Q2 2019 Earnings Call
Hello, My name is Jacqueline Gary him J H T T U E L I and E.
Gary Han Ji.
And.
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Greetings, ladies and gentlemen, and welcome to the BB Antique Corporation second quarter 2019 earnings Conference.
Currently all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
Okay.
As a reminder, this event is being recorded it is now my pleasure to introduce your host rich beta launch of Investor Relations for Bebe Anti Corporation.
Thank you Orlando and good morning, everyone.
Thanks to all of our listeners for joining us today on today's call. We have Kelly King, our chairman and Chief Executive Officer, Chris Henson, Our President and Chief operating Officer, and Daryl 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 and a session.
We will be referencing a slide presentation during the call a copy of the presentation as well as our earnings release and supplemental financial information are available on the BMT web site.
Before we begin leveraging new remind you BBSI 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.
Bdcs actual results may differ materially from those contemplated by these forward looking statements.
In addition in connection with the proposed merger with Suntrust.
BMT has filed with the SEC a registration statement on form S. Four to register the shares of Bdcs 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 BMT and Suntrust seeking their approval of the proposed transaction.
Please refer to the cautionary statements on page two regarding forward looking information in our presentation, our SEC filings and the legends on page three they relate to additional information and participants in the solicitation.
Please also note that our presentation includes certain non-GAAP disclosures. Please refer to page two and the appendix of our presentation for the appropriate reconciliations to GAAP.
And now I'll turn it over to Kelly.
Thank you rich good morning, everybody and thank you for joining our call.
We are really pleased where you're out overall, a very strong quarter of strong results with record earnings.
Really driven by strong loan growth to improve revenues, especially in insurance, but also a very strong investment banking revenue and drove solid mortgage rebound excellent asset quality once again clock or give you detail on that.
And we're making excellent progress with regard to our employee with Suntrust.
So if you're on slide four our net income was a record 842 million, which was up 8.6% versus second quarter value chain.
Now that is.
If you look at net income excluding merger as restructuring charges and.
This quarter, we are also calling out incremental operating expenses related to the merger. It was a record 806, eight mode and up 9.7% versus second quarter.
Diluted Jvs was record a $1 nine of 10.1% versus second quarter body team adjusted EPS was a record $1.12 up 10.9% processor core body team, our adjusted our ROA and ROE and ROTC or very strong.
At respectively, 1.59, 12.34 and 20%.
Our record revenue was $3.1 billion of 19.8% annualized from the first quarter and up 5.7% proceeds through second quarter.
So we really had overall strong fee income debt really helped offset.
Negative effects of the curve flattening.
We had fee income was a record 1.4 barium of 150 million from the first quarter really strong revenue performance in every regard an insurance, Chris who will give some real detail on that.
Investment banking and brokerage also had strong quarters of 20% linked quarter annualized 7% to 2% linked quarter and interestingly every fee category grew during the during the quarter.
Now NIM decreased nine 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 well know Daryls will give you a lot of detail on that and 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 the result of excellent performance coming out of our our disrupt with our strategy, which was the last three years of focus on expenses.
Our adjusted expenses were 1.72 billion.
Versus last quarter and light quarter.
That was due primarily to incentives based on related strong fee performance somewhat offset by lower payroll taxes.
Credit was just great NPK ratio was <unk> 0.23, a decrease of three basis points. We think it's the lowest we can remember where we can finally directives officers really good.
Charge offs for 38 basis points for us to 40 basis points in the first quarter and 30 basis points and video light quarter.
We continued to have made great progress in combining BBT and Suntrust.
And our merger of equals.
Create truest at Premier Fat financial institution, I'll talk more about that.
And a little bit.
But we did.
Announce our new headquarters building in Charlotte.
Which is one of the tallest billings in Charlotte, we are familiar with Charlotte COO horse building.
We did just this week announced a 60 billion dollar community benefits agreements.
Which we are excited about in terms of working with our communities because one of the most important reason we're doing this merger is to be more of a leader in making the world a better place to be and lightweight financial wellbeing.
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 is way down way way down into the organization.
We do have a special shareholder vote is set for July Thirtyth, Bobby NTM Suntrust.
And so we're very very excited about that I'll give a little bit more color on the movie and just a bit.
We are selling $4 billion worth of residential mortgages.
To respond to the changes in interest rate environment, which Daryl will give you detail on.
If you look at slide five.
We did have two categories of selected items to call out to you.
A regular merger related and restructuring charges was 23 million pre tax 19 after tax or about two cents on diluted EPS impact and again, we're calling out what we were going to just referred to for the next few quarters incremental operating expenses related to the merger, which was 9 million, which was another penny. 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 but we want you to be able to consume.
I have good information to consider.
As you know Tom in our run rate as we as we go forward.
If you look at slide six is a really good job.
Loan growth.
Our quarter.
The aggregate loan growth was 6.5%, which is our strong given the market environment, where am I see and I were really pleased about which was 7.8% our CRD.
Pardon me was down 3%, but that was frankly by design.
We've talked to you about on a factor there is a lot of.
Really stretched underwriting going on out in the marketplace, particularly the CRT space, we choose not to participate in that so we're actually very pleased with that.
Our metric our auto portfolio, we're really excited about we've been talking to you about lab optimizing portfolio.
It is now turned the corner as we projected.
And news did grow small amount more 5%, but it did grow.
And thats largely due to some product changes we made into branches, particularly our auto branches on an older loans that were making in the branches. So overall really strong loan growth and we feel really good about it you know 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 talk to him directly I'll get direct feedback from our people in our commercial in our community Bank.
Does does no sign of any kind of eminent slowdown.
Not to say that 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 pretty resilient their businesses are good.
And the underlying activity is flowing through and getting to kind of loan growth that I 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 seven.
We were very pleased with our overall deposit performance given the environment that we're operating in.
So our total deposits were down slightly for 4%, but very encouragingly, our noninterest bearing deposits with da was up 3%.
Our client deposits, which excludes national market funding sources increased two point.
6%, which is very strong.
Our percentage of non interest bearing deposits was 32.9 compared to 32.7 in the first quarter, So thats encouraging.
The cost of interest bearing deposits was 1.02 up seven basis points, but it was slower.
Increase than last quarter.
And the cost of total deposits was points excite.
Which was up four basis points. So it is a very challenging time with the ratios and the deposit disintermediation that is going on and telco providers, which some really good cover our color in that area. Because we know you're very focused on it and it is over quarter Daryl.
Thank you Kelly and good morning, everyone today Im going to talk about excellent credit quality margin in fee income dynamics improved efficiency.
And provide guidance for third quarter and full year 19, turning to slide eight credit quality remains strong net charge offs of $142 million were down two basis points as a percentage of average loans, our nonperforming asset ratio was 23 basis points and is below our previously seen in 2006.
Continuing on slide nine.
Our allowance coverage ratios remained strong at 2.8 times net charge offs and 3.46 times to nonperforming loans, we recorded a provision of credit losses of $172 million, which exceeded net charge offs of 142 million.
At $30 million allowance build was in line with loan growth.
Keeping our allowance to loan ratio flat at 1.05%.
Turning to slide 10.
Three reported net interest margin was 3.42% down five basis points after adjusting for dividends and non qualified plan assets received in the first quarter. Our core margin was 3.34, which is down six basis points. After adjusting for the first quarter Nonqualified plan dividends.
Net interest margin was impacted by lower rates has slowed and increased.
And the loan yield port loan portfolio yields.
In addition, faster prepayments on residential mortgage loans increased premium amortization, resulting in a two to three basis point negative impact on second quarter margin.
The cost of interest bearing liabilities increased eight basis points in the second quarter versus 13 basis points in the first quarter.
We are still seeing mix changes in our core deposits that are offsetting a decrease in interest rates.
Note that the BNP 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 eminently.
Continuing on to slide 11.
Non interest income was a record $1.4 billion up 10.6% versus linked quarter, resulting in fee income ratio of 44.4%.
Record insurance income increased $56 million, reflecting solid organic growth and PNC seasonality.
Reagents insurance contributed $32 million to insurance income.
Excluding regions insurance income rose, 11% from a year ago and strong organic growth.
Looking ahead.
Recall that insurance income a 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 NSPI see 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 of 1.8% increase from a year ago, and a 3.9% decrease from the prior quarter.
Included in the operating expenses for 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 design and planning of truest.
Excluding the merger restructuring charges and the incremental operating expenses related to the merger our adjusted non interest expense increased 1.4% from a year ago to 1.7 billion.
I would note personnel expense increased 30 million to $33 million due to a $43 million increase incentive related compensation, partially offset by a $14 million decrease in payroll taxes.
There were 563 fewer fts versus the first quarter.
Continuing on slide 13.
Capital and liquidity remains strong our cetone ratio was 10.3% flat with last quarter, our dividend and total payout ratios were 36.8%.
Our modified averaged LCR ratio was 129%.
In addition, our board will consider increasing our quarterly dividend by 11% to 45 cents per share at the July meeting.
Now, let's turn to slide.
14 to review our segments.
Community Bank retail 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.
And residential mortgage originations were about 70%.
Up from last quarter, the production mix was 68% purchase and 32% re Fi and a gain on sale margin was 1.65% versus 1.60% last quarter.
Continuing on slide 15.
Community banking commercial net income was $319 million and 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 increased non interest expense and higher provision.
Average loan balances grew 8.6% annualized aided by corporate banking and equipment finance.
Turning to slide 17.
Insurance holding net income was $111 million, an increase of 23 million total revenue increased $57 million.
As a seasonal pickup in PMC commissions were partially offset by higher incentive based compensation organic revenue was 11.6% from a year ago quarter now I'll turn it over to Chris to provide more perspective on insurance holdings performance this quarter.
Thanks Darryl.
Purposes, the two slides on 18, and 19 and 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 DCG, a little over a year ago and is really in full swing is built around 31 initiatives includes implementation of new operating models for both retail and wholesale.
As well as numerous revenue growth and expense reduction initiatives and as a result, I think you see 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.
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 an improvement of $57 million.
And 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 we were.
Closed 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 then second quarter. We actually saw moved to of plus three 3.5%, which is very helpful.
New business, which is producing new units is far and away the largest driver of organic growth and thats really able by strong economy, we see that continuing.
And then we've got really high intention rate retention rates, which have actually improved since first quarter retails 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 linked quarter comparison, we moved from 5.2% to as Daryl said up to 11.6%.
And I believe when all the numbers rolling in for the quarter, we'll probably see the industry, probably averaging in the five of us 4% to 5% range.
Economic fundamentals will show really favorable for this business as you as businesses grow and add equipment and expand buildings and add people those are all insurable items.
The industry versus exposure units.
We see that continuing to grow and then also market conditions are stable alluded to pricing you are seeing some specific markets, where there have been insured losses begin to harden a bit for example, commercial auto is up about 6% in commercial property, which we have a disproportionate large share to 3.5% bumped up 4% this quarter.
If you turn to page 819 excuse me.
And again at another major focuses on margin improvement and if you look at the Upper left chart, you'll see our adjusted EBITDA adjusted meaning we pull out merger related charges you can save for like quarter up from 120 million to 171 million. So up $51 million were still very much on track was 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 were 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 Thats really hinges on the economy.
And were up 9% year to date layer, which is substantial.
The expense control side, certainly we've mentioned regions, but we also have ft savings really across all business lines.
And we've got new systems implementations, which have cost implication in some cases revenue in speed to 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 we have this quarter posted the best margins that we have ever posted now this is our strongest seasonal seasonal quarter of the year, we won't maintain this but we went from 27 up to 28 eight.
Which is we haven't seen those numbers in our in our history.
So we're going to continue to optimize operations looking forward and we're going to begin to shift to differentiate with the use of data and analytics really to enhance client experience and knowledge of the client.
And we are doing that especially today in wholesale so in summary, I'll just tell you. We're really proud of the transformation. We started 15 or so months ago 18 months ago really is really begin to kick in and we're going to see.
Really a bright the remainder of 2019 in terms of environment for this business is expected to continue to perform strongly so I'll turn it back over to Dale. Thank you Chris continuing on Slide 20, you will see our outlook looking at the third quarter. We expect average total loans held for investment to be down 46% annualized versus second quarter.
Excluding the mortgage sale loans are expected to be up 46% annualized.
We expect net charge offs to be in the range of 35 to 45 basis points and the provision is expected to match charge offs plus loan growth. We also expect both the GAAP and core net interest margin.
To be down four to eight basis points versus second quarter.
We have pre invested the proceeds from the mortgage sale into high quality securities since the securities settle before the mortgage sale there will be a temporary increase in earning assets during the quarter.
This will negatively impact net interest margin by approximately three basis points in the third quarter.
The sale of residential mortgages and the reinvestment into securities will not have a negative impact on the go forward net interest income.
Excluding this temporary increase in earning assets, we expect the net interest margin declined 1% to five basis points in the third quarter.
We anticipate fee income to be up 2% to 4% versus last quarter, we expect expenses to be flat versus last 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 towards the ammo Lee 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 costs in Q and a.
Thanks, Dara also 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 if so.
It's the major focus in terms of our two companies going forward first let me just say to Bill Rogers amount are very pleased with where we are.
Yes, we are working very well together, we've known each other a long time, we have a complete meeting of minds in terms of the industry dynamics that are going on.
Which led to the merger and causes us to have a consensus view in terms of where we are going forward.
The new proposed executive management team is working great. We are meeting weekly.
As a whole team and have since we announced the.
Now it's a combination.
Making really good progress in terms of the regulatory process.
We did have the regulatory held hearings.
On April 24th in Charlotte, Medford, and Atlanta, I will tell you that we've had our 1000 public comments on 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 that we feel very good about that as I indicated we've already announced about a thousand of our key management positions and by the end of August we think we'll have north of 75% of our.
Announcements made and I get two way down into the organization in terms of people that will be leading the new company.
We did announce race lease term enhanced investments.
As we said in the beginning in terms of the great Atlanta area on the right of Piedmont Triad area in North Carolina.
We also announced our headquarter builds on mentioned, we announced our new name Truest I would feel very good about the name.
I know some people were kind of scratching our heads on order to come up.
Pardon me with that name, but we what we really wanted to.
Was what we were trying to accomplish in the merger when bill not talk about this merger we didn't want to be looking backward. We wanted to be looking forward. We want to have a merger one on how a company that could look forward to help clients and prospects think about how that could meet the dreams and goals and hopes and lives looking forward.
And so in that regard we want to have a name that speaks to the essence of the companies, but reflects a go forward mentality in terms of growing with our comp are our clients, helping our community has become better places to be and of course doing a really good job for our shareholders.
And our associates and we think to establish that and we think as time goes on and we believe that 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 babies and Suntrust.
Shareholders.
And we will have shareholder approval approvals jointly or separately, but on the same day on March July Thirtyth.
We did announce recently the six to very Moller community benefits plan, which is very very good.
On July 10, we did receive regulatory approval from North Carolina Commission or banks are such a substantial positive for us.
So we are making great progress kind of looking forward.
Here's what you can expect.
We will continue to do a lot of work in terms of of.
Building, our integrated culture together are so far we feel really good about that we do not see any substantial cultural issues and our companies.
But theres, obviously work to be done in terms of.
To be sure that we have day to day, what I call operating cultural processes and procedures.
That our same top and we're working on that is going very very well, we will be continuing to brand development process and to follow you will see.
More rollout with regard to logos et cetera.
I will be continuing to organizational design on maybe into final staffing so sort of legal day, one we will be organized and staffed and ready to go.
That's very important because you can't you can't wait to legal day, one to figure out how you're going to run the company. So we are heavily immersed into planning for the for the combined company and we will in fact be ready.
Our own legal day, one to 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.
Our we would wait for the remaining regulatory approvals.
And then we would be in a position to to clients.
I would say to you that we still feel very confident about our projected 1.6 billion miles over.
Our net cost synergies cost savings.
And again Thats net of.
Investments were made back into the business like technology and innovation.
Other investments so overall as Daryl said is a strong quarter of solid economy out there.
Great progress on the ammo 80, our truest will be in my view, a great company and we absolutely believe that our best days are clearly ahead.
Psychos rich thank you Kelly.
Orlando at this time, if you would come back on the line and explain how our listeners can participate in the Q and a session.
Absolutely.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment a voice prompt on the phone line will end came when your line is open please limit yourself to one question and one follow up again press star one to ask a question will posture.
Hi, everyone an opportunity to signal for questions.
And we'll take our first question from John Pancari with Evercore ISI.
Good morning.
Morning.
Sorry, if I missed it but could you just tell us what are you assuming from take time in your current outlook.
And then separately.
If the if you could just give us a little bit of color on what your how you're thinking about the NIM beyond the third quarter color that you gave them how do you view the NIM.
Trajectory through the year. Thanks.
John This is Darryl so and our forecast we had one grading decrease in July as of this quarter third quarter and then another one in the fourth quarter in October .
Here's what we're forecasting out.
Guidance for fourth quarter, and now I want to hit it all depends on how our deposits react and how they reprice with everything and competition. My guess is you know since we can basically three basis points back from the third quarter gross margin because of the increase in earning assets temporary from the investment purchase we're probably going to be flat to maybe down slightly in the fourth quarter.
Okay. Thank you 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 330, 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.
You know, it's obviously with lift rates potentially going down in a 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 annualized 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 for rate cuts potentially which we don't think it's going to happen. Let you see that that would put pressure on margin, but it will have an opportunity at close to reposition the balance sheet and we can get the balance sheet can be more neutral to be more insulated from from lower rates, but at the end of the day as rates come down you can't lower your cost of funds below zero right now so you'll be limited on the actions you can take hi, John This Kelly I'll I'll, just say one person's opinion I think the market is over reacting to whats going on in the world.
I think the world market is overstating.
The decline in interest rates not decided we won't have one or two but due to the sentiment out. There is that things are really collapsing phase can be cut in rates like crazy I think just completely.
Overblown.
And we will see some.
Slight decline in the economy, we will see some slightly higher in rates, but what you're seeing now.
And has been projected going forward in my mind is overstated.
Got it all right. Thank you if I could just do one more follow up on the insurance front you had a really good quarter insurance revenue and I know Chris gave some good color. There what is the outlook how what type of growth rate do you think is sustainable.
Longer term as you focus on the improvements in the in the profitability of the business.
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, 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's really project in something in the 4% to 5% range.
We're currently.
Probably more in the.
5.5% to 6.5% kind of range as is our sense and.
Current year to date organic growth is at 9.3 and again industry expectations is probably in the four to five what has happened is post. These the two largest insured loss years in our history, we're actually seeing rate begin to balance and to Kelly's point as long as the economy holds thats going to really drive new business growth, which is the largest driver of our situation, we're going to do a good job and client retention. So in I really think we've we're in that kind of five and a half six 6.5% range for the year, which is.
Which is for us will be the best numbers, we've ever posted and organic growth and I think well ahead of the industry. We're just very very pleased with the with the momentum and the transformations taking place in our business, we couldn't be more happy.
Got it all right. Thanks, Chris.
Yes.
Next up we'll hear from John Mcdonald.
With autonomous research.
Good morning, Daryl just wanted to follow up on jumping Coreys 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, Thanks, Todd what would that be.
So in the in the third quarter, we only have one great cut in there in our Eni will probably be down slightly on a linked quarter basis. So we were a billion 690.
This quarter, we will probably be a little bit lower than that maybe $5 million to $10 million.
Just because of the what's the pressure that we're seeing in our funding side.
As you go out into the next fourth quarter and now I would say that.
Our net interest income will be relatively flat to down a little bit. It all depends on if we get another rate cut in the fourth quarter or not and what happens to the shape of the curve, how we do anticipate another cut there.
Which would put more pressure on margin but.
We think overall it will be relatively.
Holding in there pretty well.
In in any changes in your rate sensitivity, obviously, the mortgage sale will impact that put in maybe easier way to just quantify what one client.
I would do if we wanted to isolate that.
So if you look on the chart on our page 10, and the cable and if you see the down 25.
And if you look at though numbers for 636.87.
You know that basically assumes over a year to $60 million hit to Eni.
Now, it's not evenly distributed over the fourth quarter.
I would say its front loaded a little bit so maybe call it about $20 million for our first quarter, and then kind of moderates out or the second third and fourth quarter and we are trying to keep our position to be on less asset sensitive and we are moving in that direction with some of the actions that we're taking and we were trying to minimize that as much as possible but.
So we don't anticipate having thats the four moves down that's put into the forward curve right now, but we have to also protect you know which direction based so we're risk managers from that perspective, and John keep in mind that right now it's hard to figure Darryl has talked about this disintermediation shift in deposits.
But there is a tipping point concept with regard to interest rates in the white clients respond so.
If rates went up over the last several quarters, we hit a tipping point and people got more sensitized rates and so all of a sudden they had extra money endo checking accounts and those federal bodies will put it to work. The same thing happens once that rates go down so as rates go down all of a sudden you know the amount of interest that you get by shifting it becomes less attractive to you. So yes. Just this last is less a lasting so I personally. Thank guys. If we see these continued declines in rates there will be less sensitivity and we'll see less of that shift in disintermediation.
Got it and maybe just a broader picture when you think about the longer term projections for true is domicile is early days, but any changes in terms of the financial goals in the longer term efficiency and 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 your original announcement on the longer term financial projections.
And John Ensign really not much of a change we were even with all the things that we just talked about we still feel good.
You know about that 51% efficiency, and obviously thats a ratio and so to the extent that revenue change that has some impact of what we can feel very confident about is the expense reductions. That's why I highlighted we we're very confident we'll get to $1.6 million net obviously, depending on what happens so the denominator that will move that around a little bit but not materially. So we still feel really good about that we think will be best in class in terms of efficiency.
In terms of our return on tangible common equity and the 22% were already 20 I'm sorry.
You know you guys feel very very confident about that.
In terms of the synergies we get remember in our model, we didnt, even build and any revenue synergies I missed but the more we talk about it more we get no.
In our more about each other and how complimentary and synergistic our businesses are.
We didn't want to project, because we're very conservative, but it will be clear revenue synergies out of this.
And so this is gonna be a really high performance company.
The other point I would add to that.
John is that with rates falling.
We really don't know what our capital levels will be at close.
But with rates coming down where they are our capital ratio might actually close 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 so the way to think about it John as we've said, we're conservative with regard to capital and particularly going through a major combination like this.
And our uncertainties in the global market at our Exosome X essential factors that could surface et cetera. That's why we said we want to hang around 10% common equity tier one level.
There's certainly some opportunity down the road with regard to that being lower.
But for now we want to plan on that but as al said I mean, if rates stay low end of March that debate. What we think are now may look like we could be pretty immediately and buying back and staying at 10%. So that Ken Cameron our problems embedded can be very encouraging.
Got it great. Thank you.
And next we'll take a question from Mike Mayo with Wells Fargo Securities.
Hi, could you elaborate a little bit more on the management.
Announced Vince in relation to the merger and 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 nasty when you trying not to do and how is a cultural integration going.
So it might be.
The managers, it's kind of a cascading process kind of going down from.
The direct reports to executive and then layer by layer by layer.
So by the time you get to the end of all of us will be down to the lowest level of operating managers.
Thanks down to our branch managers that kind of thing.
And so.
All of that is going really really well and in the process of course, what we are trying to do is number one make sure. We're picking the best players one of the beauties as you know.
How about on Nemo is you get to pick the best systems processes and frankly, the best people.
So so we've got an island the best performers because that's fair that's just.
At the same time, we got a stronger high on.
Equality in terms of it being an emo ageing and add known 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 Baby and TV.
It's going.
Extremely well in terms of the.
The culture process.
So we obviously are 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're still two competing companies.
But we can plan and that there is a whole lot of planning meeting going on so there's a lot of interaction and the feedback that bill and I, both get to from our teammates and associates is is going really well that just not any fundamental differences here and I'd take a lot of comfort in the fact that.
You know when we were getting feedback from our.
Our employees with regard to.
The new name.
I think we reported to you we got 10000 responses from both sides identifying names that characterize the words that characterize our companies.
And our 10000 on a topic that exact same for.
Words.
Bill Rogers assets grew to eight hour days of listening to community groups talk about our two companies as I said over 95 Senator comments were extremely positive and it was a very few took what I would call with a negative but what I found interesting was when I said they are accounted in my mind, Todd blank out maybe into your Suntrust and just listen to the comments you are going to fall visual community groups talking about the first same company.
So so they are not any substantial differences in the culture of this company.
As it is being formed and.
Certainly there is work to be done in terms of what are called it operating processes and procedures. There are some differences there.
For sure.
But that's not as important as as the most important part of cost of which is purpose mission and values. So we feel bill and I, both federal and our entire team feels 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 on associates feel good about this if you are really engaged they feel a sense of belonging to the organization. They are needed they are appreciated.
And they are going to be a part a fantastic company that the world will come to respect as true as one of the best financial companies in the World.
Hi, just one follow up potential road block would be the hearing next week I don't recall.
The hearing like this ever before in banking simply a standalone hearing unknowns citigroup that was up.
For a discussion way back when but that was in conjunction with the change in the law. So since you might be.
The first timer here for a hearing like this what's necip, we'd be trying to sand and why are they having this hearing when the federal reserve has such a comprehensive process.
You are asking me that question.
Correct.
So I'll give you my best shot on that Mike.
So I think number one.
You know, it's the first big merger since the recession.
As 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 the whole scheme of things, we keep saying that provided of even though will be 440 billion will still be about 20% of the size of largest banks will still have less 3% of total management deposits. So we're we're not a megabyte, which are the heading of the hearing.
So so that they're concerned that we're creating a mega bank and will create another too big to fail.
We will be say, we're not a megabyte, where a large regional bank we're focused on.
Meeting our clients needs.
We will not be increasing systemic risk in fact, we will be reducing systemic risk.
So I will share that with them.
They're concerned about.
No.
Well, we closed a bunch of branches and found a lot of people will satisfy them that while there will be over time branch consolidations.
We've already committed that are performing client facing associates will not lose their job on either side.
So we will be able to satisfy them that there is nothing.
You know negative about this impact is net overall rid of really good for the economy is good for community CFR.
So it's just that it's good for the shareholders.
I 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 or five hours or free advertising.
All right. Thank you.
Next up we'll take a question from Betsy Graseck with Morgan Stanley .
Hi, good morning.
Good morning morning.
Kelly I wanted to understand a little bit more about.
Timing of the merger, especially as it relates to.
No 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 running at close.
So this would be the timing as you know is out of our control, but I personally think that we will close this transaction late third or early fourth.
I don't know of anything that would cause me to feel differently, Although I will say again I can't control that.
You know the timing issue. This is one of the issues that have come up into the into hearing.
Has nothing to do with this and just have even came up when bill now we're talking about is 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 you continue to remain independent we would have boasted right past 250.
Independent of tightening or not.
It's a it's a number out there, but it's not it's not nearly.
Sufficient to cause you not to try to grow to gain to economies of scale to be able to compete in this extremely competitive wearable labor. So people people blowing that paying out of proportion is if it's a tale is not the Dol.
Yes, if you look at.
At the end of the capital impact.
It is only 60 basis points Thats Inc., because you you are marking to market the Suntrust balance sheet.
So it's not a huge capital impact.
Great. So my question was if it if it doesnt happen would you still do the deal was more about just a timing question here.
You know.
If you're ready to close in the tailing role is not yet finalized.
You have.
Hey, Daryl your point of capital level that it shows up a little bit lower for a quarter or two and then once telling proposal goes through.
You know that that gets so I'm just wondering over that would wait until tailoring went through our non I guess answers now absolutely not absolutely not we will close this merger is a minute where are approved.
Independent of Tyler 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 and it goes to 85, we might have to add.
Two or 3% more earning assets into high quality.
Liquid.
Assets.
But thats not material, so we could easily do it with or without the tailoring impact I mean, if we didnt have tailoring, we were granted in two or 3% leased at 5% of earning assets of high quality.
Yes, okay. So not a big deal for you. Okay. That's helpful and then Kelly just separately.
We hear from other folks about how there is you know youre merger is going to be an opportunity for them to pick up share either of you.
The strong.
Folks in the organization or have couple of clients and just wanted to hear from you. How you are.
Working to ensure that you are not losing market share. During this time when you've got the transition going on.
Yes, so that's a that's a really good question.
You know I've been involved in about 100.
Our provision lower my career at everyone every local competitor, particularly smaller competitive side are going to just jealous.
It just doesn't happen.
Doesn't apple 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 were provided.
So the fact that the name changes is inherently not a reason to call those clients to come in and changed our business declines.
Our resistant to change.
Now if you make a really big mistakes that Mike I don't think snafu that affects that but the fact that.
No competitive so we're going to try and get the business and all that is not a material issue occasionally we will have somebody that I'll go.
Go kind of where they often start raising rates and all that kind of thing and we just counter.
And so.
We're not going to sit back and let it in our local competition take our business.
So the most important part.
The answer to your question is keeping our people prefer the relationships between our people and their clients not between names.
And so we worked really really hard thats why we guaranteed our front are performing slot.
Facing associates on both sides.
We are we're not seeing any material turnover in fact last report I got with our turnover is down.
So.
That's not a concern, but we are ramping up our marketing game, we're not taking anything for granted.
First of all we're going to talk more offline. So they know what's going on asset our questions. They like us coming out and talking to them about thats on our business side, we're calling a lot more.
And on the consumer side, we are interacting with them.
And for any questions that they have but you know I've been on two regional business in the last five or six days and our people are saying to me that it's pretty calm out there.
The clients are excited about the company, they're excited about the name.
Our associates are really on a high amount of near their accent more pump and how it might have a guess at this time so.
I hear all the competitive set on what they're going to do but thats just rhetoric that is irrelevant.
Hi, how are you and and were being very focused to be transparent to our people internally. So that they know everything we know that every step along the way.
Okay. Thank you thanks for that tissue.
Sure.
And next up we'll take a question from Matt O'connor with Deutsche Bank.
Good morning.
Good morning, I was wondering if you could just wonder if you could talk about some of the things that you'll be looking at within the balance sheet as you.
I'll 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.
When you have all this excess capital that you can kind of pick and choose what you want to do with call. It PBT legacy balance. So maybe just talk about some of the things that you would consider and when that might impact net interest income going forward.
Yeah, I mean, given the rate environment, where youre right now Matt.
The way that you would probably try to enhance run rate is to focus on the liability side of the balance sheet. So we would have to look at what borrowings.
We could it change to maybe improve our run rate perspective from that side, obviously that theyre derivative position gets mark. So you can adjust but theyre derivative position is and position. The company. However, you want to do that without having anything flow through earnings.
On the asset side.
Depending on what.
Management and the board wants how much negative convexity do we want to have on the balance sheet and we do have a large mortgage portfolio. That's something we will look at and see if we want to shrink that or not.
I'd now the easy things would be securities derivatives and funding.
Maybe mortgages I don't know if we get anything more than that the auto we have a large auto portfolio, but it's a short portfolio thats, probably good portfolio to have with rate so low.
But we'll go through a lot of things that will lead to.
Figure out over the next couple of months as we get this still approve and close.
And then I guess just conceptually like it is the goal to.
Enhance the NIM as much as you can kind of coming out the deal.
Or is it more about maybe setting the bar to a more appropriate level and protecting the NIM going forward right because conceptually you can.
I want to say.
Plug it for what you want but if you're trying to profit NIM off as much as you can day one.
You're going to do certain things on the other hand, if you're trying to provide for NIM stability you on day one.
You might approach it differently.
Yeah, 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.
Oh are we firmly believe that you want to be paid to have consistent repeatable earnings. So we want to position the balance sheet basically produce consistent repeatable earnings quarter after quarter year after year and that really treichel take a gamble on interest rates or anything else, it's all about consistency and thats highly.
Get the higher p/e level than 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 share orders and be able to grow it consistently.
And then just lastly, the 2% Mark you're taking on Suntrust loans.
Credit comes in better than expected remind me is that flow through.
Net interest income if it's less than the 2% Mark that you you take.
Yeah, Matt This is Clarke thats exactly correct. So we certainly not assumed 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.
The one nuance is.
Is when we adopt Cecil first quarter of next year.
The PCIA gets reclassed into PCD, and net accounting benefit unwinds on that portion of it but on the non mark portfolio.
The non PCD portfolio Clark is correct and that will get run rate.
Going through the margin.
Okay. Thank you.
And our last question will come from Erika Najarian.
With bank of America.
Hi, good morning.
Just one more question on and the merger could you remind us on how the assistance integration is going and whether its wholesale and mortgage and also on the retail side as we contemplate the timing of the cost savings over the next two years.
Clearly our to the systems integration planning is going really well.
As you know I would say, it's a large complex organization and the way we are approaching it is to have best in class. So so we're looking at all of the systems.
They are all onto a thorough evaluation as we speak.
We'll be picking the best systems from either side.
And.
We are we are moving along to where we think that'll be pretty well decided as we get close to legal day, one and then we'll go into the process of execution.
The actual.
Operational conversion.
We'll be multifaceted.
You know historically when we've done small acquisition is kind of like a one weekend Big Bang you convert everything.
This likely won't be that this will lead to either be.
Rolling State by State, where you do all the systems in one started in another state are much lighter et cetera, or it may be that you do like deposits across all sites and you come back much lighter under loans across so we haven't decided that yet but.
But we're going to be measured about how we roll that out.
Just to mitigate minimize the.
The risk.
The wholesale.
A part of the business, we'll be able to integrate faster I'll just call. It so it's not as many pieces.
So the wholesale will integrate faster.
And our cost saves will come faster revenue enhancements will come faster the retail and 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 are heading towards that.
Full conversion and a 12 to 18 month timeframe.
And as you think about it.
Kent final run rate of expenses Thats kind of time frame that you ought to be thinking about.
Got it thank you and just a follow up to Matts question, Mark as we think about the Suntrust portfolio and Cecil World I fully understand the conversion of treatment from.
The loans go from.
Purchased credit impaired.
Purchase credit deteriorated.
But the non deteriorated portfolio is there an additional market that you would have to take if you close the deal in 2019.
Yes ill take that one so 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 but we lose is that transition benefit of adopting Cecil.
Tom on the Suntrust side of that portion.
Does that help.
Yes. Thank you.
All right.
And that completes today's Q and a session I will now turn the call back over to Rich Bay Tosch for closing remarks.
Okay. Thank you Orlando 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.
And this concludes today's call. We thank you for your participation you may now disconnect.
Again.
Uh huh.