very few that what I would call really negative.
But what I found interesting, right, was when I sit there, I kind of in my mind tried to blank out BB and T or SunTrust and just listen to the comments, you would have thought these were community groups talking about the first same company. So there are not any substantial differences in the culture of this company as it is being formed. And so there is work to be done in terms of what I call the operating processes and procedures. There are some differences there for sure, but that's not as important as the most important part of culture, which is purpose, mission and values. So we feel, Bill and I both feel and our entire team feels good about where we are in culture, but we're not taking anything for granted.
We're working really hard to make sure that all of our teammates and associates feel good about this. They feel really engaged. They feel a sense of belonging to the organization. They are needed. They are appreciated.
And they're going to be a part of fantastic company that the world will come to respect as TruList, one of the best financial companies in the world.
Just one follow-up, a potential roadblock would be the hearing next week. I don't recall a hearing like this ever before in banking, simply a standalone hearing. I know Citigroup, that was up for discussion way back when, but that was in conjunction with the change in the law. So you might be a first timer here for a hearing like this. What message will you be trying to send?
And why are they having this hearing when the Federal Reserve has such a comprehensive process?
You're asking me that question. So I'll give you my best shot on that, Mike. So I think number 1, it's the 1st big merger since the recession. It's the 4th largest bank merger based on what I've been told in history. So it's a big deal.
It's not big in terms of the whole scheme of things. We keep saying to everybody that even though we'll be $440,000,000,000 we'll still be about 20% of the size of the largest banks. We'll still have less than 3% of total management deposits. So we're not a mega bank, which is the heading of the hearing. So they're concerned that if we're creating a mega bank and we're creating another too big to fail, we will be saying we're not a mega bank.
We're a large regional bank. We're focused on meeting our clients' needs. We will not be increasing systemic risk. In fact, we will be reducing systemic risk. So we'll share that with them.
They're concerned about where we close a bunch of branches and find a lot of people. We'll satisfy them that while there will be over time branch consolidations, we've already committed that our performing client facing associates will not lose their job on either side. So we will be able to satisfy them that there's nothing negative about this. In fact, it's net overall really, really good for the economy, it's good for the community, it's good for our associates and it's good for the shareholders. I just think they view this as an opportunity to talk about the industry, And I think it will be a positive.
I kind of view it as 4, 5 hours of free advertising.
All right. Thank you.
Next up, we'll take a question from Betsy Graseck with Morgan Stanley.
Hi, good morning.
Good morning. Good morning.
Kelly, I wanted to understand a little bit more about the timing of the merger, especially as it relates to the tailoring proposal that's out there. And the question really is, does it matter to you if the tailoring proposal is not yet finalized before your merger is ready to close?
So, Vincent, the timing, as you know, is out of our control, but I personally think that we will close the transaction late 3rd or early 4th. I don't know of anything that would cause me to feel differently, although I'll say again, I cannot control that. The tailoring issue, this is one of the issues that have come up in the hearing, has nothing to do with this. There's nothing that came up when Bill and I were talking about this multiple times that we talked. There are some financial implications in terms of capital if tailoring does not occur, but it wouldn't change our view in one form or fashion.
If BB and T remained independent, we would have busted right past 250, independent of tailoring or not. It's a number out there, but it's not nearly sufficient to cause you not to try to grow to gain economies of scale to be able to compete in this extremely competitive world balloon. So people are blowing that thing out of proportion. It's like it's a tail, it's not the Yes. I
mean the capital impact is only 60 basis points, I think because you're marking the market at SunTrust balance sheet. So it's not a huge capital impact.
Right. So my question wasn't if it doesn't happen, would
you still do the deal?
It was more about just the timing question here. If you're ready to close and the tailing rule is not yet finalized, you have a Daryl, your point of capital level that
shows up
a little bit lower for a quarter or 2. And then once the tailing approval goes through, that gets fixed.
So I'm just wondering if
you would wait until tailoring went through or not. I guess the answer is no.
Absolutely not. Absolutely not. We will close this merger the minute we are approved end of end of the time. Yes.
If you look at LCR, I mean, we could close I mean depending on how countering comes in, if it's at 70%, we can close and really not have to change our balance sheet much at all. If it goes to 85%, we might have to add 2% or 3% more earning assets into high quality liquid assets, but that's not material. So we could easily do it with or without the tailoring impact. I mean, even if we didn't have tailoring, rather than 2% or 3%, we just had 5% of earning assets of high quality.
Yes. Okay. So not a big deal for you. Okay, that's helpful. And then Kelly, just separately, we hear from other folks about how there's your merger is going to be an opportunity for them to pick up share either of strong folks in the organization or of clients.
And just wanted to hear from you how you are working to ensure that you're not losing market share during this time when you've got the transition going on.
Yes. Betsy, that's a really good question. I've been involved in about 100 acquisitions over my career. And everyone, every local competitor, particularly smaller competitors say they're going to be just jealous. It just doesn't happen.
It doesn't happen for several reasons. One is, clients are very resilient. They care about their banker. They're taking care of them and they care about the services that we're providing. So the fact that the name changes is inherently not a reason to call those clients to come in and change their business.
The clients are resistant to change. And if you make a really big mistake, you make a little big snafu, that affects it. But the fact that competitors say we're going to come get the business and all that is not a material issue. Occasionally, we'll have somebody that will go kind of way off and start raising rates and all that kind of thing, and we just counter. And so we're not going to sit back and let local competition take our business.
So most important part to answer your question is keeping our people because the relationships are between our people and the clients, not between names. And so we were really or that's why we guarantee upfront our performing client facing associates on both sides. We're not seeing any material turnover. In fact, last report I got, our turnover is down. So that's not a concern.
But we are ramping up our market again. We're not taking anything for granted. First of all, we want to talk more to our clients so they know what's going on, answer their questions. They like us coming out and talking to them about that. So on our business side, we're calling a lot more.
And on the consumer side, we're interacting with them, answering any questions that they have. But I've been on 2 regional business in the last 5 or 6 days and our people are saying to me that it's pretty calm out there. The clients are excited about the company. They're excited about the name. Our associates are really on a high.
I mean, they're actually more pumped than I might have guessed this time. So I hear all the competitors say what they're going to do, but that's just rhetoric that is irrelevant.
And Michele, I'll leave an ad. We'll be very focused and transparent to our people internally so that they know everything we know every step along the way.
Okay. Thank you. Thanks for that. Appreciate it.
Sure.
And next up, we'll take a question from Matt O'Connor with Deutsche Bank.
Good morning. Good morning.
I was wondering if
you could talk about some of the things that you'll be looking at within the balance sheet as you close the deal and think about repositioning it for whatever the rate environment is when the deal closes? I mean, obviously, the SunTrust balance sheet gets marked, but you'll have all this excess capital that you can kind of pick and choose what you want to do with, call it, BBT legacy balance. So maybe just talk about some of the things that you would consider and that might impact net interest income going forward?
Yes. I mean given the rate environment where you are right now, Matt, the way that you would probably try to enhance run rate is to focus on the liability side of the balance sheet. So we would have to look at what borrowings was going to change to maybe improve run rate perspective from that side. Obviously, their derivative position gets marked, so you can adjust what their derivative position is and position the company however you want to do that without having anything flow through earnings. Now on the asset side, depending on what management and the Board wants, how much negative convexity do we want to have on the balance sheet, We do have a large mortgage portfolio.
That's something we will look at and see if we want to shrink that or not. But the easy things would be securities, derivatives and funding, maybe mortgages. I don't know if we get anything more than that. We have a large auto portfolio, but it's a short portfolio. That's probably a good portfolio to have with rates so low.
But we'll go through a lot of things, a lot to figure out over the next couple of months as we get this deal approved and closed.
And then I guess just conceptually like is the goal to enhance the NIM as much as you can kind of coming out the deal Or is it more about maybe setting the bar to a more appropriate level and kind of protecting the NIM going forward, right? Because conceptually, you can I don't want to say plug it for what you want, but if you're trying to propping them up as much as you can day 1, you're going to do certain things? On the other hand, if you're trying to provide for an instability beyond day 1, you might approach it differently.
Yes. I mean, 1st and foremost, we're going to make sure that our risk appetite and our capital and liquidity are aligned to where we want it to be. At the end of the day, our we firmly believe that you want to be paid to have consistent repeatable earnings. So we want to position the balance sheet to basically produce consistent repeatable earnings quarter after quarter, year after year and not really try to take a gamble on interest rates or anything else. It's all about consistency and that's how we get the higher PE level within the industry.
So it's all trying to do the right things with risk and trying to produce a steady return that we can give to our shareholders and be able to grow it consistently.
And then just lastly, the 2% margin taken on SunTrust loans, if credit comes in better than expected, remind me, does that flow through the net interest income if it's less than the 2% mark that you take?
Matt, this is Clark. That's exactly correct. So we certainly not assume that we would accrete that mark. But if our performance is better, we're going to work really hard to achieve that. We will get a benefit.
The one nuance is when we adopt CECL Q1 of next year, the PCI gets request in the PCV and that accounting benefit unwinds on that portion of it. But on the non mark portfolio, the non PCD portfolio, Clark is correct and that will get a run rate going through the margin.
Okay. Thank you.
And our last question will come from Erika Najarian with Bank of America.
Hi, good morning. Just one more question on the merger. Could you remind us on how the systems integration is going, whether it's wholesale and mortgage and also on the retail side as we contemplate the timing of the cost savings over the next 2 years?
So, Arcelor, the systems integration planning is going really well. As you know, it's a large complex organization and the way we are approaching it is best in class. So we're looking at all of the systems. They're all under thorough evaluation as we speak. We'll be picking the best systems from either side.
And we are moving along to where we think that will be pretty well decided as we get close to Legal Day 1 and then we'll go into the process of execution. The actual operational conversion will be multifaceted. Historically, when we've done small acquisitions, it's kind of like a one weekend big thing, you convert everything. This license won't be that. This will likely either be a rolling state by state where you do all the systems in one state and then another state a month later, etcetera.
Or it may be that you do like deposits across all states and you come back much later and do loans across. So we haven't decided that yet, but we're going to be measured about how we roll that out just to mitigate and minimize the risk. The wholesale part of the business will be able to integrate faster just because it's not as many pieces. So wholesale will integrate faster and cost saves will come faster, revenue enhancements will come faster. The retail, the branches take a little longer just because you just got so many branches, and we want to be really careful about that.
But even so, we think we're heading towards a full conversion in the 12 to 18 months kind of timeframe. And as you think about kind of getting to a final run rate of expenses, that's kind of time frame that you're already thinking about.
Got it. Thank you. And just as a follow-up to Matt's question, Art. As we think about the SunTrust portfolio in a CECL world, I fully understand the conversion of treatment from as the loans go from purchase credit and purchase credit deteriorated. But the non deteriorated portfolio, is there an additional mark that you would have to take if you close the deal in 2019?
Yes, I'll take that one. So if we close in 2019, we'll take the normal marks that you would only do. If we closed in 2020, which we don't anticipate, basically you take the marks, but what you lose is the transition benefit of adopting CECL on the SunTrust side of that portion. Did that help?
Yes. Thank you.
All right.
And that completes today's Q and A session. I will now turn the call back over to Rich Baytosh for closing remarks.
Okay. Thank you, Orlando, and thank you for everyone for joining us. I recognize that there were some people still in the queue, and we will get back to you later today. And I hope everyone has a great day. Thank you.
And this concludes today's call. We thank you for your participation. You may now disconnect.