Truist Financial Corp (TFC) 2015 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation first-quarter 2015 earnings conference.

(Operator Instructions)

As a reminder this event is being recorded.

It is now my pleasure to introduce your host, Alan Greer of Investor Relations for BB&T Corporation.

Please go ahead, sir.

Thank you, Amber, and good morning everyone.

Thanks to all of our listeners for joining us today.

We have with us today Kelly King, our Chairman & CEO; and Daryl Bible, our Chief Financial Officer, who will review the results for the first quarter of 2015 and give you some thoughts about the second quarter.

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 Community Banking; and Clarke Starnes, our Chief Risk Officer.

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

A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website.

Before we begin let me remind you 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 intentions, beliefs or expectations.

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

I refer you to the forward-looking statement warnings in our presentation and our SEC filings.

In addition please note that our presentation includes certain non-GAAP disclosures.

Please refer to page 2 in the appendix of our presentation for the appropriate reconciliations to GAAP.

With that I will turn it over to Kelly.

Thank you, Alan, and good morning, everybody, and thanks for joining us on our call.

I hope you are enjoying a nice spring day.

While this first quarter is seasonally a challenge for us as most of you know, I believe it is a very clean and solid quarter.

And while the environment is challenging, we are really well-positioned for the rest of the year and for the long-term.

The reason I say that is because we are building a business which has a very strong diversified and resilient balance sheet.

It produces steady revenue, less volatile earnings and we believe long term, less volatile steady growth in [shell] as well.

Relative to the world, we are really excited about the future and will explain to you why as the course of the conversation.

If you're following along on deck 3, our net income totalled $488 million in the first quarter.

Diluted EPS was $0.67.

We did have a penny in merg charges so we would say core at $0.68.

Revenues totaled $2.3 billion which was up 1.5% compared to the first quarter of 2014.

Had a strong performance in fee businesses and particularly in insurance where we had a record quarter.

Our fee income ratio is up to a very strong 45.8% versus 43.6% in the first quarter of 2014.

ROA was 1.18%, ROE was 9.05%, and important our return on tangible common was 14%.

With regard to loans which I'll give you a little bit more detail on in just a moment, excluding residential mortgage they did grow 5.4% which is pretty good in this environment.

It was led by C&I, direct retail and sales finance.

If you look at slide 4, we'll give you -- in just a moment I'll come to slide 4. Let me stay with slide 3 for just a moment.

On some strategic points we did announce an agreement to significantly increase our partnership interest in AmRisc which is MGU underwriting risk not taking risk and to sell American Coastal to the AmRisc management team.

This is a de-risking transaction, no material impact on results, and it does eliminate some exposure we had to hurricane exposure there, so we feel really good about that.

Successful completion of the Texas branch acquisition, just to remind you, we did an earlier tranche of about 21 branches a few months ago.

We just a few weeks ago closed 41 branches.

Our combination of that is over $3 billion in deposits.

It's a really good way for us to expand our franchise on a cost effective basis in Texas, and when we started in 2009, we were 53rd in market share, and this moves us up to 12 in market share.

So we still have a long way to get to number five -- or top five, but we have come along way.

So we feel really good about that.

I mentioned I was in Dallas twice in the last few weeks in a meeting with our people and some community leaders, and I will just tell you the positive momentum of our people in that market and in Houston and the other parts of Texas is really fantastic.

We are being very well received the Texas, and we are very thankful for that.

We did have a successful conversion of our general ledger system which was a big deal.

And now we're looking forward to benefits of the efficiency and flexibility of that new system.

We continue to move down the path that would evolve to the mergers for Bank of Kentucky and Susquehanna moving through the approval process, moving as expected.

We expect Bank of Kentucky to close in the second quarter and Susquehanna in the last half, likely in the third quarter.

Both are going very, very well.

We have huge opportunities there.

Ricky and I spent a lot of time at both of them, and we can give you more color in Q&A if you would like.

But I will just say that both opportunity are fantastic and at it this point we feel more excited about them than we did the day we announced it.

With regard to expenses it was a good quarter for us, non-interest expense was $1.4 billion.

We did say in our guidance that we would have seasonally higher expenses which we always do.

The first quarter includes $18 million increase in pension, a $22 million increase for payroll taxes.

And so our efficiency ratio was 58.5%, but it's important if you X out these two items, the pension and the payroll, our GAAP expenses were lower this quarter.

That's the overall kind of summary.

Now I will take it to slide 4 with a little color with regard to the lending area.

In the C&I area, growth was strong.

Average C&I was up $1 billion which was 10.7% annualized.

That was led by corporate, mortgage warehouse and government finance.

C&I, I would tell you is mostly in large participations, but that's what you would expect given that we are still fairly new in that whole space.

And so we are able to get good participations in old names that just have been out there for a long time, and we just haven't been a part of the lending group.

So that is working very well for us.

I will that it is very competitive out there.

Spreads are tight.

We have done well in terms of its impact on our spreads, because we are still pretty picky, but it is tough out there.

We do expect C&I to grow in the second quarter.

It would be modest -- a little bit slower though because we will have less growth in mortgage warehouse, but that depends on rates, but that's right now what we'd do.

CRE in construction and development declined $38 million down 5.6% annualized.

That was due to several large payoffs primarily.

We are seeing growth in single-family construction and modest growth in office and retail.

Multifamily was down, but here again we are being careful in multifamily.

We think it is kind of peaking, and so we are being careful in underwriting and certainly in some markets we have really curtailed lending, because we think it is overheated.

We do expect [CMD] to be seasonally stronger in the second quarter.

CRE income producing was flat.

Wwe have some production in multifamily, hospitality and industrial but again offset by a lot of large payoffs.

I think everybody knows with these extremely low protected interest rates there are a lot of actors out there looking for assets with any kind of yield, and so we and I think for everybody in the industry are seeing abnormally high runoffs which will of course separate when rates adjust, but for right now we are seeing that happening.

The market we think in multifamily is improving, but again, we think it's kind of at the top.

So it's not a problem today, but we just think we need to be careful where we're going.

We expect income producing to be seasonally stronger in the second which will be good.

Average direct retail was a strong quarter increased $106 million or 5% annualized.

It continues to perform really well.

I've got good volume in HELOCs, direct auto, [made] our of the branches.

Our wealth production is still very strong, record production every month.

It just keeps building, and we do expect the direct retail to grow at a faster pace in the second, maybe in the double-digit period.

Average sales finance, which is again as a reminder largely prime auto order for us grew $251 million almost 10%.

That was our normal production and some acquired portfolios.

We expect it to be a little slow in the second, as we're being careful about tight underwriting.

We mentioned last time that this is an area also in prime auto where there's a lot of money chasing these assets and spreads are getting to be really, really tight, so we are just not willing to take growth at unacceptable spreads.

And so we can expect that to be a little slower in the second.

Average residential mortgage was down $619 million or 8% annualized.

This is consistent with our strategy of selling off essentially all of our conforming mortgages and the impact of last year's quarter sale of $142 million of mostly nonperforming mortgage loans.

That whole portfolio is performing exactly the way we want it to.

In terms of production we had $4 billion versus $3.9 billion in the fourth.

I will tell you the applications were up substantially in the last quarter, and that should flow through as we head through and into the last year, and the application flow was stronger than any quarter last year.

Of course rates were way down, but we will see what happens with rates as we go forward.

I am pleased that the gain on sale margins were up at 1.54% versus 1.18% for the last quarter, so we are improving our margins and still getting pretty good applications, so that is pretty good.

We do expect some decline of residential mortgage based on the strategy, though, even though applications and productions are good.

Other lending subs were down $33 million or 1.2% annualized.

This is as you know a seasonally slower quarter, but we did have strong performance in equipment finance, Regional Acceptance and Grandbridge.

The second quarter will be seasonally stronger for Sheffield and AFCO/CAFO, so we can expect probably double-digit growth in this category in the second quarter.

So overall ex mortgage as I said grew 5.4%.

We think that is very good.

With regard to the second quarter we'd expect loans to grow 3% to 5%, but if you ex mortgage, we would expect a pretty strong 7% to 9% which is a little increase in our guidance with regard to loan activities, so our strategies [are] very, very diversified are working very, very well.

If you look at slide 5, with regard to deposits there is another very good quarter in deposit performance.

Our non-interest bearing deposits grew $571 million or 5.9% annualized.

Interest checking was very strong, $1.3 billion up 27% annualized.

The accounts we really wanted to grow were up 8.7% which we feel really good about.

So total deposits were down 2.4%, but again that's because we are managing our mix and our costs, and we will continue to do that.

I really am very pleased to say that our non-interest bearing deposit mix was 30.6% the first quarter of 2015, up 200 basis points from 28.2% in the first quarter of 2014.

So making a lot of progress in that area in terms of mix and our costs continues to come down, 0.25% in the first quarter versus 0.27% in the first quarter of 2014.

So it was a solid quarter and positions us very well in terms of this protracted low interest-rate environment.

And again we think we look good going forward even though this is a tough environment, because our non-bank businesses generally aren't feeling the same kind of spread pressure the community bank is, and our mergers provide excellent opportunities for efficiency improvement as we go forward.

While the market is challenging we feel relatively bullish.

Let me turn it to Daryl now for some color in some additional areas.

Thank you, Kelly, and good morning, everyone.

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

Continuing on slide 6. As Kelly stated a few moments ago we are pleased to report a solid first quarter.

Our performance includes outstanding results in credit quality.

Net charge-offs were better than expected coming in at 34 basis points, down 13% and well below our long-term normalized range.

Excluding Regional Acceptance, charge-offs were 18 basis points.

Loans past due decreased a combined 20% showing continued improvement in almost every lending category.

Going forward we expect net charge-offs to remain below 35 and 40 basis points in the second quarter assuming no material decline in the economy.

NPAs declined 2% compared with the fourth quarter.

NPLs declined 8%.

NPAs as a percentage of total assets remain at the lowest levels since 2007 at 40 basis points.

We expect NPAs to remain stable for the foreseeable future.

Turning to slide 7, our allowance coverage continues to remain very strong to 3.6 times from 3.2 times net charge-offs last quarter, grew quarter provision of $99 million for the quarter compared to net charge-offs of $101 million.

During the quarter, we completed a full review of our energy-related credit portfolio.

The allowance includes an adjustment related to this review.

Even with this, our criticized and classified ratios declined this quarter.

Going forward we continue to anticipate no reserve releases.

Continuing on slide 8. Net interest margin was 3.33% this quarter, down 3 basis points and well within our expectations.

Core margin was 3.18%, down 2 basis points compared to the last quarter.

The small decline in GAAP margin resulted from lower yields on new loans, runoff of acquired assets, offset by improved funding mix.

Looking forward to the second quarter, we expect GAAP margin to decline 6 to 8 basis points driven by lower interest rates and runoff of acquired assets.

Core margin will likely be down a couple of basis points mainly due to lower yields on loans and increased competition.

We expect net interest income to be flat next quarter.

We became a bit more asset sensitive in the fourth quarter due to funding mix changes.

This positions us to benefit when interest rates begin to rise.

Turning to slide 9. Effective January 1, we adopted new accounting guidance related to qualified affordable housing investments.

So you will see some reclassifications in 2014 related to this new guidance as well as a couple other immaterial reclassifications to conform more closely with industry practice.

We had a strong quarter from our fee income producing businesses.

Our fee income ratio came in at a very healthy 45.8% for the quarter.

Total fee income was $1 billion for the quarter down $25 million compared to the last quarter.

The change in fee income was driven primarily by a decrease in mortgage banking income, mostly due to lower net MSR income, a decrease in investment banking and brokerage fees driven by a decrease in capital markets activities and lower service charges on deposits due to fewer days and higher compensating deposit balances.

We did however experience seasonal growth and employee benefits commissions resulting in a record quarter for our insurance business.

For the second quarter, we expect growth in all major fee categories.

Turning to slide 10.

As expected, our non interest expenses were up due to seasonal factors.

Personnel expense increased $36 million.

This was mostly due to a $22 million increase in payroll taxes and an $18 million in pension expense offset by a slight decline in FTDs.

In non-interest expense, loan related expense decreased mostly due to a $27 million charge in the fourth quarter.

Other expense increased $42 million due to prior period benefits for franchise taxes and insurance related expenses.

And professional expenses declined $14 million due to lower legal fees and costs associated with strategic projects.

Looking at taxes, our effective tax rate was 30.6% for the fourth quarter and should remain at a very similar level in the second quarter.

Looking forward we expect second-quarter expenses to increase 2% to 4% driven by annual merit in increases, production related incentives, professional and IT services expenses and the impact of the Texas branches and the Bank of Kentucky.

We expect to achieve positive operating leverage in the second quarter.

Turning to slide 11.

Capital ratios remained very strong with common equity tier one capital at 10.5%.

Fully phased in common equity capital was 10.3%.

Looking at liquidity our LCR remains very strong at 130%, and our liquid asset buffer at the end of the quarter was very healthy at 13.7%.

We were very pleased to receive a non-objection to our capital plan.

Later this month we plan to increase the quarterly dividend by $0.03 per share to $0.27, a 12.5% increase.

Additionally we are approved for share buybacks of up to $820 million beginning in the third quarter of this year.

Our capital plan also included the Texas branch acquisition, the Bank of Kentucky, Susquehanna and the AmRisc deal.

Looking briefly at our segments, on slide 12 the Community Bank's net income was down $41 million compared with last quarter due to seasonally lower revenues.

The segment had very good loan production.

Compared with the same period last year, commercial loan production was up 5%, and direct retail lending was up 50% due to an increase in home equity lines of credit.

Additionally, Bancorp production increased 9%.

Non-interest expense decreased 3.1% compared to like quarter.

The Community Bank successfully converted the branches in Texas.

Finally we are preparing for the upcoming acquisition of the Bank of Kentucky planned for the second quarter and Susquehanna for the second half of 2015.

Turning to slide 13.

Residential mortgage banking net income declined $18 million.

This was driven by the runoff of the mortgage loan balances and lower production volumes sold offset by higher gain on sales spreads.

On slide 14 dealer financial services had net income of $43 million, an increase of $9 million compared to last quarter driven by lower provision expenses and continued strong loan growth.

Asset quality indicators for regional acceptance continued to perform very well within our risk appetite.

Turning to slide 15, our specialized lending net income declined $7 million to $57 million compared to last quarter due to seasonally lower loan production.

Like quarter loan growth was up 19% due to Grandbridge, Sheffield and Commercial Finance.

On slide 16, insurance had a strong quarter with segment net income of $72 million up $7 million linked quarter.

Revenues were up 3% for retail, 2% for wholesale and 3% in total.

Additionally, insurance enjoyed strong like quarter new business growth of 32% for retail and 23% for wholesale.

Regarding the transaction with AmRisc and American Coastal, we expect to have a $30 million $40 million merger-related charge next quarter.

Remember that this transaction eliminates our exposure to underwriting risk and enhances an investment in a high-growth business.

And lastly, on slide 17, the financial services segment experienced excellent linked quarter loan and deposit growth driven by corporate banking.

Wealth also had record lending production, an increase of 39% compared to the fourth quarter.

In summary, we had a strong performance in a seasonally challenged quarter driven by excellent credit quality, record insurance income and controlled expenses.

We have great momentum going into the second quarter with a stronger outlook for loan growth and fee income.

We are excited about our two upcoming bank acquisitions, the Bank of Kentucky and Susquehanna.

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

Thank you, Daryl.

So overall again I think it was a very solid quarter.

Relative to the market we had really good loan performance, excellent deposit growth, good fee income, record quarter for insurance, expenses were lower [with the exile] seasonal in pension expense.

Most importantly we are well-positioned for the rest of the year and going forward.

Our non-bank businesses have really given us diversified income which is less volatile.

Efficiencies in M&A are really going to begin to pay off for us.

In this environment it's really about consistent strategies and excellent execution.

That is what BB&T is good about.

Alan, (technical difficulty).

Thank you, Kelly.

Amber, at this time if you would come back on the line explain how are participants can call in and ask a question.

Thank you.

Thank you.

(Operator Instructions)

We will go first to Erika Najarian with Bank of America.

Morning.

Morning.

My first question, Kelly, is on your updated outlook on the rate environment.

I remember last earnings call you were optimistic about potential Fed actions this year, and I think investors in the market or a little less so.

If you could give us an update on how you think rates are going to trend for the rest of the year?

Then Daryl, maybe as a follow-up to that, if rates don't go up in 2015, what the trajectory is for BB&T's core margin both on a standalone BB&T basis and then and overlaying Susquehanna?

Erika, that is obviously the question of the day I think for everybody.

I tell you what I personally think.

I think the Fed is going to raise short-term rates in the June to September timeframe in spite of all the rhetoric about the recent changes and so forth.

The reason is because I think they believe they need to get started on moving off the zero-based level.

The economy is not great, but it's not bad.

They really need to begin setting the psychology for a movement in rates.

At some point you've got to get rates up so when you have the next step down you have some cushion.

Having said that, I don't think you can expect a quarter every time they meet.

And so this will be a quarter that kind of signals that it has started, and I think they are going to be very cautious about their wording and maybe even they'll say give you a quarter and kind of take it back.

Maybe don't expect this to come right back, but my point is they will start the process.

I don't think over the next year and a half or so you should expect a material change in rates even though there will be a change in the direction.

That means the rate environment is still going to be challenging for us and everybody else.

Our plans in general are we keep hoping and it would be nice if rates went up a lot.

We are not counting on that.

We're planning to run our business assuming that the environment is about like it is, and we think we've got a strategy to enable us to do that.

Erika, on the second part of your question, the guidance that we gave for margin, even though Kelly believes rates are going up, we always use the floor curve when we model our projections, and we ran our models this month we basically had no rate increases for 2015.

It was really the month of December which basically had no impact for our Company in margin.

To answer your question I would expect our core margin to probably drop about three basis points in the second quarter.

From that standpoint assuming we are able to get our loan growth targets that we're projecting for the next several quarters, we expect core margin to be flat.

GAAP margin will probably be about 10 basis points higher than that for the next couple of quarters.

As Susquehanna comes online in the second half of the year, that will improve our GAAP margin probably in the neighborhood of 10 to 15 basis points potentially, and as that gets closer we will probably give a little bit more color on that.

Great.

Just my follow-up question, you have been open in terms of potential consolidation activity going forward, and we've seen in some of the small and midsize peers in your footprint we are starting to see credit trends creep even outside of energy.

The question here is, do you think the willingness to sell or least the willingness to negotiate a more reasonable price is sort of the issues in credit and the challenges in the rate environment.

Is that going to change the tone of your conversations in 2015?

I think, Erika, that everybody is experiencing the same environment.

It's the interest rate you just alluded to.

It's challenges in terms of technological costs going up a lot.

Regulatory costs are going up, and you can't beat that environment by making poor quality loans and low priced loans.

It is a very challenging environment.

And to be honest, and I've said this for some time, in this kind of environment it is a cost control game.

You can't do so much in terms of cutting cost out of your existing fundamental franchise or you'll ruin your franchise for the long term.

That looks like adding scale.

Do as much as you can organically, but you can't push that because you might get scale and expenses but you lose it on net interest income as a provision.

Our answer is mergers make more sense for us.

I do believe to your point, Erika, that others are beginning to see the same thing, and I don't think that's a sign of weakness for them.

I think it's just a sign of scale advantages in a tough environment that's going to persist for some time.

I expect the conversations to be more kind of practical and realistic about M&A going forward, because I think everybody is settling into the recognition that is going to be a protracted tough environment.

Thank you.

We will go next to Gerard Cassidy with RBC.

Thank you.

Good morning, guys.

Kelly, can you share with us, you were talking about some of the lending areas where the competition is really intensified and more actors have come into play here.

Is it non-bank competitors that you are seeing more of or is it just traditional depositories?

Could you compare it to the last time you saw this type of competition?

Was at 2006, 2005, that time period?

Gerard, you have been watching us a long time like I have.

This time is tougher and the reason is because there are more actors out there.

What we've got going on globally is obviously an extended period of really low interest rates and what that's doing is causing assets all around the world to be chased by a lot of money.

The US has relatively higher yields than anywhere except in China.

Money from everywhere is flooding in, and obviously it's strengthening the dollar but chasing higher-yielding assets in the US.

It's showing up in private equity funds, hedge funds, business development, corporations, all kinds of factors out there competing with us on loans today that ten years ago we'd never have seen.

This environment is tougher than it was before.

With regard to just bank to bank competition first time versus last time, it is probably a little tougher this time also just with bank to bank, because we haven't experienced this kind of long-term extended very low flat yield curves than I don't remember seeing before ever.

So, I think everybody is reacting to a really tough environment.

I think some frankly are getting a little overzealous in terms of trying to chase net interest income and maybe taking a bit more risk than they ought to.

Everybody always says everybody else does it, and we don't do it, and I get that, so I'm not trying to be critical.

I'm saying it is a tough environment, and everybody is scrambling to do the best that they can do.

At least for us we have said consistently we are not going to chase loan volume at the expense of quality.

Our actual loan volume as I tell our Board is extraordinarily good relative to the environment we are experiencing.

Thank you.

To follow-up, you guys have obviously have converted over to a single general ledger.

Maybe, Daryl, can you share with us how much further do you have to go for updating your systems?

And second, how big of an acquisition could you do with the systems that you just implemented?

What's the capacity of those systems?

Gerard, the system we went to is an SAP general ledger system.

It is a very proven system and the industry, not as much in the US but around the world in Europe and other countries.

I think this is very scalable, easily double our size, maybe much more.

One of the large competitors in the US, one of the top four banks also just converted to this general ledger system, and so they are a trillion plus company, so I think it is very scalable.

Gerard, to prove that point, Chris and I about three weeks ago went to Australia in Sydney and Melbourne and visited three banks that are using SAP, and we got extremely confirming feedback in terms of the quality of it, the efficiency of it and scalability of it.

So I think ours is exactly alike.

We could certainly double easily our size with this foundation.

Kelly, are you looking to expand your footprint into Australia?

(Laughter)

I really like Sydney, Gerard, but it might be a few years before we get there.

Okay, thank you.

We will go next to Betsy Graseck with Morgan Stanley.

Hi, good morning.

A couple of questions.

One was on the expenses, you called out where we are expecting to see them go, one of the reasons was acquisitions.

I was wondering if you could give us some color as to what you are thinking there especially with Susquehanna which isn't expected to come in until second half?

And maybe if you could speak to acquisition impacts on revenues in the various lineups that you called out?

So for the acquisitions for the second -- and the second-quarter impact, Betsy, if you take the 2% to 4% increase I would probably attribute about 1.5% of that to [First City] and to the Bank of Kentucky.

It's nominal but it is real there, and it is mainly in line items and personnel, occupancy are the main drivers for that category.

As you get into third quarter, Susquehanna will have a much more significant impact.

If you look at their expense base today it is about $500 million on an annualized basis.

And the cost saves we have phased in going over 12 to 18 months so it's going to have an impact initially on our run rate.

I think I will update that a little bit better next quarter as we get closer to that acquisition closing, but you can kind of look at Susquehanna's pro forma numbers they released yesterday and use that as a gauge and layer in expense saves.

We say we get a 32% save.

We think that is definitely doable over a 12 to 18 month period.

On the revenue side you called out the expenses impacting -- the acquisitions impacting expenses in Q2, but you didn't call out the acquisitions impacting revenue.

So just wondering if it just wasn't as big of a benefit that you see in Q2.

That's more of a Q3 event or too hard to parse it out?

The city deal is one that is really in for the second quarter for the whole amount and that is basically -- there is not any real difference between the revenue expense pretty much matches each other.

I think over time is where we get the accretion as the community bank becomes successful growing the loan growth and the account growth over time.

That is how we get that accretion, and we have been very successful there.

The First City deal is on track, and we expect this one to be on track, so that is really how that will be accretive.

For Bank of Kentucky we do get a loan portfolio of about $1.3 billion that we're going to get towards the second quarter, and that will have an impact into the third quarter really from a revenue perspective.

Betsy, remember that while there is a little bit of a lag time, in all three of these cases we think the lag will be shorter than typical.

The reason is because in all three cases we are entering very large markets with very, very low market shares with more products, more services.

Our strategies are very effective in this kind of market.

Rick and his team think, and I totally agree, that we will be able to ramp up the revenue side of all three of these acquisitions very quickly relative to other traditional mergers.

To get some positive operating leverage in the second quarter but it should accelerate from there as the revenues come through from these deals?

That's right.

That is correct.

I think deals closed that [teen] as we achieve cost saves.

Positive operating leverage for the next six to eight quarters should be very achievable.

Okay, thanks.

We will go next to Matt Burnell with Wells Fargo Securities.

Good morning folks, thanks for taking my call.

Daryl, maybe just a question if you can sort of on a BB&T standalone basis, with the general ledger system now up and running, is there much in the way of cost benefits that you're getting from that conversion, or are you still sort of running dual systems at this point and you really don't expect to see much in the way of savings in the next few quarters?

We converted over Presidents' Day weekend in February.

We haven't really decommissioned the old system.

That is going to take place later this quarter or into the third quarter.

I think that will phase in over time.

I would say the efficiencies of the system plays out as we continue to automate and improve our manual processes to automated processes.

It's going to take time for that to happen.

The real benefit of these systems is there is an efficiency play for automation, but it's really the more you can attach to the systems.

So now we have basically a work horse general ledger system.

The key now is to try to get all of our other systems onto this system to get more efficiency to scale rather than have lots of ancillary other systems that support, convert more to the SAP environment so we have better control and more efficiencies and more automation.

So that will play out over probably over the next two to three years.

And maybe a question for Clark, in terms of the delinquencies, those were down quite nicely both on an early-stage and 90 plus basis, yet you are still suggesting no additional reserve releases going forward.

How are you thinking about the trend in delinquencies and criticized assets going forward?

Great question, Matt.

I think our view is that we're operating more or less at or below normalized levels in a very benign current performance environment.

While we feel really good about that, and that's an opportunity to outperform and hopefully have a lower provision if our losses are lower, at the same time we are growing our loan book nicely, particularly in large corporate and other areas.

And we'd want to make sure we are appropriately and adequately reserved.

So that is why we said we don't believe it's appropriate right now to be releasing, but we still feel good about the opportunity to outperform on credit for the near-term here.

Thank you very much.

And we will go next to John Pancari with Evercore ISI.

Good morning.

Back to the margin outlook, on the core margin, what gives you confidence that the core margin flattens out in the third quarter excluding rates and excluding deals following the compression you do expect in the second quarter and the compression we saw this quarter?

John, we have talked about this before over the last year or two.

For us to have our core margin flatten out, we are really hoping and getting growth from our higher yielding loan categories.

What we need to get to the loan growth in our specialized businesses and our CRE businesses and those businesses to actually outgrow.

But we are slowing the growth.

We're running off mortgage which is one of our lowest yielding, lowest spread businesses.

We are slowing the growth in prime auto which is also a slower spread business.

As we slow those growth down and we increase the growth in the others, it is really the asset mix of that is really what is driving at the core to stabilize.

On that liability side there really isn't a whole lot of room to come down.

That is really what we need to have happen for the core margin to stabilize.

And that can happen without commercial real estate really picking up all that much because by your tone it sounds like (technical difficulty).

We believe it is so with the forecast we have.

Okay.

Thanks for the color on the margin trajectory.

I am wondering what is your margin guidance particularly for the back half of 2015?

What does that imply in terms of your spreading expectations?

If you just look at the core bank, we would expect net interest income to start to rise as our loan growth kicks in.

As Bank of Kentucky basically comes in towards the end of the second quarter and then really as a full effect in the third quarter, that would also be a benefit there.

As Susquehanna closes sometime hopefully in the third quarter, that would also have a huge benefit.

But just on a core basis by itself, we believe NI will start to grow from second to third and fourth.

Okay, all right.

Lastly, Daryl, based upon your earlier answer around resi mortgage abatement, is that -- is it fair to assume then the declines in the resi mortgage held for investment portfolio should continue here?

Yes, we have projections where mortgages -- it came down a lot this past quarter about 8%, but that was driven partially by the loan sale as well as the refi and everything.

I think the pace of it coming down will be slower over the next couple of quarters, but it should also shrink.

So you will see still a pretty good Delta between the core portfolio as well as the portfolio excluding mortgage.

So I would expect it to continue to shrink but not as much.

Okay, thank you.

We will go next to John McDonald with Sanford Bernstein.

Hi, good morning.

I just wanted to see if there's any more precise estimate of the timing of the Susquehanna close, Daryl?

In terms of our modeling, should we think about that as you're hoping to close it right at the beginning of the third quarter or is it just still very uncertain?

John, this is Kelly.

You know, this environment is a different environment than any other we have played in with regard to M&A.

In the old days you could predict with a lot of precision exactly when things would occur.

It's really not that predictable today.

As I said in the opening remarks we have a lot of confidence that it will close in the second half.

In all honestly I think it will close in the third quarter, but I can't be precise enough as to whether it is July or August 15, I just can't be that precise.

Okay.

Maybe, Daryl, you could help us think a little bit now, I know you said you would be more details later about the initial impacts in the first quarter or two when you do close that deal.

Is it dilutive upfront before you get these saves?

Just any sense of the timing of the saves and also the merger charges, how should we think about those as you first close the deal?

Thanks.

Yes.

The merger charges obviously will be pretty heavy in the first quarter or two when we close it.

I would say from an earnings per share basis in the first quarter or two it's probably not that accretive, maybe a penny or two.

But it's really -- early on it is the getting the cost saves and then over time it is really getting the businesses to perform and getting the growth engines and getting all of our products and the people in Susquehanna trained to sell over our -- off our new platform.

Ricky does his magic with the community bank.

That really plays out but it doesn't happen in the first quarter or two.

It takes a year or two.

Okay, but it could be accretive by a penny or two ex the merger charges even in the first quarter or two?

It's possible, yes.

Okay and then one follow-up question on deposit service charges.

What did you see this quarter in terms of seasonality on that, pressure on that line?

And then how much are you seeing maybe behavioral changes with folks managing their balances better and having less overdrafts and fewer deposit service charges?

This is Ricky.

I think you kind of answered your question actually.

Obviously seasonality, a little bit days in the quarter, but balances increasing or offsetting analysis service charges so they are using balances to pay for service charges instead of hard fees.

Certainly overdraft behaviors are becoming more managed by our people.

I think a lot of that is the gas benefit that they are getting.

They are using those savings to not necessarily spend more but to manage their opportunities in their existing lives so that they are not over drafting as much.

Those impacts all together had the decline that you saw in service charges.

We are still seeing great deposit growth.

Balances are continuing to increase.

That momentum continues, and that could continue to put some pressure on service charge income as those behaviors continue.

Certainly we want to continue to try to grow accounts.

With the increasing in accounts you get the potential for more service charges based on volumes, and that's what our focus is right now as we go into the second, third and fourth quarters of the year.

Okay, thank you.

We will go next to Paul Miller with FBR Capital Markets.

Thank you very much.

On the mortgage banking side, you talk about the segment was down -- the mortgage income was down due to lower servicing costs.

Is that mainly -- but you had a hedging gain, so I'm a little confused about why was down.

In the fourth quarter, we had a reevaluation in our MSR asset, so if you really take that revaluation away, I would say mortgage banking was essentially flat for the first which is actually pretty good, because usually the first is a weaker quarter.

It is really set up to have a pretty strong second quarter's off to a good start, so we have pretty good momentum in mortgage revenue right now.

And secondly, a couple of your competitors are saying that the purchase market especially in Florida is doing very, very well, probably better than most people thought given that the purchase world was a disappointment a year ago, I'm just wondering are you seeing the same thing?

Can you add any color to that?

Paul, this is Ricky again.

Absolutely.

Yes, the Florida market is very strong in purchases.

We spent a lot of time down there the early part of the year visiting our regions there and in every market, we are seeing very strong active purchase activities spanning the price ranges from low to high.

I tell you another thing we will see how much impact it really does have, but we have heard a lot about the weather in the Northeast causing people to say I'm coming to Florida and I'm going to be there.

So we'll see what that impact -- it is probably anecdotal, but I think it shows you that Florida is back, and people are again moving to Florida.

They are buying homes -- we feel that's an impact particularly in South Florida with foreign borrowers coming in buying condos.

We see Florida just as you describe it, a much bigger more robust purchase market.

Thank you very much, guys.

We will go next to Geoffrey Elliott with Autonomous Research.

Putting in the context of assets you're looking at potentially buying, how do you think about the assets of the businesses, that GE capital is selling -- could any of those be of interest to BB&T?

Jeff, we think that the asset sales out in the industry are frankly going to continue as particularly the larger institutions have to right size and optimize the use of capital.

We think that is a good thing for banks like us, because as we've talked about organic growth on a good quality basis is challenging, so we're looking at everything that's available out there in the marketplace.

Obviously we wouldn't be interested in any huge megadeals like Wells Fargo as has been talked about.

They are much larger.

They can do that kind of stuff.

We can't, but we look at deals that make sense for us.

We are fairly positive that some of those acquisition opportunities will come to fruition.

And then just shifting tack a little bit on expenses, I'm kind of curious in the divergence between personnel expense up 6% year on year and full-time employees down 9%.

I understand that pension is part of that.

If you could just explain why those trends are so different?

Besides pension, we would probably -- we had an increase on linked quarter pension and seasonal factors, but on a like quarter basis, it is mainly that the pension is the main decrease or increase.

We also and strong insurance revenue which tends to payout higher incentives, so it's probably more incentive related and pension related.

We maybe had an uptick probably in healthcare expenses and flex benefits from that perspective would probably be the other driver.

Thank you.

We will go next to Nancy Bush with NAB Research.

Good morning.

Two questions here.

Can you guys try to expand a little bit your discussion of the AmRisc transaction?

I think you said you significantly increased -- you sold Coastal to AmRisc, and significantly increased your partnership interest at the same time but got rid of a lot of risk.

So I'm sort of missing a piece here.

Could you just explain that?

And also if you could repeat the merger charges that will accompany that?

Nancy, this is Chris Henson.

Keep in mind we owned a portion of AmRisc.

AmRisc is the managing general underwriter that underwrites, does not assume any loss, but underwrites wind catastrophe coverage.

That gets placed with many underwriters throughout the world, one of which was our own America Coastal which we owned 100% of.

What they did was underwrite condominiums in the state of Florida.

We took real underwriting risk in American Coastal.

Both of these businesses were started up really back in the 2006, 2007 timeframe.

AmRisc, the managing general underwriter has -- both have performed exceptionally well.

That one in particular has risen to the third largest in the US.

High margins and a very high growth business and we just thought prior to what I call sort of the New World being an underwriter might've been okay.

Sort of in the world we operate today from a [marine corp] perspective being in the underwriting business is probably not a place for us to be long-term.

It might've been okay for a while but long term probably not the best place for us.

More importantly, AmRisc is really key to our franchise.

If you think about, we have the second largest wholesale P&C business in the country.

What they really focus on is placing hard to place coverages.

One key go to partner of theirs is AmRisc in this whole underwriting wind cap coverage.

What AmRisc really brings us is high-margin high-growth no risk of loss and it's really -- it behaves within the wholesale segment as an underwriter almost because it's really about large underwriters outsourcing their wind underwriting to AmRisc.

So it is a bit of a hedge in the wholesale business.

It is key to franchise long-term, and we thought it made much more sense to increase our interest there.

It is the same management team running in post the deal than it was before and frankly the same one that has been running America Coastal.

And, Nancy, this is Kelly, just a little color, because I want to make sure there is no confusion.

As Chris said we did the American Coastal thing about nine or so years ago.

We did it at a time when you will recall that many, many -- most of the underwriters had left Florida.

And we were new in Florida, and we want to show market support.

So we thought there was an opportunity to provide a bit of capital in that market, and we had these really good underwriters at AmRisc that knew that market extremely well.

But we only put $50 million in it.

So it was a relatively small amount of money.

We actually made a lot over the last seven or eight years, and we just frankly redeployed that into the underwriting MGU that Chris described.

We made some good money.

We decided not to be greedy.

We took it off the table, and we put it in a core part of our business that does not take risks.

I would just think of it really as a trade.

We traded it out of 100% ownership in an underwriter into more of a broker.

Okay, so are you still a minority partner in AmRisc, if I could get you to discuss your partnership interest?

Absolutely not.

We are majority holder of AmRisc, a clear majority.

I'd call it a significant partnership interest.

In terms of the -- you ask about the balance sheet hit, we really experienced a gain on the transaction.

It is just from a goodwill impairment perspective, we have to look at it in the context of our entire wholesale segment.

And so we had a small -- when you take that into account we had a small impairment.

But I think Daryl had said something, can you tell me what you said the charge was going to be in the second quarter?

The goodwill impairment is probably going to be between $30 million and $40 million -- call it $35 million give or take.

And, Nancy, it's all good well.

It's not a cash charge.

We had a positive economic gain because the overall proportion of that business in the overall insurance business.

We have not only a majority, we have 90% ownership in AmRisc and that is a really good position for us because it is a very, very good business.

Okay.

And then secondly my follow-up question, I think you cited a 1.54% gain on sale in the mortgage business this quarter.

That's a bit behind some of your competitors which are I think reporting in excess of 2% gain on sales.

Is it a mixed issue for you guys?

And do you expect to -- where do you expect that 1.54% to go in the second quarter?

It is really a mixed issue.

If you look at the pieces, our retail spreads were 3.62 and correspondence spreads were 36.

Correspondence was about two thirds of the business which is really why it was down lower.

We expect going into this next quarter to have stronger purchase activity and stronger retail.

So it should move into the other direction this next quarter.

Thank you.

We will go next to Ken Usdin with Jefferies.

Good morning guys.

Daryl, you alluded a little bit to the Ricky Brown magic in retail but I was wondering if you also alluded to a little Daryl Bible magic on the Susquehanna side.

You mentioned 10 to 15 basis points of potential increased to the NIM post-close.

They had a 340-ish NIM against your 333 when I looked at their numbers.

I'm just wondering -- I know you're going to give us more detail later on, but can you help us understand what you are saying that would be that incrementally beneficial, because that implies maybe a 4.5% bring over NIM on the Susquehanna side.

Is it residual lease accounting, or is it just where rates are relative to announcement?

Any color there would be helpful.

Thanks.

Typically what we do an acquisition obviously everything is mark-to-market.

So you go in with a mark-to-market balance sheet.

But what we always do is we basically take in all the client activity so we take in the client loans, client deposits.

We were very hard to exit out any non-client borrowings except like advances and other opportunities there.

And in the investment portfolio decision is really a decision on whether we need the liquidity or not.

If you don't need securities or liquidity and also helps raise your margin.

There are a lot of things you work with to optimize the whole overall piece so it fits into your total organization.

But we will give you more color next quarter on that.

I guess at base does that imply if that math is right that the type of earnings accretion you could get relative to that 3% you had indicated could be decently larger?

It's going to be off a smaller base, because you these are smaller earning assets.

There's puts and takes there.

That's a fair point.

Okay.

Secondly just on the insurance business.

You guys have been talking about 6%-ish organic growth.

This quarter it was about 3%.

And you had some deals I think on a year-over-year basis.

I was wondering if you could just elaborate on, was that through some changes in the seasonality?

Can you talk about just organic opportunity and whether we should see a better year-over-year trajectory from here?

It's Chris again.

We -- if you look at it on a same-store sales basis it would be about 3% quarter-over-quarter kind of common view.

We still -- what you'd expect and what we expect is a better second quarter than we had first.

While it's a bit seasonal, generally this year second quarter is going to be the strongest, followed by the first, followed by the fourth and the third.

What you are referring to is most of the EB business as Daryl alluded to earlier hits in the first quarter.

But we still believe through the balance of the year we're going to have enough strength out of the business to still aim at a 5% to 6% core growth year-over-year.

So we feel very good about that.

What you're seeing right now because we haven't had large loss periods, the retail businesses are absorbing more of the underwriting.

And we are seeing very strong strength in our retail business.

As Kelly alluded to, retail's new business growth was 32%, wholesale was 23%.

So on balance the whole franchise new business growth was about 26%.

Okay, thanks guys.

We will go next to Eric Wasserstrom with Guggenheim Securities.

Thanks very much.

Just a couple of questions.

First the foreclosure inventory on the legacy portfolio, so excluding the FDIC sales, it's low members, but it's ticked up pretty consistently over the past few quarters.

Can you indicate what's driving that trend?

Eric, this is Clarke.

I sure can.

That is mostly in our residential mortgage in some of the judicial states we're finally breaking some of the logjam and getting the foreclosures done.

And also we had some delays in closings frankly in the first quarter because of the weather, but we feel really good when we look out on the pipeline.

I believe you will see that stabilize to start coming down a bit, so were not concerned about it.

It's mostly working through residential stuff, but we feel good about it.

Great, thank you.

And your brokerage commissions line item was down a bit in the period which is a little bit different from peers.

Were you seeing just a different trend activity than the broader markets?

We just had really strong equity deals in the fourth-quarter that in fact strongest in our history.

We had the biggest fourth quarter we could have out of that three deals, so we are just bouncing back from that.

If you look at the core business it is still doing very well, good strong M&A back log.

The retail broker continues -- commissions are growing about 9%, so it's really nothing more than we had a strong fourth-quarter.

Got it.

Lastly, as I think about your common equity tier 1, it seems like there are several puts and takes.

Obviously there is some issuance coming and also some buyback on the numerator, and then in the denominator you've got assets coming on potentially some re-rating as those assets move to the fully phased-in basis which may be Susquehanna probably isn't doing today and all that kind of thing.

Net, net of all of that, what should be our expectation about your resulting common equity tier one at year end versus where it is today?

Is that higher or lower?

From a CCAR 2015, Eric, if you looked at the dividend request that we had and the buyback and then the four acquisitions that we had embedded in there, we had well over 100% use of our retained earnings over this five quarter period.

So if you look at our common equity tier one call it 10.5 now transition basis it's probably going to end up a little better 10, call it 9.8 give or take 10 basis points, so we're going to use probably use 60 plus basis points of capital over the five quarters.

Excellent, thanks very much.

We'll go next to Marty Mosby with Vining Sparks.

Daryl, I went to ask you a little bit more and maybe even challenge you on the sale of the mortgage residential and running that portfolio down.

If you look, the yields are 3%, 3.5% on new originations and if you get rid of that the only thing you can put it into is securities.

Kelly didn't think rates were going up that quickly, so I'm just curious what's driving the overall thought process here?

I know, Marty, you are an old CFO finance guy, so you understand all this stuff, but if you look our match funded basis and you look at these assets, these assets have a credit spread that we are putting on the books well north of 100 basis points if you try to actually fund these assets call it 80 basis points.

With the negative convexity you have and if rates eventually do go up, these assets will really start to extend out and it's just a really tough asset to really fund properly over the long term.

I think selling as much as we can out and getting the revenue that we can is the right thing for our Company right now.

All of our other loan businesses are growing really well.

We are able to grow even with this running off, so I think that's positive.

We are stabilizing core margin with basically flat interest rates which is really pretty good in this environment.

Marty, you have to keep in mind, too, what Daryl said is true, but our primary driver in this is diversification.

We're just not going -- even if it's 5%, we're just not going to hold assets that are not consistent with our long-term diversification strategy.

So we wanted to bring it down some to get it in -- it's not dramatic, but we wanted to bring it down some to get it in line with our diversification plan.

Daryl, just pulling all that together, then really what you are substituting out is the extension risk for shorter securities which is that really what is making more asset sensitive so when you're looking at that each quarter, asset sensitivity getting a little bit stronger, is that really what is driving that needle there?

It's a contributor -- I think it's one part of it, but the other piece is really the unbelievable strong growth we have gotten in core deposits.

Core deposits, they are strong for the industry.

Our core deposits growth in our community bank and corporate banking has been phenomenal.

If you go back six or seven years ago, the percentage of DDA to our funding was in the mid-teens.

We are now over 30% DDA funded.

That is just a completely different BB&T.

And then just lastly, Kelly, you talked a lot about the pricing pressure on loans.

As we do see rates starting to move up slowly, can you envision with all the liquidity which is driving like you are saying be chasing of assets maybe being the opposite and allowing a little bit more room once you do get some relief with rates moving even modestly higher to be able to re-create some deposit spreads?

Yes, absolutely.

I think that the best scenario will create the draining of the deposits in the system.

I think it will create an opportunity for these asset investors to chase other assets rather than traditional banking assets.

And all of that will create asset price increases for the banking segment.

What about deposit spreads?

The deposit spreads will be challenging during that, but what I personally think is that banks will lag as rates are going up simply because we have given up a lot of deposit yield on things like NSFs and other factors over the last two or three years, we the industry.

So I think all of that will be incorporated into decision-making which will cause a lag on the deposit pricing as we go up.

Thanks.

We will go next to Chris Mutascio with KBW.

Good morning Kelly and Daryl, how are you?

Good morning.

Most of my questions have been answered, but I wanted to go over the accounting change in the quarter.

Just to make sure -- that improves your operating leverage overnight, correct?

Because you add $30 million or so odd more in fee income, but the offset is not an expense, it's in taxes?

That's correct.

We basically move a negative income item out and put it in the tax line item.

We also restated 2014 financials, so if you go back and compare numbers versus last quarter you're going to see 2014 change.

This is proportional accounting that we had to do for our tax credit businesses that we run.

Okay, I appreciate the color on page 18 of the supplement in terms of what it would have been in the past.

If I were to average those numbers both on the other income impact and also the tax impact that would be roughly the same for the quarter?

In other words you would've benefited from the accounting change of roughly $35 million in fee income, and then your taxes would've been up by about $40 million on the accounting change?

Is that about right?

That's right, Chris.

Thank you for the color.

I appreciate it.

That concludes today's question and answer session.

At this time I will turn the conference back over to Alan Greer for any additional or closing remarks.

Thank you, Amber.

And thanks to everyone for joining us today.

This concludes our call.

We hope you have a good day.