Truist Financial Corp (TFC) 2015 Q3 法說會逐字稿

Greetings, ladies and gentlemen.

Welcome to the BB&T Corporation third 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, Eric, and good morning, everyone.

Thanks to all of our listeners for joining us today.

We have with us today Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter of 2015.

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; Clarke Starnes, our Chief Risk Officer; and Ricky Brown, our community banking President.

We will be referencing a slide presentation during our comments.

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 these forward-looking statements.

I refer you to the forward-looking statements in the 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.

And now I'll turn it over to Kelly.

Thanks, Alan.

Good morning, everybody and thanks for joining our call.

We always appreciate your interest in our Company.

I'd say overall we had a strong quarter with higher revenues, improved net interest margin, continued excellent asset quality, very strong capital and liquidity, and importantly, we had three significant strategic developments which I'll discuss.

Net income was $492 million up 8.4% versus last quarter on a GAAP basis.

Diluted EPS totaled $0.64 up an annualized 12.8% versus second quarter 2015 and 3.2% versus last quarter.

Excluding $77 million of pre-tax merger-related and restructuring charges, our adjusted diluted EPS totaled $0.70, up an annualized 5.7% versus second quarter 2015, and importantly our adjusted ROA was 1.13 (Sic-See Presentation Slide-3 �1.13%�) and adjusted ROTCE was 14.4% (Sic-See Presentation Slide-3 �14.44%�), so we feel very good about that.

In terms of revenues, revenue totaled $2.5 billion up $122 million, largely due to Susquehanna which we closed on August 1. That is an annualized 20.4%.

If you exclude the acquisitions, revenues were lower due mainly to insurance seasonality, soft insurance pricing in that market and sell of American Coastal which I'll remind you was in connection with our substantial increase in our ownership of AmRisc which is a really steady and promising fee income business.

Our fee income ratio was 42.1% versus 44.3% for the last third quarter.

Net interest margin did increase eight basis points to 3.35% primarily due to purchase accounting.

In the expense control area, if you exclude the impact of acquisitions, non-interest expenses are modestly lower for the quarter versus second quarter.

I will point out though that the environment remains very challenging, and we remain very tightly focused on expense control.

I'm very pleased that we have the opportunities to rationalize the expense basis from the Bank of Kentucky and Susquehanna acquisitions.

This is an important part of our expense strategy and gives us a real lever that would not be available if we were not in the acquisition business.

In terms of the lending area just a couple highlights, and then I'll give you a little bit more deep dive.

Loans and leases held from investors totaled $130.5 billion third quarter versus $120 billion in the second, and if you exclude acquisitions, average loans grew 3.2% annualized versus second quarter or 6.7% excluding residential which is really kind of the run rate that ought to think about, because we're consciously running down our resi portfolio.

Organic loan growth was really kind of focused on C&I, CRE, direct retail, Sheffield and Grandbridge, so you can see it was very broad based.

We had three what I consider to be significant strategic developments during the course of the quarter.

We did successfully close Susquehanna on August 1. I'll just tell you that the merger is going great.

We expect the conversion in November.

Ricky and I have now visited all of the four regions that come through Susquehanna, three in Pennsylvania and then our expanded Maryland branch.

The client reaction has been fantastic.

We often times get clients just really excited because a lot of these folks have winter homes in Florida, and they really like being able to go down there and not having to change banks.

And so that's been a real positive hit for the clients have been real positive.

Associated engagement is superb.

They really like our culture, and they embraced it really, really quickly.

I will remind you that Susquehanna had the best client service quality in their market, and so it's a really high quality client and service quality company just like ours is.

I'll just say overall this is just going to be a fantastic merger.

We did also announce the agreement to acquire National Penn Bancshares.

Just as a reminder it's $9.6 billion in assets, $6.7 billion in deposits, 124 branches.

It's a really good institution, has deep relationships with its clients and also has very good client service quality, very community oriented.

If you combine these two together, we will move up quickly to a number 4 market share in Pennsylvania which is a really big market to have a number 4 market share in a short period of time.

And not only the market share but we have excellent efficiencies coming out of the combination of these two institutions in that marketplace, and more importantly, we have outstanding market potential going forward.

So it's a great place to be where you already have big market share with a lot of efficiencies and you have huge opportunities in places like Philadelphia and really throughout the entire mid Pennsylvania area.

So we're really, really excited about Pennsylvania.

It's a good market.

It's got a lot of wealth and offers us a huge amount of potential in all aspects, but I would particularly call out insurance and Wealth Management.

Finally, we're very excited about the fact we introduced you to the Marketplace.

This is our new digital platform.

It is innovative.

We think it's the best in the marketplace.

The two big cornerstones of U, we use and that as the letter you U to represent the fact that we're focusing on the client is integrated platform which allows the clients to bring together easily all of the information of BB&T and other information from other financial intermediaries, and they can customize the offering on their device.

And they have seamless consistent information across all devises and so it's really uniquely different.

I'd recommend you try it.

So really good offering in the marketplace.

Now a little bit of a deeper dive into lending.

C&I loan growth was strong in the quarter.

Average core C&I loans were up $715 million which was 6.7% annualized.

This was lead by large corporate lending but solid production into branching network as well.

I will point out that the C&I lending still is significantly in larger participations, and that market is still very competitive, spreads are very tight, so we are being cautious even though we are growing it.

We currently expect C&I to grow in the fourth quarter but more modestly when you exclude acquisitions.

I just want to point out again that our oil and gas portfolio reserve base lending is small at $1.1 billion, less than 1% of our out standings.

It's very conservative.

90% upstream, 10% midstream, practically no exposure in service and supply, and I would just point out that we did review our portfolio in the last quarter, and we currently have absolutely no non-accruals in this portfolio.

So it's really a really good portfolio.

We've been conservative.

We're being conservative, and we feel good about it from a long term point of view.

In CRE, construction and development, it increased to $128 million or 18.4% annualized if you exclude acquisitions.

End of period was a little bit slower, but organic growth was driven single family construction, hospital projects, so pretty diversified.

Our expectation now is that C&D growth will be a little seasonally softer in the fourth quarter which you would expect.

CRE income producing increased $127 million or 4.7% annualized this quarter, again if you exclude acquisitions.

This portfolio growth was broad based, included increases in multi-family, office, hospitality, industrial.

The fundamentals in all of those businesses in the marketplace continued to improve, but I will tell you that the spreads in the marketplace continue to tighten.

I keep asking our lending folks when is it going to get better and they say well as of yesterday, it hadn't gotten better, so it's still a tough marketplace out there.

And again, we're being careful because we don't want assets that don't produce good risk adjusted returns on capital.

So we expect core C&I, IPP to slow and be about flat for the fourth quarter.

Direct retail lending is having a really good movement in our Company to date, performing very well increased $253 million or almost 12% annualized.

A lot of growth in HELOCs, home equity lines and direct auto lending, and branches has got really strong momentum at this point.

Wealth continues to really move market share for us, make some major contribution, hitting new records every month, and the community bank is really growing its direct retail book.

So we have great momentum in the direct retail lending heading into the fourth quarter and we currently expect direct retail lending to continue to grow.

There will be a little bit of a seasonal slowdown but still good growth in that market in the fourth quarter.

If you exclude acquisitions in sales finance which is I'll remind you largely prime auto lending for us, it declined $278 million or 11.6% in the quarter for two reasons.

One is we continue to be very careful in these tighter spread paper offerings with unacceptable terms that we're seeing in that marketplace.

It's just not -- it just doesn't give you a decent risk adjusted return on capital, and so we're being very, very careful on that.

And related to that is we did transition to a flat rate compensation model for our dealers.

We think this is a better program for our dealers long term.

The overall feedback from our dealers is they like it.

There's a little confusion because it's new but the more time we have to get out and explain it to our dealers we think it will settle into a very profitable level.

It may be a lower volume level, but it will be a more profitable level which is what we are really focusing on.

So we would expect this area to see a similar decline in the fourth quarter.

Residential mortgages, recall we are allowing our portfolio to run-off so they were down $548 million or 7.3% link quarter annualized.

That includes the sale of all of -- essentially all of our conforming production.

In terms of production, originations in the quarter were $5 billion which was 8% lower than second quarter, and applications were down but higher than the third quarter of last year, so it's kind of stable in terms of applications and production today.

Gains on margins were about flat.

So looking forward in this business we expect contraction in the resi portfolio by design absent the impact of Susquehanna, although it might be a little slower next quarter.

In the other lending subsidiaries good quarter.

We grew $609 million or 20.6% annualized.

As you know this is always a seasonally stronger quarter for us.

Strong performance in Sheffield, Grandbridge, our insurance premium finance businesses, and after [the case] of prime rate regional [sub percent] had another very strong quarter.

Remember the fourth quarter is seasonally slower in these businesses, and so we'd expect growth to be slower next quarter.

So to sum up in total we expect average loans held for investment to be essentially flat on a core basis excluding acquisitions given the seasonal decline that we always experience in the fourth quarter, so there's nothing new about that if you excluding mortgage, a little much less [modesty] if you include mortgage.

Including all of the deals, obviously our growth rates will be significantly higher, and annualized loan growth is expected to be in the low double digits including acquisitions.

I will point out to you that while we try to, when we can, point out the difference between GAAP and adjusting for acquisitions, the fact is we are acquiring assets that are income producing and takes a lot of work to put these loans on the books so for myself it is real growth.

And so we try to make sure you understand both, but we're very excited about having these new assets and think they will be a really productive for us as we go forward.

Taking a look at the deposits on slide 5. It's just another really strong deposit performance quarter.

Non-interest bearing deposits, or DDA, was up 6.9% on a link quarter adjusted, and so we feel really good about that.

Third to second annualized is actually 25%.

If you look at total deposits on third quarter to second quarter 2015, that's 3.6% and so deposit portfolio performing well.

Our costs are remaining low at 0.24% on total deposits and excluding acquisitions, our average non-interest bearing deposit mix was [31.7] (sic -- see News Release "30.7%") in the third quarter versus 31.5% in the second quarter.

So modest improvement there, but at a very, very high level for us.

So let me turn it over to Daryl now for some more color in a lot of detailed areas.

Thank you, Kelly and good morning, everyone.

Today 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 said we are very pleased to report a strong third quarter.

We met much of the guidance from last quarter, and the closing of Susquehanna has gone very well.

Credit quality remains excellent.

Net charge-offs were 32 basis points, down one basis point.

Excluding regional acceptance, net charge-offs were only 15 basis points.

Loans past due 90 days or more were higher due to the acquisition.

Excluding Susquehanna, loans 90 days past due decreased 10.5%.

Loans 30-89 days past due increased 9% due to the acquisition and seasonality.

Going forward we expect net charge-offs, including Susquehanna, to be between 35 and 45 basis points in the fourth quarter, assuming no material decline in the economy

NPAs increased 2.1% in total and 0.5% excluding Susquehanna.

Looking forward we continue to expect NPA levels to remain in a similar range.

Looking on slide 7. Our allowance coverage ratios remain strong at 3.44 times for net charge-offs and 2.49 times for MPLs.

The total allowance to loans ratio was 1.08 on a GAAP basis which includes $12.8 billion of acquired loans marked at 4.45% with no related allowance.

Excluding Susquehanna, the allowance as a percentage of loans remained at 1.19%.

We recorded a provision of $103 million for the quarter compared to net charge-offs of $107 million.

Looking ahead we expect fourth quarter provision to be based on charge-offs and new loan growth in Susquehanna regions.

Continuing on Slide 8.

Net interest margin was 3.35%, up eight basis points from the impact of purchase accounting and better than our guidance.

Core margin was 3.15%, down one basis point.

In the fourth quarter we expect GAAP and core margin to be relatively flat compared with third quarter assuming no Fed rate hikes.

We continued to be slightly more asset sensitive this quarter mostly due to acquisitions that drove favorable changes in net free funds and deposit mix.

We will definitely benefit should the Fed begin to raise interest rates.

Turning to slide 9. We experienced a seasonal decline in insurance and mortgage banking income offset by higher service charges on deposits and other income.

The fee income ratio declined to 42.1% reflecting these declines and the impact of Susquehanna on our revenue mix.

Remember Susquehanna's fee income ratio was only 20%.

A bit more on that detail.

First, insurance income declined $68 million compared to the second quarter due to more seasonality and the sale of American Coastal.

Additionally, the insurance market has experienced pricing softness which slowed our like quarter same-store sales growth to about 2%.

Second, mortgage banking income decreased $19 million reflecting lower net mortgage servicing rates income and a decrease in commercial mortgage volume, offset by an increase in residential income.

Third, service charges on deposits increased $13 million driven by new accounts and increased activity.

And finally, other income increased $27 million due to higher income on private equity investments of $22 million partially offset by $19 million (Sic-See Presentation Slide-9 �$18m�) of lower income related to assets for certain post-employment benefit expense and pre-tax loss in the second quarter due to the sale of American Coastal.

Looking on slide 10.

Non-interest expenses totaled $1.6 billion in the third quarter.

Expenses excluding merger-related charges and last quarter's loss on the early extinguishment of debt increased 4.2%, including Susquehanna which is consistent with our guidance.

If you exclude the impact of Susquehanna on our total non-interest expenses, we were down slightly.

So we are doing a good job of controlling core expenses.

The primary contributors to the change in non-interest expenses were personnel expense increased $18 million due to Susquehanna related personnel costs of $37 million offset by lower post employment benefit expense of $19 million, FTEs were up 2400.

Excluding acquisition FTEs remained almost flat.

Occupancy and equipment expense increased $17 million mostly due to acquisitions.

Merger-related and restructuring charges totaled $77 million.

Susquehanna and the Bank of Kentucky totaled $69 million and $5 million respectively.

Our effective tax rate was 29.4%, and we expect the effective tax rate of about 30% in the fourth quarter.

We expect merger related charges to again to be in the $60 million to $80 million range in the fourth quarter.

We remain confident in achieving our targeted cost savings from our announced acquisitions, and we will improve our efficiency throughout 2016.

Turning to Slide 11.

Capital ratios remain very strong with Basel III common equity Tier 1 capital of 10.1%.

The acquisition of Susquehanna used 60 basis points of common equity Tier 1 capital.

Fully phased in common equity Tier 1 capital was 9.8%.

Looking at liquidity, our LCR increased to 136% due to the Susquehanna acquisition causing a decrease in wholesale funding and increases in high quality securities.

Also our liquid asset buffer at the end of the quarter was strong at 13.3%.

As we begin to look at our segment results on slide 12 please note that these results exclude Susquehanna.

Once we complete the system conversion in November we will incorporate these results.

Susquehanna results from the first two months show we are off to a good start and are exceeding expectations from an earnings perspective.

At community banks net income was up $30 million from last quarter driven by growth in commercial lending, retail lending, and deposits as well as higher funding spreads, partially offset by lower rates on commercial production.

Lower production continues to be very good with total commercial loans up 13% and direct retail up almost 17% link quarter.

Turning to slide 13.

Residential mortgage banking income totaled $60 million down $12 million from last quarter.

This was driven by a decrease in net MSR income and is partially offset by mortgage loan production.

Production mix in the quarter was 2/3 purchase, 1/3 refi.

Looking to slide 14.

Dealer Financial Services income totaled $43 million down $6 million from last quarter due to higher provision.

Asset quality indicators for dealer finance are performing very well.

Regional acceptance continues to perform within our risk appetite.

Turning to slide 15.

Specialized lending net income totaled $62 million down $8 million from last quarter driven by lower commercial mortgage income and lower gains on finance leases.

Sheffield, which finances equipment for consumers and small businesses experienced solid loan growth, up 28.5% link quarter.

Credit metrics experienced normal seasonality with charge-offs at 27 basis points.

Looking at slide 16.

Insurance Services net income totaled $21 million down $32 million from last quarter mostly driven by a seasonal decrease in commercial, property and casualty insurance and lower insurance premiums due to the sale of American Coastal in the second quarter.

Like quarter same-store sales achieved 1.4% growth as the market for insurance pricing is softer.

Turning to slide 17.

Financial Services segment had $83 million in income up $15 million from last quarter.

Corporate banking generated significant loan growth of 26% and deposit growth of 32%.

Wealth experienced 28% loan growth.

Non-interest income increased $15 million link quarter due to higher SBIC partnership income and investment advisory fees.

In summary we produced a strong quarter including very strong broad based loan growth, revenue growth due to Susquehanna acquisition and excellent credit quality.

We look forward to executing opportunities with our merger partners in the coming quarters.

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

Thanks, Daryl.

We're going to just reinforce a couple of the points.

It was a strong quarter, higher revenues, improved margin, excellent asset quality, strong capital and liquidity, focused expense Management, three really important strategic developments, really great opportunities in several large markets, particularly including Texas and Pennsylvania.

So I would say overall given that it is a challenging environment out there, we remain very optimistic about our future at BB&T.

Now I'll turn it back over for Q & A.

Okay, thank you, Kelly.

Eric, at this time if you'd come back on the line and explain how our listeners can participate in the Q & A session.

Thank you.

(Operator Instructions)

We'll go first to Betsy Graseck with Morgan Stanley.

Hi, good morning.

Good morning.

Hi, Betsy.

Two questions -- one on the loan growth: I realize there's a lot of puts and takes with the acquisition, but it does seem relatively strong, especially compared to what we're seeing from other institutions and what we're hearing about in the headlines with regard to investment activity.

And I also realize it's third quarter is a seasonally strong quarter for the specialized lending group, but could you just give us a sense as to whether or not you feel that this is a one-off, or if the underlying demand for borrowing is actually stronger than what we're seeing from other folks because of your region?

Betsy, I'll give you a general comment, and then Clarke can add some color.

So, clearly, as you pointed out, we did have seasonal positive impact in the third, but remember that we do have these diversified businesses that are really helping us in terms of ongoing growth.

While they're seasonally stronger in the third, they don't go away completely in the fourth.

So, that's just an ongoing strategic advantage we have.

We have lots of these new markets where we have tiny market shares.

So, while the markets might not be growing very fast, we are able to get some real traction in terms of market share movement.

So, the challenge for us is that there's a lot of opportunities for us because we are in a lot of new markets, but we are very careful and conservative in terms of underwriting and pricing.

So, we could be growing a lot faster, not because the markets are growing that fast, but because we have such tiny market shares in these new markets.

But I don't expect us to grow tremendously faster than we're growing now because we are just going to remain very disciplined.

But, Clarke, you may want to add more color to that.

I'll just second what Kelly said: A big driver of the third quarter always is the seasonality in our subsidiary businesses, so wouldn't say the demand was materially higher.

It was just typical seasonality we see on the -- particularly on the C&I side.

I would just remind you, Betsy, that we're still relatively underpenetrated in the larger middle-market area in our corporate lending group, and so, again, we're just moving up to our reasonable share of the market there.

So, I think that isn't necessarily new demand in the overall market; it's just our penetration there.

But I think one bright spot for the quarter that was unique is we had the strongest growth in C&I in our Community Bank portfolio than we've seen in a long time.

So, Ricky, you might want to comment.

Yes, thank you, Clarke, we did.

We had a very good core production -- link quarter was up, in C&I, 21 -- almost 20%, and that was really strong for us.

We had growth in C&I for the quarter linked, which was solid.

It bucked the trend of what we've been seeing because of this Main Street, Wall Street kind of dilemma where Main Street has been very slow.

I don't think it really sends a message that things are significantly different.

I think it just sends a message that we've been working really hard; as Kelly said, our opportunities in Texas and south Florida and Washington DC and Atlanta are all giving us good opportunities.

In fact, that's where the most of our growth did occur, in the larger regions in Texas and Florida and DC and Atlanta.

We continue to be in pretty good shape with our pipelines.

They're holding up fairly well.

Our CRE business had a good production quarter as well.

Growth was not quite as robust.

Part of that was just we had some paydowns with some construction projects, but good activity.

So, we look at the third quarter of this year as one of our very, very best quarters.

But I think it is not necessarily market; it's just the fact we've been working really, really hard.

Okay, so, market share gain -- that's really helpful.

The follow-up is a little bit of an unusual question, but it has to do with the U mobile app, Kelly, that you mentioned you launched.

One of the questions I get from investors is: How do you measure the ROIC on things like this?

And it feels like the mobile app that you have -- critical for gaining new customers and millennials, et cetera.

I'm just wondering: How do you determine the value, and how do you measure its success over time?

Betsy, this is Ricky.

Thank you for that question.

What we think is that this really has three prongs that we hope to be able to exploit.

First is that we think it can be a real driver for new household acquisition, and particularly in the millennial space.

It should really be attractive for millennials, and the early return is they really, really like it.

Secondly, we see this as a big opportunity to reduce attrition.

So, if we can get our existing clients to put more of their financial lives on our application, integrate with more products, we get them to be stickier, and attrition goes down.

And then thirdly, we hope to be able to launch more cross-sell activities because they are going to be able to see things more clearly, be able to use their products more effectively.

And the good news about this platform, as Kelly said, it is integrated.

It's not built as a product that has an end life.

It will iterate over time.

We'll be able to add new products to it; clients will be able to choose what they want.

They'll be customizing the look that they want for themselves.

So, we think it's pretty unique, and we feel really, really good about it.

We're about one month into all regions having access to the product, in terms of clients.

All of our new clients that we're signing up for our online services are going through our U platform.

We're beginning the process of converting existing clients through an upsell and/or a request process.

So far, we've got approximately 70,000 users on the platform, and that's only in about a three- or four-week time frame.

So, we think it's really being adopted very well.

And the response to the application has been exceptional.

That's what we're getting from our people in the field, and what our people that are driving this program getting feedback -- it's been very, very good.

As we said, it iterates, and we hope that through our next release we'll be able to have the ability for folks to have stock reports on their application.

They will be able to get weather and news, but we also were very hopeful that we'll have a FICO score that would be refreshed every quarter for our clients to be able to see, so that -- we think that's important for them to understand credit and financial literacy.

That's a way we can help do that.

So, we're very excited about the platform, and we hope we'll continue to get good growth.

Betsy, one final point with regard to the analytical part of your question on the ROIC: As you alluded to, it is really hard to measure the specific ROIC on any individual products, particularly in the case of this where it's a platform, because what will happen is the return on capital will bleed over into all other areas.

So, your deposit profitability will go up because you have higher acquisition and lower attrition and so forth.

So, it's practically impossible to measure it.

But I would point out that, on a product like this, because in terms of putting it up it's actually a very people-sensitive strategy, it doesn't take a huge amount of actual capital in terms of equipment, et cetera, to put it up.

So, it's not a huge investment of capital.

I'm quite confident long term the implicit total return is outstanding, but I'd be really -- it would be hard pressed to try to prove it exactly.

Okay, that's helpful.

And the point about attrition is important, so being a first mover is critical in the space, so I appreciate that.

Right.

Thank you.

The next question is from John Pancari of Evercore ISI.

Good morning.

Good morning.

On the loan growth front, I appreciate the color you gave on the seasonality and then the outlook for next quarter, but I wanted to see if we can get a little bit more color into the 2016 outlook?

Kelly, I think you'd indicated that 3% annualized level that we saw this quarter may be a fair way to think about it.

So, is that how we should be thinking about 2016, that it could be at the lower end of that 3% to 5% range?

John, this is Daryl.

You know, we're right in the midst of our planning period right now, and we typically update everybody on 2016, what's going to happen, in our January earnings call.

So, we're going to kind of lay low on any 2016 guidance right now.

Okay.

And I guess then if we could talk a little bit more about the components?

If you can give a little bit more detail on your strategy around mortgage -- I know you indicated that you're paring that back and letting some of that run off.

What is the strategy there as we move through the next couple of quarters and the rationale behind it?

Is it more out of rate sensitivity?

John, this is Clarke, and Daryl can kick in on the rate sensitivity.

I think, for us, we just think those are very low-margin assets for us with long duration, and so we would prefer to focus on being an originator and creating [MBI] mortgage-making income, and just not use our balance sheet so extensively there.

So, we're very focused on volumes and origination, but it's more in the form of producing the fee income.

John, this is Daryl.

If you look at the credit spread that we make on mortgages, if we put it on balance sheet, because of the long tail and the negative convexity that mortgages have, you're less than 100 basis points, about 85-basis-point credit spread.

So, it's really hard to get any good, long, predictable returns in that business.

And we've been doing this strategy now for several quarters.

And what we're seeing in our balance sheet is that we're basically originating less fixed rate and more floating rate, which is what you would say, and we're about 50/50 mix now.

So, it's been significant in moving our sensitivities to a little bit more asset-sensitive, less tail risk.

But we really are capturing all of the revenue and volume because we're originating everything we can do in our markets.

We just choose to securitize and all of the conforming product, so it's not going on balance sheet.

And then finally, John, I'd just point out that we, and I suspect everybody today, are looking much more carefully at the components of our balance sheet, in terms of risk-adjusted returns.

But remember that there's been a dramatic increase in capital and liquidity in the banking business today; certainly true for us.

We believe that's going to remain to be true.

And so, historically, you kind of look to the bank, and if they have strong loan growth, you kind of feel good about that.

It's not quite that clear today.

Strong loan growth does not inherently mean improvement in shareholder returns.

And so, if you can grow loans that have good asset quality and have really good returns relative to the rates you can get, that's a good deal.

But if you originate in narrow spread loans that have a low return on equity, you either need to be able to originate and sell, or you shouldn't be in that business.

So, you'll see us, like in dealer finance and in mortgage today, you're seeing us tweaking our strategies, and you may see more of that as we go forward.

Okay, that's helpful, Kelly.

That leads me to my very last thing for you is that you kind of alluded to that same theme on C&I to a degree.

You indicated that you're seeing spreads continue to tighten.

Is there a bit more cautiousness that you're dialing into your C&I production as well?

Yes, absolutely.

That market -- I keep waiting for it to turn because, as I just alluded to, everybody's got a stronger capital [out there], and so at some point the industry really held a turn on this, but it hasn't turned yet.

And so, I think what's happening, John, is that (inaudible) everybody's struggling with the fact that the economy is growing slowly, expenses are going up, and you naturally think that growing loans is the way out of that trap.

But we've kind of concluded that growing loans just to be growing loans is not a good strategy.

And so, yes, we'll be very careful in that marketplace.

And based on today's pricing, you would not expect to see that grow at a very fast pace.

Okay, thanks, Kelly.

Yes.

The next question is from Gerard Cassidy with RBC Capital Markets.

Thank you.

Hi, Daryl; hi, Kelly.

Hi, Gerard, how are you doing?

Good.

Kelly, can you give us some thoughts on acquisitions?

I think in your prepared remarks you used the expression you're in the acquisition business.

And you've already come out and said that your deals that are currently under way will prevent you, or you've chosen not to do any more deals until possibly late next year or 2017.

Can you give us some thoughts on when a large deal could be considered, and what the ramifications would be going over $250 billion in assets, and the change in the regulatory complexity for your Organization?

Yes, Gerard, what we said is that we are really happy about the deals that we have under way, but because, for us, our M&A is a very long-term strategy, been very successful for us, but it's been very successful for us because we measure ourselves and we do what we do well.

And so, after we announced National Penn, we simply said we're going to take a pause, and we're going to make sure we do everything well.

I have no reservation about that, except just being sure that we stay focused.

And so, we are tightly focused on executing on these now; and as I said, they're going very, very well.

Long term, our acquisition strategy has not changed.

We think we'd still like to grow 5% to 10% of our assets in new deals each year.

But I think sometimes when we're talking about this, people expect that to turn into a lot of -- so, that's like $10 billion to $20 billion, so you might not see us do more than $10 billion in assets in a particular year, which is pretty immaterial.

To be honest, Gerard, I don't think there's much activity in large deals today, depending on how you define large.

Our focus is in that, ideally in the $10-billion to $25-billion range.

So, if you're thinking large is above that, we're not in that game today.

So, I think there's been a lot of talk historically about that, but as far as I can see today, BB&T doing anything larger than $25 billion is virtually unlikely.

Therefore, with regard to the $250-billion level, we could do another one or two smaller ones over the next couple of years, and still not be over, depending on how organic growth is going.

You see that we are measuring our organic growth, so as we are able to see acquisition opportunities at reasonable prices, we can tailor back more our organic growth, keep our balance sheet under $250 billion, and improve our overall return on capital pretty dramatically.

Nonetheless, from a long-term point of view, I fully expect us to go past $250 billion, but as I said at one point, you wouldn't expect us to be at $249 billion and do a $2-billion deal and go to $251 billion.

I don't think that would be very rational.

So, as we approach that $250-billion level, we will just have to be pretty clear that we have got lined-up opportunities that will get us pretty meaningfully over that in the not-too-distant future.

So, you know, Gerard, the $250 billion is not as big a deal as a lot of people think it is.

It does have OCI implications; it does have advanced purchase implications.

But other than that, the rest of the regulatory issues and all -- to be honest, we are already being regulated as if we were over $250 billion.

And it's under the guise of good practices.

And so, we are making all of the efforts to methodically move to be prepared from a regulatory perspective to go past $250 billion.

We're not in a rush to do it.

We are tightly focused right now, Gerard, on shareholder returns.

And so, I wouldn't be surprised to see us be a little slower in acquisitions than people expect, because we did a lot.

We did over $30 billion in the last year, and that's a lot, and particularly in a slow growth environment.

So, we are going to really stay tightly focused on returns, and let the shareholders benefit from what we've done already.

Thank you.

And then as a follow-up question, staying on this theme of acquisitions, with the announcement of the new digital channel, U, how do you think that's going to factor in to your guys' thinking on a go-forward basis of branches of potential targets?

If U turns out to be as good as Ricky just described, will branches be as important to you on a go-forward basis and acquisitions as maybe three, four, five years ago?

Gerard, this is Ricky.

Thank you for the question.

We see branches continuing to be a very important part of our delivery channels to our clients.

Still from data we can see, clients still want to have a branch.

They see that as the real tangible evidence of their money, and they like to be able to get to it.

If they got a problem, they want to walk in and see somebody face to face.

And clients still see, I think, financial institutions as a people business.

And, yes, we are getting more mobile and more digital and things like U and other types of digital offerings are there, but we still see branch as important.

We will be very judicious in terms of expansion of branches, and I think we've got to be very careful about acquisitions to ensure that what we do acquire would fit in the distribution system that makes sense.

And over the long haul, we will clearly try to rationalize the number of branches that we've got.

We've been doing that year after year after year.

We'll be doing that with National Penn and Susquehanna.

We have already announced that we were closing 22.

We think there's some more that we will be evaluating.

We don't know when they will happen, but clearly rationalization of your branching network is the direction that we are going to continue to go in.

We think that with the advent of digital and things like U, that we will be able to go into markets where we've got great distribution, great coverage, great brand, and perhaps be able to take branches out that you wouldn't ordinarily think that you would be able to take out, because you can absorb them into your digital space and into your overall branch distribution.

We're doing a few experiments on that as we speak, and so far, successfully.

We think there are other opportunities.

So, we think that long-term branches play a big part.

We think that you've got to do things like U. You have to have a good ATM system.

You have to have a good call center system.

You have to have 24x7 access that's absolutely consistent with our (inaudible) client experience.

But long term, you've got to figure out how to have the interplay between all these channels, so the client gets the access to BB&T.

But clearly our most expensive channel is the branch.

We'll be rationalizing over time, and we'll be building smaller branches when we do build them.

Reducing cost in that network is important.

Just a final overall conceptual perspective with regard to M&A and this issue: Historically you thought about M&A as you are acquiring loans and deposits and a bunch of branches.

That's why some people asking today why would you do it?

Because you buy all those branches, and branches are going away.

That's not really looking into the essence of what you really do when you acquire an (inaudible).

When you acquire an institution, you are acquiring relationships with clients, which is created through relationships of the associates and the clients.

So, we go in and we do rationalize the loan structure.

We do go in and rationalize their deposit structure, but now you do go in and rationalize the branch structure.

But just because you go in and close branches -- if U, for example, is more effective, which we think it will be, you go in and close more branches, that's just one more really good opportunity to reduce expenses.

The fact that you eliminate the branch doesn't mean you eliminate the client.

In fact, by having a really well-developed integrated platform like U, it gives you more opportunities, Ricky alluded to, to be a little more aggressive on the branch side.

So, it's not a negative.

It's just more of a positive than it has been in the past.

Thank you.

We'll go next to Paul Miller with FBR Capital Markets.

Yes, follow-up on Gerard's question on acquisitions: What about like -- you guys have been active in the insurance space and leasing space and what not.

Could we see some small fill-in acquisitions over the next year?

Yes, Paul, this is Chris Henson.

We definitely could, and I think specifically in the areas of Texas and Pennsylvania we will need to build out those markets.

And I think you've hit the key.

I think likely it will be small fill-in where we don't represent the branching network currently.

We really don't have to have anything else with respect to products.

We have all of the products covered, so it will be small fill-in's.

And then, on the mortgage question, I thought you guys did a pretty good job talking about why you don't want conforming stuff, but you've seen a move in some institutions, especially to drive some private wealth, is the booking jumbo loans.

Have you even thought about, or are you doing it on the jumbo side, putting those on your balance sheet?

Paul, this is Clarke.

Absolutely, as Chris mentioned in some of his comments, we've had a really strong growth rate in our emerging wealth model.

And a big part of that is home mortgage finance.

And so, we are very active on jumbos and construction and perm loans for those clients.

And we do hold those on the balance sheet, and feel really good about that.

So, I think you would see that as a growth area and a focal point for us in the future.

We even have a specific program that's really more sort of a white glove approach to the wealth side, as you mentioned.

And did you guys disclose what -- how much jumbos you do out of the $5 billion that you did this quarter?

We didn't cover that, Paul.

I'll see if we can get it for you real quickly.

You can just follow-up later on, that's okay.

Call Alan or Tamera; they will get you that number.

One of the other benefits, Paul, is jumbos tend to be more -- shorter duration.

People basically don't stay in the houses as long, so it's a shorter asset for our balance sheet as well.

Okay.

Hey, guys, thank you very much.

The next question is from Michael Rose with Raymond James.

Hi, good morning, guys.

How are you?

Good morning.

Kelly, just wanted to maybe get a sense for your outlook for the insurance business.

We're running mid-teens in terms of percentage of revenue.

Where can we expect that to shake out over the next couple of years?

Obviously you've done some stuff there, and just wanted to get your general outlook for insurance?

So, we've said, Michael, that clearly insurance is our best and most significant non-spread business.

Last quarter, it was about 18% of revenue.

To be honest, some people have asked: Why don't we grow it really, really fast?

And we could be growing it much faster, but the overarching strategy for us is diversification.

So, as good as insurance is, we're not going to grow it so fast as a percentage of our Business, because there could be scenarios where insurance gets really bad.

In fact, it's not as good today as it was 10 years ago at certain points, because it's been a little bit of softer market, and we think that's going to be changing going forward.

So, actually, as we do things like Susquehanna and others where we build a revenue stream, we can grow insurance faster.

So, we wouldn't want to think about insurance as revenue getting materially over, say, 20% of revenues, but what we think will happen is the rest of the Bank will grow and we'll be able to grow insurance and hang around in that 15% to 20%.

Every time we do another deal, Chris likes it because then -- another bank deal -- then he can go buy more insurance sales.

And so, it's a really good long-term strategy, but we're not going to grow it so fast that it gets outsized relative to our diversification strategy.

Okay, that's helpful.

And then as my follow-up, just going back to energy -- I know it's a small piece of the portfolio, and you mentioned there's no non-accruals this quarter, but did you have any negative migration?

And then, do you have any second-lien exposure?

If you do, can you quantify it?

Thanks.

Michael, this is Clarke.

We don't have any second-lien exposure.

As Kelly said, the vast majority of what we have is senior secured reserve-based credits -- very modest mid-stream, and almost no oil field services, which is a policy exception for us.

So, what we did do in both the first quarter and now in the third quarter, we actually did a very comprehensive stress test, and looked at significant stress and prices at well below where they are today.

We looked at the results from the SNC exam and the agent re-determination process, and we re-graded the entire portfolio again in the third quarter.

We did (inaudible) a few credits go to the watch list, based on that very conservative process.

But again, to Kelly's point, no non-accruals at all.

We feel really good about where we are, and all of that is baked into our allocated reserves and our allowance.

Great -- appreciate the color.

Thanks for taking my questions.

No problem, thanks.

The next question is from Dan Werner with Morningstar.

Good morning.

Could you provide some color on the percentage of cost saves that you've realized so far on the Bank of Kentucky and Susquehanna acquisitions, and how we should think about that going into 2016?

Yes, so, for Bank of Kentucky, we closed on that transaction in June, and integration happened at the same time that we closed.

And for the most part, all of the costs have been taken out, and we're pretty much what we thought we would be from that.

That's a pretty small transaction.

As far as Susquehanna goes, there are some cost cuts that have come out, but for the most part you won't see big drops in their expense base until you get into the first quarter.

Remember that the conversion is in November.

You have to give a 60-day notice period whenever you're going to RIF individuals, so you basically won't get big drops in FTEs until you start to see first quarter, and then by second quarter of 2016 we'll probably be fully effected, phased in throughout 2016.

So, that's when you'll start to see the efficiency ratio positively impacted by those cost cuts.

Okay, thanks.

And as a follow-up, I know you discussed some of the opportunities with insurance.

Could you discuss the opportunity relative to the National Penn acquisition?

Yes, I think, we picked up a small agency with both Susquehanna and National Penn, which is unusual.

We typically don't get those.

So, we have a real good opportunity to build around.

And National Penn provides us a real opportunity, we think, to build out of Philadelphia, which will be really key to supplement our C&I business.

So, I think clearly we have the opportunity, and we've already had some lines in the water, but it takes time to work through those opportunities.

Okay, thank you.

The next question is from Nancy Bush with NAB Research.

Good morning.

Another question on insurance, Kelly: You referenced the pricing softness in the market right now several times.

Can you just give us some color on that, and whether you expect that this is going to persist into the fourth quarter, which is a seasonally strong insurance quarter for you?

Nancy, this is Chris.

In the US market, it is generally down about 1%.

We are a little heavier in property, especially with AmRisc, which is cat property, so we probably are feeling it a little more along the lines of, say, 2% to 3%.

On the other hand, the way to outrun that is through new business production.

So, our new business on average is up in the, call it, 8% to 10% range.

So, we actually, as Daryl commented, are growing on a same-store sales basis about 2%.

And in the fourth quarter it will persist, but with the new business production and the bounce back of the seasonality, we'll expect fourth quarter to pop back up in the 10% to 12% range over third quarter.

So, we'll recover the seasonality, and hopefully outrun the price challenges through new production.

But you see the pricing environment persisting for some time, at this point?

I think so.

I mean, we saw, through 2012 and 2013, price improvements of about 4%.

That fell to 1% to 2% last year, and we're kind of in that flat to down 1% nationally.

Property seems to be catching a little bit more brunt of it at the moment.

So, I think it could continue through next year, but we have in our Business a couple organic opportunities that are unique in the sense of Crump Life where we actually are building and cross selling life insurance within all of the points within the Bank -- wealth, P&C insurance, C&I businesses.

So, we have really a model with a focused effort, as well as through the branches.

And then we have a state-of-the-art EB platform.

We bought a company called Precept back in 2012, and we built what we think is state-of-the-art platform nationally, and that really got up and running mid-last year, and we have really good momentum.

So, those two areas provide us a bit of offset to the pricing as well.

Nancy, one other thing to think about, and I'm sure you know this, but with regard to the insurance companies, which of course, drive the pricing, they are very competitive like banks are in terms of pricing and all, but in my view, when this thing pivots, it's going to pivot sharply, for two reasons.

One is, these companies have been accreting capital, but they've also been having reductions in yields on securities.

So, they're very yield dependent on securities, and so they are sucking wind right now on their securities portfolio.

And so, pretty soon they are going to be pressured to get their rates up to get some decent return on capital.

And then the other thing is they are doing what I call the insurance version of reserve releasing, and that they've not had any losses for a long time, and so they are having reasonably good profitability because of no losses.

So, you combine the fact that the yields on securities have gone down, and then any kind of losses flowing through because of catastrophes, you're going to see them jack rates up really fast.

So, what we are trying to do, and Chris is doing a great job of, is basically building that annuity.

And so, we're really good at acquiring and retaining.

We have one of the best -- maybe the best -- retention ratios in the business today.

So, actually, it doesn't help you as much in the short run, but from a long-term point of view this is a good scenario for us because rates are down, demand gets really elastic.

We're able to go out and acquire more because people are more willing to compare their services, and then we really are good at keeping them.

So, when it does pivot, you're going to see BB&T be in a really good place.

And, Nancy, another point I'd make is, what really drives pricing is catastrophes in the market.

And what we just experienced, while it's been terrible for many people in the South, it will begin to turn the market, so it's directly related to what type of weather events we have and catastrophe events we have in the country.

But I do think we have some organic engine -- some opportunity to actually outpace.

And if it's down nationally 1% today, we're growing 2%, we're outpacing the industry by about 3%.

And we think potentially, as we get these organic run up, we've got actually some upside.

If I may just ask a quick follow-up on credit quality?

Kelly, before the quarter, there was some speculation in the press that this was going to be, quote, the inflection quarter in credit quality, that banks would have to begin to build reserves, et cetera.

And we really haven't seen that in any great way.

Can you just opine on your opinion on credit quality right now, and when you see the turn coming?

Nancy, I think we have seen the bottom with regard to credit quality.

We are at the bottom.

While some may or may not have started building yet, I think in the next quarter or so you'll see that, because I think the building actually occurs as a function of when you think you're at the bottom and where they are in terms of asset ratios.

But we are at the bottom.

You see a little bouncing around probably, in my view, over the next few quarters.

I don't expect quality to deteriorate substantially over the next several quarters, but just the mathematics is that with it bottoming, people are going to have to transition from releasing to building for growth.

I don't think you'll have to see a lot of building for deterioration in credit quality further over the next several quarters, but you will have to build because of growth.

Do you guys, Kelly, see any particular importance at the 1% ratio?

You're slightly above that now, adjusted, but is there sort of a sacred, do not break 1% that's out there with the regulators or with your own thinking?

Well, over my career, Nancy, there was this classical, sacred 1%.

Of course, as you know now, we can't go into any type of quarter end with any predetermined ideas.

So, no, I have no predetermined idea about 1%, just for the record.

But it is a very mathematically driven analysis -- very, very thorough -- Clarke drives it every quarter.

But as a practical matter, whether you call it 1% or whether you call it around that area, I think you kind of can think about a floor there, in my personal opinion.

Clarke, would you agree with that?

I would agree with that.

All right, thank you.

Thanks.

It appears there are no further questions at this time.

Mr. Greer, I'd like to turn the conference back to you for any additional or closing remarks.

Okay, thank you, Eric, and thanks to everyone for joining us this morning.

This concludes our call.

We hope you have a great day.

This concludes today's call.

Thank you for your participation.