Truist Financial Corp (TFC) 2013 Q1 法說會逐字稿

Welcome to the BB&T Corp first quarter 2013 earnings conference call on April 18th.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr Alan Greer, Director of Investor Relations at BB&T Corp.

Thank you.

Please go ahead, sir.

Thank you, Tiffany.

Good morning, everyone.

Thanks to all of our listeners for joining us today.

We have with us Kelly King, our Chairman and Chief Executive Officer and Daryl Bible, our Chief Financial Officer, who will review the results for the first quarter as well as provide a look ahead.

We also have other members of our Executive Management team who are with us to participate in the Q&A session -- Chris Henson, our Chief Operating Officer; Ricky Brown, the President of our Community Banking; and Clarke Starnes, our Chief Risk Officer.

We will be referencing a slide presentation during our remarks today.

A copy of the presentation, as well as our Earnings Release and supplemental financial information, are available on our website.

After Kelly and Daryl have made their remarks, we will pause to have Tiffany come back on the line and explain how you may participate in the Q&A session.

Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts.

However, there may be statements made during the course of this call that express Management's intents, beliefs or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

Additional information concerning factors that could affect Management's forward-looking statements are presented on Slide 2 of our presentation and in the Company's SEC filings.

Our presentation includes certain non-GAAP disclosures.

Please refer to Page 2 in the Appendix of the presentation for the appropriate reconciliations to GAAP.

With that, I'll turn it over to Kelly.

Thank you, Alan.

Good morning, everybody.

Thanks again for joining our call.

Thanks for your interest in our Company.

We're really pleased with the earnings for the quarter.

Frankly, we're fairly optimistic about improving loan growth, being sustainable, that we saw towards the end of the quarter.

Recall, everybody, that first quarter's always kind of challenging for us due to seasonal factors.

But even so, we think we had reasonably strong results which included revenue growth over the last year and really very good expense control versus the last quarter.

If we look at net income, on a GAAP basis it was $210 million or $0.29 a share, which included the impacts of the tax adjustment which you're familiar with.

If you exclude that tax adjustment, our net income was $491 million, up 13.9% versus like quarter.

So if you look at the EPS, $0.69, an increase of 13.1% versus like quarter.

So we feel good about that.

Revenues, fully tax equivalent revenues were $2.5 billion, which was up 4.9% versus the first quarter.

Now -- first quarter last year.

We were down on a linked quarter, that was due to slower mortgage income and lower net interest income.

Lower net interest income was a function of less loan growth and fewer days than last quarter.

Frankly, just a tough interest rate environment with a low flat yield curve.

We did have strong results in insurance driven by Crump and 5.5% organic insurance growth, so that business is doing extremely well.

A result of that was our fee income ratio increased to 42.9% versus 41% last first quarter.

In the loan area, it's been a challenging quarter for loans.

Our average loans did decline 1.4%.

That's was consistent with our mid-quarter guidance versus the fourth quarter.

It now did increase 5.3% versus the first quarter last year.

The slower growth for this quarter was due to lower mortgage warehouse lending to covered runoff, which as expected is continuing and seasonal influence in our other businesses.

Now, as you recall last year -- last quarter, we had a reclass from C&I to CRE.

So if you adjust C&I growth, it was a pretty strong, 4.5% annualized.

Sales finance grew 6% annualized versus the 4%.

So, we felt good about that.

Other lending subsidiaries grew 15.2% versus the first quarter, which you have to compare because of seasonality.

So, that's fine.

I would point out, importantly, that March was our strongest production month in our history.

Again, there's some reason to be encouraged about loan growth as we head into the second.

Had another great deposit quarter, although total deposits decreased $1.3 billion, that was as planned.

Our non-interest bearing deposits increased 8.5% versus fourth quarter.

So consistent with our several year diversification strategy, deposit mix improved and total costs declined, which will continue.

On the credit quality, all was good.

NPAs decreased $123 million or 8% versus fourth quarter.

Foreclosed real estate declined 17%.

NPLs declined 7%.

Really, all of the credit quality trends look good.

Daryl will give you a little bit more detail on that in a little bit.

In the expense area, we feel good about that.

Non-interest expenses decreased an annualized 20% versus the fourth quarter.

We did achieve positive operating leverage.

The expense reduction was largely from lower credit related costs including foreclosed property expenses, professional services and loan related expenses.

I would point out that expenses are a major focus for our Company for this year.

We recognize that this is a slow economy.

We think, frankly, the economies will be fairly slow for the rest of this year, maybe the next two or three years.

So we have to adjust our business strategies accordingly.

As you recall, last year we started a process of reconceptualizing our expense structure.

That is continuing with enhanced focus.

Really, what we're trying to do is focus on what we do and how we do it.

So, we're going to be finding ways to reconceptualize our business -- restructure our business and in the process relatively reduce our expenses.

So we think we have legs in terms of expense control.

You just you saw a beginning of that in the first quarter.

If you're following along on the slide deck, let's go to Slide 4. Again, referring to the slow economy, we feel really good about having a diversified revenue stream.

I wouldn't want to be totally spread dependent in this kind of environment.

If you look at that revenue mix pie chart, we're very pleased that Community Bank produced a 47% directly of our revenue mix, 15% from Insurance.

12% from Financial Services, which includes Asset Management and Corporate Banking.

11% from Mortgage.

Then 8% and 7%, respectively, from Specialized Lending and Dealer Financial Services.

So, we're diversified from the Community Bank to the non-Community Bank.

We're well-diversified in the non-Community Bank.

So that gives us confidence as we go forward.

I would point out on that right hand chart -- I think this is a very important issue -- that we have, we think the best value proposition in the marketplace.

But we focus on quality relative to price in terms of value offering.

It's important to note that during the last five years kind of all the way through this cycle, our revenue was up 31.8%, where our peer median was 7.4%.

So what happens in a tough environment is, the consumers become more discerning.

They move to the higher value proposition.

We think that's exactly what played out in the last five years.

It doesn't guarantee you anything for the future.

But it does portend, if you keep your focus on that is, it gives you probability of better revenue growth going forward.

Looking at Slide 5, in terms of our loan growth, obviously, loan growth was relatively strong in the fourth quarter last year.

But then as we headed into the first quarter this year, frankly, the loans just -- production just hit a wall.

I think all of us are trying to figure out kind of what happened.

I personally think it's because all that's being going on in Washington and concerns the business people still have around taxes and regulations and insurance.

All -- that's all together.

It leaves business people to feel very, very hesitant to invest.

So we've seen the result of that.

So the economy is struggling to get solid footing.

We'll see how that plays out.

We did see some positive signals toward the end of the first quarter in talking to business people.

There's a little bit of a move towards being willing to invest.

Mostly because they kind of have to invest because they haven't invested for the last five years.

So that's a little bit encouraging in a weird kind of way.

If you look at our loan growth, as I said, we had the reclass last year.

C&I growth was up 4.5%.

That reclass would show that CRE was down about 4.7%.

Now, we are making a lot of effort to improve CRE, as I told you.

We're beginning to see some real opportunities there.

But I think that will begin to change as we go forward.

But I'm real pleased with C&I, 4.5% in this environment -- the way we lend is a really good result.

I would point out that despite the market conditions, our end of period loans held for investment were approximately $1 billion higher than our first quarter average.

Again, this momentum really started picking up in March.

It seems to be kind of continuing as we head into April.

So we think loan growth for the second quarter will be in the 2% to 4% range.

I know that's what we said last quarter.

But again, we didn't expect the wall that we hit.

We could hit another wall.

I don't really think so.

I think that spring is here.

People feel better in the spring.

A little detail on that, our C&I, CRE and consumer pipelines are improving.

In fact, they're really strong.

Auto demand has improved significantly.

It's really strong.

We expect double-digit growth in the second quarter there.

Other lending subsidiaries will swing back from seasonal headwinds.

We think they'll grow in the low double-digits in the second quarter.

So pretty good reasons to support a 2% to 4% kind of growth.

I would just reinforce to you that in banking, there's loan growth and then there's profitable loan growth.

We are very disciplined.

A big difference between us and some competitors is, we are not participating in leveraged financing deals out there.

That is a huge part of what's going on in the industry.

Maybe it will work out for them.

We think it's too much risk.

We're not substantially changing our hold positions which others are doing.

We think our growth is very good relative to our discipline.

Frankly, I'm very pleased with it.

I'd much rather have long-term profitable loan growth than short-term growth that might not be as profitable.

If you look at Slide 6, on deposits, it was another great quarter for deposits.

We saw DDA non-interest bearing deposits grow 8.5%.

We did shrink CDs by plan.

They were down 35%, fourth to first.

That is a part of our strategy in terms of, frankly, not needing as much deposit growth because of loan growth being timid and controlling our costs.

You could see that our costs went down again from 0.38% in the fourth to 0.36% in the first.

Down substantially from 0.49% a year ago.

So what we expect is that we'll see stronger non-interest bearing deposit growth during the second quarter.

We think, we'll be below 0.30% by the year-end.

We feel good about where deposits are going.

If you look at Page 7, just give you a little bit of color about what we're going to do in this relatively slow environment.

I know for all of us in banking it's challenging.

It is certainly testing in a difficult environment to be negative and kind of discouraged about it.

We view it as, that's just what the rules of the game are.

The market's tough, so we have to get tougher.

In our January planning conference, our executive team came up with a number of initiatives to enhance revenue growth in spite of a tough economy.

We are continuing our strategy at an accelerated pace as we grow to expanding corporate banking in key national markets.

For example, we've recently opened houses in San Francisco, Chicago and Cincinnati.

Really good initial results from that.

I'll remind you this is not a change in BB&T's discipline in terms of underwriting.

This is doing the same kind of corporate banking we've always done, the granularity is extremely small.

When we're not doing big deals out of market, we're doing relatively smaller deals.

We have people on the ground doing banking the way we've always done it.

We continue to expand our advisor capacity in Wealth Management and the broker-dealer.

For example, we've recently expanded in Florida, Texas and Washington.

We'll continue to invest there for revenue growth.

A really big opportunity for us in life insurance, in Crump, because that is settling in and frankly, is exceeding our expectations.

We have this whopping opportunity in institutional sales initiatives through Crump, where basically our Crump people work with large insurance companies and other financial institutions to support their desire to sell Life products to their Wealth clients.

So, for example, Life sales are up 18% over first quarter of 2012.

So, that strategy is really, really working and has a lot of future opportunity.

We're going to continue to expand our mortgage correspondent lending network.

We'll continue to expand our retail mortgage lending, frankly, that's just more producers and in a relatively newer market.

We're excited about our commercial expansion in Texas.

Recall, we mentioned that we would be opening 30 new branches in Texas.

We've already opened -- or will have opened by June, 26 of those, another 4 will follow right along.

Those branches are focused in Dallas, Houston, Austin and San Antonio.

The opportunity there is absolutely enormous.

The early feedback from that -- the area for us is fantastic.

About 30 days ago, I took our entire senior leadership team down to Texas, about 120 people.

We spent a whole day making 500 calls in the marketplace.

The results were just phenomenal.

So, we feel really good about Texas.

Then finally, we're going to realize potential revenue opportunities in our legacy Colonial markets, really focusing on Alabama, Florida and Texas.

Just to give you a mathematical perspective, in those markets our revenue per FTE in 2011 was $268,000, 2012 it's $361,000.

By 2015, we think it will be $549,000.

As we ramp up the existing cost structures, this is not additional cost.

This is just more revenue -- these folks getting more seasoned and more productive in our system.

A huge revenue opportunity there for us.

So, a lot of initiatives that are well underway.

We expect good results with that for the rest of 2013 and as we head into 2014.

Let me turn it to Daryl now for some more detail.

Daryl?

Thank you, Kelly.

Good morning, everyone.

I'm going to talk about credit quality, net interest margin, fee income, non-interest expense, capital and our segment performance.

On Slide 8, you can see that our credit metrics showed continued improvement across the board.

Non-performing assets declined 8% during the first quarter and are down 37% since last year.

Charge-offs declined to 98 basis points during the first quarter.

We expect modest improvement in non-performing assets during the second quarter.

We anticipate net charge-offs will continue to trend lower throughout the year.

Turning to Slide 9. While delinquencies can fluctuate due to seasonality, our 30-89 and 90 days-plus past dues both improved nicely this quarter.

During the first quarter, our allowance to non-performing loans increased from 1.37 to 1.43 times, showing continued improvement in the underlying credit trends.

We also had a lower reserve release during the quarter.

Including covered, we released $28 million this quarter versus $39 million in the prior quarter.

As other portfolios normalize, we expect to have further modest reserve releases.

Continuing on Slide 10.

Net interest margin came in at 3.76%, down 8 basis points from last quarter and consistent with our guidance.

The decrease was driven by declines in both yields and balances of covered assets.

Looking to the second quarter, we expect margins to be down another 10 basis points, driven mainly by lower rates on new earning assets, runoff of covered assets and tighter credit spreads, partially offset by the benefits from continued decline in funding costs and favorable asset and funding mix changes.

Looking out into the year, we expect more modest declines in net interest margin.

As you can see in the lower graph, we remain slightly asset sensitive and are positioned well for rising rates.

Turning to Slide 11, our fee income ratio for the first quarter decreased to 42.9% versus 44.1% in the fourth quarter.

But up from 41% in the first quarter.

As Kelly said earlier, we are very pleased with insurance market firming.

We began in wholesale and are now spreading to the retail side of the business.

We expect this firming to be more sustainable over a longer period.

Mortgage banking produced record originations in the first quarter.

However, spreads decreased 82 basis points to 165 compared with last quarter, resulting in lower gains on sales.

A gain on sale margin declined for two reasons.

Two-thirds of the Mortgage business is correspondent which has tighter margins and reacts quicker to market rate changes.

On the retail side, we are being more aggressive on spread to acquire more purchase activity.

We really think purchased loans are beneficial.

This will be favorable as refinancing slows down.

Looking forward, we expect Mortgage banking activity in the second quarter to be similar to the first quarter due to a greater emphasis on HARP refinancing, increased volume on our mandatory delivery and cross-selling with our Mortgage warehouse lending clients.

Service charges declined $11 million due to seasonality and fewer processing days.

But we are growing retail accounts.

We expect service charge income to grow in the coming quarters.

FDIC loss share income improved due to the higher offset for the provision for covered loans and reduced accretion.

Other income was down $13 million, due to lower income on other investments.

Looking on Slide 12, we had excellent results in expense control this quarter.

Our non-interest expense was down $74 million linked quarter or 20% annualized.

Personnel expenses declined due to a slight reduction in FTEs and lower incentives offset by higher payroll taxes.

Foreclosed property expense was down $30 million from last quarter because of lower foreclosed property balances.

Remember, our efficiency ratio calculation excludes foreclosed property expense which is consistent with the industry.

On a GAAP basis, including this expense, our efficiency ratio improved the last two quarters.

Loan-related expense was down $15 million, compared to fourth quarter.

This was due to lower expenses related to the Mortgage loan repurchase expense.

Professional service expense was down $10 million, due to lower credit related legal costs.

Finally, the effective tax rate for the quarter was 27%, excluding the tax adjustment.

We expect a similar rate in the second quarter.

Given the challenging revenue environment, we believe we can continue to drive our expenses lower, to achieve positive operating leverage next quarter and for the rest of the year.

Turning to Slide 13.

Tier 1 common was 9.2%.

Under Basel III Tier 1 common was 7.8%.

This estimate does not include mitigating actions we will take to lower our risk weighted assets and improve our capital ratios for Basel III.

As you know, we reported in our 10-K the need to modify our calculation of risk weighted assets.

We have reviewed our regulatory capital calculation process.

The primary drivers for the revision in risk weighted assets are unfunded lending commitments and Mortgage loans.

The revised calculation reflects a very conservative interpretation of the regulatory guidance.

When it comes to CCAR, we are focused on the resubmission which is due by June 11.

The regulators will then have 75 days to review it.

Dividends will be our first priority in the revised capital plan.

Now, here are a few highlights from our segment disclosures.

Starting on Slide 14, Community Banking net income totaled $230 million, showing strong growth versus common and linked quarter.

Common quarter growth was due to lower credit-related expenses and stronger fee income.

Consistent with our growth strategy, average dealer floorplan loans increased $118 million, compared with first quarter.

Turning to Slide 15.

Residential Mortgage income was up $15 million on a linked quarter, from a very strong fourth quarter and down from first quarter last year.

We had record originations totaling $8.7 billion, plus our purchase Mortgage activity was up 15% versus last year.

Looking at Dealer Financial Services on Slide 16, you'll see net income totaled $40 million.

That's flat compared to linked quarter and down from last year.

The decrease in segment income is mostly due to higher loan loss provisions, coupled with annual strong loan growth.

We continue to see strong demand with record originations this quarter of $1.5 billion, that's a 40% increase over last year.

We continue to open new offices in strong markets.

On Slide 17, you can see that Specialized Lending businesses earned net income of $52 million.

Average loans grew 11%, over first quarter last year, with strong performances in almost all of our businesses.

Moving to Slide 18, at $30 million, net income for Insurance Services was up significantly compared to last year.

We continue to take advantage of opportunities presented by Crump, plus the benefits from firming market conditions.

Turning to Slide 19, Financial Services generated $71 million in net income that was mostly driven by Corporate Banking and Wealth.

These businesses had loan growth of 31% and 19%, respectively.

With that, let me turn it back over to Kelly for closing remarks and Q&A.

Thank you, Daryl.

What you've seen here is strong operating earnings, a nice continued credit quality improvement, beginning to see some real cost reduction benefits with less NPAs, of course, the challenge is revenue.

But some improvement in loan momentum, which we feel good about.

As you can see, we have a lot of key revenue initiatives in process that will accelerate during the course of the year.

Let me turn now back to Alan for Q&A.

Thank you, Kelly.

We will now begin the Q&A session.

We have a number of questioners in the queue, so please observe our normal practice of asking one primary question and one follow-up.

If you have further questions, please re-enter the queue to allow others to participate.

Tiffany, at this time, please come back on and explain how callers can participate in the question process.

(Operator Instructions)

And as a quick reminder, please limit yourself to one question and one follow-up question.

Matthew O'Connor, Deutsche Bank.

I guess just a big-picture question.

I think you had cancelled the investor conference that's in a couple of weeks, and obviously, there's the CCAR submission.

I guess just anything behind all that?

It seems like most of the outlook comments are consistent with what you've been saying.

But just any comments on -- I guess the conference?

Then if you can elaborate on CCAR at all?

Matt, we just really wanted to have a little more time to get through the CCAR resubmission.

If we had it at the scheduled time, we'd spend the whole time talking about the resubmission.

When we have it, we want to be focused on long-term strategic operating issues.

So, we just thought it would be better to kind of get past this short-term noise, so we could have a really substantive discussion.

We think investor conferences is more about long-term, strategic issues than talking about the short-term things like we're talking about today.

The CCAR resubmission, as Daryl described, we'll have our resubmission in by June 11.

They have 75 days to respond.

It's just a process that we have to go through.

We're optimistic about it.

But obviously, you can't -- they have two rules now, they used to say you can't fight the Fed.

Now they say, you can't [second-guess] the Fed.

So, we'll see how it works out.

But we're optimistic about it.

Then I guess just in general, we're seeing some other banks making some adjustments to the qualitative parts of CCAR, or beefing up some of their systems in mismanagement.

There's obviously just a lot of regulatory kind of crossfires out there.

When you put all the stuff together, do you think it will be meaningful from an expense point of view or strategy or just kind of day-to-day how things are going?

I personally think this is an industry-wide phenomenon.

I think all companies are having to invest enormously in -- not only into all of the process that goes into CCAR, which is enormous, but also heightened regulatory focus in every part of the bank.

It's across the industry.

I've never seen such a broad-based, intense level and increased regulatory scrutiny.

So, it will be substantially expensive for us and everybody else, in my humble opinion.

Now, we recognize that.

So, we will be making the investments that are necessary in terms of systems and all the things that are required -- some of which are purely regulatory driven, some of which just makes us a better company.

But because that is a substantial investment, we are, therefore, making major focus in terms of controlling expenses in other areas to compensate for it.

Okay, thank you very much.

Michael Rose, Raymond James.

Just wanted to get a sense on kind of what drove the rebound in the pipelines a little bit more specifically.

Was it in a certain category?

Maybe, how much did Texas contribute?

Clarke, do you want to handle that?

Michael, this is Clarke Starnes.

We did see, as Kelly said, a pretty meaningful slowdown coming out of the end of the year -- really across the board, but primarily in our large corporate segment.

That readjusted nicely.

So, toward the end of the quarter, we've seen very healthy pipelines beginning to rebuild, again, in our corporate middle-market segments.

But also in our Community Bank space, we had very good pipelines.

Ricky can talk about that.

Then we also saw nice increases in our consumer retail branch-oriented credits as well.

Yes.

Thanks, Clarke.

We did see, Michael, some improving commercial real estate pipelines.

We put some focus on that.

It's been sort of broad-based, multifamily, some good office, where retail is improving.

We've been pleased with the increase there.

We've redesigned our sales focus with our sales teams.

That's beginning to bear some real fruit.

We also saw some broad-based C&I improvement in pipelines.

Then certainly our focus on wholesale sales finance venue, which is very positive coming off of our great Dealer network that we have on the Sales Finance Retail side showed some really great improvement.

So, broad brush, we see some nice improved activity.

As Kelly said, the end of the first quarter we saw some momentum.

That pipeline continued to build.

Production compared favorably, at least flat from a year ago, so not up, but not down from a year ago.

So, if we can build off this momentum ending the quarter, really make this pipeline come to fruition, then we are optimistic about the view for the second and beyond.

Okay.

That's helpful.

Then Daryl, as a follow-up, can you just kind of maybe quantify what you mean by modest margin compression in the back half of the year?

And if anything related to the Colonial accretion has changed from that slide you included a couple quarters ago?

Thanks.

Yes, Michael.

So, I would say for the second quarter, I expect GAAP margins to decline up to 10 basis points.

Thereafter, GAAP margin may be a few basis points a quarter.

That lingers out for third and fourth quarter.

If you look at the slides that we had two quarters ago, if you recall, in 2013, we had an estimate of $600 million in net interest income.

Then there was about $200 million negative number in the FDIC loss share.

We're tracking relatively close to that.

We're probably up about $15 million forecast overall for 2013.

So, closer to $615.

If you look at the negative FDIC loss share for 2013, we're a negative $220 million.

So, we'll [spend] $5 million of what we said about two quarters ago.

Thank you.

Craig Siegenthaler, Credit Suisse.

First, just want to hit on regulatory capital and capital deployment.

I heard your comments earlier that priority number one is really increase the dividend.

But can you also comment on what capital mitigation strategy you have to improve your Basel III under the NPR?

Also, what should we think about long-term prospects for both buybacks and acquisitions?

Craig, so for Basel III, we're still waiting to get the final rules out; hopefully later this quarter or maybe early third quarter is what we're hearing now.

I think there's a couple of examples.

If you look in the Mortgage area, there's a category one and category two differentiation.

Our focus would be much more on the category one redeployment on new originations so that we get more favorable risk weighted asset treatment on those.

There are some existing loans that you could do some modifications on some floating rate Mortgages by putting caps in -- that could potentially put you back in some category one.

If you look at CRE underwriting -- Clarke might want to comment on it, but I think if he modifies it a little bit, we can maybe fall under the rules there to get the more favorable risk weighted asset treatment.

Yes.

That's right.

Craig, we'll -- there's a high volatility CRE; we think we can easily adjust around equity requirements and basic underwriting to get a favorable risk weighting on the good CRE loans that we make.

Your other question about deployment of capital -- I think we're really focused at serving our clients first organically, and then making sure that we can pay the highest dividend allowable that's prudent for our Company and acceptable by the regulators.

After that, it's really -- those are just two main areas of focus for now.

Got it.

So, it sounds like M&A and buybacks are definitely back of the line right now to the dividend focus in the second half?

Yes, that would be absolutely right, Craig.

All right, guys, thanks for taking my questions.

[Ibraham Gunwhilla]

Operator, I think we missed that one.

John Pancari, Evercore Partners.

Can you give me some additional color on new money yields on your new loan originations through the quarter?

How you're seeing that compared to what the runoff yield is on your loan portfolio, I guess across product types as well.

Yes, John, this is Clarke Starnes.

We continue to see, obviously, deterioration in the new spreads versus the existing portfolio, but it's moderating to some extent, particularly in the C&I world.

So, our new money spreads for example in C&I right now are about 2.20%.

In our CRE book, we obviously get a premium there -- it's about 3.20%.

Our consumer retail business is about the 2.25% level, and our Sales Finance, our dealer finance business is in about the 1.66% level.

So, those were the primary areas that we're putting on the balance sheet right now outside our specialty lending areas.

Obviously, those -- you can see the yields in our press release.

Those new spreads are lower than the existing portfolios.

So, we continue to see very aggressive competition in the marketplace now, but we think we're holding up our spreads as well as probably anybody out there.

If you look at what's running off versus what's going on, I would say we have modest pressure on the loan side and on the securities side.

Securities yields will probably come down a couple more basis points this quarter, or throughout the rest of this year, as we reinvest versus what's rolling off, and loans will come down a little.

But if you look, our core margin this past quarter was actually up 1 basis point.

If you exclude the impact on covered, we actually increased net interest income this quarter.

So, our core businesses are actually doing really well.

We have offsets on the funding costs.

We're working really hard on diversifying our mixes.

Our specialty businesses are growing faster; those yield over 10%.

So, I think our business mix strategy and the ability to lower funding costs are helping offset some of these asset pressures we're seeing.

Okay.

Thank you.

That's very helpful.

Then on the expense side, can you talk about the sustainability of the first-quarter comp expense levels?

Saw a pretty good decline in that number -- came in well below where I was expecting.

Just want to get some feel around -- is that level sustainable going through the rest of the year?

John, I would say generally it is.

You do get some volatility based on volumes.

So, obviously, if we had a bumper production in Mortgage -- let's say, rates really dropped and Mortgage volume really jumped up, you'd have [personnel] expense go up because of more incentive comp, but you'd make more money.

Leaving that aside for the moment, if you stabilize that factor, then I think you would see a continuation of that trend.

To be honest, we will be very conservative in terms of managing FTEs.

We have a number of initiatives in place that are putting downward pressure on FTEs, and obviously, that drives personnel cost.

So, we're taking this economic environment very seriously.

We're not going to wait until several quarters to see what it's going to do.

So, we are ahead of the curve.

We already have major initiatives under way.

I'm not going to come out like a lot of people do with these grand programs and grand numbers and all.

We'd rather just like to prove to you what we can do.

Then we'll let you comment about it.

But I would say I have a lot of confidence in that trend.

One other thing I would just add to that is -- we focus on positive operating leverage.

If you look out into the next quarter, we will grow revenues, and our expenses will probably be flat to down.

So, we will definitely have positive operating next quarter and for the year.

Okay, thank you.

Ryan Nash, Goldman Sachs.

I have a question for Kelly.

Just given how competitive the lending environment is right now, you have a few niche businesses in specialty lending that I think many of your competitors don't.

I noticed in your 2013 initiatives, you didn't highlight this as a focus.

Just given where we are in the cycle for credit, are you considering getting more aggressive in those businesses at all, just given where the risk adjusted returns are at this point?

Well, that's a good pick-up, Ryan.

I was trying to highlight some of them, and didn't particularly point that out.

But I would say that it is a continuing, very strong focus for us.

Nothing has diminished in terms of our interest in that.

In fact, every one of those businesses are getting better.

Many are continuing to expand more fully their national footprint.

So, yes, we will absolutely continue that.

I would easily put that as one of those major initiatives.

I was just trying to be relatively brief on time.

But they're great.

You see the contribution they make to us in terms of our total revenue mix.

To be honest with you, they are relatively economic independent.

In other words, they don't correlate directly with economic variables like regular spread lending does in the normal Community Bank.

So, insightful question.

The answer is yes, we'll be very aggressive with them.

Got it.

Thank you.

Daryl, I know you gave good color on the margin.

In terms of the core margin, I know you talked about it stabilizing in the mid-3.30%s.

Is that still the way that you're thinking about it as we look out to the rest of 2013 and into 2014?

Yes.

That's correct, Ryan.

I would say from what we see now, the trajectory, we're probably in the mid-3.30%s over the next year or two.

Thanks for taking my questions.

Ken Usdin, Jefferies.

I was wondering if you can give us some color on the insurance business?

What's the core organic growth rate that you're seeing, because Crump hasn't fully annualized yet?

Then, how do you expect that business to grow going forward, given your comments that the market seems to still be hardening?

Right.

Core organic growth, as Kelly said, is running about 5.5%.

We think the industry's in the 4.5% kind of range.

Obviously, we did not own Crump first-quarter last year, but had we, it would have added about 2 percentage points to our growth rate.

So, nice upside leverage, we believe.

You really have not had the expense reductions kick in.

They begin to kick in the second quarter this year.

We got about 50% more in expense reduction than we had initially modeled, which is positive.

We also, as Kelly pointed out, had a real upside, we think, in a couple areas.

One is in the institutional business, as you commented on.

The way that business works -- we brought over several large clients.

You ramp up in the expense first because you're really having to hire up people to outsource.

You get the benefit of the revenue later.

We still have that to look forward to, as well as the cross-sell of the life insurance business inside BB&T through our P&C clients, through our broker-dealer, and through our Wealth division.

We're actually adding about 50 to 60 life insurance reps embedded within our Wealth group to help drive that.

So, the life insurance, as Kelly pointed out, is a real upside leverage.

The core P&C business, I will tell you, as Daryl alluded in his comments, we've really seen it come back initially in wholesale.

We're seeing margins there pre-intangibles in the 20% range, which a year or two ago would have been below 15%.

We're seeing the retail business bounce back, probably in the mid-teens, we think with upside up to 20% over the next several years.

The last item I'd just leave for you is -- historically you see really strong rebounds for about two years, and then it goes away.

Because of the staying power of this downturn, what you see now is you see lesser upside, so instead of 15% upside, you're seeing a 5%.

We think it's going to be here for several years.

So, we think potentially two to four years we could see -- at least two to three years, we could have upside here.

Okay.

Great.

My second question -- just, Kelly, you talked about the comp side of controlling expenses.

We just heard a little bit on the insurance side.

But I was wondering if you could also just kind of give us a little more color on what opportunities do you have inside the rest of the Firm aside from staff and compensation to continue to just be smarter and tighter on non-comp expense?

Yes.

So, Ken, a lot of this, remember now, is going to be flowing through in terms of credit costs.

You saw the first leg of that in the first quarter.

That has a good ways to go.

That is -- nothing's guaranteed, but that's pretty doggone assured because -- it's very directly correlated with NPAs.

NPAs come down, legal cost comes down, and real estate carrying cost comes down and appraisal write-downs comes down.

So, all that -- the credit costs come down is a biggie.

In terms of the other parts of the business, Ricky's doing a good job of looking at rationalizing our branch structure.

He has a number of branches that will be kind of methodically closing as we go along during this process.

We are constantly looking at expense optimization with regard to procurement.

We constantly see opportunities to reduce costs in contract renewals.

Then the other, which is the pennies and the dimes, which most people don't pay much attention to, but I pay a lot of attention to the small things because they add up.

So, we have a bottom's up from our people effort to get them to focus on the small things.

If you've got two subscriptions of a newspaper, maybe cut it to one.

Be sure when you walk out of a room, you cut the lights off.

Just a lot of little stuff adds up.

But the biggies are going to be HR, credit, and then the miscellaneous that relates to running the general bank.

Okay, got it.

Thanks a lot, Kelly.

Erika Penala, Bank of America.

I just wanted to put together all the answers -- responses you had on the expense question, to make sure that we're taking away the right thing.

So, you mentioned a lot of positive color in terms of being able to control the number.

At the same time, you mentioned reinvesting in Mortgage expansion and in expanding in Texas.

So, is the main take-away here that despite that, you can keep the total expense level close to this $1.4 billion number that we saw in the first quarter -- for the balance of the year?

Yes.

That's a good question.

I think what you're seeing for us is, we are not on a linear -- let's go figure out how to cut costs.

The idea of less is better -- we don't believe in that.

That's a short-run strategy.

What we believe in is reinvestment.

So, generally, what you're seeing is, we're cutting in some areas to reinvest in other areas.

We think you get a boomerang effect there.

You cut the cost, and you redeploy them to higher-earning assets.

Having said that though, we still think that we will see total expenses flat to down, because -- if we didn't reinvest in these revenue opportunities, we could put them way down, to be honest.

But we're not going to do that.

It's a long-term business.

We're going to protect the long-term franchise.

We want you to be happy with us two years from now, as well as this quarter.

So, it will be an intellectually driven strategy of reducing costs in terms of cutting out things that we do, and doing things better, and reinvesting in areas that have higher returns.

Got it.

My follow-up question is on the resubmission process.

Does the resubmission preclude you -- for example, if there was an interesting deal or the books are out during those 75 days that the Fed is reviewing your resubmission, would you be allowed to put in a bid, or do you have to wait until the Fed gives you a non-objection in your total capital plan?

No, as we understand it, you're not precluded from doing a deal, but you would have to go to the next level.

Typically, if your plan is approved, you have what's called an expedited approval process, which is kind of at the regional level, if it's consistent with your capital plan.

If your capital plan's not approved, and then you have a deal, it has to go through a more rigorous process, meaning it has to go to Washington.

So, it doesn't mean you can't do it.

It just means you've got to go through more process.

Got it, thank you.

Betsy Graseck, Morgan Stanley.

Just tying together the efficiency question.

At the beginning of the comments -- prepared remarks -- you were discussing that this is just the beginning and that you have a lot of opportunities to rethink how you are running the business.

I guess I'm just wondering -- is that end game an actual improvement?

You're looking for positive operating leverage, so I think it would be an improvement in the expense ratio.

But what kind of legs do you think it has?

What kind of target expense ratio can you tell us that you're kind of managing towards?

Well, Betsy, as you know, it's always challenging to know exactly how these things will work out the way we do it, because we don't start from a top-down -- I don't dictate we're going to cut X percentage.

I just don't think that's the way to run the business.

We start out with a challenge to our people to reconceptualize and restructure that business.

I will just say to you, without -- I'm not going to discuss specific initiatives.

It wouldn't be fair to parts of the Organization that might be involved in that.

But we are way down the road in terms of developing strategies to execute on this enhanced focus on improving our operating leverage.

So, I think that we will execute.

I'm very, very confident of that.

It's not a two- or three-year out process.

It's a relatively near term.

So, long term, our stated target is low-50%s on operating efficiency ratio.

In the near term, of around mid-50%s, but over two or three years, I expect to get to low-50%s.

Okay.

That's helpful.

Thanks.

Then the follow-up is on the new locations that you have opened up offices in -- you mentioned San Fran, Chicago, Cincinnati.

Part one of the question is -- is there more to come there?

Then the second thing is -- how are you dealing with the credit extension that you're doing in those markets?

Is there an overlay for being in a new market?

How does it correspond with what you're doing in markets where you've been for quite some time?

Are you holding them to a higher standard with regard to either pricing or credit?

I ask the question just because people sometimes get a little nervous about moving into new markets outside of footprint.

I realize you're lending within that footprint, but it is outside of your historic footprint.

Betsy, this is Chris.

I'll answer your expansion question.

Then I'll let Clarke deal with the credit side of it.

In terms of what we have done this year, we've -- as Kelly commented, we've added a couple offices, a couple general bankers -- generalist bankers in Chicago and Dallas.

We have added the AG vertical.

So, we have someone in Southern California, and also in Chicago now, who are already beginning to book credits there.

We think we've got about -- we'd be happy if we could add about 8 to 10 more bankers this year, very methodically.

Which will give us something on the order of a 12 to 14 or so this year.

I can tell you, the underwriting is very much in check, but I'll let Clarke deal with that.

Yes.

Thanks, Chris.

Betsy, as a risk officer, we had that conversation along with Chris and Ricky and the team.

I feel very good about it.

Most of these bankers are originating within our eight industry verticals that we have specialization around, both on the sourcing and underwriting side.

So, we're very careful about bringing in bankers that, number one, understand those businesses and industries.

We typically know the companies through our research coverage.

So, it's not just a speculative approach.

Then we bring those bankers in with some heavy training into our underwriting standards and culture.

Then we have specialized underwriters in our central office that approve all the credits.

I actually approve most of them, frankly, because they're going to be the larger middle market.

So, very, very disciplined there.

It does not look different than our long-term credit standards, as Kelly mentioned earlier.

Betsy, I would just add, you and I have been around long enough -- I've been around longer than you.

But you've been around long enough to know that obviously the [net stated] strategy -- the continental strategies, we all know what the tombstones are on all of that.

Clearly, we're not going down that road.

But if you think about it, the only difference in a large corporate credit in Winston-Salem, North Carolina and Chicago is do you apply the same analytical evaluation?

Do you have people on the street talking to the people, developing a relationship, looking [the Treasurer] eye to eye?

I mean, that's the difference.

When these other companies got in trouble because -- first of all, they started buying loans, they didn't know what they were -- the types of loans, but they didn't [know what they were doing].

They were buying them out of market.

They didn't even see the clients.

So, it was just a big mess.

But this is nothing more than our exact same strategy in a different location.

But because it is different, to your point, it is getting enhanced scrutiny.

Clarke, as he said, approves most of them.

Frankly, I look at several of them that come in through our loan policy committee.

Not that I mean to make loan approvals every day, but I looked at several of these just to be sure that we're doing exactly what we said we were going to do.

Okay, super.

Thank you for that.

Gerard Cassidy, RBC.

I have a question on the Dealer Financial Services area.

You guys are obviously -- been in the business for some time.

We've been hearing stories about underwriting trends weakening in indirect auto.

Have you guys seen that?

Can you also comment on the operating margin coming down from first-quarter 2012 from about 61% to 39%?

Gerard, this is Clarke Starnes.

We have been in the retail Sales Finance business for many, many years.

In fact, that was a core foundational business at BB&T, and our predecessor bank.

So we're very, very good at it with specialists.

So, we do see what you are describing.

Many new entrants to the markets or people getting in and out and coming back and competing on aggressive terms and, obviously, spreads.

So, spreads are very, very tight right now.

So, that's a negative for us.

We're not deviating from our underwriting, but we see things like extended terms, higher advanced rates, all those types of things -- type of mistakes that we've seen in past cycles.

So, we are watching that.

We're being very disciplined.

I think, Daryl, in regarding the margin -- it's primarily -- the Dealer Financial Services includes our non-prime auto as well.

The difference in the operating margin is the provision expense going to more of a normalized level in that business.

So, we've had outsized margins over the last year or so.

So, we're still very healthy.

But that's the primary contributor.

Okay.

The second question has to do with the foreclosure expenses, obviously fell nicely in the quarter.

Can you give us some color on -- with the housing market in recovery, and housing prices rising, how is that affecting your OREO balances?

Is it easier to liquidate these portfolios?

Are you liquidating them at better prices than six months ago?

The answer to all of that is yes.

We are seeing improvement, particularly on residential housing.

So, just about any time we get in a resi property, we're able to move that out very quickly with minimal marks.

Again, where we've seen the biggest hit to that expense line item in the past are the non-residential properties that stood awhile, and we have to go through a revaluation process.

But the good news there is, if you look at our inventory mix, that is way down.

Most of what we're getting in now are resi properties.

We're able to move those out at much lower marks, and keep that expense level down.

Thank you.

Matt Burnell, Wells Fargo Securities.

A couple of bigger picture questions.

But let me follow up on the Dealer Finance subject with a somewhat different question.

There's been a whole lot of regulatory focus on this business in the last few months.

I guess I'm just curious, given all of the increased pressure on this business, does that potentially hurt the returns in this business going forward?

Or, in fact, given some of the comments that you just made about the competition being so aggressive, does this, in fact, improve the operating environment for that business?

Matt, this is Clarke again.

I think over the long term, we would view it as a net positive in that there will be clear guidelines and rules of engagement.

There's a lot of entrants in there, a lot of different pricing schemes with the dealers.

So, the dealers have enormous options to move the paper around, based upon the existing environment.

The CFPB put out new guidance recently.

As you all saw, we know more clarity is coming around that.

We think it will look like much less dealer discretion over pricing of the paper, more standardization there.

I think that plays well for a very efficient long-term player like BB&T.

I think it could be an advantage for us.

It will push out some of the folks that were in it for the short run.

Does it reduce returns in the very near term, however?

I think there's some risk of that.

There's risk of some short-term volume disruption until the final guidance comes out because obviously some people will move based on what's known today.

It will take a while to settle out.

I think the near-term effect could be on volumes.

Not as clear on price at this point.

Then if I can ask a follow-up to Kelly.

Kelly, you'd made some pointed comments about the higher cost of regulation.

I guess I'm just curious, given what appears to be an even greater focus on some of the internal regulatory issues that many banks face, have you gotten -- have you sensed that there's a greater level of willingness for mid-sized players to think about selling?

Or is that -- has that dialogue been relatively steady?

Matt, I think the dialogue to this point's been relatively steady.

Frankly, I think where everybody is still is trying to kind of figure out what the end state's going to be.

Clearly, I would say, based on conversations with folks, everybody is feeling it.

Obviously, the smaller you are, the more difficult it is, to your point.

I don't sense today that people have -- has pushed them over the dam.

But I think over time, it's a really big issue for smaller institutions because, as I've said for many years, I still believe economies of scale are going to be a major driver in this business, notwithstanding the fact that the regulators tend to want to put some kind of a cap.

They think big is bad and all that.

But certainly in the space we're in, I think that we feel like we need to have more size today.

So, that would imply institutions substantially small enough today, in my view, have a tough row to hoe going forward.

Thanks for taking my question.

Marty Mosby, Guggenheim.

I was wondering about the seasonal impacts.

There's a couple of lines with the expense improvements.

There's even some impacts there from seasonality, and with fee income you were -- like, for instance, talking about insurance that was relatively flat, which was -- masked how good that performance was because of seasonality.

The last two years, your EPS has actually gone up more than $0.10 from first to second quarter.

I just didn't know if you could, in general, quantify what you think that seasonal uptick is as we move into 2Q?

Yes.

This is Chris Henson.

I'll comment on insurance.

Daryl can comment for the overall.

Insurance, we were really pleased.

Typically -- you're exactly right, typically, first quarter has a decline in the insurance business.

What you saw this time from fourth to first is actually somewhat flat, slightly up.

For second quarter, it's typically -- used to be fourth quarter was our best revenue quarter.

As you go forward, it's really turning to more of a second quarter being our best quarter because renewals tend to occur in June.

So, you could see us up from first to second, up about 10% or so.

We think that is very doable and highly probable.

I'll let Daryl maybe deal with the EPS question.

Yes.

On the other categories, Marty, I think there is some positive seasonality as you look at service charges, and net interest income will be -- you have more days there.

So, I think, we definitely believe we're going to have much higher revenue second versus first.

With Kelly's discussion on expenses, we should have a pretty nice improvement net overall.

Then my second question, Daryl, was -- you had been kind of moving that asset-sensitivity graph you have on that net interest margin page.

You've been kind of neutralizing some of that.

This quarter have moved in the other direction.

Was that -- as you saw some changes in some increased DDA growth and some other kind of assumptions that you made there with cash flows, do you think that you'd be eating back into that as you move forward, hoping to mitigate some of the margin compression going forward?

We aren't managing -- to change it very much right now.

Our growth in DDA is really the main driver for the increasing sensitivity.

We still continue to put on a little bit more fixed versus variable.

So, if you go back a couple years ago, we were 50/50 between fixed and variable rate loans.

Now we're 53% fixed versus 47%.

So, there's a little bit of drift with the lower rates.

But the growth that we're having in DDA and our managed rate deposits is more than offsetting that right now.

Thanks.

That's all the time we have for questions.

Okay.

Thank you, Tiffany.

Thanks; we do have several still in the queue.

I apologize that we've run out of time.

Kelly, do you have any closing remarks?

Thanks, everybody, for joining our call.

We appreciate it.

Hope you have a great day.

That concludes today's conference call.

Thank you for your participation.