Ladies and gentlemen, welcome to the BB&T Corporation second 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 Baytosh of Investor Relations for BB&T Corporation.
Thank you, Orlando. 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 Bible, our Chief Financial Officer, all who will review results for the second quarter and provide some thoughts for the third quarter of 2019. We also have Clarke Starnes, 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 BB&T website. Before we begin, let me remind you, BB&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.
BB&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&T has filed with the SEC a registration statement on Form S-4 to register the shares of BB&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&T and SunTrust seeking their approval of the proposed transaction. Please refer to the cautionary statements on page two regarding forward-looking information in our presentation, our SEC filings, and the legends on page three 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 two in the appendix of our presentation for the appropriate reconciliations to GAAP. Now I'll turn it over to Kelly.
Thank you, Rich. Good morning, everybody. Thank you for joining our call. We're really pleased. 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. Clarke will give you detail on that. We're making excellent progress with regard to our MOE with SunTrust. If you're on slide four, net income was a record $842 million, which was up 8.6% versus the second quarter 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 million, up 9.7% versus second quarter. Diluted EPS was a record $1.09, up 10.1% versus second quarter of 2018.
Adjusted EPS was a record $1.12, up 10.9% versus second quarter of 2018. Adjusted ROA, ROCE, and ROTCE were very strong at respectively 1.59%, 12.34%, and 20%. Record revenue was $3.1 billion, up 19.8% annualized from the first quarter and up 5.7% versus the second quarter. We really had overall strong fee income that really helped offset the negative effects of the curve flattening. We had fee income was a record $1.4 billion, up $150 million from the first quarter. Really strong revenue performance in every regard in insurance. Chris will give some real detail on that. Investment banking and brokerage also had strong quarters, up 20% linked quarter and annualized 72% linked quarter. Interestingly, every fee category grew during the quarter. NIM did decrease nine 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's 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. Our adjusted efficiency ratio came down to 55.1%, which has been kind of a long-term target for us. That's a result of excellent performance coming out of our disruptive drive strategy, which was the last three years of focus on expenses. Our adjusted expenses were $1.72 billion up versus last quarter and linked 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 three basis points.
We think it's the lowest we can remember or we could find in the records, it's really good. Charge-offs were 38 basis points versus 40 basis points in the first quarter and 30 basis points in the linked quarter. We continued to make great progress in combining BB&T and SunTrust in a merger of equals to create Truist, a premier financial institution. I'll talk more about that in a little bit. We did announce our new headquarters building in Charlotte, which is one of the tallest buildings in Charlotte. If you're familiar with Charlotte, it's the old Hearst building.
We did, just this week, announce a $60 billion community benefits agreement, which we're very excited about in terms of working with our communities because 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 light the way to financial well-being. We're very excited about that. We're making really good progress in terms of laying out the management structure. We've had two rounds of higher level management announcements. We've already announced about 900 positions, and the next layer will be out by the end of August. By the end of August, we will have announced about 75% of the management layers, which gets us way down, way down into the organization. We do have a special shareholder vote set for July 30th by BB&T and SunTrust.
We're very excited about that. I'll give you a little bit more color on the MOE in just a bit. We are selling $4 billion worth of residential mortgages, to respond to the changes in the interest rate environment, which Daryl will give you detail on. If you look at slide five, we did have two categories of selected items to call out to you. Our regular merger-related and restructuring charges was $23 million pre-tax, $19 after-tax, or about $0.02 diluted EPS impact. 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 was $9 million, 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, excuse me, 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 six, 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. Our C&I, we're really pleased about, which was 7.8%. Our CRE part of it was down 3%. 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. 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. It did grow a small amount, 0.5%. It did grow. That's largely due to some product changes we made in the branches, particularly our auto branches, and auto loans that we're making in the branches. Overall, really strong loan growth. 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 the overall talk about tariffs and trade wars and all that won't eventually have some impact if we keep talking about it enough.
For now, most people are pretty resilient. Their businesses are good. The underlying activity is flowing through and getting the kind of loan growth that I just reported. We actually feel pretty good about the economy. We believe it has legs to continue as we go forward. If you're following along on page seven, we were very pleased with our overall deposit performance given the environment that we're operating in. Our total deposits were down approximately 0.4%. Very encouragingly, our non-interest-bearing deposits or DDA was up 3%. Our client deposits, because we've matched up market funding sources, increased 2.6%, which is very strong. Our percentage of non-interest-bearing deposits was 32.9 compared to 32.7 in the first quarter. That's encouraging. The cost of interest-bearing deposits was 1.02%, up seven basis points. That was slower increase than last quarter.
The cost of total deposits was $0.68, which was up four basis points. It is a very challenging time with the rate shifts and the deposit disintermediation that is going on. Daryl's going to 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. Daryl.
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 third quarter and full- year 2019. Turning to slide eight. Credit quality remains strong. Net charge-offs of $142 million were down two basis points as a percentage of average loans. Our non-performing asset ratio was 23 basis points, and is below our previous low seen in 2006. Continuing on slide nine. Our allowance coverage ratios remain strong at 2.8 x net charge-offs and 3.46 x to non-performing loans. We recorded a provision of credit losses of $172 million, which exceeded net charge-offs of $142 million. The $30 million 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 five basis points after adjusting for dividends on non-qualified plan assets received in the first quarter. Our core margin was 3.34, was down six basis points after adjusting for the first quarter 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 two to three basis point negative impact on second quarter margin. The cost of interest-bearing liabilities increased eight basis points in the second quarter versus 13 basis points in the first quarter. We are still seeing mix changes in our core deposits that are offsetting a decrease in interest rates. Note that BB&T plans to sell approximately $4 billion 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 $1.4 billion, up 10.6% versus like-quarter, resulting in fee income ratio of 44.4%. Record insurance income increased $56 million, reflecting solid organic growth and P&C seasonality. Regions Insurance contributed $32 million to insurance income. Excluding Regions, insurance income rose 11% from a year ago on strong organic growth. Looking ahead, recall that insurance income is seasonally lower in the third quarter. Investment banking and brokerage fees and commissions increased $20 million on greater deal activity and increased managed fee accounts. Mortgage banking income increased $50 million and included $29 million of net MSR valuation adjustments and seasonally higher mortgage sales volumes. Service charges on deposits increased $10 million due to more days in the quarter.
Other income was down $5 million, mostly due to a $20 million decrease in SBIC private equity investments, and 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 link and like quarters. We reported $1.8 billion 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 million and incremental operating expenses related to the merger of $9 million, 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 $1.7 billion. Of note, personnel expense increased $33 million due to a $43 million increase in incentive-related compensation, partially offset by a $14 million decrease in payroll taxes. There were 563 fewer FTEs versus the first quarter. Continuing on slide 13. Capital and liquidity remain strong. Our CET1 ratio was 10.3%, flat with last quarter. Our dividend and total payout ratios were 36.8%. Our modified average LCR ratio was 129%. 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 - 445 million.
The increase was driven by higher loan volume, more days in the quarter, improved deposit spreads, seasonality and higher mortgage volume, and net MSR valuation adjustments of $29 million. 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 fair margin was 1.65% versus 1.60% last quarter. Continuing on slide 15. Community Banking Commercial net income was $319 million. The $9 million decrease was due to a $20 million increase in provision, partially offset by an $8 million increase in non-interest income and a $5 million 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 million.
The $13 million increase reflected a $45 million 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% annualized, aided by corporate banking and equipment finance. Turning to slide 17. Insurance Holding net income was $111 million, an increase of $23 million. Total revenue increased $57 million as a seasonal pickup in P&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 18 and 19 are 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 assistance of BCG a little over a year ago and is really in full swing. It's built around 31 initiatives, includes the implementation of new operating models for both retail and wholesale, as well as numerous revenue growth and expense reduction initiatives. As a result, I think you see the business continues to gain significant momentum. 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 up 17.6% or $89 million.
If you exclude the $32 million that Daryl mentioned from Regions, we've now had Regions a full-year. We still, excluding Regions, had organic revenue improvement of $57 million. If you look at organic growth, really three drivers of organic growth, and really we're hitting on all three cylinders there. Pricing is one. Recall we are post two of the largest insured loss years in history in 2017 and 2018. 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 them move to up +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 enabled by a strong economy. We see that continuing.
We've got really high retention rates, which have actually improved since first quarter. Retail's up to 92.1%, wholesale at 79.6%. 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 like quarter comparison, we moved from 5.2% to, as Daryl said, up to 11.6%. I believe when all the numbers roll in for the quarter, we'll probably see the industry probably averaging in the 4%-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 as exposure units. We see that continuing to grow. 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 have a disproportionate large share to, is up 3.5%, bumped up 4% this quarter. If you turn to page 19, again, another major focus is on margin improvement. 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 - 171 million, so up $51 million. We're still very much on track with Regions now that we've had it for a 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, that's really hinging on the economy. We're up 9% year- to- date there, which is substantial. On the expense control side, certainly we mentioned Regions, but we also have FTE savings really across all business lines. We've got new systems implementations which have cost implications, in some cases revenue and speed to delivery, really in probably 75%-80% of the businesses. If you look at the EBITDA margin in the lower left-hand corner, we at this quarter posted the best margins that we have ever posted. This is our strongest seasonal quarter of the year. We won't maintain this, but we went from 23.7 up to 28.8. We haven't seen those numbers in our history.
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. We're doing that especially today in wholesale. In summary, I'll just tell you, really proud of the transformation we started 15 or so months ago, or 18 months ago, really. It's really beginning to kick in and work, and I see really a bright remainder of 2019 in terms of the environment for this business and expect it to continue to perform strongly. I'll turn it back over to Daryl.
Thank you, Chris. Continuing on slide 20, you will see our outlook. Looking at the third quarter, we expect average total loans held for investment to be down 4%-6% annualized versus second quarter. Excluding the mortgage sale, loans are expected to be up 4%-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 four to eight basis points versus second 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 three basis points in the third quarter.
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 one to five basis points in the third quarter. We anticipate fee income to be up 2%-4% versus like quarter. We expect expenses to be flat versus like quarter. Incremental operating expenses related to the merger may increase from second quarter levels, which is why we created this category. Finally, we anticipate an effective tax rate of 20%-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 and last year, strong loan growth, and excellent credit quality. Let me turn it back to Kelly for an update on the merger of equals with SunTrust, closing costs, and Q&A.
Thanks, Daryl. 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 two 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 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 24th in Charlotte and May 3rd in Atlanta. I'll tell you that we've had over 1,000 public comments, and 95+% of those are positive and very much in support of the merger. All of that is going 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 1,000 of our key management positions, and by the end of August, we think we'll have north of 75% of our announcements made. That gets you way down into the organization in terms of people that'll 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 Triad 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 on how the world had to come up, pardon me, with that name. 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.
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. We think Truist does that. We think as time goes on and we build the branding around that, we think it will be an outstanding name. We feel very good about it. We have mailed the merger proxy statements to BB&T and SunTrust shareholders, and we will have shareholder approvals jointly and separately, but on the same day on July 30th. We did announce recently the $60 million community benefits plan, which is very good. On July 10th, we did receive regulatory approval from the North Carolina Commissioner of Banks, that's a substantial positive for us.
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. 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 well. We'll be continuing the brand development process. In the fall, you'll see more rollout with regard to logos, et cetera. We'll be continuing the organizational design, naming the final staffing so that on legal day one, we will be organized and staffed and ready to go.
That's very important because you can't wait till legal day one to figure out how you're going to run the company. We are heavily immersed into planning for the combined company, and we will, in fact, be ready on legal day one to run the company effectively. We do have on July 24th a hearing with the United States House Committee on Financial Services, which we expect to go well. We would wait for the remaining regulatory approvals, we would be in a position to close. I would say to you that we still feel very confident about our projected $1.6 billion of our net cost synergies, cost savings. Again, that's net of investments we'll make back into the business, like technology and innovation and other investments. Overall, as Daryl said, it was a strong quarter, solid economy out there.
Great progress on the MOE. Truist will be, in my view, a great company. We absolutely believe that our best days are clearly ahead. Now I'll turn it back over to Rich.
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&A session.
Absolutely. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a 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, press star one to ask a question. We'll pause just to give everyone an opportunity to signal for questions. We'll take our first question from John Pancari with Evercore ISI.
Morning.
Morning.
Sorry if I missed it, could you just tell us what do you assume for Fed cuts in your current outlook? Separately, if you could just give us a little bit of color how you're thinking about the NIM beyond the third quarter color that you gave. How do you view the NIM trajectory through the end of the year? Thanks.
John, this is Daryl. In our forecast, we have one rate decrease in July of this quarter, third quarter, and then another one in the fourth quarter in October, is what we're forecasting out. Guidance for fourth quarter, it all depends on how our deposits react and how they reprice, with everything and competition. My guess is, since we get basically three basis points back from the third quarter margin because of the increase in earning assets temporary from the investment purchase, we're probably going to be flat to maybe down slightly in the fourth quarter.
Okay. Thank you. Longer term, in terms of the NIM, I know you had previously indicated or talked about a core NIM in the ballpark of about 330 ± 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 and the flatter curve, that does put pressure on that 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. Definitely you're going to see some tighter margins if the rate scenario stays where it is. If you see four rate cuts potentially, which we don't think is going to happen, if you see that would put pressure on margin. We'll have an opportunity at close to reposition the balance sheet, we can get the balance sheet to be more neutral, to be more insulated from lower rates. At the end of the day, as rates come down, you can't lower your cost of funds below zero right now.
You'll be limited on the actions you can take.
Hey, 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 market is overstating the decline in interest rates. Not to say that we won't have one or two, the sentiment out there is that things are really collapsing, basically cutting rates like crazy. I think that's completely overblown. We will see some slight decline in the economy. We will see some slight decline in rates. What you're seeing now, 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?
Yeah, John, appreciate the question. In the near term, remember, the second quarter is our strongest quarter. Third quarter is our weakest seasonal quarter of the year. What you can expect in the near term is probably down in the 15%-16% range in the third quarter. 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%-5% range. We're currently probably more in the 5.5%-6.5% kind of range is our sense. Our current year- to- date organic growth is at 9.3%. Again, industry expectations is probably in the 4%-5%. What has happened is post the two largest insured loss years in our history, we're actually seeing rate begin to bounce.
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. I really think we're in that kind of 5.5%, 6%, 6.5% range for the year, which for us, would be the best numbers we've ever posted in organic growth. I think well ahead of the industry. We're just very, very pleased with the momentum and the transformations 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.
Morning. Daryl, just wanted 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? Then if we wanted to isolate the impact of 125 basis points Fed cut, what would that be?
In the third quarter, we only have one rate cut in there, Our NII will probably be down slightly on a linked quarter basis. We were $1.69 billion. This quarter will probably be a little bit lower than that, maybe $5 -10 million, just because of the pressure that we're seeing in our funding side. You go out into the next fourth quarter, 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 the fourth quarter 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.
Any changes in your rate sensitivity, the mortgage sale will impact that. Maybe, is there a way to just quantify what one cut would do if we wanted to isolate that?
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 630, it's 0.87. That basically assumes over a year, it's a $60 million hit to NII. It's not evenly distributed over the fourth quarter. I would say it's front-loaded a little bit, so maybe call it about $20 million for our first quarter, and then kind of moderates out over the second, third, and fourth quarter. 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 are trying to minimize that as much as possible. We don't anticipate having that before moves down that's built into the forward curve right now.
We have to also protect which direction rates could go. We're risk managers from that perspective.
John, keep in mind that right now it's hard to figure. Daryl talked about there's disintermediation shift in deposits. There's a tipping point concept with regard to interest rates and the way clients respond. If rates went up over the last several quarters, we hit a tipping point, and people got more sensitized to rates. 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. 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 less elastic. 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 disintermediation.
Got it. 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 kind of 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 has really changed. Even with all the things that Daryl just talked about, we still feel good about the 51% efficiency. Obviously, that's a ratio, to the extent that revenue change, that has some impact. What we can feel very confident about is the expense reductions. That's why I highlighted, we're very confident we'll get the $1.6 billion net, obviously, depending on what happens to the denominator. That'll move that around a little bit, but not materially. We still feel really good about that. We think we'll be best in class in terms of efficiency. In terms of our return on tangible common equity and the 22%, we're already 20%. I feel very confident about that. In terms of the synergies, remember, in our model, we didn't even build in any revenue synergies in this.
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 didn't want to project it because we're very conservative, but there will be clear revenue synergies out of this. 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. 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.
The way to think about that, John, is that we've said we're conservative with regard to capital, and particularly going through a major combination like this. There are uncertainties in the global market. There are existential factors that could surface, et cetera. That's why we said we want to hang around that 10% common equity tier one level. There's certainly some opportunity down the road with regard to that being lower. For now, we want to plan on that. As Daryl said, if rates stay low and the markets get to be what we think they now may look like, we could be pretty immediately in buying back and staying at 10%. We're not promising, but it can be very encouraging.
Got it. Great. Thank you.
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? By the end of August, you'll have named 75% of the managers. How many in total is that? What are you concerned about in making these announcements? What are you trying not to do, and how is the cultural integration going?
Mike, the managers, it's kind of a cascading process, kind of going down from the direct report to executive and then layer by layer by layer. By the time you get to the end of August, we'll be down to the lowest level of operating managers sink down to branch managers, that kind of thing. All of that is going really, really well. In the process, of course, what we're trying to do is, number one, make sure we're picking the best players. One of the beauties, as you know, about an M&A is you get to pick the best systems, processes, and frankly, the best people. We've got an eye on the best performers because that's fair, that's just. At the same time, we've got a strong eye on equality in terms of it being an M&A and on diversity and inclusion.
All of those factors go into these organizational decisions. 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&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's lots and lots of meetings going on down through the organization. All 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 still two competing companies, but we can plan. There's a whole lot of planning meeting going on, so there's a lot of interaction.
The feedback that Bill and I both get from our teammates and associates is it's going really well. There just aren't 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 name, I think we reported to you, we got 10,000 responses from both sides identifying names that characterize, or words that characterize our companies, and all 10,000 on each side picked the exact same four words. Bill Rogers and I sat through two eight-hour days of listening to community groups talk about our two companies. As I said, over 95% of the comments were extremely positive, and there were very few that what I would call really negative.
What I found interesting, Mike, was when I sat there, I kind of, in my mind, tried to blank out BB&T or SunTrust and just listened to the comments. You would have thought these were community groups talking about the very same company. There are not any substantial differences in the cultures of this company as it is being formed. Certainly there's work to be done in terms of what I call the operating processes and procedures. There are some differences there for sure. That's not as important as the most important part, of course, which is purpose, mission, and values. We feel, Bill and I both feel, and our entire team feels really, really good about where we are on culture. 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 a fantastic company that the world will come to respect as Truist, 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. 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? I'll give you my best shot on that, Mike. I think number one, it's the first big merger since the recession. It's the fourth-largest bank merger, based on what I've been told, in history, 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 billion, we'll still be about 20% of the size of the largest banks. We'll still have less than 3% of total management deposits. We're not a mega bank, which is the heading of the hearing. They're concerned that 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. We'll share that with them. They're concerned about will we close a bunch of branches and fire 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. 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 communities, 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'll be a positive. I kind of view it as four or five hours of free advertising.
All right. Thank you.
Next up, we'll take a question from Betsy Graseck with Morgan Stanley.
Hi. Good morning.
Morning.
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. The question really is: does it matter to you if the tailoring proposal is not yet finalized before your merger is ready to close?
This is the timing, as you know, is out of our control, but I personally think that we will close this transaction late third or early fourth. 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'll come up in the hearing, has nothing to do with this. This is nothing that came up when Bill and I were talking about this, the multiple times that we talked. There are some financial implications in terms of capital, if tailoring does not occur. It wouldn't change our view in one form or fashion. If BB&T had remained independent, we would've 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 the economies of scale, to be able to compete in this extremely competitive global level. People are blowing that thing out of proportion. It's a tail, it's not the dog.
Yeah, I get that.
The capital impact is only 60 basis points, I think. Because you're marking to market the SunTrust balance sheet, so it's not a huge capital impact.
Right. 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 tailoring rule's not yet finalized, you have, Daryl, your point, a capital level that shows up a little bit lower for a quarter or two, and then once the tailoring proposal goes through, that gets fixed. I'm just wondering if you would wait until tailoring went through or not. I guess the answer is no.
Absolutely not. We will close this merger the minute we are approved, independent of tailoring.
If you look at LCR, we could close, depending on how tailoring 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 a 2% or 3% more earning assets into high quality liquid assets. That's not material. We could easily do it with or without the tailoring impact. Even if we didn't have tailoring, rather than 2% or 3%, we just add 5% of earning assets of high quality.
Yeah. Okay. Not a big deal for you. Okay. No, that's helpful. Kelly, just separately, we hear from other folks about how 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.
Yeah. That's a really good question. I've been involved in about 100 acquisitions over my career, and every one, every local competitor, particularly smaller competitors, say they're going to just kill us. It just doesn't happen. It doesn't happen for several reasons. One is, clients are very resilient. They care about their banker that's taking care of them, and they care about the services that we're providing. The fact that the name changes is inherently not a reason to cause those clients to come in and change their business. The clients are resistant to change. If you make a really big mistake, you make a really big snafu, that affects it. 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'll go way off and start raising rates and all that kind of thing, we just counter. We're not going to sit back and let local competition take our business. The most important part to answer your question is keeping our people, because the relationships are between our people and the clients, not between names. We work really, really hard. That's why we guaranteed upfront our performing client-facing associates on both sides. We're not seeing any material turnover. In fact, last report I got was our turnover's down. That's not a concern. 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.
On our business side, we're calling a lot more. On the consumer side, we're interacting with them, answering any questions that they have. I've been on two regional visits in the last five or six 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. They're actually more pumped than I might have guessed at this time. I hear all the competitors saying what they're going to do, but that's just rhetoric that is irrelevant.
Kelly, I would even add, we're being very focused to be transparent to our people internally so that they know everything we know every step along the way.
Yeah.
Okay. Thank you. Thanks for that. Appreciate it.
Next up, we'll take a question from Matt O'Connor with Deutsche Bank.
Good morning.
Morning.
Daryl, 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 kind of whatever the rate environment is when the deal closes. 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 BB&T legacy balance. Maybe just talk about some of the things that you would consider and how that might impact net interest income going forward.
Yeah. Given the rate environment where you are right now, Matt, the way that you would probably try to enhance the run rate is to focus on the liability side of the balance sheet. We would have to look at what borrowings we could change to maybe improve a run rate perspective from that side. Obviously, their derivative position gets marked, you can adjust what their derivative position is and position the company however you want to do that without having anything flow through earnings. 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 to see if we want to shrink that or not. 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. It's probably a good portfolio to have with rates so low. 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.
I guess just conceptually, is the goal to enhance the NIM as much as you can kind of coming out the deal? Is it more about maybe setting the bar to a more appropriate level and kind of protecting the NIM going forward, right? Conceptually, you can, I don't want to say plug it for what you want, but if you're trying to prop the NIM up as much as you can day one, you're going to do certain things. On the other hand, if you're trying to provide for NIM stability beyond day one, you might approach it differently.
Yeah. First and foremost, we're going to make sure that our risk appetite and our capital on the equity are aligned to where we want it to be. At the end of the day, we firmly believe that you want to be paid to have consistent, repeatable earnings. We want to position the balance sheet to basically produce consistent, repeatable earnings quarter after quarter, year after year. 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. 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.
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% margin that you take?
Yeah, Matt, this is Clarke. That's exactly correct. We'd certainly not assume that we would accrete that mark. If our performance is better, and we're going to work really hard to achieve that, we will get a benefit.
The one nuance is when we adopt CECL first quarter of next year, the PCI gets requests from the PCD, and that accounting benefit unwinds on that portion of it. On the non-marked portfolio, the non-PCD portfolio, Clarke is correct in that we'll get a run rate going through the margin.
Okay. Thank you.
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 two years?
Erika, the systems integration planning is going really well. As you know, it's a large, complex organization, and the way we're approaching it is best in class. 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. We're moving along to where we think that'll be pretty well decided as we get close to legal day one, 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 bang. You convert everything. This likely 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, et cetera.
It may be that you do deposits across all states, and you come back a month later and do loans across. 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. 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. Even so, we think we're heading towards a full conversion in the 12 to 18-month kind of timeframe.
As you think about kind of getting to a final run rate of expenses, that's kind of the timeframe that you ought to be thinking about.
Got it. Thank you. Just as a follow-up to Matt's question, Clarke, as we think about the SunTrust portfolio in a CECL world, I fully understand the conversion of treatment as the loans go from purchase credit impaired to purchase credit deteriorated. The non-deteriorated portfolio, is there an additional mark that you would have to take if you close the deal in 2019?
Yeah, I'll take that one. If we close in 2019, we'll take the normal marks that you would normally do. If we closed in 2020, which we don't anticipate, basically you take the marks, 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.
That completes today's Q&A session. I will now turn the call back over to Rich Baytosh for closing remarks.
Okay. Thank you, Orlando. 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. I hope everyone has a great day. Thank you.
This concludes today's call. We thank you for your participation. You may now disconnect.