Truist Financial Corp
NYSE:TFC
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Truist Financial Corp
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Greetings, ladies and gentlemen and welcome to the BB&T SunTrust Merger of Equals Conference Call. As a reminder, this event is being recorded. Your Investor Relations hosts for this call are Mr. Richard Baytosh of Investor Relations for BB&T; and Mr. Ankur Vyas of Investor Relations for SunTrust.
I will now turn the call over to Mr. Richard Baytosh. Please go ahead, sir.
Thank you, Becky, and good morning, everyone. Thank you to all of our listeners for joining us today on such short notice. We are here today to discuss the transformational merger of Equals between BB&T and SunTrust.
Here with me today me today from Charlotte, North Carolina are Kelly King, our Chairman and Chief Executive Officer of BB&T; Bill Rogers, Chairman and Chief Executive Officer of SunTrust; Daryl Bible, Chief Financial Officer of BB&T; and Allison Dukes, Chief Financial Officer of SunTrust. Also to participate in the Q&A session is Clarke Starnes, Chief Risk Officer of BB&T.
In addition to today’s press release, we’ve also provided a presentation that covers the topics we plan to address during our call. The press release and presentation are available on the BB&T and SunTrust Investor Relations websites. This information can also be found at thepremierfinancialinstitution.com.
Before we begin, let me remind you BB&T and SunTrust do not provide public earnings predictions or forecasts. However, there may be statements made by both companies during the course of this call that express management’s intentions, beliefs or expectations. Actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary statement on Page 3 regarding forward-looking information in our presentation and our SEC filings.
Please note that our presentation includes certain non-GAAP disclosures and additional information about the merger. Please refer to the appendix of our presentation for the appropriate reconciliations. The topics we will cover today are shown on Page two of the presentation.
And now, I’ll turn it over to Kelly.
Thanks, Rich. Good morning everybody. Thank you very much for joining our call. I’ll just tell you, Bill Rogers and I and our entire teams are extraordinarily excited to announce our MOE of our two great companies and building the premier financial institution.
As you’ve heard me say many times over the years, the primary criteria of combinations is that number one, they are good cultural fits. Number two, they strategically make sense. And number three, they are very economically attractive. As you’ve already read and as you will hear us talk about this combination meets all three of those to the team. In over the years, Bill and I have been in many industry discussions about what’s going on in the world. And the last year or so and particularly, we have agreed that the world has really changed. And we talked about the fact that in order to survive in this really quickly changing world, it’s important to be willing to change. We’ve talked about disrupt to thrive and this is it. This is kind of the ultimate disrupt to thrive. This will be a great combination for our clients, for our associates, for our communities and for our shareholders.
One of the main reasons that this is such a positive transaction is because it is highly synergistic. It’s because it is a very strong cultural alignment. I’ll talk about that a bit more in a moment with both of our companies are extremely focused and mission-driven. It combines complementary business models to create a diverse and comprehensive business mix, and we are leading positions in traditional banking, insurance brokerage and a very attractive proposition in capital markets to deliver the best of both institutions in terms of talent, technology and process.
It’s also financially compelling. It produces industry-leading financial performance with an efficiency ratio of 51%, less than our peer group, a return on tangible common equity of 22% and tangible book value accretion. It enhances fee income mix and it leverages our model into expanded client base. It maintains our – our rigorous risk management closure and our strong capital and liquidity position. It is also very, very compelling, because it’s transformative. We focus on relentless pursuit of differentiated client service experience, leveraging our Community Bank, our wholesale bank and fueled by the incremental capacity for investments in innovation and talent. Leading with the innovative mindset and embracing the opportunity for disruption, this is first going to drive sustainable competitive advantage. We will be the sixth largest U.S. bank. We will be in some of the most highly effective markets in this country and therefore, in the world.
We believe in this world today, that in order to survive that you really have to have a high-quality proposition. As I said, the world has changed. Quality has been redesigned. Quality is today a function of touch combined with technology which produces trust. This combination allows us to invest substantially in technology to enhance our already outstanding levels of trust and confidence and that will result in a lasting and trusting relationship with our clients, which is a winning proposition. We believe this combination is culturally attractive and strategically and financially attractive.
If you’re following along in the text, if you look at Page 7, I just want to mention again that I said culture is number one. It is number one. It drives everything else. These companies are almost identically aligned. If you look at SunTrust, for example, their mantra, their cultural mantra is lighting the way to financial well-being. BB&T has also been focused on that substantially in the high schools and in other areas.
At BB&T, we say we will make the world a better place to live. What way to make a better place to live than to light the way to financial well-being with the challenges so many people in our world have today. BB&T has these lighthouse projects, our projects. When you combine all these together, this is classically as Bill and I started talking in the beginning, two plus two is five. So, with combining two organizations, creating a really strong foundation to create the premier financial institution. Two like-minded institutions with strong cultural alarm, our focus forward is a winning proposition.
If you turn to Slide 8, just a few comments about some of the financial metrics, which are really exciting. In terms of assets, we’ll be first in terms of market value. We will be pro forma $76 billion, sixth largest U.S. bank, assets $442 billion, sixth largest loans, $301 billion deposits, $324 billion. Our efficiency ratio is just incredible. I dreamed for years of getting into the low 50s. Here we are, 51%, number one in our peer group. Return on tangible equity was very strong, 22%, number one in our peer group. And number of households, 10 million households, and we’ll be number one in the fastest-growing footprint amongst our peers.
We’ll be two weighted average deposit market share of sub-20 MSAs. We’ll be the number one regional bank owned bank, we’ll be the number two regional bank mortgage originator and servicer. We’ll be the number five global insurance broker and number five in the United States, and we will have $311 billion in knowledge and wealth and institutional assets under management.
If you turn along Page 9, Bill and I see this as transformational. I can’t emphasize enough how important this is. We said, to just come back two companies, you go to law college, you get to profit up. That’s okay, but that, that’s not exciting. What’s exciting is the years get the economics and more importantly to paint a pathway to the future. So that this is a transformational organization. This paves the way for technological differentiation individually. We’re strong, combined, we will be the best.
For example, if you just look at our new platform in terms of mobile banking and ranked number one in Apple, number three in Android, number two in Dynatrace, our new data center we’ve talked about is best-in-class. We have a new commercial loan system, where financial insights program for our small and medium sized commercial class, which is fantastic.
SunTrust had some superior offerings, superior mobile applications received doubling’s leader award, leading online consumer, leading lending platform, LightStream, which is fantastic and growing really, really fast on a high quality amount, and a fully digital mobile application called SmartGUIDE, digital portal for private wealth clients, cloud-based loan origination platform for wholesale. On and on and on, each of our companies have outstanding individual offerings. And then when you combine that, it gets to be pretty spectacular.
So individually, we are strong. You know that, but together, we will be best-in-class. We will be able to leverage our scale to create capacity for incremental investments and technology to create a sustainable competitive advantage. When you build into our model, $100 million of excess investment in technology, this is a big deal, because as Bill is going to describe, we are really focusing, leaning on our front toes in terms of technology and innovation and that money will allow us to come out of the shoot while making investments in that area. We’re focusing on creating our distinctive class and experience to drive digital revenue and account growth.
We’re developing a new innovation technology center, right here in Charlotte, where we’re located this morning doing this call. That’s very, very exciting. We’ll transform platforms to drive out calls that’s important, supporting a more technologically enabled business. And we will gain incremental efficiencies through automation, enabling faster, smaller and more secure way of doing business. We will increase our investments in sovereign business, resiliency, because in this world, it’s pretty risky. And we now have the capacity to make sure we’re best-in-class in terms of cybersecurity risk and other risk management systems.
Let me now turn it over to Bill for his insights.
Great. Thanks Kelly. Really well said, and let me just start by saying I have tremendous respect for Kelly, his leadership team and the BB&T associates. We are just absolutely going to be great together. I want to reiterate, we didn’t approach this as a merger of two legacy institutions, but rather than coming together of two strong foundations to create a different bank, to create, as we’ve said, the premier financial institution.
Well, that said, let me turn to Slide 11, and let’s review the transaction terms. As Kelly said, this is not an acquisition, it’s a merger of Equals, and I think the terms are reflective of that. Kelly and I, along with our boards have created a thoughtful transition plan that ensures we have strong side-by-side partnership for now and for many years to come. This was critically important to both of us. Our board and Executive Management Team will be evenly comprised of members from both teams.
However, would it be clear starting from today, we’re going to be referred to that as one team. The combined company will operate under a new name and brand that will be determined prior to closing. Kelly and I have been with our respective companies our entire careers, and I can assure you no two individuals are more attached to their brands and our discussion though we both knew this was about the future. So while we honor and respect our past absolutely. We elected to create a new brand that reflects our future of the premier financial institution. We also decide on Charlotte as our new headquarters. Charlotte will be one of our top 10 markets and collectively, we already have a significant presence here. In addition, as Kelly said, Charlotte, it’s going to be the home of our innovation and technology center. Those are going to be the hub of our efforts to drive digital transformation through innovation.
Just like our brands, Winston-Salem and Atlanta will always be our hometowns. It’s where we’re from. It’s our legacy. Most of our people will be in Winston-Salem and Atlanta and the headquarters of our community banking and wholesale centers. We may remain incredibly committed to and invested in Atlanta and Winston-Salem, which will demonstrate by increasing our investment in those two cities. Lastly, we’re targeting the clone of the fourth quarter of this year and both parties will work extremely hard to make this happen.
So let’s turn to Slide 12, so we can talk about the Executive Management Team, which is very exciting. The great thing about our two companies is the breadth and depth of our teams. Kelly and I are really fortunate to have an incredibly talented group of individuals that the leadership team of our combined company, but it doesn’t start or end with these 14 individuals on this slide. It starts with all of our teammates and all of our associates are going to be able to accomplish so much more together than we were alone.
In terms of the specifics, Daryl Bible, who serves as BB&T’s CFO will be our new CFO; Clarke Starnes, the current Chief Risk Officer of BB&T will be our new CRO; Ellen Koebler, who was recently appointed, Chief Risk Officer at SunTrust will also be on the management team serving as Deputy CRO; Scott Case, who is the current CIO of SunTrust, will be the leader of our technology team at the new company; Dontá Wilson, BB&T’s Chief Digital and Client Experience Officer will also be on the team and work side-by-side with Scott to lead our digital transformation; Ellen Fitzsimmons, the current General Counsel at SunTrust will take on expanded responsibilities at the new company, as Head of Legal and Human Resources.
In terms of our business leaders, Beau Cummins, the leader of Wholesale segment will be the leader of our combined wholesale business; David Weaver, the leader of BB&T’s community bank will be the leader of our combined community banking business; Brant Standridge, BB&T’s current leader of Retail Banking were closely with David as the leader of our expanded Retail Banking business; SunTrust’s CFO, Allison Dukes will be the new leader of our combined specialty lending businesses. She’ll also have oversight of treasury and payments; and Joe Thompson, leads SunTrust Private Wealth business will have responsibility for our new company. And finally, Chris Henson, who serves as our Chief Operating Officer at BB&T will lead our banking groups. This is really a great team.
We know this new executive management team will work incredibly well together. We’ve already seen great evidence of that. They’re going to help keep us on the path to becoming the premier financial institution. I’m really grateful for their past experience, but I’m really more excited about their future leadership.
So with that, let me turn it over to Allison to cover some of the business profile.
Thank you, Bill, and good morning everyone. I’ll start with an overview of the pro forma business mix on Slide 14. As Kelly and Bill have noted, this is an exciting transaction. And when you look at the pro forma financials, you really start to understand many of the reasons why. This merger brings together two highly complementary business models to create one of the most diverse and comprehensive business mixes in banking. We believe this is a powerful combination and we foresee strong revenue synergies as we drive further scale into certain businesses.
Specifically, SunTrust Robinson Humphrey, the leading middle market investment banking platform that now benefits from an expanded corporate and commercial banking client base and a larger balance sheet. Additionally, BB&T’s insurance brokerage business, which already had strong market share, brings the new highly relevant capability to SunTrust client base. LightStream, SunTrust digital consumer lending platform has produced good growth over the last few years with 25% of its production coming from SunTrust clients. Going forward, we have an opportunity to leverage this platform into an expanded client base at a very low cost.
And lastly, there are many businesses, where we will leverage our relative strength and create increased scale. Bigger picture, together, we will have a unique set of differentiated businesses, many of which are national in scope and we are extremely well positioned to provide our clients with an exceptional experience.
Moving to Slide 15, fee income will represent approximately 40% of our combined revenue profile and it’s comprised a highly diversified set of businesses with a more balanced revenue stream relative to the two standalone companies. Specifically, BB&T’s insurance business, which is going to comprise a meaningful 20% of the standalone company’s revenue, will be balanced to get the more diverse revenue mix and it will represent less than 10% of our combined total revenues.
Relatedly, SunTrust capital markets business, which is going to comprise a meaningful 25% of the standalone companies’ fee income, will now represent approximately 15% of fees, including BB&T’s capital markets fees and 6% of total revenue. This supports both of these businesses more opportunity for growth without compromising diversity. Importantly, this comprehensive business mix, not only positions us estimate a broader set of client needs, and it also reduces the volatility of our earnings profile.
Moving to Slide 16. This combination will also result in a diverse loan and deposit portfolio, both by type and by geography. Additionally, BB&T’s community bank model brings a slightly more rural deposit base, which helps to balance out SunTrust slightly more urban oriented deposit base. Importantly, this combined balance sheet also enhances our capacity to grow certain businesses while keeping in mind our collective commitment to maintaining a rigorous risk management culture.
Moving to Slide 17, which illustrates the highly synergistic and transformational nature of this merger. Together, we represent the sixth largest bank in the United States and within our combined Southeast, mid-Atlantic footprint; we will have the third largest deposit market share behind Bank of America and Wells Fargo. We will have significant depth and relevant within our markets, evidenced by the fact that we will have eight states with the top three market share and our weighted average rank at our top 20 MSAs is number two.
Moving to Slide 18. A key element of the strategic rationale behind this merger is that it is highly synergistic. BB&T and SunTrust have almost the highest degree of branch overlap within a two mile radius of any two banks between $50 billion and $500 billion of assets. In fact, 24% of our branches are within two miles of each other, which creates significant opportunity to reshape and modernize our brick and mortar footprint. Despite this branch overlap, we expect a low level of deposit divestitures. As we rationalize our branch network, we will maintain the same level of analytical rigor and discipline we have individually shown which was driven very strong deposit retention rates for both of us.
As you can see on Slide 19. This combination is amplified by an extremely favorable demographic backdrop. Many of our businesses will operate within the highest growth markets in the country. This, when combines with our revenue synergy opportunities and investments in technology and innovation, creates a compelling growth story and we will ensure that together we do all that we can capitalize on this opportunity.
With that, I’ll turn it over to Daryl Bible for review with the financial profile and impact.
Thank you, Allison. I’ll begin my comments on Slide 21, which highlights key assumptions regarding the proposed merger. Each SunTrust shareholder will receive 1.295 shares of BB&T stock. We assume our core deposit intangible equal to 2% of non-time deposits is generated through this transaction and is amortized over 10 years using some of your digits.
We have assumed a modest 2% gross mark on SunTrust loan portfolio, which we believe is appropriate given the quality of their portfolio and our conservative risk profile. We have assumed approximately $1.66 billion a pretax cost saves Class A net of additional investment, which is approximately 12.5% for the combined companies’ expense space. We have not modeled any revenue synergies. However, we do expect revenue synergies based on the complimentary and diversified capabilities we bring each other as Allison highlighted in the previous section.
We look forward to updating you on our progress here as we bring the two companies together. We are targeting from approximate nine in three quarters to 10%, CET1 ratio at closing, which will be achieved given both companies organic strong capital generation and temporary suspension of share repurchases by both companies in 2019.
Lastly, we are targeting closing in the fourth quarter of 2019 and both parties will work extremely hard to make this happen. From a financial return perspective, returns are strong and shared between two shareholder bases. GAAP earnings accretion is 13% and 9% for BB&T and SunTrust shareholders respectively. Cash earnings accretion, which is probably more relevant metric in the context of capital generation, is 17% and 16% to BB&T and SunTrust shareholders respectively. This will also be 5% accretive to SunTrust shareholders current dividend. We are modeling an 18% IRR well in excess of the combined companies, cost to capital. Lastly, the transaction is 6% accretive to BB&T’s projected tangible book value per share at closing including full one-time merger cost.
Slide 22 provides detail on the expected cost savings and sources of those savings. As I stated earlier, the $1.6 billion of pretax cost savings are net of investments. As Bill and Kelly have already alluded too, one of the most powerful benefits of this merger is that we are able to take significant cost out from redundant areas and reinvest them into innovation, technology and our talent, ensuring we are much better positioned for the future.
As you can see, there are almost 740 branches within two miles of each other, which represents 24% of the combined franchise. This overlap is almost unparalleled in banking, particularly among larger institutions. One thing that I’m personally excited about is that we have the opportunity to choose the best of both companies in terms of processes, systems and people. We have great respect and talent – we have great respect for the talent and technology at SunTrust and we look forward to applying that skill, expertise and capabilities towards our shared clients. And we know Bill, Allison and the broader SunTrust team feel that same about BB&T capabilities.
On Slide 13, a simple illustration at the combined company’s profitability profile. This information represents 2018 actual results overlaid with a $1.6 billion pretax cost savings net of investments. This combination propels us into the leading position amongst our peers. Individually, each of our return and efficiency profiles were strong, but together, we become the best. Once this energy are fully realized beginning in 2021 and 2022, we expect to produce a tangible efficiency ratio in the low-50s and cash return on average common equity north of 20%.
Moving to Slide 24. Importantly, these industry leading returns will be achieved by continuing the conservative risk prior profile of both companies. The combined company will be uniquely positioned of producing best-in-class returns while having a strong balance sheet and low levels of credit risk. This is true both today and potentially and more adverse conditions as illustrated by the fact that we have both consistently demonstrated lower levels of losses and capital erosion relative to our peers in CCAR. We expect to maintain a nine in three quarters to 10% CET1 ratio and we’ll target an LCR ratio for around 115 to 120. This assumes the tailoring NPR is finalized it as proposed and we expect the combined company to be a category three institution. The institution will be funded primarily with low cost deposit base and have minimal reliance on wholesale funding. Our philosophy on our investment portfolios are identical. We want to ensure that our investment portfolios are high quality such that they can provide us and our clients with strong levels of liquidity in both base and more stressed conditions.
Our goal is to continue to maintain strong credit rating for the combined company. And we believe that diversity of our combined business mix, our low relative risk profile, our strong capital and liquidity position and our industry-leading profitability levels should be supported with this.
Slide 25 provides you an overview of approach to capital allocation. We believe the philosophies of each company around the disciplined capital management ROI. First and foremost, we deploy capital on behalf of our clients to help them achieve growth. Second, we want to ensure that we have strong and sustainable dividend to help our owners and financial confidence through multiple cycles. Lastly, we will have excess capital and we’ll return it to our shareholders via share buybacks. Our capital generation of the combined company will be industry-leading and will provide significant opportunity for us to help our clients, communities, teammates, associates and shareholders growth.
Moving to Slide 26. Clearly, the most important work stream over the coming months and years will be integrating these two iconic institutions. While the effort required will be significant, we believe there’ll be a number of factors that should give you comfort or ability to do this. First, we both had deep experience successfully integrating acquisitions. Second, we will have a very deliberate, diligent and highly levering process to ensure all work streams move forward in an organized and structured fashion. Third, we understand each other’s business, footprint and competitors very well. And lastly and most importantly, we have a strong cultural alignment. We each care deeply about our clients, communities, shareholders, teammates and associates, and we both have very similar and conservative risk cultures. We’ll be transparent with all of you on our progress towards integration, both prior to and after the closing of the merger.
Now, let me turn it back to Bill for closing comments.
Great. Thank you, Daryl. Let’s turn to Slide 28. I think it’s very clear the combined company has the opportunity to more than we could have done on our own, and all of our stakeholders are going to benefit. As Kelly and I reiterated through this presentation, we are relentlessly focused on the client. Together, we’re going to make significant investments in talent and technology to deliver superior client experience for our clients, help them achieve smart growth and just make banking easier. This all ties back to our purpose of lighting the way to financial well-being and making the world a better place to live.
Related to this purpose, we remain steadfast in our commitment to our communities. I fundamentally believe that together, we’re much better positioned to serve all of our communities. For our shareholders, I think the financial results of this combination are clear and compelling. I also want to assure you that together we’ll maintain the same disciplined approach to risk and capital allocation that we have as two stand-alone companies. And then importantly, to the SunTrust teammates and BB&T Associates, I’m sure that many of you are listening to this call, and I want to reiterate the combined company will remain committed to developing, retaining and investing in you. I also want to emphasize the opportunity to all come together in the spirit of being the best.
Kelly and I and all of our leadership team, we are absolutely committed to making this the best bank in the country to work for. So to conclude, let’s turn to Slide 29. Kelly and I had a lot of conversations about our mutual desire to focus forward, embrace the opportunity for disruption and position our companies for future success. This merger of Equals is the first step towards creating the premier financial institution, and we’re just incredibly excited about the opportunity that we have in front of us.
As we said, it’s truly and highly synergistic, financially compelling and ultimately transformative. Kelly and I just want to thank you for your tremendous leadership. And I know that you’re going to be providing that for us over the next years, and I can’t tell you how much I look forward to working together.
So with that, Ankur, let me turn it over to you.
Great, Becky, we’re now ready to begin the Q&A portion of the call. As we do that, I’d like to ask everyone to limit their questions to one as a primary question and one follow-up, so that we can accommodate as many of you as possible today.
[Operator Instructions]. And we will go first to John McDonald with Bernstein.
Hi, good morning guys. I was wondering to kick things off, Kelly and Bill, if you could give us some thoughts of how your thinking evolved over the last few months. Kelly just had a big Investor Day highlighted, your strategy for going alone. And Bill, you’ve talked over the years about investing in SunTrust and feeling good about going alone. So, just kind of wondering over what timeline your discussions occurred leading up to this deal and how are your individual thinking’s evolved?
Yes. So, thanks, what you said is exactly right. We hear both in laser-focus on organic growth, that’s the best way to run an company. I have said repeatedly for some period of time, we were not interested in smaller institutions, because of the destruction from our organic growth focus. To be honest, because I’ve said that the economics didn’t work, the marketplace and price smaller institutions at a level that we couldn’t make the numbers work. You’ve also heard me say for decades that the best combinations are MOEs and especially, if it’s an MOE end-market.
And so that how does it evolve is that over the year, Bill and I have been very involved, and there’s industry organizations over, particularly, the last couple of years, we’ve had lots and lots of industry discussions about what’s been going around the world, and everybody kind of recognized as that the world change. But I really think Bill and I saw it more clearly other than most and as much went on. And then most particularly in the last few weeks, we started really looking at the possibility that we could actually put our companies together, because we have light man of the future challenges, future opportunities, a light culture, fantastic market.
So we just said, wow, it’s actually possible for us to combine our companies and make two plus two plus five. And then in a relatively short period of time, we rode over with – they do it together, because it’s just such a logical deal. So, I think, it’s just one of those natural things that just evolved in two good companies. And I’ll speak for bill, a great leader. So, he’s what the possibilities are good things happen.
John, I would just add, I think when Kelly and I start talking that it was – we never really started with an MOE. We start with an MOE for something, it’s probably easy to add companies together and see how compelling the financial results would be. But what would it be for, what would we be trying to achieve? I look like, I think about it like we’re doubling or tripling down on organic, we just now have a much more compelling denominator so to speak to have tremendous organic growth in both our companies and the combination just to accelerates that.
Okay. And then just as a follow-up, I think Allison mentioned not needing big divestitures, wondering if you could comment on the potential market concentration issues in a deal like this and what kind of regulatory hurdles or questions you could face on market concentration?
Hey John, this is Daryl. I would tell you that the divestitures are pretty minimal here, approximately $1 billion plus or minus and just a few markets. So, it’s really amazing how you put these two companies together achieved big confidence and have hardly any divestitures.
And we’ll go next to Mike Mayo with Wells Fargo Securities.
Hi. I think as you said the numbers worked, it’s factual that in the demographics are better in the Southeast. That’s actually you said, that the branches of the cost savings or the accretion role run through our numbers. But on paper, this looks really good. I think the biggest question is the extent of the equal nature of the merger. So, if we look back at other mergers of Equals, some it works, some haven’t, you go back to Citigroup, go back to KeyCorp, even Comerica manufacturers, I remember the CEO, Gene Miller said a few years after that he said, well, half the room was talking Spanish and the other half of the room was talking fresh, saying they weren’t talking the same language. So, what is – life insurance, can you get investors that everybody will be talking the same language, talking to the same page? It’s just so equal. It doesn’t someone have to be in charge at some time.
So, Mike, you didn’t mention one of the most successful MOEs in BB&T [indiscernible] in 1995 as I was technically involved in, it was I think you would have made one of the best ever we’ve had, maybe because we all spoke English. I’m not sure, but we certainly all around this table speak English. And what makes an MOE work like really is the two leaders genuinely honestly means equal. That’s why when we started out day one, we said this would be equal, this would be equal in terms of my role for a period of time. And then a following role for bill, this would be equal in terms of the board of directors, this would to be equal in terms of the executive management team, this would be equal in terms of all the way through the organization. It’s like products and processes and systems and people.
You’ve had to really be truly committed to equal, when you are truly committed to equal, and everybody gets excited and passionate about it and you really do pick the best of both organizations. And I’ll tell you, I haven’t been sort of one. It’s just pretty incredible. Every organization has great parts, but every organization has weak parts. And when you get a chance to marry two great organizations and pick the best from both organizations, you get strike rate. And so you can make sure that this will be highly successful. This will be the best MOE in the history of banking.
Yes, Mike. I think we checked the boxes, as you said and I think that check from MOE. We had board, we had management and we had transition all identified and lockdowns. But I think most importantly and I can say this for the conversations we had is everything went to the middle of the table first. I mean nothing started at the edge of the table in the conversations, everything went to the middle of a table, headquarters, name. All of those things that people get are caught up yet. So, I feel extremely confident that we’re going to speak the same language and move forward. And as Kelly said, I mean we’re going to make the best MOEs that’s ever been done.
And how long will it take for you to make deeper management decisions? When do you expect the kind of second layer of executive management to be named to reduce that uncertainty?
Mike, it’s important to move fast as you’re alluding to. We have already identified the 14 member executive management team. We are already working on a second operating committee that will be a high level of executives that will have multiple operating duties that is already underway. We will begin the integration process next week. This is not a situation, where we wait till September, October when the closing occurs. We will start meeting as the executive team next week. We will meet a full day every week and jazz is transition. That’s what we did when we did it. Something national merger. It works. The executive team has to be the primary integration leadership. I will of course, be the subgroups and we’ll do lots of the real work, but that has already started and will continue with haste next week.
Thank you.
And we’ll go next to Betsy Graseck with Morgan Stanley.
Hi, good morning.
Hi, good morning.
Hey, Betsy.
Can you hear me?
Yes.
Very exciting. Just wanted to ask a couple of questions here. One is on how you are thinking about integrating the organizations and the timeframe for that, I mean I understand the closure is going to be coming sometime in September, October. I’m assuming that you already spoke with regulators and have confidence around that timeframe, but I’m thinking about the more nuts and bolts of not only branch decisions, but also systems and it’s not just the question around the timing of those – that execution, but also how you compete for mind share in the markets when today now, all your competitors see this is going to happen and Kelly as we mentioned – as we discussed it in your Investor Day, the competitors are pretty aggressive about going after your clients during periods of what is perceived disruption. So, I wanted to understand how you’re thinking about integrating timeframe and the speed with which you can do that.
Yes, Betsy. So, we’ve obviously already thought a lot about that. And as I indicated to Mike Mayo, we will actually start – had already started and executive management team’s formed. Everybody knows who they are, what their jobs are. We already have a good bit of preliminary work on the next level, which will be an operating committee. That will continue with great focus next week. Our executive team will be meeting weekly to make all the major decisions kind of top-down flowing. We will tackle methodically with deposit system, with loan system. We will start immediately focusing on the branch closes. We won’t be closing them. Of course, we can’t do anything until the actual closure, but you can do a lot of work. We’ve learned how to deal with all the mergers we’ve done. As you can do, almost all of the planning work pre-closing. So as we actually close, you go into immediate execution. You don’t have to close and then say what you’re going to do. We will have all of the – what are we going to do decided before we close.
So on closing day, we move into execution in all of these various areas. Different work streams will move at different paces. For example, the branches, we will take a little longer, because we have to be very careful about closing branches. Clients are very sensitive. They love technology, but they still love their branches. So we’ll be very careful and methodical about that. But I can assure you that with the mergers that SunTrust is done and the mergers at BB&T has done, we have super qualified people that know exactly how to do this. I’m not being cocky, but I’m confident that we will be able to do this and we’ll do this extremely well.
In terms of people attacking our clients in this process, our people are, as we speak, calling out their clients started an hour and a half ago. We are calling our top shareholders. We are in motion, making sure everybody understands that this is positive for everybody. This is great for our clients. It’s fantastic. There’s no other institution that could go to our clients and offer something as good as what we’re offering. And so we’ll be methodical and very energetic about talking to our clients, but we don’t expect any attrition. Rather, the opposite is likely, and that is, we will have all the prospects calling us and we will be seeing prospects and growing our business. We fully expect to grow our business right through the process. So just stay tuned, Betsy. It’s going to be great.
And then can you just give us some color around the conversations for the new name, the branding? Why did you choose to go out with the announcement this morning before the branding was decided? Is there a reason for that? And help us understand how you’re thinking about what branding you’re looking for?
Yes, Betsy. It’s Bill. I think I said the excitement we want to build around the new brand. So we want to involve. We’ll do a lot of qualitative, lot of quantitative research, but we want to also involve our associates and teammates really get their feedback and build ownership in the brand versus something Kelly and I cook in the backroom and then introduce. So that was very intentional as we want the building of the brand to be part of that process that we build into and come together as a company. And it’ll reflect all the things that we’ve been talking about, about leaning forward and thinking about the future. And I think it’s going to be one of those great cultural moments for our company of building this brand together.
We’ll go next to David George with Baird.
Thanks. Good morning for taking the question. I had a couple of questions related to the financial assumptions and the deal. If we’re looking at – I assume you used Bloomberg, the first call numbers for both SunTrust and BB&T. Did you take out the buyback that are embedded for both of those companies when considering the accretion for the deal? And then I’ve got one quick follow-up.
Yes, David. We did, we used consensus for 2019 and 2020 in our model and we had growth rates going on after that. But we did take all buybacks out for 2019 except that we would our capital up close to that 10% CET1 ratio.
Okay. I appreciate the color on that, Daryl. And Kelly, I guess by your most recent comments for the last question about attrition, you’re not assuming that my next question is going to be related to are you assuming any kind of balance sheet runoff as a function of this deal, as a function of client attrition, et cetera?
We expect growth from day one.
Yes. We did – bought modest growth after the conversion and building that out over the years.
All right. Thanks for the color guys.
We’ll go next to Saul Martinez with UBS.
Hello. Hi, good morning.
Good morning.
Good morning.
So, a couple of questions on my end, how confident are you in the fourth quarter close, I think in an earlier question, you addressed the issue of market concentration, but any issues that you think we should be aware of that could come up in terms of the discussions with regulators? And can you just give us a little bit more color on the closing process and where the approval process and how you’re thinking about the timing within the context of what you said in the fourth quarter?
Yes. So, we’re very, very confident about the closing as people I expect in the fourth quarter. I have another target date. I have September 12 is my target closing date. That just happens to be my birthday, and so I’m – on September 12. I believe we can do it. There’s nothing that I can see that will stand in the way of this combination. We have outstanding CRA ratings, best in class in terms of compliance ratings. We both have excellent relationships with our regulators. And while we obviously can’t disclose any confidential discussions with our regulators, you might expect that we would amount something as large as this without feeling confident that our regulators would be positive with regard to such a combination. So there really are no obstacles that we see that will be insurmountable. Obviously, we will be working very closely on all of the outside extra center of issues that may affect this but we’re very, very confident.
Okay, got it. And if I could follow-up with questions on the cost save assumptions of $1.6 billion, could you just give a little more color on the breakdown, what’s driving that? You put some bullets in there on what the expected sources are. You kind of have just – or you indicated that the branch overlap is pretty pronounced relative to most banks. But of that $1.6 billion, sort of what’s the breakdown between the different buckets? And it is about 12.5% of the combined expenses. I guess is there any potential upside to that as well? Do you feel that’s a conservative estimate or more of a realistic estimate?
Yes, Saul. This is Daryl. And I’ll tell you that we want to under promise and over deliver. So we put numbers in there that we know we can achieve. What we really expect of it, we have duplications throughout the whole company. So we have like GL systems, like commercial lending systems. As we select the systems and support around the systems with other costs follow up have been larger and doubling in size. We’ll have more when we’re negotiating with vendors. So we get savings from that perspective. As we consolidate branches and some of our back office operations, facility costs will come down. So we are at a point now where we want to give you specifics on it. Just know that it will basically be through plus the whole expense line item as we come together and the selections that move forward. So we feel very comfortable with what we have. And when we do achieve more savings, it’s really up to Bill and Kelly how much falls to the bottom line and how much they put more into other investments.
Yes. This is Allison. I would just add, when you look at the efficiency ratio and how industry-leading that efficiency ratio is, it gives us a tremendous amount of capacity. As we identify even more cost savings than we already have, they do exactly as Daryl said, we always think about how we can use that to create further investments and innovation. And we’ll be returning some along the way to our shareholders as well.
And we’ll go next to Ken Usdin with Jefferies.
Thanks. Good morning. Just a couple of follow-ups on the revenue expense side. Daryl, to your earlier answer there, $1.6 billion of net saves. Can you talk about the gross versus the investments? Where’s the investment side of that? How big is that as a proportion versus that growth side number and how you think about that as a proportion for – as it relates to the efficiency ratio target?
Kelly mentioned it in his opening remarks that we have $100 million expense increase in innovation on an annual basis in his opening remarks and we have other increases there. We really are at the point where we want to disclose all of our investments because we're really going through and scrub each area and figure out all the savings. And like I said in the last call, we're going to decide how much falls to the bottom and how much more investment.
We know, and Allison said, this is a great transaction. It's not just cost save that's driving this transaction. It's also the ability to invest for the future. That's what makes it so – I don’t Bill and Kelly talked about two plus two equal five. This is what it's really all about.
And on the other side of the revenue side, you did mention that you don't have revenue synergies when you expected. So, I wonder where you think the biggest potential areas are. And also you mentioned the hopeful closing of the formalization of the tailoring benefits. And what do you think that magnitude could be from tailoring when you think about the combined pro forma? Thanks guys.
I'll start with the revenue synergies. You're right. We didn't model this thing in. It's pretty compelling without it. But suffice it to say, the complementary nature of these businesses is what gets us really excited, and we think there's a tremendous opportunity. We'll start with thinking about the strength of our capital market platform being delivered across BB&T's really strong cultural client base. We have had great successes, as you know, and really growing our capital markets revenue by delivering this product solution down market and for our commercial client base. What we have now is a larger denominator as Bill referred to earlier in the call to deliver these solutions across, and we're really excited about that.
When you think about BB&T's insurance business and the strength of that business, it's something we just absolutely don't have in our portfolio today. And we have an opportunity really think about how do we deliver that across our wholesale client base. You think about our mortgage businesses together and how large they are, and this has been – mortgage is really a scale-oriented business and this is going to allow us to drive even greater top line growth in that business.
LightStream and our digital lending capabilities, one we have first of all, LightStream, the 20%, 25% of this origination come from an existing SunTrust client base. You think about that across BB&T's consumer client base and the ability to integrate that towards what they do and deliver that solution across the greater breadth of clients. But also it's really the technology and the capability we have there and how we should think about utilizing that, and even more elaborate way to reach more clients and really deliver that high touch seamless, frictionless client experience that our clients are looking for in all of their interaction not just in the consumer lending profile.
I'll let Daryl touch on the tailoring NPR.
So Ken, tailoring, I would say with the new category of banks between 250 and 700, that really allows us to we don't have to worry about the AOCI that flows through the balance sheet from capital numbers for capital ratios. The LCR, what we assume right now is that the LCR will stay at 70% cash flow level. But if it goes to the 85%, which is a range that's very manageable and feel that we can accomplish that without any significant impact at all.
So the tailoring helps with AOCI, but I think just overall, as we put this company together, that we have kind of the fortress balance sheet with strong capital of liquidity, high capital generation and we're going to have the ability to make significant investments for the future.
And we'll go next to Stephen Scouten with Sandler O'Neill.
Hi. Congratulations, everyone. I'm curious just how you're thinking about kind of the expected potential for disruption in your markets. You talked about how you guys have already gone out to clients. But I'm just wondering on the other side of things, other regional banks maybe trying to poach some of your people in the near term, even some of these midcap banks and what you think you can do to make sure to minimize disruption and continue to deliver growth upon the completion of the deal, as you noted.
Well, Steven, the challenge here is what type of culture you have, what type of engagement your associates have, and whether you have an attractive place for people want to work. We both have really, really good cultures. Combined, our cultures, I believe, will be even better. We have really strong benefit programs. Our associate engagement scores, for example, BB&T, are 79% highly engaged versus 64% for the industry. SunTrust has similar types of numbers.
And so yes, our people will get calls from others. Of course, they'll like to try to have our people, but I'm not aware of any other competitor out there that offers the kind of current and future opportunities our associates that we all especially combined. And so my question is why would anyone – logically think anyone will leave us to go to someone else not as good?
I’d just add. Kelly and I have the same approach as we recruit people every day ourselves. So that's the mantra that we have and that's going to continue. And from the team and associate perspective, we just exponentially increase their opportunity to serve clients. So, I think we're going to get really excited about that opportunity. And we also are going to exponentially increase our investment in that. So, I mean, I think those are good combinations and we're going to recruit them today and tomorrow just like we did yesterday and last week.
That’s great. That’s really helpful. And then maybe digging a little deeper to the investment bank, wholesale bank. SunTrust guys have had great success and like you said, push that in across the commercial bank. Is that the main area of opportunity to leverage the investment bank into the BB&T profile? Or do you start to invest in scaling up that business even more so in the products to the completion of the deal, as you noted.
Well, I think it’s two things. It's exactly what you said. One is to continue to expand the capabilities. We'll look at all the industry verticals. We'll do all those combinations. As Kelly said, that's already started. We're looking for things where we get the leverage. And as we talked about, just the ability to grow the business on a larger denominator. So just like Kelly and insurance, we were worried about capital markets from a diversity standpoint and how big that part of our portfolio is going to be. We just change that dynamic. So the ability to grow the business organically, the ability to continue to invest, the ability to lever to a bigger platform is just a new opportunity.
Becky, we have time for one more question.
We'll go next to Lana Chan with BMO Capital Markets.
Hi. Congratulations on the deal. Just – have you looked at how much customer overlap there is between the two banks, especially on the commercial side of the house?
It's really very small. We both have competed, I think, very strongly against the largest institutions, not so much against each other.
Yes. And I’d just add. Our strength in the wholesale business are probably pretty balanced, and we're really strong on the upper middle part or the corporate side. BB&T is particularly strong in the small business, smaller commercial. It's very complementary in nature. As you think about some of the larger relationships, where we won't have some overlap, the great news is we have a much larger balance sheet. We have the opportunity to have larger relationships with these clients and we're excited about that. We don't see that as a real challenge. We frankly think it's a bigger opportunity to create deeper relationships with these clients across a broader suite of capabilities.
Okay, thank you. And then just as a follow-up, if I may. In terms of the previous question about – confidence about getting the regulatory approval. Just BB&T, do they still have the consent order from the BSA AML issue?
We do still have the consent order with the Federal Reserve. You may recall that a couple of months ago, it was released from the FDIC and also on the banking commission. We are, we believe, in the very final stages of having that lifted. Obviously, we can't speak for them, but we done everything that they have asked us to do, and it is in the final stages of the regulators doing the final validations, they call it, of the changes that we have made. So we made all the investments. All the feedback we get as of today is extremely positive so I believe we're on the – in terms of this result. And in any event we do not expect – even if it were outstanding, we do not expect it to stand in the way of this combination being approved.
I would like to hand the call back over to Mr. Ankur Vyas for additional or closing comments.
That's it. Thank you, Becky, for hosting the call. Thanks to everyone for joining us this morning on short notice. We're all very excited about the transaction in combination. Please feel to contact myself or Rich, should you have any follow-up questions.
That does conclude today's conference. We thank you for your participation.