Ladies and gentlemen, welcome to the BB&T Corporation first 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, Director of Investor Relations for BB&T Corporation.
Thank you, Leanne, good morning, everyone. Thanks to all our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer, Daryl Bible, our Chief Financial Officer, and Chris Henson, our President and Chief Operating Officer, who will review the results for the first quarter and provide some thoughts for the second 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 intentions, 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 will be 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 legend 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.
Good morning, everybody. Thanks for joining our call. We think the first quarter was a great start to the year. We had record adjusted EPS, strong returns, strategic loan growth, very good expense control, and excellent asset quality, and very importantly, a great strategic move in terms of our MOE with SunTrust, which I'll talk about in a bit. Our net income was $749 million, up 4.5% versus the first quarter of 2018. Our net income, excluding merger-related and restructuring charges, was a record $813 million, up 6% versus the first quarter of 2018. We did have diluted EPS, which was $0.97, up 3.2%. We did wrap up our Disrupt to Thrive initiatives, which you know we've been working on for better part of a year and a half.
We wrapped that up this quarter, we did announce the SunTrust and the REIT, so we had some substantial charges related to that. As a result, our first quarter adjusted diluted EPS was a record $1.05, which is up 8.2% versus the first quarter of 2018. Adjusted ROA, ROCE, and ROTCE, respectively, were 1.55%, 12.01%, and a very strong 19.86%. I'm on slide four. If you follow the highlights, our taxable equivalent revenue was 2.9%, which was down 5.7% annualized versus fourth quarter. Of course, remember some seasonality there. I think a very good 3% increase versus first quarter of 2018. Loans held for investment averaged $148 billion, up 1.4% annualized versus the fourth quarter. Our reported NIM increased two basis points to 3.51%, and our core NIM increased four basis points.
Insurance income was very strong, a record $510 million, up 19.2% annualized versus fourth quarter. Chris will give you some specific information on that in just a bit. Adjusted efficiency was essentially flat at 56.6% versus 56.5%, which as you know, is very strong from an industry point of view. Our adjusted non-interest expenses totaled $1.7 billion, which was down 4.7% annualized versus the fourth quarter. We're doing exactly what we said in terms of maintaining extremely strong expense control. Our credit quality was great. Nonperforming asset ratio was 0.26%, flat versus fourth quarter, and a decrease of four basis points versus the first quarter of 2018. Charge-offs were 40 basis points versus 38 in the fourth quarter, with some seasonality impact there, but lower than the 41 basis points in the first quarter of 2018.
We did announce strategically our combination with SunTrust, which we're very excited about. We'll talk about that in just a little bit. Related to the merger, we did suspend share repurchases in anticipation of that combination. On slide five, you'll see the merger-related restructuring charges I referred to. It was $80 million on a pre-tax, $64 million after tax, so a $0.08 negative impact on EPS from a GAAP point of view. If you follow along on slide six, we'll look at loan growth. It's kind of interesting what's going on in loan growth. Our total loan growth was 1.4%, which is not super strong, but remember, we focus on the categories more than we do the aggregate. Our C&I was a strong 5.5%. Our CRE was down 7.5%, but that's really because of our focus on conservative underwriting.
We actually feel good about that as we move through the quarter. We had strong performance in corporate banking, Community Banking, equipment finance, and equipment capital finance. We did see a lot of competition in the market this quarter. Particularly in CRE, underwriting is really very competitive. As I indicated, we're simply not willing to go where some are with regard to CRE underwriting, and so that's why we saw the softness there. Retail was overall strategically where we wanted it to be. Residential mortgage saw a 3.5% annualized increase. Our direct was down 3.7%, but we are finally seeing the bottom that we have been projecting. We've been doing a lot of things in terms of restructuring our direct offerings and our processes. Volumes are increasing. We see that bottoming kind of as we expected.
Indirect was soft this quarter, but as you know, we always have that particularly driven by Sheffield. Overall, we were pleased with loan growth for the quarter. If you look at page seven, slide seven, on deposits. Total deposits were up 5.7%. We are seeing a shift here that we just want to mention. Our non-interest-bearing deposits were down 10.9% first to fourth annualized. On a year-over-year, it was 2.1, so the 2.1 is a meaningful number to look at. That's really not a function of losses to BB&T as much as it is movement between DDA to interest-bearing accounts. The market's finally gotten sensitive to interest rates. As we expected, we would see some internal and external disintermediation, and that's occurring, although we believe that most of ours is just internal shifting.
We think that will continue to occur, probably at a decelerating pace. That remains to be seen, but we're in a whole new world in terms of how people are responding to this still relatively low interest rate environment. We'll see how that works out. The percentage of non-interest-bearing deposits to total deposits was 32.7 versus 34, that reflects that softness in that. Overall, I would just say that our cost was a little higher, betas was a little higher this quarter. Daryl will give you some detail on that, but it was mostly because of a substantial marketing effort that we had in terms of some markets that we were concerned about some market share dilution. We ramped up our marketing efforts in the first quarter, and we think that'll ramp back down as we head into the second, third quarter.
Daryl will give you a little more color on that, but I just want to explain it was the beta increase was not independent of marketing strategic actions that we chose to make. With that, let me turn it over to Daryl.
Thank you, Kelly, and good morning, everyone. Today, I'm going to talk about our excellent credit quality, margin and fee income dynamics, strong expense management, and provide guidance for second quarter and full year 2019. Turning to slide eight. Credit quality remains strong. Net charge-offs of $147 million were up two basis points and improved one basis point from a year ago. This quarter's increase reflects an uptick in CRE and seasonal revolving credit, offset by a decline in lease financing and the mortgage portfolio. Our NPA ratio of 26 basis points was unchanged and remains historically low. Continuing on slide nine. Our allowance coverage ratios remain strong at 2.62 times net charge-offs and 2.97 times NPLs. The allowance to loan ratio was 1.05%, unchanged from last quarter.
We recorded a provision for credit losses of $155 million, which exceeded net charge-offs of $147 million. This resulted in an allowance build of $8 million in the first quarter. Turning to slide 10. The reported net interest margin was 3.51%, up two basis points. The core margin rose four basis points to 3.44%. The improvement was driven by dividends received on assets for certain post-employment benefits, which occurs in the first quarter of every year. This added four basis points to the margin. This dividend income is partially offset by higher personnel expense. The cost of interest-bearing liabilities rose 13 basis points, a modest deceleration from last quarter's 14 basis point increase. Balance growth in time deposits and money market and savings drove the interest-bearing liability costs higher. We expect the rate of increase in interest-bearing liability costs to significantly moderate next quarter.
Asset sensitivity declined due to an increase in fixed rate assets and a decrease in DDA. Continuing on slide 11. Non-interest income of $1.2 billion grew 1.9% versus like quarter. Our fee income ratio declined 50 basis points to 41.5%, as record insurance income was offset by declines in other fee categories. Insurance income increased $23 million, reflecting seasonality and solid organic growth. Regions Insurance contributed $46 million to the insurance income. Excluding Regions, insurance income rose 6.4% from the like quarter, reflecting continued strong organic growth. Investment banking and brokerage fees and commissions declined $28 million, following a record fourth quarter of 2018. In addition, mortgage banking income decreased $23 million due to seasonally lower commercial and residential volumes. Service charges on deposits declined $14 million as there were fewer revenue days, but up 3.6% versus last year.
Other income rose $18 million, primarily due to income on assets for certain post-employment benefits, which is offset by higher personnel expense. Turning to slide 12. Our expense management continues to be strong. Adjusted non-interest expense, which excludes marks, was $1.7 billion, a decrease of $20 million. Compared to the first quarter of 2018, adjusted non-interest expense increased $30 million. Excluding Regions Insurance, this quarter's adjusted expense was about flat versus last year. Personnel expense declined $9 million due to lower salary expense with 518 fewer FTEs. Professional services expense declined $12 million, primarily due to lower consulting expense. Merger-related and restructuring charges increased $4 million, largely due to investment banking fees related to the Merger of Equals. You will note that the current quarter's effective tax rate was down.
This was primarily due to excess tax benefits from equity-based compensation plans, which also occurred in the first quarter last year. Continuing on slide 13. Our capital and liquidity remain strong. Common equity Tier 1 capital increased to 10.3%, reflecting the suspension of share repurchases associated with the Merger of Equals. Our dividend payout ratio was strong at 41.3%. On April 5th, BB&T submitted a standalone capital plan to the Fed, requesting a common dividend increase for the third quarter from $0.405 to $0.45 per quarter. We expect the board to authorize this at the July board meeting. Our modified average LCR ratio was 113%. Now let's turn to slide 14 to review our segments. Community Banking, Retail, and Consumer Finance generated net income of $379 million, down $8 million.
Revenue decreased $46 million, driven by lower loan spreads and fewer revenue days impacting deposit service charges and a seasonal decline in payment-related fees. Loan production decreased due to softer mortgage market conditions and seasonality at Sheffield. We rolled out a new branch direct auto product in late February, reducing the time frame for loan approval from over a day to just minutes. In just the first month, we saw a 225% increase in loan production, which translates into an annual run rate increase of about $500 million. This is a great example of how being more responsive can improve client service and benefit the bottom line. Continuing on slide 15. Community Bank Commercial net income was $328 million, down $1 million. Revenue decreased $14 million, driven by fewer days and a slight decrease in loan spread, offset by an increase in deposit spread.
Loan production declined largely due to seasonality. Continuing to slide 16. Financial Services and Commercial Finance net income was $156 million, up $1 million. Revenue decreased $40 million, coming off record fourth quarter 2018 investment banking and brokerage fees and commissions, plus seasonally lower commercial mortgage banking income. Average loan balances increased 11.9% annualized, driven primarily by corporate banking and C&I loans. Average deposit balances increased due to growth in wealth and corporate banking. Invested assets increased due to recovery in the equity markets. Turning to slide 17. Insurance Holdings net income totaled $88 million, increase of $11 million. Total revenue increased $20 million due to seasonality. A seasonal pickup in employee benefit commissions was partially offset by a seasonal decline in P&C commissions. Organic revenue grew 6.7% versus like quarter. I'll turn it over to Chris to provide more perspective on Insurance Holdings' performance this quarter.
Thanks, Daryl. Good morning. Primary purpose on these two slides really is to reinforce that the transformation plan that you heard John Howard, our Chairman and CEO of Insurance Holdings, share with you at Investor Day this past fall is really in stride and working. As a reminder, he brought BCG in about a year ago and really looked at the business sort of from top to bottom, developed a transformation plan, and is now executing on 31 initiatives that fell out of the plan. We have out of that new operating models for retail, for wholesale. We've got revenue growth and expense reduction initiatives. As a result, the business really currently has significant momentum. If you'll look at the upper right-hand chart, you can see that. We're receiving strong results across all business lines. You can see revenue's up link quarter or like quarter 17.2%.
You'll recall, we did acquire Regions July 2nd of 2018, and so there's $46 million in revenue, as Daryl pointed out, included in first quarter 2018. If you exclude that, we still are up $33 million organically. Just as a reminder, three primary drivers for organic growth. First is pricing, and we are in an environment where pricing is stabilizing in the plus 2% range. You'll recall we have had two of the largest insurable loss years over the past two years with $150 billion hitting in 2017 because of the largest three storms and another $80 billion in 2018. We got good price support up for this year. Second driver of organic growth and far and away the biggest impact is new business growth.
Our new business growth across all entities is up 8%, which is exceptionally strong and driven by really the strong economic environment. The third is high client retention rates. Our retail business retention rate is just below 92%, which is industry-leading, and then wholesale is 76%. What that gives you is the chart at the lower left, and you can see a nice improvement in organic growth from 3% a year ago, up to 6.7%. We believe this is going to be best in class and believe when all the numbers come in, that the industry will probably average Q1 somewhere in the 4%-5% range. As I said, the economic fundamentals are still favorable looking forward. As business expands, businesses are building buildings, buying equipment, hiring employees, does create insurable opportunities as we go forward.
With that stability, there are still pockets of tightening in certain commercial lines like energy, commercial auto, which is up in the neighborhood of 7% in pricing, and then transportation industry would be examples. If you turn with me to page 19, you can see part of the reason for this plan was really continued focus on enhancing our margin across all the business lines. You can see adjusted EBITDA on the upper left-handed chart there, up 38.6% year-over-year or $39 million. About a third of that would be from Regions and the synergies from Regions. We're on target to achieve about 80% of those cost savings in 2019. In addition, there's revenue lift in the numbers as well. With, of course, organic growth and strong expense control are driving a margin expansion.
I mentioned new business growth as a primary driver of organic growth, but expense control plays a big role. We mentioned the cost takeout in Regions, but we've also got personnel savings really across all entities within insurance business. About every entity has an automation program going in, and some also include robotics implementations. If you'll look at what that has driven in the lower left chart, you can see the EBITDA margin has moved over the last year from 22% up to 26.1%, which is really nice improvement. The focus in the business really is to optimize the operations, but with differentiation in data and analytics.
I would say while that's true across the whole business, it's specifically true in wholesale, which is a harder to place coverage and a riskier insurable opportunities where Dave Obenauer and his team are really offering the ability to help better understand through analytics the true risk and educate the underwriter on behalf of the client. In sum, I'm very proud of the progress that you have made in a year. We've got another couple of years of implementation, but really pleased with where we are at this point. I'll turn it back to Daryl.
Thank you, Chris. Continuing on slide 20, you will see our outlook. Looking to the second quarter, we expect average total loans held for investment to be up 4%-6% annualized versus first quarter 2019. Net charge-offs to be in a range of 35-45 basis points, and the provision is expected to match charge-offs plus loan growth. We also expect both the GAAP and core net interest margins to be down 4-6 basis points from the first quarter. Fee income to be up 5%-7% versus like quarter, and expenses to be flat to up 2% versus like quarter. Finally, an effective tax rate of 20%-21%. Full year guidance has not changed, but we have updated the effective tax rate to 20% from a range of 20%-21% previously.
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 adjusted earnings, positive adjusted operating leverage versus last year, good loan growth, excellent credit quality, and strong expense management. Let me turn it back to Kelly for an update on the Merger of Equals with SunTrust, and closing remarks and Q&A.
Thanks, Daryl. Let me update you all on kind of where we are. As you know, we announced this combination on February 7th, I would say that it is going extraordinarily well. Remember we said the fundamental foundations for this is that it is highly synergistic, it is financially compelling, it is transformative, everything we've seen in the last couple of months just affirms that to be true. Bill and I and our teams are working together extraordinarily well. We started immediately having weekly meetings. We've already had eight weekly meetings where we are reviewing and planning for the merger. Just this past week, we had our first team-building session at the BB&T Leadership Institute, which went extraordinarily well. We're making really good progress in terms of the teams working together.
We are working through the process of pulling the organization together in terms of how it will operate when we actually combine. We've named integration leads across businesses and functions. We have outside consultants working with us on this, which is really helping. We're spending a lot of time focusing on risk oversight to make sure that we have that process nailed down very tightly. The merger application and registration statement was filed in early March. We are working with Interbrand, a global leading brand agency, to help us develop the new name and branding. Our cultures are very similar. However, we are still planning a process to be sure that we pull the cultures together in terms of terminology and how we talk about ourselves. The fundamentals we knew in advance that were really affirmed now are really very, very similar.
We are in the process of holding listening sessions from the community groups, individuals, because we really want to know what people have to say about this. We recognize this is a major combination. We recognize
We have a major responsibility in terms of giving back to the community. Both organizations have done this as a matter of our moral commitment to the marketplace, but we believe we can do even more. That's very exciting. We've already done four. We've got a couple more to go. The feedback's been very positive. In terms of next steps, the FRB and FDIC actually hold their public meetings to get feedback. Those are being held in Charlotte on April 25th and Atlanta on May 3rd. We will be submitting our joint capital plan and stress tests in May. We will be continuing to name additional business leaders as we move down through the organization. We expect to announce our new brand and new name in late second quarter.
We will be finalizing the divestiture commitments and undertake the marketing process as we head into the second quarter, the shareholder vote is expected in the early third quarter. We remain very confident in our projected $1.6 billion net cost savings. Remember, that is net of technological investments and HR expenses. That is going very well. In terms of our quarter, it was overall, I think, a very good quarter. We're extremely pleased about our progress also in working towards creating the premier financial institution. A great quarter. Outstanding strategic combination announced with the combination with us and SunTrust, it really positions us to thrive in a really challenging environment we can continue to focus on making the world a better place to live and focusing on lighting the way to financial wellbeing. With that, I'll turn it back to Rich.
Thank you, Kelly. Before we start the Q&A session, we recognize there will be a lot of interest in getting an update on the merger planning and what's happened since the announcement on February seventh, as well as our current expected timeline for things to unfold from here. We'd like to have the Q&A be a balance of questions about our standalone BB&T results and trends from the first quarter and merger questions. Leanne, at this time, if you'd come back on the line and explain how our listeners can participate in the Q&A session.
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 question. Again, press star one to ask a question. We'll take our first question from John McDonald with Autonomous Research.
Hi, good morning. Wanted to ask about, just on a standalone BB&T question. It feels like there's some crosscurrents on the net interest income outlook, Daryl, with loan growth picking up but the NIM seeing some pressure. I guess the question is, what's the source of the 4-6 basis points of NIM pressure next quarter if the deposit betas are going to slow? How do the NIM and loan growth dynamics feed into your NII growth outlook for 2Q and the full year?
Yeah. This quarter, John, just like we have in other years, we have to record an entry in net interest income. It's basically our deferred comp plan, and it's the earnings that are generated out of the funds that are invested, those dividends that we receive. This quarter, it was $18 million. If you go back a year ago, it was $12 million. Last year it was worth 3 basis points, this year, 4 basis points. That basically just comes out of net interest income. With the loan growth that we're projecting across all major loan categories, even though margin will be down, we still expect net interest income to be up in a linked quarter basis between first and second. We do benefit by an additional day, so that helps.
If you look on a year-over-year basis, we still are expecting net interest income year-over-year to be up in a 2%-3% range. Still positive revenue even with this margin guidance.
Okay, great. Then in terms of the MOE, as you've dug deeper into the financials, how has your view of the initial projection of earnings power changed, if at all? On announcement day, you showed an illustrative 2021 EPS of $5.59. Just kind of wondering what type of refinements, positive or negative, you might have made to that. I know S-4 came out and showed, for example, higher amortization on the one hand, but also higher purchase accounting. I know it's early, but any refinements you'd make to that initial crack of combined earnings power?
John, I'll give you a broad answer, then Daryl will give you the detail if you like. No, nothing in aggregate. As you say, in a large combination like this, there are gives and takes. You get more detail, more specificity in terms of some of the projections, which early on, as you know, are necessarily broad-based and assumption-based. We're two months into it, and I would say in terms of the aggregates, we feel as confident as before, if not a tad more confident. The combinations of the businesses, now that we've learned more, leave us very encouraged in terms of the complementary nature of these businesses. Remember, the big levers on this are the expense controls. We feel very good about that. The long-term enduring benefits are around cross-levering the specialty focuses of SunTrust over BB&T and BB&T over SunTrust.
The more we've learned, the better we feel about that. I would say net positive.
Yeah, I would just reiterate that, John. We talked about five major categories where we would achieve a saving. Facilities, retail, third-party vendors, technology, and shared services. As we have met as a new co-management team and we talk about these, we feel extremely confident that we can achieve the $1.6 billion net number. We're in the process of getting more information in detail as our companies come together so we can plan to basically allocate by all the business lines so they will be held accountable for these savings. [Gonna still] believe that we are very confident in achieving the net savings of 1.6. As far as your accounting question goes, we really don't know what the rate environment's going to be when we close the transaction. We're looking at late third quarter or fourth quarter close.
Interest rates will have some say on what the potential mark on the portfolio is. It's probably less now with rates down a little bit, but I'm not sure which way rates are going to go across the curve by the time we close. We will basically be reporting both GAAP and cash earnings for the foreseeable future because we're going to have a lot of non-cash expenses. Recall non-cash expenses still fall to capital, so it is very accretive from a capital usage perspective. We feel very confident in the projection that we gave a few months ago.
Okay. That's very helpful. Thank you.
We'll take our next question from Betsy Graseck with Morgan Stanley.
Daryl, just on the capital comment that you just made, can you give us a sense as to how you're thinking through the combined capital position that you have? What does it mean for capital return over the next couple of CCAR cycles? I know part of that answer has to come with an assumption that the NPR that's out there is approved on advanced approaches banks, but maybe give us some color on if it is, if it isn't.
As we put the two balance sheets together, we will have purchase accounting marks. What we said two months ago is that the capital ratio should be between nine and three quarters and 10%. That we would start capital actions and the amount of share repurchases once we achieve the 10% CET1 ratio. That's still the plan. Right now, we want to make sure that we get through all the conversions, and conversion's going to take probably one to two years. We want to make sure our earnings get to the really high levels that we can achieve, that we have out there projected. At that point, then we'll revisit the leverage and capital of the company.
The combination of these two companies should be leading industry capital generation at the end of the day, which will help bolster our overall returns and returns back to the shareholders.
Are you suggesting that capital return will be on hold until the conversions are done? I just want to make sure I understand that.
We will basically, obviously the board has to approve this, but when we approve a transaction, both boards said that we wanted to get our capital ratio CET1 to 10, and then at that point we would do share repurchases.
Okay.
Betsy, remember that it's a multifaceted set of variables that we have to consider, and the board has to consider. The progress with regard to the merger, the combinations in terms of systems, et cetera. We also have to pay attention to what's going on in the economy and in global geopolitical issues and all of that. For all of those reasons, we're being admittedly conservative when we say 10%. There certainly is some upside opportunity with regard to capital utilization as we go forward. As you know, we're conservative, and we're going to be careful as we go through this because there's so much earnings power in this organization as we go forward. We will be able to provide extremely good returns, in my view, for our shareholders.
It's important not to rush it in terms of over-leveraging the company in the beginning.
I mean, even at a 10% CET1 ratio, we will have leading industry return on tangible equity.
It's only 22%, Betsy. Would that be satisfactory?
22? 22 and a half. Do I hear 22 and a half? No, that's helpful. Okay. It really doesn't matter if the NPR goes through or not. Your 10% is your 10%.
Yes.
Yes.
Okay. All right. Just separate question on the net cost saves that you've talked about. I know that's on a net basis. Are you thinking about disclosing what your expectations are for the gross investment to get those net cost saves at some point? When do you think you'll be communicating that to the street?
Betsy, we still are putting together the plans as you would expect, and trying to figure out what the net savings will be, what will be the investments in terms of innovation and technology. We gave you a good broad number. We will be refining that as we go forward. It's a bit early, to be honest, to know exactly what the advanced savings costs will be, exactly what the investments in innovation will be. Make no mistake, we're confident with at least $1.6 billion, and we're confident that that allows us to make the kind of investments we've talked about in terms of leaning forward with regard to innovation and technology investments because that's really the juice in this thing, Betsy. I mean, it's a cost-save play. We get that. That's not what we're really focused on.
We're focused on positioning ourselves to be a leader in terms of innovation and technology so that we can compete effectively with the largest institutions in the country. We believe there's enough economics in this to allow us to make those kind of investments from a long-term point of view and still generate robust returns for our shareholders.
Got it. Okay. TBD, you'll let us know when you're there.
Yes.
Appreciate that.
Yeah.
Okay. Thank you.
Thank you.
We'll take our next question from Mike Mayo with Wells Fargo Securities.
Hi. Since the merger, BB&T stock has performed only in line with the bank index and has underperformed the S&P 500. It seems that one issue is cultural risk. Kelly, you just said that the cultures are similar, but they certainly are not the same. The question is, what are the cultural differences and how do you bridge the gap? I'd highlight three areas. One would be the structure. It seems that BB&T runs relatively more by hierarchy than SunTrust. How do you get team A plus team B to create a new team C? Two would be engagement of employees. You've mentioned retention packages, but we all know that people can quote, "Quit without leaving." In other words, how do you get their hearts into the job? Three would be the CEO risk. I get it that you and Bill are all smiles.
You love each other. Everything's great. How will you handle it during times when you don't agree? My wife and I got married, it was all great. We had disagreements like, "Your socks are on the floor." We were able to confront that. All is good with my wife and I, but you're going to have times you disagree. I think that seems to be important how you're going to get along during those times than during this kind of engagement or honeymoon period.
Well, thanks, Mike. I think that is at the heart and soul of the issue. I would say that I feel really good on all those. Let me be direct. With regard to your positioning that BB&T is more hierarchical, I would disagree with that. When you really look at these two organizations, now we've lived very closely together for eight weeks. I know that's not like 25 years, but it's been a pretty involved eight weeks. Bill and I've known each other for a long time. I really think when you get into it, Mike, there's not any substantial difference. We're both very focused on empowering our associates and leading from principle, leading from purpose, leading from mission.
When you really get into it, I have not been able to find any kind of difference in terms of hierarchy or any other words that you might choose to use with regard to that. In terms of our associates, which is the most important, we feel really good about that. We've had very little loss of associates at this point. Yes, we are using retention programs, et cetera. Much more importantly, Bill and I agreed day one that we're not taking anything for granted, and we're not expecting our associates to just line up and be good soldiers. We take the responsibility, and all of our team does, to re-recruit every day. We are recruiting our associates to remain a part of this team for the purpose of being a part of something that's very exciting, very dynamic.
It's an organization that has and can continue at an enhanced basis, be a really good place to work. It can be a place where you can find your why for your purpose in life and align it with an organization that is deeply committed to purpose and why and making a difference in the world and lighting the way to financial well-being. All of that, these two organizations are extremely consistent. I think it's going to be hard to find somewhere that's any better and hard to find many places that are as good in terms of just pure opportunity. I told some people I wish I was 40 years old again. This is just so exciting in terms of thinking about where this organization could go, but not just economically. I'm talking more important in terms of the contribution we can make to the world.
We can truly help our clients achieve economic success and financial security. We have a fantastic associate benefit and value program, and we can enhance it. We're working really hard with our communities to even enhance an already outstanding community involvement program. There is no meaningful difference in terms of how we do business. Our associates get that. I don't expect to see any substantial reasons to leave, whether you're talking about technical or not, or mostly about having their heart and soul into the game. When I'm talking to our associates, and when I'm getting feedback from the SunTrust associates, and Bill tells me the same thing, they're genuinely excited about this.
They recognize we're putting together two great companies that can forge an opportunity for all of us to have a lot of fun, make it a little better place to be, and do some good stuff. Get up in the morning, excited about coming to work. That's what we're trying to do. The CEO risk, I know everybody talks, Mike, a lot about that, Bill and I get along great. We've known each other a long time. We're both, as I say, North Carolina boys, although he's been basically all of his career in Atlanta. Look, I've spent a lot of time in Atlanta, too, and there's no material difference between Georgia and North Carolina. We're all from kind of the base root cultures. We get along great. We're both kind of really purpose-driven individuals. We're both achievement-driven individuals.
We're both deeply committed to our communities and our associates. While you might find slight differences in terms of our personalities, I really think we are an awful lot alike. I know we've got to work on our fist bump thing. We've been practicing that. Other than that, there's no material difference between Bill and I. We're working together great.
Just one follow-up. Where do you think the stock market has it wrong? You've gotten zero credit in the stock market for your merger despite the synergies, based on the MOE performance with the bank index. Almost every investor that I speak with brings up the cultural risk, the differences in culture. Where do you think the stock market has it wrong when they're evaluating this aspect of the merger?
Mike, as you know, I've been through one large M&A, although it was 20-plus years ago. They're similar. I'm seeing the same thing here that we saw then. The stock market doesn't have it wrong. The stock market just kind of is prudent. I don't blame them for that. I think the smarter ones will take a bit of a more of a leap of faith and trust the experience that Bill and I have had over all these years. I've been at it 47 years. He's been at it, like, 39 years. We're not just starting out. I think the smart investors will recognize it, that they'll find a high probability to a successful venture, and they'll invest early. Those that are more conservative will lay back and wait for us to prove it. It kind of doesn't matter to me.
I'm not interested in short-run results. I'm not interested in short-term pops of the stock. My commitment, Bill's commitment to the long-term by shareholders is to produce a good, steady, less volatile, long-term growing TSR. That's exactly what we're going to do.
last quick follow-up. Are the SunTrust executives going to go through the BB&T Leadership Institute? We enjoyed that investor day that you had for us there, how will that play a part in the new firm?
Yes, I was glad you were there, Mike. We were actually there last week. You may appreciate we spent a day and a half over there last week with our new executive team. We'll have multiple leadership team-building sessions going forward. All of the SunTrust executives have committed to go through, excitedly have committed to go through. They loved it, frankly, and made me feel really good. Yeah, they're definitely going to be going through that. We'll be doing things together. The Leadership Institute is a powerful organization in terms of helping people grow individually and as teams. So far, I would say there's a 150% commitment to working together in those types of endeavors.
All right. Thank you.
You bet.
We'll take our next question from Erika Najarian with Bank of America.
Hi, good morning.
Good morning.
Morning. You've been pretty explicit about the purchase accounting adjustments on the loan side. Daryl, I'm wondering if you could give us a better sense on the mark-to-market accounting that we could expect on the pro forma balance sheet on the securities and on wholesale funding. Also, is there any flexibility to optimize the yields and the cost?
That's a great question, Erika. Being a former treasurer, this is a once-in-a-lifetime opportunity. When the two companies come together, we're basically going to have half the balance sheet mark to market. As that gets closer, our treasurer and executive management will decide if we need to adjust the interest rate risk profile or if we need to change some of the asset classes or mix of what we have. Everything, half the balance sheet will be available to basically buy or sell at that time or change positions. I would view that as a huge opportunity for us and position us for the future. I think, as the time gets closer to when we know we're going to close, we'll be able to give you more color on that.
I think this is just an unbelievable opportunity for somebody to really position the company forward from that perspective.
Got it. In your S-4, you noted that the $3.5 billion fair value adjustment, $3 billion of it was for credit and the rest, about $500 million, was for interest rates and other mark-to-market adjustments. I'm wondering if you close the deal in 2019, if SunTrust's loan portfolio does better than, or runs better than a 2% loss rate, could you continue to reclassify that $3 billion or the PCI or non-accretable yield to non-PCI or accretable yield? Does CECL change any of this, even if you close in 2019?
When we came up with the credit mark on the SunTrust portfolio, it was 2%. Clarke and I still agree that's the appropriate number as we get in and look more at it. We did hire a third party to help us with evaluation methods for the whole balance sheet. That is going on, and that is not completed yet. That will probably be completed in the next couple of months. From the closing of transaction in 2019, we'll have your typical PCI amount of loans, and then the rest will have a fair value mark. When we adopt CECL in 2020, the PCI loans and some of the other loans will be reclassified into PCD, and then we will allocate a life of loss, the CECL reserve to the remaining SunTrust and BB&T loans at that point in time.
In essence, if you look at just the SunTrust loans from a good book perspective, you have a discountamount on there that we'll accrete through income, plus you have a life of loss reserve with CECL. From that perspective, I would say the loan portfolio will be more than adequately covered. It's kind of really odd accounting. We have a comment letter into FASB, and I think some of other banks that have done deals recently have comment letters into FASB. That's the way we understand the accounting now is how it's going to play out.
Got it. Thank you. We'll take our next question from Matt O'Connor with Deutsche Bank.
Good morning. Daryl, back at Investor Day, you talked about loading down the securities book, and using that to fund loans. Kept the securities relatively flat on an average basis for this last quarter. I understand that you can kind of reposition this when the deal closes, what's your thought process between now and then, in terms of the securities book?
I'd really like to get clarity on the NPR tailoring, Matt. Assuming that we stay at 70% LCR or go to 85, that's really going to dictate how much securities we need. We have the advantage that both of us have capacity at the Federal Home Loan Bank, so we can do letters of credit there. We can also pledge the public funds to kind of optimize the balance sheet from that perspective. I wouldn't anticipate us changing our investment portfolio right now until we get approval from the proposed NPR to adopt the right.
Okay. Just circling back on some of the discussion about the cost saves and the investments, get us more information down the road. Do you guys have an estimate on when we might get more details on what's driving the cost saves, beyond just a couple of the bullet points and the numbers behind it? Do you just have a sense of when you'll have that information for us?
I would say we will continue to work on that as we put the 2 companies together and we have financials, we'll get more clarity. We are in the midst of selecting the layers of management from executive management on down. That will create some cost savings from that perspective, just because you got duplications in a lot of business managers from that perspective. That will kind of start where some of the savings are. It's going to really evolve over time. We really aren't looking at and can't really look at any vendor information until we close the transaction due to antitrust. That's just out there at a very high level. As the branch systems come together and we'll have some branch closures, we'll have more color on what those savings relate to. Shared services, there's a lot of overlap on shared services.
As business models are selected and locations are selected, that's going to impact closures on those areas and facilities. I think there's a wealth of areas that we'll be able to piece together, to achieve a net $1.6 billion number to leave enough for technology and other investments in the company. We think we can have industry-leading profitability returns as well as still increase and ramp up our technology investments in the company.
Okay. All right. Thank you.
We'll take our next question from John Pancari with Evercore ISI.
Morning.
Morning.
On the standalone side, on the loan growth, I wanted to see if you can give a little bit more color around your outlook. What gives you the confidence in the 4%-6% linked quarter annualized trend that you can see in the second quarter? Where are you seeing the greatest strengths and acceleration in production? Thanks.
Hey, John. This is Clarke Starnes. You have to remember, we do have defined seasonality in the first quarter, you saw that particularly in our indirect businesses, such as our Sheffield portfolio, our premium finance, our mortgage warehouse lending. The projections right now, as you'll see, that bounce back nicely in the second quarter. We anticipate we're going to have good mortgage lending growth and then also very strong overall C&I. Those would really be the drivers. Based on those dynamics around seasonality and what we see in the pipeline and know we're going to book, we have a lot of confidence we'll get the number.
I think we're forecasting every category to be up one quarter but CRE.
Yeah.
It'll be across the board contribution.
Got it. Okay, thanks. Separately, on the combined basis, I know you had indicated that there are more broadly no big change in earnings power expectation per John's question. Also want to see, can you talk specifically about your 51% combined efficiency ratio expectation as well as the 22% return on tangible common equity expectation? Any change to those given the backdrop, the rate environment, et cetera?
John, we don't see any changes based on everything we can see now. Those numbers were derived very mathematically based off of reasonably conservative assumptions. Nothing we see today or looking forward changes the fundamentals of those assumptions.
Got it. Okay. Thanks, Kelly.
We'll take our final question from Ken Usdin with Jefferies.
Thanks. Good morning. One more merger-related question. Daryl, as we think ahead to the closing quarter, one of the toughest things is always to kind of range what the ending up NIM looks like. Granted that there'll be some differences, as you already mentioned, about where the purchase accounting ends up. Do you have a general understanding of how we should think about what the pro forma NIM looks like, given that you guys are at 350s or so and SunTrust is in the upper 320s, plus any PAA or credits or stuff to help us just with that starting point? Thanks.
Yeah. We're going to be reporting both the core net interest margin and reported or GAAP report net interest margin. There will probably be a wide variance between the two because you're marking to market basically half the balance sheet. We'll give you more specifics as we get closer. Our core margins overall should be pretty much simply just putting our two margins together today. 330 plus or minus would probably be a good ballpark number. As far as the reported GAAP margin, there's a lot of puts and takes in there. We'll give you a lot of color and a lot of tables and basically disclose how all that's going to play out because it will be complex as we put the two together.
We'll just have to be very transparent with you and show you how it's going to work and just how it's going to run off over time from that perspective. As I said earlier, though, earlier question, we will have the opportunity to basically reposition the balance sheet if we want to do that at some point. That could potentially help and drive core margin at that point, but it's too early to know that right now.
Okay, understood. Back to the core question. Kelly had mentioned the ongoing migration out of non-interest bearing to interest bearing trend we're seeing at a lot of banks. Now that the rate cycle presumably has stopped, I know you said that you expect that mix to continue, what are you seeing and hearing in terms of the ongoing pressures on interest-bearing deposit costs and the push and pull between growing deposits versus having to pay up for them? Thanks, guys.
I think, Ken, that having watched these things over a number of cycles, these spurts where everybody's kind of price insensitive for a while, they look at it, they become price sensitive, there's a spurt of time, 60, 90 days where they're much more sensitive. They kind of go back to running their business again, they're not as sensitive. You kind of go ebb and flow. What I think is that we just saw over the last 90 days or so a spurt up in sensitivity. With rates stable to back down kind of now, I think you're probably going to move into you won't go back down in terms of sensitivity, but you won't see a rise up in sensitivity, if that makes sense.
I think you'll see less focus on betas and moving money around over the next period of time than you've seen over the last 90 to 120 days. Now, if there's a dramatic shift in rates one way or another, that'll change that, nobody expects that. I certainly don't expect that. I think you're getting ready to go into a period of less price sensitivity focus in terms of moving money around.
Got it. Thank you.
Sure.
That does conclude our Q&A session today. I would now like to hand things back over to Rich Batusch for any additional or closing remarks.
Okay. Thank you, Leanne. Thanks, everyone, for joining us today. I hope you have a great day. Thank you.
That does conclude today's conference. Thank you for your participation. You may now disconnect.