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BB&T Corp (TFC 0.06%)
Q2Â 2019 Earnings Call
Jul 18, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Second Quarter 2019 Earnings Conference. [Operator Instructions]
It is now my pleasure to introduce your host, Rich Baytosh of Investor Relations for BB&T Corporation.
Richard Baytosh -- Executive Vice President, Investor Relations
Thank you, Rolando, and good morning, everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer; Chris Henson, our President and Chief Operating Officer; and Daryl Bible, our Chief Financial Officer, all who will review the 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 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 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 2 regarding forward-looking information in our presentation, our SEC filings and the legends on Page 3 that relate to additional information and participants in the solicitation.
Please also note that our presentation includes certain non-GAAP disclosures, please refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP.
And now, I'll turn it over to Kelly.
Kelly S. King -- Chairman and Chief Executive Officer
Thank you, Rich. Good morning, everybody, and thank you for joining our call. We are 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, and we're making excellent progress with regard to our MOE with SunTrust.
So if you're on Slide 4, net income was a record $842 million, which was up 8.6% versus second quarter of '18. Now, that is if you look at net income excluding merger and restructuring charges, and this quarter, we are 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 record $1.09, up 10.1% versus second quarter of '18. Adjusted EPS was a record $1.12, up 10.9% versus second quarter of '18.
Our adjusted ROA and ROCE and ROTCE were very strong at respectively 1.59%, 12.34% and 20%.
Our record revenue was $3.1 billion, up 19.8% annualized from the first quarter and up 5.7% versus the second quarter. So, we really had overall strong fee income that really helped offset the negative effects on 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 you some real detail on that. Our investment banking and brokerage also had strong quarter, is up 20% like quarter and annualized 72% linked quarter and interestingly every fee category grew during the quarter.
Now NIM did decrease 9 basis points to 3.42% and core NIM decreased 10 basis points to 3.34%. There's a lot going on with regard to the yield curve, as you well know, Daryl is going to give you a lot of detail on that in just a bit.
Our expense management continues to be very strong. As you know, we've been focusing hard on that for the last several years. So our adjusted efficiency ratio came down to 55.1, which has been a kind of a long-term target for us. That's a result of excellent performance coming out of our disrupt to thrive strategy, which was for last 3 years a focus on expenses. Our adjusted expenses were $1.72 billion, up versus last quarter and like quarter that was due to primarily to incentives based on related strong fee performance, somewhat offset by lower payroll taxes.
Credit was just great. NPA ratio was 0.23, a decrease of 3 basis points. We think it's the lowest we can remember or we can find any records of, so it's really good. Our charge-offs were 38 basis points versus 40 basis points in the first quarter and 30 basis points in the like quarter. We continue to have -- made great progress in combining BB&T and SunTrust in our merger of equals to create Truist, a premier financial institution. I'll talk more about that in a little bit, but we did announce our new headquarters building in Charlotte, which is one of the tallest buildings in Charlotte, if you're familiar with Charlotte, the old Hearst building. We did just this week announced 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 and we're very excited about that.
We're making really good progress in terms of laying out the management structure. So we've had two rounds of higher level management announcements. So we already announced about 900 positions and the next layer will be out by the end of August and by the end of August, we will have announced about 75% of the management layers, which gets its way down -- way, way down into the organization.
We do have a special shareholder vote set for July 30th by BB&T and SunTrust. And so we're very, very excited about that. I'll give you a little bit more color on the MOE in just a bit.
We are selling $4 billion worth residential mortgages to respond to changes in interest rate environment which Daryl will give you detail on.
If you look at Slide 5, we did have two categories of selected items to call out to you, regular merger-related and restructuring charges were $23 million pre-tax, $19 million after-tax, or about $0.02 diluted EPS impact, and again, we're calling out what we're going to just refer to you for the next few quarters, incremental operating expenses related to the merger, which was $9 million, which was another $0.01.
These are expenses that don't meet our definition of merger-related charges, because they do provide future benefit, 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 6, it's a really good loan growth quarter. The aggregate loan growth was 6.5% which is very strong given the market environment we're in. Our C&I, we are really pleased about which was 7.8%. Our CRE -- pardon me -- was down 3%, but that was frankly by design we've talked to you about, and the fact that there is a lot of really stretched underwriting going on out in the marketplace, particularly in the CRE space, we choose not to participate in that. So we're actually very pleased with that metric. Auto portfolio, we're really excited about, we've been talking to you about that, optimizing portfolio, it has now turned the corner as we projected and it did grow small amount, 0.5%, but it did grow and that's largely due to some product changes we made in the branches, particularly our auto branches and at auto loans that we're making in the branches.
So overall, really strong loan growth. And we feel really good about it. You know, 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 is no sign of any kind of imminent slowdown. Not necessary that the overall talk about tariffs and trade wars and all that will eventually have some impact, we keep talking about it enough, but for now, most people are pretty resilient, the businesses are good and underlying activity is flowing through and get into kind of loan growth that I've just reported. So we actually feel pretty good about the economy and believe it has legs to continue as we go forward.
If you're following along, on Page 7, we were very pleased with our overall deposit performance given the environment that we're operating in. So our total deposits were down slightly, 0.4%, but very encouragingly, our non-interest bearing deposits or DDA was up 3%. Our client deposits, excludes national 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. So that's encouraging.
The cost of interest-bearing deposits was 1.02%, up 7 basis points, but that was slower increase than last quarter and the cost of total deposits was 0.68%, which was up 4 basis points. So it is a very challenging time with the ratios and the deposit disintermediation that is going on. And Daryl will provide you with some really good color -- or color on that area because we know you're very focused on it and it is very, very important. Daryl?
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
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 '19.
Turning to Slide 8, credit quality remains strong. Net charge-offs of $142 million were down 2 basis points as a percentage of average loans. Our non-performing asset ratio was 23 basis points and is below our previous low seen in 2006.
Continuing on Slide 9, our allowance coverage ratios remain strong at 2.8 times net charge-offs and 3.46 times 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% [Technical Issues] basis points after adjusting for dividends and non-qualified plan assets received in the first quarter. Our core margin was 3.34%, was down 6 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 2-basis point to 3-basis point negative impact on second quarter margin. And cost of interest bearing liabilities increased 8 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 the 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 mortgages sold will be reinvested in high quality securities and provide improve 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 that was partially offset by client derivatives.
Turning to Slide 12. Our efficiency ratio improved. We generated positive operating leverage on a GAAP and on an adjusted basis versus linked and like quarters. We reported $1.8 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 and 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 million to $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 sale margin was 1.65% versus 1.60% last quarter.
Continuing on Slide 15. Community Banking Commercial net income was $319 million, a $9 million decrease was due to a $20 million increase in provision, partially offset by an $8 million increase in net 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 $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 Holdings 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.
Christopher L. Henson -- President and Chief Operating Officer
Thanks, Daryl. Purpose of two slides on 18 and 19 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, is build 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, and as a result, I think you see the business continues to gain significant momentum. And we're really seeing the results across all lines of business. If you look on Page 18 at the upper left-hand graph, you can see revenue of 17.6% or $89 million. If you exclude the $32 million that Daryl mentioned from Regions, we've now had Regions of full year, we still, excluding Regions, had organic revenue improvement of $57 million.
And 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, and recall, we are post two of the largest insured loss years in history in 2017 and '18. So we actually saw pricing bump in the first quarter to sort of a flattish to up 2% and in second quarter, we actually saw a move to up plus 3.5% which is very helpful.
New business, which is producing new units is far and away the largest driver of organic growth and that's really able by a strong economy. We see that continuing and then we've got really high intention rate -- retention rates, which has actually improved since first quarter, retail is up to 92.1% wholesale at 79.6%. So what that gives you is really in the lower left hand corner, which is substantially improved organic growth and I think probably the best numbers that we've posted in our history. And if you look at the like quarter comparison, we moved from 5.2% to, as Daryl said, up to 11.6% and I believe when all the numbers roll in for the quarter, we will probably see the industry probably averaging in the 4% to 5% range.
Economic fundamentals are still really favorable for this business as businesses grow and add equipment and expand buildings and add people. Those are all insurable items, the industry refers to exposure units. We see that continuing to grow and then also, market conditions are stable I alluded to pricing, you'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 too is up 3.5%, bumped up 4% this quarter.
If you turn to Page 8 -- 19, excuse me, again another major focus is on margin improvement. And if you look at the upper left chart, you will see our adjusted EBITDA, adjusted meaning we pull out merger-related charges. You can see for like quarter, up from $120 million to $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, really the drivers of the improved margin. As it relates to organic growth, as I said a moment ago, the primary is new business growth and that's really hinging on the economy and we're up 9% year-to-date there, which is substantial. And then on expense control side, certainly, we mentioned Regions. But we also have FTE savings really across all business lines and we've got new systems implementations, which have cost implications, and in some cases, revenue and speed the delivery really in probably 75% to 80% of the businesses.
So if you look at the EBITDA margin in the lower left hand corner, we have this quarter posted the best margins that we have ever posted. Now this is our strongest seasonal quarter of the year and we won't maintain this, but we went from 23.7% up to 28.8%, which is we haven't seen those numbers in our history.
So we're going to continue to optimize operations looking forward and we're going to begin to shift and differentiate with the use of data and analytics, really to enhance client experience and knowledge of the client and we're doing that especially today in wholesale.
So in summary, I'll just tell you, really proud of the transformation we started 15 or so months ago or 18 months ago, really -- is really beginning to kick in and we're going to see really a bright remainder of 2019 in terms of environment for this business and expect it to continue to perform strongly.
So I'll turn it back over to Daryl.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
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% to 6% annualized versus second quarter. Excluding the mortgage sales, loans are expected to be up 4% to 6% annualized. We expect net charge-offs to be in the range of 35 basis points to 45 basis points and the provision is expected to match charge-offs plus loan growth. We also expect both the GAAP and core net interest margin to be down 4 basis points to 8 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 3 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 1 basis points to 5 basis points in the third quarter. We anticipate fee income to be up 2% to 4% versus like quarter. We expect expenses to be flat versus like quarter. Incremental operating expenses related to the merger may increase from second quarter levels, which is why we created this category.
And finally, we anticipate an effective tax rate of 20% to 21%. Our previous full-year guidance remains unchanged. In a challenging rate environment, we will continue to grow revenue faster than expenses, driving positive operating leverage as we move toward 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.
Now let me turn it back to Kelly for an update on the merger of equals with SunTrust closing fast and Q&A.
Kelly S. King -- Chairman and Chief Executive Officer
Thanks, Daryl. So if you're following along on Slide 21, we just wanted to give you a bit of detail with regard to where we are, because obviously it's the major focus in terms of our 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, very well together, we've known each other longtime. 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 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, May 3rd in Atlanta. I will tell you that we've had our 1,000 public comments and 95-plus percent of those are positive and very much in support of the merger.
So all of that is going very, very well. We submitted our capital plan, which is going well and we feel very good about that. As I indicated, we've already announced about 1,000 of our key management positions and by the end of August, we think we will have north of 75% of our announcements made and they get you way down into the organization in terms of people that will be leading the new company.
And 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 and North Carolina, we also announced our headquarter building 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 [Indecipherable] you come up partnered with that name, but what we really wanted was what we were trying to accomplish in the merger. When Bill and I talked about this merger, we didn't want to be looking back, we wanted to be looking forward. We wanted to have a merger, we wanted to have a company that we can look forward to have clients and prospects, think about how they can meet their dreams and goals and hopes and lives looking forward. And so in that regard, we wanted a name that speaks to the assets of companies that reflects the go forward mentality in terms of growing with our clients, helping our communities become better places to be, and of course doing a really good job for our shareholders and our associates, and we think Truist does that. And we think as time goes on and we build the branding around that, we think it will be an outstanding name. We feel very, very good about it.
We have mailed the merger proxy statements to BB&T and SunTrust shareholders and we will have shareholder approvals jointly or separately, but on the same day on July 30th. We did announce recently the $60 billion community benefits plan, which is very, very good. On July 10th, we did receive regulatory approval from North Carolina Commission of Banks, I'd say substantial positive for us. So we're making great progress kind of looking forward. Here's what you can expect, we'll continue to do a lot of work in terms of building our integrated culture together. So far, we feel really good about that. We do not see any substantial cultural issues in our companies, but there is 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 are working on that, it's going very, very well.
We'll be continuing to brand development process and to follow you will see more rollout with regard to logos et cetera. We'll be continuing the organizational design, namely the final staffing, so that on Legal Day One, we will be organized and staffed and ready to go. That's very, very important because you can't wait until Legal Day One to figure out how you're going to run the company. So we are heavily immersed in the planning for the -- on 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 United States House Committee on Financial Services, which we expect to go well, and then we would wait for the remaining regulatory approvals and then we would be in a position to [Indecipherable]. I would say to you we still feel very confident about our projected $1.6 billion of net cost synergies, cost savings and again that's net of investments we make back into the business like technology and innovation and other investments. So overall, as Daryl said, it is a strong quarter, solid economy out there, great progress on the MOE, Truist will be, in my view, a great company, and we absolutely believe that our best days are clearly ahead. Now, I will turn it back over to Rick.
Richard Baytosh -- Executive Vice President, Investor Relations
Thank you, Kelly. Rolando, at this time. If you would come back on the line and explain how our listeners can participate in the Q&A session.
Questions and Answers:
Operator
Absolutely. [Operator Instructions] And we'll take our first question from John Pancari with Evercore ISI.
John Pancari -- Evercore Partners -- Analyst
Good morning. Sorry if I missed it, but could you just tell us what do you assume for Fed cuts in your current outlook? And then separately, if the -- if you could just give us a little bit of color what you're -- 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.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
John, this is Daryl. So in our forecast, we had 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, you know, it all depends on how our deposits react and how they reprice with everything and competition. My guess is, since we get basically 3 basis points back from the third quarter, good 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.
John Pancari -- Evercore Partners -- Analyst
Okay, thank you, and then longer term in terms of the NIM, I know you had previously indicated or talked about core NIM in the ballpark of about 3.30% plus or minus post the deal just given the rate backdrop, I got to assume that may have changed, can you give us your updated thoughts on that? Thanks.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
You know, it's obviously with rates potentially going down in the flatter curve that does put pressure on net interest margin. I would update you once we get the deal approved and close on what core margin will be and what GAAP margin will be at that point in time. But definitely, you're going to see some tighter margins if the rate scenario stays where it is. And if you see four rate cuts potentially which we don't think it's going to happen, but if you can see that , that would put pressure on margin, but we will have an opportunity at close to reposition the balance sheet and we can get the balance sheet to be more neutral to be more insulated from lower rates. But at the end of the day, as rates come down, you can't lower your cost of funds below 0 right now. So you'll be limited on the actions you can take.
Kelly S. King -- Chairman and Chief Executive Officer
Hi John, this is Kelly. I would just say one person's opinion, I think the market is overreacting to what's going on in the world. I think the world, I mean the market is overstating the decline in interest rates, not to say that we won't have one or two, but the sentiment out there is that things are really collapsing. Fed's going to be cutting rates like crazy, I think that's completely overblown. And we will see some slight decline in the economy, we will see some slight decline in rates. But what you're seeing now and is being projected going forward in my mind is overstated.
John Pancari -- Evercore Partners -- Analyst
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?
Christopher L. Henson -- President and Chief Operating Officer
Yeah, John, I appreciate the question. When the near term, remember the second quarter is our strongest quarter, third quarter is our weakest seasonal quarter of the year. So what you can expect in the the near term is probably down in the 15% to 16% range in the third quarter, but if you look out for the balance of this year and from everything I can read the industry is really projecting something in the 4% to 5% range. We're currently probably more in the 5.5% to 6.5% kind of range as our sense and a current year-to-date organic growth is at 9.3% and again industry expectations is probably in the 4% to 5%. What has happened is post these the two largest insured loss years in our history, we're actually seeing rate begin to bounce and to Kelly's point as long as the economy holds, that's going to really drive new business growth, which is the largest driver of our situation. We're going to do a good job on client retention. So I really think we're in that kind of 5.5%, 6%, 6.5% range for the year, which is, for us, will be the best numbers we have ever posted in organic growth and I think, well ahead of the industry. We're just very, very pleased with the momentum in the transformation that's taking place in our business. We couldn't be more happy.
John Pancari -- Evercore Partners -- Analyst
Got it. All right, thanks, Chris.
Christopher L. Henson -- President and Chief Operating Officer
Sure.
Operator
Next up, we'll hear from John McDonald with Autonomous Research.
John McDonald -- Autonomous -- Analyst
Good morning, and Daryl, I 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? And then if we wanted to isolate the impact of 125-basis point Fed cut, what would that be ?
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
So in the third quarter, we only have one rate cut in there and our NII will probably be down slightly on a linked quarter basis. So we were $1.690 billion this quarter, we'll probably be a little bit lower than that, maybe $5 million to $10 million just because of what's the pressure that we're seeing in our funding side. As 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 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 cooled in there pretty well.
John McDonald -- Autonomous -- Analyst
And then any changes in your rate sensitivity, obviously the mortgage sale will impact that, but -- and maybe, is there a way to just quantify what one cut would do if we wanted to isolate that?
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
if you look on the chart on our Page 10 and the table, and if you see the down 25 and if you look at the numbers for 6/30, it's 0.87%, that basically assumes over a year, it's a $60 million hit to NII. Now 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 it kind of moderates out over the second, third and fourth quarter. And we are trying to keep our position to be less asset sensitive. And we are moving in that direction with some of the actions that we're taking and we're trying to minimize that as much as possible, but we don't anticipate having that the 4 moves down, that's built into the forward curve right now, but we have to also protect you know which direction rates could go. So we're risk managers from that perspective.
Kelly S. King -- Chairman and Chief Executive Officer
And John, keep in mind that right now, it's hard to figure Daryl's talk about this disintermediation shift in deposits, but there is a tipping point concept with regard to interest rates and the way clients respond. So as rates went up over the last several quarters, we hit a tipping point and people got more sensitized to rates. And so all of a sudden, they had extra money in their checking accounts and they said, well, how does we put it to work. The same thing happens when rates go down. So as rates go down, all of a sudden, the amount of interest that you get by shifting it becomes less attractive to you. So you just get less elastic. So I personally think as if we see these continued declines in rates, there will be less sensitivity and we'll see less of that shift in disintermediation.
John McDonald -- Autonomous -- Analyst
Got it. And maybe just a broader picture when you think about the longer term projections for Truist obviously it's early days, but any changes in terms of the financial goals and the longer term efficiency at 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?
Kelly S. King -- Chairman and Chief Executive Officer
And John, interestingly not much of it has changed, even with all the things that Daryl just talked about, we still feel good about the 51% efficiency, now obviously that's a ratio, and so to the extent that revenue is changed, that has some impact on that, but what we can feel very confident about is the expense reductions. That's why I highlighted, we are very confident we'll get the $1.6 billion net obviously depending on what happens to the denominator, that will move that around a little bit, but not materially. So we still feel really good about it. We think we'll be best in class in terms of efficiency.
In terms of our return on tangible common equity in the 22%, we're already 20% and so I kind of feel very, very confident about that. In terms of the synergies, we don't remember in our model, we didn't even build in any revenue synergies in this, but the more we talk about it, more we get to know and 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. And so this is going to be a really high-performance company.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
The other point I would add to that John is that with rates falling, we really don't know what our capital levels will be at close, but with rates coming down where they are, our capital ratio might actually close of 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.
Kelly S. King -- Chairman and Chief Executive Officer
So way to think about that John is that we've said, we are conservative with regard to capital and particularly going through a major combination like this and 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 1 level. There are certainly some opportunity down the road with regard to that being lower, but for now, we are going to plan on that, but as Daryl said, I mean if rates stay low end of March that to be what we think they're now may look like, we could be pretty immediately and buying back and staying at 10%. So that can -- we're not promising, but they can be very encouraging.
John McDonald -- Autonomous -- Analyst
Got it. Great, thank you.
Operator
And next, we'll take a question from Mike Mayo with Wells Fargo Securities.
Mike Mayo -- Wells Fargo Securities -- Analyst
Hi. Could you elaborate a little bit more on the management announcements in relation to the merger? So by the end of August, you'll have named 75% of the managers. How many in total is that? And what are you concerned about in making these announced? What you're trying not to do? And how is the cultural integration going?
Kelly S. King -- Chairman and Chief Executive Officer
So Mike, the managers is kind of a cascading process kind of going down from the driver post to executive and then layer by layer by layer. So by the time you get to the end of August, we will be down to the lowest level of operating managers, I think down to branch managers that kind of thing. And so all of that is going really, really well and into our 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 MOE is you get to pick the best systems, processes and frankly the best people. So we've got an eye on the best performers, because that's fair, that's just and -- but at the same time, we've got a strong eye on equality in terms of it being an MOE and on diversity and inclusion. And so all of those factors go into these organizational decisions. But so far, I would say that we feel really good about the team that is being put on the field, the mix in terms of diversity, the mix in terms of SunTrust BB&T, it's going extremely well. In terms of the cultural process, we obviously are learning more about each other's cultures as we meet more, not just the executive team, but there are lots and lots of meetings going on down through the organization, 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 and there is a whole lot of planning meeting going on. So there is a lot of interaction and the feedback that Bill and I both get from our teammates and associates is going really well. There are just not any fundamental differences here.
I'd take a lot of comfort in the fact that when we were getting feedback from our employees with regard to the new name, I think we reported to you, we got 10,000 responses from both sides, identifying names that characterize -- words that characterize our companies and all 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, and as I said, over 95% of their comments were extremely positive and it was a very few that what I'd call really negative. But what I found interesting was when I said there, a comment in my mind tried to blank out BB&T or SunTrust and just listen to the comments, you got to follow up these were community groups talking about the very same company.
So there are not any substantial differences in the cultures about this company as it is being formed and 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, but that's not as important as the most important part of course which is purpose, mission and values. So we feel -- Bill and I both feel and our entire team feels really, really good about where we are on culture, but we're not taking anything for granted. We're working really hard to make sure that all of our teammates and associates feel good about this, they feel really engaged, they feel a sense of belonging to the organization, they are needed, they are appreciated, and they're going to be a part of fantastic company that the world will come to respect as Truist, one of the best financial companies in the world.
Mike Mayo -- Wells Fargo Securities -- Analyst
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 stand-alone hearing, I know, Citigroup. That was up for a discussion way back when, but that was in conjunction with the change in the laws. So since you might be the 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?
Kelly S. King -- Chairman and Chief Executive Officer
You're asking me that question? So, well, I'll give you my best shot on that Mike. So 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. So it's a big deal. It's not big in terms of whole scheme of things, we keep saying that provided that even though will be $440 billion, we'd still be about 20% of the size of the largest banks, we'll still have less than 3% of total management deposits. So we're not a megabank which is the heading of the hearing.
So they are concerned that we've created a megabank and we'll create another too big to fail. We will be saying we're not a megabank, we are a large regional bank. We are focused on meeting our clients' needs. We will not be increasing systemic risks. In fact, we will be reducing systemic risks. So we will share that with them.
They're concerned about will we close a bunch of branches and fire a lot of people? We will satisfy them that while there will be over time branch consolidations, we've already committed that our performing client-facing associates will not lose their job on either side. So we will be able to satisfy them that there is 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 do think they view this as an opportunity to talk about the industry, and I think it will be a positive. I kind of view it as four, five hours of free advertising.
Mike Mayo -- Wells Fargo Securities -- Analyst
All right, thank you.
Operator
Next up, we'll take a question from Betsy Graseck with Morgan Stanley.
Betsy Graseck -- Morgan Stanley -- Analyst
Hi, good morning.
Kelly S. King -- Chairman and Chief Executive Officer
Good morning.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
Good morning.
Betsy Graseck -- Morgan Stanley -- Analyst
Kelly, I wanted to understand a little bit more about the timing of the merger, especially as it relates to the tailoring proposal that's out there and the question really is does it matter to you if the tailoring proposal is not yet finalized before your merger is ready to close?
Kelly S. King -- Chairman and Chief Executive Officer
So Betsy, the timing, as you know, is out of our control, but I personally think that we will close this transaction in late third or early fourth, I don't know of anything that would cause me feel differently, although I'll say again I cannot control that. You know this tailoring issue, this is one of the issues that will come up in the hearing, has nothing to do with this, there is nothing that came up when Bill and I were talking about this the multiple times that we talk, there are some financial implications in terms of capital if tailoring does not occur, but it wouldn't change our view in one form or fashion. If BB&T to remain independent, we would oppose to drive past 250 independent of tailoring or not, it's a number out there, but it's not -- it's not nearly sufficient to call you not to try to grow to gain economies of scale to be able to compete in this extremely competitive world we live. So people are blowing that thing out of proportion, it's a tail, it's not [Indecipherable] --
Betsy Graseck -- Morgan Stanley -- Analyst
Yes, I get that --
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
The capital impact is always 60 basis points, Betsy, because you're marking to market the SunTrust balance sheet. So it's not a huge capital impact.
Betsy Graseck -- Morgan Stanley -- Analyst
Right. So, my question was, and if it doesn't happen, would you still do the deal, was more about just the timing question here, if you're ready to close and the tailoring rule is not yet finalized, you have, Daryl, your point of capital level, that shows up a little bit lower for a quarter or two and then once tailoring process goes through, that gets effected. So I was just wondering if you would wait until tailoring went through or not. I guess the answer is no?
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
Absolutely not. We will close this merger the minute we are approved independent of tailoring. If you look at LCR, I mean we could close, I mean it -- 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 2% or 3% more earning assets in the high-quality liquid assets, but that's not material. So we could easily do it in with or without the tailoring impact, I mean even if we didn't have tailoring we'd rather than 2% to 3%, we just had 5% of earning assets of high quality.
Betsy Graseck -- Morgan Stanley -- Analyst
Okay, so not a big deal for you. Okay, that's helpful, and then Kelly, just separately, we hear from other folks about how there is -- 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?
Kelly S. King -- Chairman and Chief Executive Officer
Yeah, Betsy, that's a really good question. I have been involved in about 100 acquisitions over my career and everyone, 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, those taking care of them and they care about the services that we've provided.
So the fact that the main changes is inherently not a reason to cause us clients to come in and change their business. Clients are resistant to change. And if you make a really big mistake, [Indecipherable] that affects, but the fact that competitors say we're going to kind of get the business and all that is not material issue. Occasionally, we we'll have somebody that'll go kind of way off and start raising rates and all that kind of thing and we just counter.
And so we're not going to sit back and let our local competition take our business. So the most important part, the answer to your question is keeping our people because the relationships are between our people and the clients not between names and so we worked really, really hard. That's why we guaranteed upfront our performing client-facing associates on both sides.
We are not seeing any material return [Indecipherable] I got with that turnover is down, so that's not our concern, but we are ramping up our market again, we're not taking anything for granted. First of all, we're going to talk more to our clients so they know what's going on and answer their questions, they like us coming out and talking to them about that, so on our business side, we're calling a lot more. And on the consumer side, we are interacting with them answering any questions that they have, but you know, I've been on two regional visits in the last five days 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 are excited about the name, our associates are really on a high. I mean they are actually more pumped than I might have guessed at this time. So I hear all the competitors say on what they're going to do, but that's just rhetoric that is irrelevant.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
Kelly, I will even add we have been very focused to be transparent to our people internally so that they know everything we know and every step along the way.
Betsy Graseck -- Morgan Stanley -- Analyst
Okay , thank you. Thanks for that.
Operator
And next up, we'll take a question from Matt O'Connor with Deutsche Bank.
Matt O'Connor -- Deutsche Bank -- Analyst
Good morning.
Kelly S. King -- Chairman and Chief Executive Officer
Good morning.
Matt O'Connor -- Deutsche Bank -- Analyst
Daryl, I was wondering if you could -- 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. I mean obviously the SunTrust balance sheet gets marked, but you'll have all this excess capital that you can kind of pick and choose what you want to do with call it BB&T legacy balance. So maybe just talk about some of the things that you would consider and that might impact net interest income going forward.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
I mean given the rate environment, we are in right now, Matt, the way that you would probably try to enhance the run rate is to focus on the liabilities side of the balance sheet. So we would have to look at what borrowings we could have changed to maybe improve run rate perspective from that side. Obviously, their derivative position gets marked, so you can adjust, but their revenue position is in position the company however you want to do that without having anything flow through earnings.
On the assets side, depending on what management and the board want 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, but now the easy things would be securities, derivatives and funding, maybe mortgages, I don't know if we get anything more than that. We have a large auto portfolio. But it's a short portfolio that's probably a good portfolio to have with rates so low.
But we'll go through a lot of things, a lot to figure out over the next couple of months as we get this deal approved and closed.
Matt O'Connor -- Deutsche Bank -- Analyst
And then I guess just conceptually like is the goal to enhance the NIM as much as you can kind of coming out the deal or is it more about it or maybe setting the bar to a more appropriate level and kind of protecting the NIM going forward, right, because conceptually, you can. I don't want to say plug it for what you want, but if you're trying to prop up 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 instability beyond day one, you might approach it differently.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
I mean, first and foremost, we're going to make sure that our risk appetite and our capital and liquidity are aligned to where we want it to be. At the end of the day, our -- we firmly believe that you want to be paid to have consistent repeatable earnings. So we want to position the balance sheet to basically produce consistent repeatable earnings quarter-after-quarter, year-after-year. Not really try to take a gamble on interest rates or anything else, it's all about consistency and that's how we get the higher PE level within the industry. So it's all trying to do the right things with risk and trying to produce a steady return that we can give to our shareholders and be able to grow it consistently.
Matt O'Connor -- Deutsche Bank -- Analyst
And then just lastly, the 2% market taken on SunTrust loans, if credit comes in better than expected, remind me, does that flow through the net interest income. If it's less than the 2% mark that what you take?
Clarke R. Starnes -- Senior Executive Vice President and Chief Risk Officer
Hey, Matt, this is Clarke. That's exactly correct. So hope, we certainly not assume that we would increase that more, but if our performance is better, and we're going to work really hard to achieve that we will get a benefit.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
The one nuance is is when we adopt CECL first quarter of next year, the PCI gets reclassed in the PCD and that accounting benefit unwinds on that portion of it, but on the non-mark portfolio, the non-PCD portfolio, Clarke is correct in that we will get a run-rate go through the margin.
Matt O'Connor -- Deutsche Bank -- Analyst
Okay, thank you.
Operator
And our last question will come from Erika Najarian with Bank of America.
Erika Najarian -- Bank of America -- Analyst
Hi, good morning. Just one more question on the merger. Could you remind us on how the systems integration is going? And 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?
Kelly S. King -- Chairman and Chief Executive Officer
So, Erika, the systems integration planning is going really well. As you know, it's a large complex organization and the way we are approaching it is to have best-in-class. So we are looking at all of the systems. They are all under thorough evaluation as we speak. We'll be picking the best systems from either side and we are moving along to where we think that will be pretty well decided as we get close to Legal Day 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 sound like a one [Indecipherable] 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, then another state or much later et cetera or it may be that you do like deposits across all states and you come back a month later into loans across.
So we haven't decided that yet, but we're going to be measured about how we roll that out just to mitigate and minimize the risk. The wholesale part of the business will be able to integrate faster just because it's not as many pieces. So wholesale will integrate faster and cost saves will come faster, revenue enhancements will come faster. The retail, the branches take a little longer just because you just got so many branches and we want to be really careful about that.
But even so, we think we're heading toward full conversion in 12-month to 18-month kind of time frame. And as you think about kind of getting to the final run rate of expenses that's kind of time frame that you ought to be thinking about.
Erika Najarian -- Bank of America -- Analyst
Got it. Thank you. And 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 from as the loans go from -- purchase credit impaired to purchase credit deteriorated. But the non-deteriorated portfolio, is there an additional mark that you would have to take if you close the deal in 2019?
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
I'll take that one. So, well, what -- if we close in '19, we'll take the normal marks that you would normally do. If we closed in '20, which we don't anticipate, basically you take the marks, what we use is the transition benefit of adopting CECL on the SunTrust side of that portion. Does that help?
Erika Najarian -- Bank of America -- Analyst
Yes, thank you.
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
All right.
Operator
And that completes today's Q&A session. I will now turn the call back over to Rich Baytosh for closing remarks.
Richard Baytosh -- Executive Vice President, Investor Relations
Okay, thank you, Rolando. And thank you for everyone for joining us. I recognize that there were some people still in queue and we will get back to you later today and I hope everyone has a great day. Thank you.
Operator
[Operator Closing Remarks]
Duration: 63 minutes
Call participants:
Richard Baytosh -- Executive Vice President, Investor Relations
Kelly S. King -- Chairman and Chief Executive Officer
Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer
Christopher L. Henson -- President and Chief Operating Officer
Clarke R. Starnes -- Senior Executive Vice President and Chief Risk Officer
John Pancari -- Evercore Partners -- Analyst
John McDonald -- Autonomous -- Analyst
Mike Mayo -- Wells Fargo Securities -- Analyst
Betsy Graseck -- Morgan Stanley -- Analyst
Matt O'Connor -- Deutsche Bank -- Analyst
Erika Najarian -- Bank of America -- Analyst
