Truist Financial Corporation (TFC) — Q2 2019 Earnings Call Transcript

Thank you, Orlando, and good morning, everyone. Thanks to all of our listeners for joining us today. On today’s call, we have Kelly King, our Chairman and Chief Executive Officer; Chris Henson, our President and Chief Operating Officer; and Daryl 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 the 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.

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, driven by strong loan growth, improved revenues, especially in insurance, but also very strong investment banking revenue and a solid mortgage rebound. Excellent asset quality once again. Clarke will give you detail on that. We’re making excellent progress regarding our merger of equals with SunTrust. So, if you’re on Slide 4, net income was a record $842 million, which was up 8.6% versus the second quarter of 2018. Now, that is – if you look at net income excluding merger and restructuring charges, and this quarter we’re also calling out incremental operating expenses related to the merger. It was a record $868 million, up 9.7% versus the second quarter. Diluted EPS was a record $1.09, up 10.1% versus the second quarter of 2018. Adjusted EPS was a record $1.12, up 10.9% versus the second quarter of 2018. Our adjusted ROA, 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 have overall strong fee income that 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 some detail on that. Investment banking and brokerage also had strong quarters, up 20% like-for-like quarter and annualized 72% linked quarter. 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 is a lot going on with regard to the yield curve, as you all 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. Our adjusted efficiency ratio came down to 55.1%, which has been a long-term target for us. That’s a result of excellent performance coming out of our disrupt-to-thrive strategy, which has been a focus for the last three years. Adjusted expenses were $1.72 billion, up versus last quarter and like quarter, that was due primarily to incentives based on related strong fee performance, somewhat offset by lower payroll taxes. Credit was just great. The NPA ratio was 0.23%, a decrease of 3 basis points. We think it’s the lowest we can remember or we could find in the records also, it’s really good. 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 make great progress in combining BB&T and SunTrust in a merger of equals to create Truist, the 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, it’s the old Hearst building. We just announced a $60 billion community benefits agreement, which we are 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 and to light the way to financial wellbeing. We’re making really good progress in laying out the management structure. We’ve already announced about 900 positions, and the next layer will be out by the end of August, which will get us down into the organization as we move forward. We have a special shareholder vote set by July 30 by BB&T and SunTrust. We’re very, very excited about that. If you look at Slide 5, we had two categories of selected items to call out to you. Our regular merger-related and restructuring charges were $23 million pre-tax, $19 million after-tax, or about $0.02 diluted EPS impact. We’re also calling out what we’re going to refer to 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 but they do provide future benefits, and they will not be a part of our expense run rate. We simply want to be very transparent in this regard, because we want you to have good information as you determine our run rate going forward. On Slide 6, we had a really good loan growth quarter. The aggregate loan growth was 6.5%, which is strong given the market environment we’re in. C&I was up 7.8%. We’re really pleased about that, while CRE was down 3%, but that was frankly by design. We’ve talked about the fact that there is a lot of very stretched underwriting going on out in the marketplace, particularly in the CRE space. We choose not to participate in that, so we’re actually very pleased with that metric. Our auto portfolio is now turned the corner as projected, growing small amount 0.5%, larger due to some product changes made in the branches, particularly our auto branches. Overall, we feel really good about the economy, and while there’s talk about potential economic issues ahead, the feedback we get is that business activity remains resilient, and we are still achieving loan growth as reported. If you’re following along on Page 7, we were very pleased with our overall deposit performance given the operating environment. Our total deposits were down slightly 0.4%, but encouragingly our noninterest-bearing deposits, or DDA was up 3%. Our client deposits, excluding national market funding sources, increased 2.6%, which is very strong. Our percentage of noninterest-bearing deposits rose to 32.9% compared to 32.7% in the first quarter. The cost of interest-bearing deposits was 1.02%, up 7 basis points, but that was a slower increase from last year. The cost of total deposits was 0.68%, which was up 4 basis points. So, it is a very challenging environment with the deposit disintermediation that is currently taking place, and Daryl’s going to provide good insights in that area shortly. Daryl.

Thank you, Kelly, and good morning, everyone. Today, I’m going to talk about excellent credit quality, margin and fee income dynamics, improved efficiency, and provide guidance for the third quarter and full year 2019. 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 nonperforming asset ratio was 23 basis points, below our previous low seen in 2006. Continuing on Slide 9, our allowance coverage ratios remained strong at 2.8 times net charge-offs and 3.46 times nonperforming loans. We recorded a provision for 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. The reported net interest margin was 3.42%, down 5 basis points after adjusting for dividends on nonqualified plan assets received in the first quarter. Our core margin of 3.34% was down 6 basis points after adjusting for the first quarter nonqualified plan dividends. The net interest margin was impacted by lower rates that slowed and increased in loan portfolio yields. In addition, faster prepayments on residential mortgage loans increased premium amortization resulting in a 2 to 3 basis points negative impact on the second quarter margin. The cost of interest-bearing liabilities increased 8 basis points in the second quarter versus 13 basis points in the first quarter. We're still seeing mixed changes in our core deposits, offsetting the decreases in interest rates. Note that BB&T plans to sell approximately $4 billion of residential mortgages, which will reduce our asset sensitivity and negative convexity. The proceeds from the mortgage sale will be reinvested in high-quality securities to provide improved liquidity from the upcoming merger. Continuing on Slide 11, noninterest income was a record $1.4 billion, up 10.6% versus the like quarter, resulting in a fee income ratio of 44.4%. Record insurance income increased $56 million reflecting solid organic growth and seasonality in property and casualty. 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 mortgage servicing rights valuation adjustments and seasonally higher mortgage sales volumes. Service charges on deposits increased $10 million due to additional 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 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. Excluding the merger restructuring charges and the incremental operating expenses related to the merger, our adjusted noninterest 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 common equity Tier 1 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 Banking 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 in higher mortgage volume, and net MSR valuation adjustments of $29 million. Improved loan production was driven by strong growth in mortgage and indirect lending. Residential mortgage originations were about 70%, up from last quarter. The production mix was 68% purchase and 32% refinance. And again, our fair margin was 1.65% versus 1.60% last quarter. Turning to Slide 15. Community Banking Commercial net income was $319 million, a $9 million decrease 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 noninterest income. Loan production increased 15.4%, mostly due to seasonality. Turning to Slide 16. Financial Services and Commercial Finance net income was $169 million. The $13 million increase reflected a $45 million increase in noninterest income attributable to higher deal activity, managed account fees, client derivative fees, and commercial mortgage banking income. Higher revenue was partially offset by a rise in noninterest 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, and the seasonal pickup in PNC commissions were partially offset by higher incentive-based compensation. Organic revenue was up 11.6% from a year-ago quarter. Now I’ll turn it over to Chris to provide more insight on Insurance Holdings performance this quarter.

Thanks, Daryl. The purpose of the two slides on 18 and 19 is really to show the transformation plan that John Howard and his team implemented and also shared at Investor Day last fall, which continues to gain momentum. The plan, as a reminder, was developed with the assistance of BCG a little over a year ago and is now in full swing. It's built around 31 initiatives, implementing new operating models for both retail and wholesale, along with numerous revenue growth and expense reduction initiatives. As a result, we’re seeing significant momentum across all lines of business. On Page 18, you can see our revenue increased 17.6%, or $89 million. If you exclude the $32 million from Regions, we now have organic revenue improvement of $57 million. Looking at our organic growth, there are three key drivers, pricing being one. Recall that we are post two of the largest insured loss years in history in 2017 and 2018. We saw our pricing bump in the first quarter to flat to up 2%, and in the second quarter, we actually moved up plus 3.5%, which is quite beneficial. New business, producing new units, is far and away the largest driver of organic growth, which is enabled by a strong economy and we see that continuing. We also have high retention rates, which have improved since the first quarter, retail up to 92.1% and wholesale to 79.6%. This gives us substantial organic growth; I think it's probably the best numbers that we’ve posted in our history. If you look at light quarter comparison, organic growth improved from 5.2% to 11.6%. All the numbers rolled in for the quarter will likely see the industry averaging around the 4% to 5% range. Economic fundamentals are still very favorable for our business as companies grow and add equipment, expand buildings, and hire new employees, which are all insurable items. Market conditions are stable; we've seen pricing in specific markets begin to harden. For instance, commercial auto is up about 6% and commercial property, where we hold a disproportionate share, is up around 3.5-4% this quarter. Moving to Page 19, another major focus is on margin improvement. If you look at the upper left chart, our adjusted EBITDA, excluding merger-related charges, increased significantly from $120 million to $171 million, up $51 million. We’re right on track with Regions now that we’ve had a full 12 months to achieve our target expense and revenue synergies. Organic growth, a strong expense control, are the key drivers of improved margin. In terms of organic growth, as mentioned earlier, new business growth hinges on the economy, putting us at a growth rate of 9% year-to-date which is substantial. Expense control is seen across all business lines with new system implementations, yielding cost implications and improving speed to delivery. Our EBITDA margin this quarter posted the best performance recorded in our history; we improved from 23.7% to 28.8%. While this quarterly performance is expected to be the strongest seasonal quarter of the year, we aim to maintain this performance through strategic optimization and utilizing data and analytics to enhance client experience and knowledge. We’re doing this especially within wholesale. In summary, the transformation initiated about 15-18 months ago is beginning to yield results, and I am optimistic for the rest of 2019.

Thank you, Chris. Continuing on Slide 20, you’ll see our outlook. Looking at the third quarter, we expect average total loans held for investment to be down 4% to 6% annualized versus the second quarter. Excluding the mortgage sale, loans are expected to be up 4% to 6% annualized. We expect net charge-offs to be in the range of 35 to 45 basis points, and provision is expected to match charge-offs plus loan growth. We expect both GAAP and core net interest margin to be down 4 to 8 basis points versus the second quarter. We've pre-invested the proceeds from the mortgage sale in high-quality securities. Since the security is settled 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 negatively impact forward net interest income. Excluding this temporary increase in earning assets, we expect net interest margin to decline 1 to 5 basis points in the third quarter. We anticipate fee income to be up 2% to 4% versus the like quarter, and we expect expenses to be flat compared to the like quarter. Incremental operating expenses related to the merger may increase from second quarter levels, which is why we created this category. Finally, we anticipate an effective tax rate up from 20% to 21%. Our previous full-year guidance remains unchanged. In this challenging rate environment, we will continue to grow revenue faster than expenses, driving positive operating leverage as we move towards the merger of equals close with SunTrust. To summarize, the quality of our earnings this quarter was excellent, resulting in record earnings, positive operating leverage relative to the 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 thoughts, and Q&A.

Thanks, Daryl. If you’re following along on Slide 21, we want to provide some detail regarding where we stand, as obviously this is a major focus moving forward for both companies. First, let me say that Bill Rogers and I are very pleased with our progress. We have been collaborating extremely well. We've known each other a long time. We have a united view in terms of the industry dynamics that led to this merger. The new executive management team is functioning great, meeting weekly as a whole team since we announced the combination. We're making substantial progress with the regulatory process; we held regulatory hearings on April 24 in Charlotte and May 3 in Atlanta. We've had over 1,000 public comments, of which over 95% are positive and supportive of the merger. Our capital plan has been submitted successfully and we feel positive about that. As mentioned, we've announced about 1,000 of our key management positions and by the end of August, we expect to have over 75% of our announcements made. This will ensure effective leadership throughout the organization. Recently, we announced our investment in the Greater Atlanta area and the Greater Piedmont Triad area of North Carolina, as well as our headquarters build. The name, Truist, was announced, and we feel good about it. We wanted a name that reflects a forward-looking company aimed at helping clients meet their dreams and goals. The merger proxy statements have been mailed to BB&T and SunTrust shareholders, and we’ll have shareholder approvals separately, but on the same day, on July 30. We announced our $60 billion community benefits plan, which is significant. On July 10, we received regulatory approval from the North Carolina Commissioner of Banks, which is substantial. Looking ahead, expect continued work on building our innovative culture together, and we’re committed to ensuring there are no substantial cultural issues during this merger. Bill and I both feel very good about where we stand in terms of culture. We are actively planning for the day one operations of the new company to ensure we will be ready to run effectively from the outset. We will have a hearing scheduled with the United States House Committee on Financial Services on July 24, which we expect to go smoothly. Following remaining regulatory approvals, we will be in a position to close. We remain confident about our projections for $1.6 billion in net cost synergies and cost savings net of our investments back into the business. Overall, as Daryl stated, we had a strong quarter, a solid economy, and are making great progress on the merger of equals. I firmly believe Truist will be an exceptional company, and our best days are clearly ahead.

Thank you, Kelly. Orlando, at this time, if you could come back on the line and explain how our listeners could participate in the Q&A session.

Good morning.

Good morning.

Morning, John.

Sorry if I missed it. But could you tell us what you assume for fed cuts in your current outlook? And then separately, if you could just give us a little bit of color on how you’re thinking about the NIM beyond the third quarter color that you gave, how you view the NIM trajectory through the end of the year? Thanks.

Yeah, John, this is Daryl. Our forecast includes one rate decrease in July of this quarter, third quarter, and then another one in the fourth quarter in October, and that’s what we’re forecasting out. Guidance for the fourth quarter depends on how our deposits react and how they re-price with everything and competition. My guess is, since we see a slight decrease of 3 basis points back from the third quarter margin because of an increase in earning assets temporary from the investment, it may result in a flat or slightly down quarter in the fourth quarter.

Okay. Thank you. And then, longer term, in terms of the NIM, I know you had previously indicated or talked about a core NIM in the ballpark of about 3.30% plus or minus post the deal. Just given the rate backdrop, I got to assume that may have changed. Can you update us on that? Thanks.

With the current rates potentially going down and the flatter curve, that does put pressure on net interest margin. I would update you once we get the deal approved and closed on what core margin will be and what GAAP margin will be. But definitely, you’re going to see some tighter margins if the rate scenario stays constant. If you see four rate cuts, potentially, that's something we don’t think will happen, but if it does, that would put pressure on margin. However, we will have an opportunity at closing to reposition the balance sheet accordingly.

Right, John, this is Kelly. I will just say it's my opinion that the market is overreacting to the current situation in the world. While there may be some cuts, the sentiment really overstates the decline in rates. I believe the projections of economic collapse and aggressive rate cuts are exaggerated. We may see a slight decline but overall, the economy appears resilient.

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 insurance revenue, and I know Chris provided some good insights there. What is the outlook? What type of growth rate do you think is sustainable longer term as you focus on the improvements in the profitability of the business?

Yeah, John, I appreciate the question. In the near term, remember second quarter is our strongest quarter. Third quarter is typically our weakest seasonal quarter of the year. So, you can expect that this may be down in the 15% to 16% range in the third quarter. However, if you look for the rest of the year, the industry is projecting something in the 4% to 5% range. Currently, our organic growth is at 9.3%. Post the two largest insured loss years in our history, we are seeing rates beginning to bounce back. As long as the economy holds, that drives new business growth, which is the largest driver of our growth. So, I believe we're in that 5.5% to 6% range for the year, which would be the best numbers we’ve ever posted in organic growth and significantly ahead of the industry average.

Got it. All right, thanks, Chris.

You’re welcome.

Good morning. Daryl, just want to follow up on John Pancari’s question regarding the NII dynamics. What kind of outlook do you have for net interest income in the back half of the year? And then, if we wanted to isolate the impact of 125 basis points fed cut, what would that be?

In the third quarter, we predict only one rate cut will occur. Our NII will likely be down slightly on a linked quarter basis, possibly around $1.690 billion this quarter. It may dip by a little, maybe $5 million to $10 million due to funding pressure. Looking further out to the fourth quarter, it will depend on whether we see another rate cut or not; there's potential for it to remain relatively flat to slightly down. Ultimately, that will hinge on the shape of the curve.

And then, any changes in your rate sensitivity? The mortgage sale will impact that, but can you quantify what one cut would do if we wanted to isolate that?

Sure. On the chart on our Page 10, the Down 25 scenario currently reflects a $60 million hit to NII, which assumes over a year. It's not evenly distributed, but I’d say about $20 million for the first quarter, tapering over the second, third, and fourth quarters. We’re trying to optimize our position to mitigate assets sensitivity and while we’re trending in that direction, we want to minimize exposure.

And John, remember that the current decline in rates could lead to clients becoming less sensitive to rates. If their rates go down, their perceived opportunity to shift funds becomes less attractive. Thus, while the current environment is evaluating opportunities for disintermediation, continued declining rates may have less effect.

Got it. And maybe just a broader picture regarding the longer-term projections for Truist. It's fairly early, but have there been changes to financial goals, particularly around the longer-term efficiency target of 51%? Additionally, how are you viewing core capital levels around 10%?

Interestingly, not much has changed. We still feel good about the 51% efficiency target. Naturally, that ratio goes as revenues change, but what we feel confident about is expense reduction. We remain assured we’ll achieve the $1.6 billion in net cost reductions, even though variables may shift slightly. We’re committed to achieving best-in-class efficiency. As for tangible common equity at 22%, we currently stand at 20% and feel assured about that as well. In terms of synergies, we forecasted conservatively and are now seeing clearer revenue synergies emerge as we become more aware of our complementary businesses.

Another point I'd add is with rates falling, the capital levels at closing might surpass 10%. Assuming we receive a non-objection from the Fed concerning our capital plans, we could actually be in a position to initiate buybacks sooner rather than later.

Correct. We previously expressed concerns regarding capital levels during such a major merger, notably in light of market uncertainties. While we aim for the 10% common equity Tier 1 level, future opportunities may surface that could lead to adjustments.

Got it. Great. Thank you.

Hi, could you elaborate a little bit more on the management announcements related to the merger? By the end of August, how many managers are you expecting to name, and what challenges are you focusing on as you make these announcements? How is the cultural integration going?

So, Mike, the managers’ announcements focus on streamlining direct reports to executives, progressively moving down to the lower levels of operations mid-August. By then, we will have made substantial progress towards appointing the best managers. One major advantage of a merger of equals is the opportunity to select the best systems and people while maintaining strong oversight on equality, diversity, and inclusion during management decisions. So far, we're pleased with the team dynamics and the mix of expertise represented. Regarding cultural integration, as we interact more with the respective teams, we’re learning more about each other’s cultures and priorities. There are numerous planning meetings at all levels. Overall feedback suggests positive sentiments about the merger experience. Bill Rogers and I have received consistent positive feedback about the name; our team engaged in discussions with community representatives who expressed overwhelming support for the merger. We perceive this combination as beneficial not only for our companies but for the communities and the economy.

One follow-up: A potential roadblock could be the hearing next week. I don’t recall hearing this before banking—only at the Citigroup discussion back when they were undergoing changes. Why is this hearing taking place, and what insights are you aiming to convey?

Valuable question, Mike. This is the first significant merger since the recession, and it's among the largest bank mergers historically. Though we’re growing to a size of $440 billion, we will still only hold around 20% of the largest banking share and less than 3% of total deposits. Our goal is to convey we are not creating a megabank, but a robust regional bank focused on client needs without raising systemic risk. While there may be consolidation, we are confirming that frontline associates will not lose their jobs—maintaining those relationships is key. This merger will yield overall benefits for the economy and our communities. I see this hearing as a valuable opportunity to promote what we aim for.

Good morning. Kelly, I want to understand the timing of the merger, particularly concerning the tailoring proposal in process. Would you want the tailoring proposal finalized before closing the merger?

The timing is not in our control, though I personally believe we will close this transaction late third or early fourth quarter. I cannot foresee anything preventing this timeline. The tailoring issue will be discussed in the upcoming hearing, but its outcomes are unrelated to our merger's progress. While there are financial implications in terms of capital if tailoring does not occur, it wouldn’t alter our perspectives. Even independent of tailoring provisions, note that we would have surpassed the $250 billion threshold, not merely for the sake of growing. We operate in a fiercely competitive market, and such discussions are exaggerated compared to the realities of our operations.

Certainly, that clarifies things. Thank you, Kelly. Separately, others have indicated this merger may provide opportunities to capture share from strong talent or clients. I want to hear how you will ensure you’re retaining market share during this transition period.

That’s an excellent question, Betsy. My involvement in about 100 acquisitions leads to competitors claiming they’ll capture our business. Historical evidence shows this doesn’t typically occur. Clients value established relationships with their bankers and the quality of services we provide. Simply changing a name doesn't equate to client loss, as client resilience remains strong. While occasional competitors may increase rates to attract business, we will proactively counter. Thus, our priority is retaining our teams since relationships matter more than names in the banking sector. We are investing significant resources into communication and strategizing for effective client engagement during this period. Frankly, I’ve recently received positive feedback from team members affirming excitement about our trajectory.

Kelly, I would even add that we are prioritizing transparency internally, ensuring all employees are aware of developments as time progresses.

Thank you for that clarity.

Absolutely.

Good morning.

Good morning.

Thanks, Matt.

Daryl, could you discuss considerations for balance sheet repositioning post-deal in light of the rate environment? While I understand the SunTrust balance sheet will be marked, there are excess capital opportunities for BB&T. Which areas will be prioritized?

In the context of the current rate environment, Matt, we’ll likely focus on the liability side of the balance sheet to enhance our positioning. We can review borrowings for alterations that improve our position. We must also assess derivative positions and manage the asset side with consideration of our mortgage portfolio, the asset’s makeup, and others. We’ll evaluate these elements to strategically enhance our existing structure as the deal progresses.

Is the goal to optimize NIM right from the start or focus more on stability post-acquisition?

First and foremost, aligning on risk management with the deemed levels of liquidity and capital will ensure consistency in our earnings. We aim to foster stable, repeatable earnings growth while managing risks effectively. This approach is critical for consistent long-term performance.

Lastly, regarding the 2% mark taken on SunTrust loans, if credit performs better than expected, would that directly influence NIM?

Correct, Matt. The potential for improved performance without increasing the mark would reflect positively in our NIM dynamics.

While on the subject of CECL transitioning, the PCI component is refreshed during the first quarter, with the accounting prevention unwinding that section; however, non-mark portfolios will maintain flow through our margins effectively.

Thank you.

Hi, good morning. I have a specific inquiry about systems integration as it pertains to mortgage, wholesale, and retail aspects concerning the anticipated timing over the next two years?

Erika, our systems integration planning is progressing positively. We are diligently reviewing all systems with the idea of exercising best-in-class methodology as we make these crucial comparisons. We will identify the most effective systems shortly before reaching legal day one, leading into applications of execution strategies. Operational conversion may follow a sequential state-by-state rollout rather than an all-at-once setup. Importantly, the wholesale part will integrate faster because it contains fewer components. Anticipate scaling up to a full conversion in around 12 to 18 months. Regarding the overall timing for cost savings after the merger, expect that timeframe to remain in line with those outlined plans.

Thank you for the insights. Regarding the SunTrust portfolio in a CECL environment, even acknowledging the transition effects from purchased credit impaired to purchased credit deteriorated, is there any additional mark needed if we close the deal in 2019?

Should we close the deal in 2019, the standard marks that normally apply will be taken. If we close in 2020, which we do not anticipate will happen, those extra marks transition to CECL until then.

That’s helpful, thank you.

Okay. Thank you, Orlando, and thank you everyone for joining us. I recognize that some people were still in the queue, and we will follow up later today. I hope everyone has a great day. Thank you.