Truist Financial Corp (TFC) 2016 Q4 法說會逐字稿

Welcome to the BB&T Corporation fourth-quarter 2016 earnings conference call.

(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.

Thank you, Ashley.

Good morning, everyone.

Thank you to all of our listeners for joining us today.

On today's call, we have Kelly King, our Chairman and Chief Executive Officer and Daryl Bible, our Chief Financial Officer, who will review the results for the fourth quarter of 2016 and provide some thoughts for the first quarter of 2017.

We also have other members of our executive management team who are with us to participate in the Q&A session: Chris Henson, our President and Chief Operating Officer and Clarke Starnes, our Chief Risk Officer.

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.

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.

Please refer to the cautionary statements regarding forward-looking information in our presentation and our SEC filings.

Please also note that today's presentation includes certain non-GAAP disclosures.

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

Now, I'll turn it over to Kelly.

Thanks, Alan.

Good morning, everybody.

Thanks for joining our call.

We appreciate your interest in BB&T.

So overall, we had a strong 2016 and a solid fourth quarter.

Fourth-quarter results were driven by good expense control and really very strong credit performance.

But it also had a couple of key strategic actions that we took during the quarter and in the first part of this quarter that will benefit future quarters, which we will talk about.

We had record annual net income totaling $2.3 billion, which was up 16.7% versus 2015.

Fourth-quarter net income totaled $592 million, which was up 17.9% versus fourth quarter of 2015, but was down slightly from the last quarter.

Diluted EPS totaled $0.72, which was up 12.5% versus the fourth quarter, down $0.01 from last quarter.

But we did have some special items I'll cover in just a minute.

So our adjusted EPS totaled $0.73, excluding merger-related restructuring charges.

We had very solid ROA, RO Common Equity and Return On Tangible of 1.16%, 8.75% and 14.91% respectively.

We had taxable equivalent revenue totaling $2.8 billion, up 8.3% versus fourth quarter of 2015.

It was down slightly from last quarter.

Net interest margin did decline 7 basis points to 3.32% from the third quarter, but most of the decline was due to the securities duration adjustments from our old Colonial, our non-agency portfolio.

Remember that was a large portfolio that was deeply marked.

With the steep rate increases in the fourth quarter, we had some duration adjustments there.

Daryl will give you a lot more color about that.

So our core net interest margin was flat for the quarter.

Our fee income ratio improved to 42.6%, up from 41.9%, so a nice steady improvement there as well.

GAAP efficiency improved to 71.1% versus 71.7%.

But I will say that our adjusted efficiency ratio was up a tic from 58.7% to 59.5% from the third quarter; however, GAAP expenses were $1.7 billion and have actually declined 10% annualized versus the third quarter.

So while the efficiency ratio moves around some, our actual expense management is very, very strong.

Average loans increased 3% to $142.3 billion.

Net non-performing assets decreased 3.6%.

So we had very strong credit metrics.

Clarke can give you more detail on that as we go along.

We did repurchase 7.5 million shares in the fourth quarter.

We had a special ASR repurchase of $200 million in the fourth quarter, so our total payout ratio was 101.9% for the fourth quarter, which we were very pleased with.

We did, in the first couple of weeks of this quarter, restructure $2.9 billion in total home loan bank advances.

We did record a pretax loss of $392 million, which will meaningfully improve our forward run rate.

In fact, we expect our earnings growth to exceed our balance sheet growth for the year, so we expect a meaningful increase in our CCAR-linked [2007] total payout.

Looking at page 4, just looking at these special items.

We did have merger-related and restructuring charges of $13 million pretax, which was $0.01 dilution to EPS.

We did have the securities duration adjustments, I mentioned, did have a material impact because of the long nature of the Colonial securities and because they are very, very heavily marked.

Of course, we'll get that back over time, but combined with hedge ineffectiveness due to the rate moves, we incurred a $34 million pretax cost or approximately $0.03 negative hit to EPS.

Post our FHA settlement in the last quarter, we completed a further evaluation of our mortgage reserves and released $31 million, which was a $0.02 benefit to EPS.

So if you net these items together, you'll get about a $0.02 negative impact to EPS out of those various items.

If you look at page 5 with regard to loans, we had some loan growth.

We had 3% loan growth.

We did have a couple of portfolio purchases of Prime auto.

I would point out that we do that periodically.

We do it as kind of a normal part of our business, not unlike correspondent mortgage purchases.

But we only buy when the seller needs to sell, meaning when the economics are really good for us.

So those were two acquisitions that were very attractive for us.

In addition, we had strong growth in our several of our specialized areas: Grandbridge was up 28.4% annualized; Equipment Finance, up 15.2% annualized; and Regional Acceptance was up 10.5% annualized.

So solid growth given our risk appetite, which we feel pleased about.

Now looking ahead to the first quarter, we expect loans to be flat to slightly up.

Remember that a first quarter for us is seasonally challenged.

So first quarter last year, we were actually down 1.3%, so that's a bit more optimistic.

But it may not sound very bullish, but I'll tell you that we actually are very optimistic about the economy going forward.

It will take a little while for it to get it going, but look, we're going to have lower taxes, less regulation -- it's really a big deal.

Optimism is up.

I've been talking a lot to clients and to our RPs, Regional Presidents, in the last several weeks, including yesterday and clearly, CEOs are optimistic.

They are making plans to invest.

We really think this is going to kick in to a meaningful improvement in investment and job growth as we head into the second and third and fourth quarter.

Our expectation is that real GDP can move to the 3% to 4% range, which will be supporting a much better loan growth as it begins to unfold.

So while loan growth is not stellar at this point, we believe it will be growing consistently as we go through the year.

We are very, very excited about that.

Looking at slide 6, we continue to improve our deposit mix.

Interest rate bearing deposit costs went down 1 basis point to 22 basis points.

Non-interest bearing deposits or DDA went up 6.8%, which is continuing a very strong trend.

Our percentage of non-interest bearing deposits to total deposits improved to 32.1% up from 31.7%.

So really nice movement in our deposit mix and cost, which has been the continuing trend for a couple of years.

Let me turn it over to Daryl now for some additional perspective.

Thank you, Kelly.

Good morning, everyone.

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

Turning to slide 7.

Overall, we had a good quarter with regard to credit quality.

Net charge-offs totaled $151 million, up 5 basis points from last quarter.

That includes $15 million related to TCI loans and $14 million related to loan sales.

When you exclude these items, core charge-offs were $122 million, down 6% from last quarter.

Loans 90 days or more past due increased 7.4%, primarily due to an increase in residential mortgage.

Loans 30-89 days past due increased 10% due to seasonality in our consumer-related portfolios.

NPAs were down 3.6% from last quarter.

Looking at the first quarter, we expect net charge-offs to be in the range of 35 to 45 basis points assuming no unexpected deterioration in the economy, as we expect the NPAs to remain in a similar range to this quarter.

Continuing on slide 8. Our energy portfolio totaled $1.2 billion, less than 1% of our total loans.

At standing balances, total commitments and non-accruals were all down from last quarter.

Our quality mix continues to be very good with less than 10% in oil field services.

With higher Oil & Gas prices, conditions are trending positively in this industry.

Turning to slide 9. Our allowance coverage ratios remain strong at 2.47 times for charge-offs and 2 times for NPLs.

The allowance to loan ratio was 1.04%, relatively flat compared to last quarter.

Excluding acquired portfolios, the allowance to loans ratio was 1.13%, slightly down from last quarter.

Our effective allowance coverage remains strong.

We recorded a provision of $129 million.

Adjusting for PCI loans, the provision was $133 million.

Compared to core net charge-offs of $122 million, which I mentioned earlier, this shows a reserve build of $11 million.

Looking forward, our provision is expected to match charge-offs plus loan growth.

Turning to slide 10.

Compared to last quarter, net interest margin was 3.32%, down 7 basis points.

Core margin was 3.18%, flat versus last quarter.

The decrease resulted mostly from security duration adjustments from deeply discounted acquired assets and the decline in purchase accounting accretion.

Earlier this month, we restructured $2.9 billion of federal home loan bank advances.

This balance sheet action places BB&T in a unique position where earnings growth will exceed balance sheet growth.

Given the expected growth in capital, we plan to significantly increase CCAR 2017 payout, which will support faster EPS growth.

This does not include any potential corporate tax policy changes.

Looking into the first quarter, we expect core margin to increase 8 to 10 basis points due to the impact of the federal home loan bank restructure, last month's rate increase, and favorable asset mix and funding cost and mix changes.

We expect GAAP margin to increase 10 to 12 basis points.

This is due to items mentioned earlier plus the expected absence of duration adjustments offset by the reduction in benefits from purchase accounting and PCI.

Asset sensitivity decreased mostly due to the federal home loan bank restructuring and slower mortgage prepayments due to higher rates.

Continuing on slide 11.

Our fee income ratio improved to 42.6%.

Some of the changes in the increase of $9 million in insurance income was mostly driven by seasonally higher commissions.

Mortgage banking is down $47 million due to net MSR valuation adjustments and lower production and spreads.

Other income increased $19 million due to the higher income from partnerships and other investments offset by $10 million in hedge ineffectiveness.

Non-interest income totaled $1.2 billion, essentially flat compared to last quarter.

Looking ahead to the first quarter, we expect fee income to be relatively flat.

We expect seasonally stronger insurance to be offset by seasonal declines in service charges and lower Investment Banking and mortgage banking income.

Turning to slide 12.

Non-interest expenses totaled $1.7 billion, down 10% from last quarter.

Personnel expense was essentially flat driven by $12 million decline in equity-based compensation offset by incentive payments.

Loan-related expense declined as a result of a $31 million adjustment to the mortgage repurchase reserve.

Other expense was up $39 million mostly due to the net benefit of $73 million last quarter related to the FHA settlement.

Merger-related and restructuring charges decreased $30 million as National Penn integration winds down.

Going forward, excluding merger-related and restructuring charges and the federal home loan bank restructuring charge, expenses should be slightly below $1.3 billion even with seasonal headwinds that typically occur in personnel costs.

Turning to slide 13.

Capital ratios remained strong with a fully phased-in Common Equity Tier 1 ratio of 10%.

Our LCR was 121%.

Our liquid asset buffer was very strong at 12.6%.

A dividend payout was 41%, with a total payout including the ASR of 101.9%.

Going forward, we continue our share repurchase program with up to $160 million in the first quarter.

As I mentioned before, we are currently targeting a significant increase in total payout for CCAR 2017.

Now let's look at segments, beginning on slide 14.

The Community Bank net income totaled $334 million, down slightly from last quarter.

Non-interest expense decreased $8 million driven by lower personnel expense and merger-related and restructuring charges.

Our commercial production in the fourth quarter was the highest level seen since 2011.

Turning to slide 15.

Residential Mortgage Banking net income was $64 million, down from last quarter.

This was driven by lower net MSR valuations and lower volumes and margins.

Production mix was 47% purchase and 53% refi.

Gain on sale margins were 0.86%, down from 1.06% last quarter driven by lower correspondent levels.

Looking to slide 16.

Dealer Financial Services income totaled $41 million, relatively flat compared to last quarter.

Net interest income was up $13 million, partially due to the purchase of the Prime auto portfolio in November.

The provision for credit losses increased $10 million, mostly driven by loan growth as well as seasonally higher net charge-offs in Regional Acceptance's portfolio.

Net charge-offs for the Prime portfolio remain excellent at 21 basis points.

Turning to slide 17.

Specialized Lending net income totaled $55 million, down $9 million from last quarter.

We had strong seasonal growth and production growth in Premium Finance, Equipment Finance and Grandbridge.

The increase in non-interest expense was primarily driven by asset write-downs in Equipment Finance.

Looking at slide 18.

Insurance Services net income totaled $34 million, up $11 million from last quarter.

Non-interest expense totaled $374 million, relatively flat linked-quarter.

The higher non-interest income from last quarter primarily reflects seasonality in commercial property and casualty insurance.

Turning to slide 19.

The Financial Services segment had $122 million in net income.

The increase was mostly due to higher Investment Banking and client derivative income, higher income from SBIC, private equity investment and a decline in provision.

Corporate Banking's modest decline in loan growth was driven by higher than usual pay-downs and the sale of some energy loans.

Wealth generated strong loan and deposit growth, 8% and 31% respectively compared to last quarter.

Finally, the provision was down $34 million, driven by the sale of energy loans.

In summary, we had solid earnings performance, strong credit quality, stable core net interest margin and good expense control for the quarter.

Looking forward, we expect continued strong credit quality, meaningfully stronger net interest margin, solid expense control, and a significant increase in total payout to our shareholders.

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

Thanks, Daryl.

So just a couple of strategic summary points.

As I said I think it was a solid quarter, good expense control, strong credit performance.

These strategic actions really do set up a meaningfully better margin and potential higher CCAR payout for the next year.

I would point out that all of our key strategies are working very, very well.

Our Corporate Banking strategy is working well.

We think we can even ramp it to a higher level as we go through this year.

Our Wealth strategy, likewise, is doing great and positioned for even an enhanced investment.

Specialized Lending continues to provide good diversification and is growing at an appropriate rate.

Insurance, while not performing as high level as it will in the future because of soft insurance rates, we continue to build what I consider to be kind of an annuitized insurance revenue stream in that business as it gets more and more effective every year.

We're making increased investments in our digital operations, which will cause substantial improvement quality relationships with our clients and improved profitability going forward.

So projected with a better economy, especially in MainStreet, we are really excited about what can happen in our Community Bank.

Keep in mind that our Community Bank is almost totally focused on MainStreet.

MainStreet has been really struggling for the last eight years.

We believe what's getting ready to happen is a substantial resurgence of MainStreet.

These folks as we reported to you have been holding back on investments and equipment: our computers, trucks, and our cars, et cetera.

We are getting really, really good feedback from our client contact people that this is really changing.

In fact I saw a survey yesterday on small business optimism.

It says it's at a 12-year high.

So overall, I will just tell you that things look pretty good.

Lower taxes, less regulation, higher interest rates and faster GDP growth is overall a really good proposition for the banking industry.

It's a new day and we are very excited about it.

I'll turn it over to Alan.

Okay, thank you, Kelly.

Ashley, if you will come back on the line at this time and explain how our listeners may participate in the Q&A session.

(Operator Instructions)

John Pancari, Evercore ISI.

I just wanted to ask around the CCAR commentary, around the significant increase.

I wanted to just get an idea of, if you can help us with how to think about the magnitude given where you see earnings going?

Could you be significant -- could you be nearing the 100% combined payout?

Then separately, the mix, if you can just talk about how you would prioritize the dividend versus buyback?

Thanks.

So we really think with the -- as I indicated, the anticipated faster earnings growth and less fast growth in the balance sheet, it sets us up for that opportunity.

We try to be conservative.

Having said that, we would expect -- we have not met our CCAR final decision and the Board has not approved it, but management would expect that the total payout for next year would be in the 100% range, which would be materially higher than we have been.

We would expect to see a modest increase in our dividend.

Remember, our dividend is already very high, one of the highest if not the highest dividend yield.

So that will set up then a pretty large bucket of capital opportunities for us, which will be used as we have in the past, there's certainly the possibility of acquisitions.

There's some possibility of a special cash dividend, although I don't put that high on the list, and certainly, that would imply a substantial increase in buybacks.

Okay, got it.

Then separately, my follow-up is going to be on the -- around expenses.

Have you -- if you could talk a little bit about your reg and compliance spending around -- particularly around the BSA consent order.

How much would you say in terms of related expense is in the run rate currently versus still to come?

Thanks.

Yes, so the BSA issue for us is an important issue but not a substantially important issue.

We've been working on this for about a year.

We've already built-in most of the run rate expense increase related to that.

So it will not be a material increase in terms of additional expenses.

We are way down the road in terms of resolving the issues that we needed to improve on.

So it's important.

We need to fix it, but we've substantially already done it, to be honest.

So we've got some remaining execution work to be done, but it's not going to be a material issue in terms of our expense run rate going forward.

Given how quickly do you expect a potential resolution, since you're way down the road?

These things have a life of their own.

In many cases, it's taken companies 1.5 years, 2 years to get out.

There's no way I can guarantee anything.

But I would expect because of how far down the road we are that we will get out much quicker from this point going forward than you've come to expect with other institutions.

Okay, got it.

Thanks, Kelly.

Gerard Cassidy, Royal Bank of Canada.

Kelly, can you talk about the outlook for being better this year on the economy and stuff?

Are there any parts of the franchise where you're seeing better growth opportunities, whether it's in Florida or Texas?

On that, would you guys consider growing the oil and energy portfolio later this year, if the oil prices stabilize at these levels?

So Gerard, it's actually very broad based.

In fact, I did a survey because I was going to a Goldman conference back here a few weeks ago.

So I did a survey from all of our 26 presidents across our entire 15 states and asked them to talk to a few of their clients to see what they were thinking, because I like direct realtime feedback.

Their feedback was absolutely consistent across-the-board that everybody was optimistic.

They were making plans to invest.

It's exactly what we thought: new trucks, new computers, some expansions.

I met with the regional presidents in person yesterday and got a real current update.

The message was very, very consistent.

They gave me a number of anecdotes in terms of individual companies that were already requesting loans to buy trucks to expand their plant, expand inventory, et cetera.

So it is in fact happening.

It's across the footprint.

It is what I would call Main Street America, which is exactly where we play the best.

With regard to oil and energy, yes, we would expect to expand that.

We think -- we've said all along, it's a really good long-term business.

The last year or so has been a bit of an over reaction in my humble opinion with regard to the quality of that.

We haven't changed our posture during the whole period.

We remain optimistic and bullish and are looking for ways to expand.

Gerard, this is Chris.

I would add specifically areas if you're looking for them, the Triangle -- in Charlotte and Triad regions in North Carolina, DC and Houston are all areas that have really forwards building momentum and pipelines.

Three of those have been the top of our production leaders in 2016 as well.

Great.

Then Daryl, you talked about capital liquidity in your prepared remarks.

On the LCR at 121%, is that the fully phased-in number that you expect to have when the rules go 100%, I think it's in 2019?

Yes, I would say, we'll operate in the 120% range.

We might get into the teens, fluctuate.

But we want to keep a little bit of a cushion.

That number tends to move around a fair amount on a day to day basis, so you just want to keep it elevated.

So I wouldn't want to get it too close to the threshold, but keeping a little cushion.

It's really not hurting us where it is.

I think we can manage it at those levels.

Thank you.

John McDonald, Bernstein.

Daryl, I wanted to ask about net interest income and some of your thoughts around the dynamics there.

In the securities portfolio, you had some run-off this quarter as you indicated you would as you kept some cash on the table.

Just wondering what your thoughts are there as rates have gone up?

Will you be investing?

Will we see the securities portfolio start to grow?

How that might affect your net interest income dollars outlook?

Yes.

So, right now, John, we did not reinvest the cash flows in the fourth quarter.

We did repurchase our normal cash flows for this quarter, so securities are going to stay around the $44 billion-odd size.

So that's our level that we're staying at.

It is true that levels are higher now.

I would say what we're investing in now, which are basically treasuries, 5-years and in and some 15-year pass-throughs.

Those are coming on at yields that basically are not hurting our yields anymore.

So there shouldn't be any material rundown in the investment yields if the curve stays where it is.

Or it could even get better at some point.

As far as -- at a point where we would try to add back to it, I think we're far from that point.

If you listened to Chairman Yellen's speech yesterday, she's clearly in the camp that she thinks short-term rates should get up close to 3%.

Whether that gets there or not we'll see, but it's definitely going higher.

We'll see what happens to the longer end of the curve.

Our liquidity is strong so there's really no need to add to the investment portfolio.

With Kelly and Chris and Clarke, they feel really confident that our loan growth is going to really start to come online middle part of the year and thereafter.

So we feel that we're going to have pretty good balance sheet growth and good NII growth.

The restructuring that we did basically ensures us that we're going to have positive NII growth year-over-year.

It's going to probably show that we're going to have revenue growth and if we continue to have our expenses stay where they are, you should see the efficiency ratio start to fall.

Okay.

Just on the NII/NIM front, could you remind us how much benefit do you expect to get from the Fed hike that occurred in December?

What kind of deposit beta are you assuming that you'll see this year versus last?

How does that compare to what's modeled in your disclosures?

I would say if you look at the increase we had in December of 2015, the beta was almost non-existent, less than 5%.

To date, we're only a month out now, our beta is between 5% and 10% mainly in the commercial accounts.

So here again, really outperforming what we had in our models.

We have in our models close to 60% beta assumptions.

So I would say that the increase that we had this past quarter will probably give us 3% plus net interest margin benefit just from that alone.

So that's one of the reasons why we're helping to guide for much higher core net interest margin.

So that's about 3 basis points, Daryl, for a [25] hike?

Yes, for what we had this past December and the beta is less than 10% right now.

Got it.

Okay, great.

Thank you.

Betsy Graseck, Morgan Stanley.

A couple questions.

One is on the capital ratios, so bringing up the payout ratio plus the loan growth, just wondering what type of CET1 you're willing to traject to?

Like, how low will it go?

So Betsy, you can see with the ASRs that we did this last quarter, we still build capital ratios.

We expect to have -- there was a fair amount of compensation-related benefit coming through on the equity provision, so I would say that our CET1 should still stay 10% or higher.

We don't see it going down more than a touch right now so if you look at our number now, we're at 10.2% fully phased-in at 10%.

So you might see it go down a pitch but I think we feel comfortable that we can significantly increase that and still maintain a 10% CET1.

But over time, like do you feel even at 10% you're overcapitalized; that there's economically room to bring that down?

Well Betsy, we're going to remain somewhat conservative on that until we see how things play out in Washington.

Independent of the changes that are being talked about, with regard to [Hensarling's] CHOICE Act, et cetera, et cetera, there's an opportunity to bring that 10% down.

On the other hand, there's a reasonable prospect that some variation of the CHOICE Act is going to pass, which will cause upward pressure on capital requirements.

So we don't want to be in a position to where we get forced into having to go in to market and buy expensive capital, so we're going to remain a little conservative.

That will hurt EPS a little bit in the short run, but it's a smart run.

It's the best move for the shareholders, so we'll [stake] that, see how things play out.

If all that fizzles out then there's an opportunity to your point to move down a little bit.

On the other hand, if it comes through, we may be having to accumulate capital.

Got it.

Okay.

Then just a follow-up on -- the total return is obviously divi/buyback but then there's also the opportunality for M&A.

Maybe you could speak to where you think you are in that?

I know there was the AML BSA out there that was holding you back from M&A.

But just wondering how investors should think about your comments?

Is it a placeholder for buyback?

Or you really think, look, we're not in the M&A camp over the next year, so it is a buyback?

It's a placeholder with reservation.

Independent of the BSA issue, we are not ready to get back into bank M&A yet.

We are still finalizing Susquehanna and Nat Penn.

We hadn't closed, but we're still finishing up some of these big projects.

To be honest, Betsy, I've done a lot of thinking just in terms of the proper value of buying institutions that have a lot of branches.

There's a chance that we are facing a near-term tipping point with regard to the value of branches as the digital technologies really accelerate and reduced the interactions in the branches.

It's not to say that we would have no interest.

But it changes economics.

So I'm not quite sure today the sellers in any event would be ready to recognize the realities of the changing economics.

So number one, we're not ready to get back in the game independent of BSA.

Number two, we are being thoughtful during this pause about the real valuations of acquisitions when the time comes.

Number three, we don't think this BSA thing's going to take all that long to get out.

By the way, we're not inherently precluded from acquisitions during the BSA period, certainly with regard to insurance and other types of acquisitions.

So -- but we just don't consider that to be a binding constraint right now because the binding constraint is our own.

Got it.

Okay, thanks.

Jennifer Demba, SunTrust.

Betsy just covered my question.

But let me ask a little more on M&A and your commentary on buying a Company with a lot of branches.

That's a pretty big statement, Kelly.

Is this something you've been thinking about for awhile?

When you think you are ready to buy again, what kind of institution are you looking for ideally?

Is it something more larger in [mawii]?

Or how small will you go?

So yes, I've been thinking about it for awhile.

It's a difficult thing to get your hands around.

On the one hand, there's clearly a steady decline in branch activity.

On the other hand, that is not to suggest the branches are not really, really important.

The small business clients still go in to branch about once a day because they've got a lot of cash.

Wealthy clients go fairly often.

Even the Millenials, who don't go very often, really value the branches.

So we are just in a period right now where it's in conclusive in terms of the future value of branches.

But it's probable that branches will be somewhat less attractive going forward than they are today.

All that means is you're still interested, I'm still interested, but it means it has an economic impact in terms of your valuations.

So we will have to be thoughtful about that as we go forward.

Now there's a difference in terms of M&A, end market and out of market.

So the most difficult frankly today would be to acquire a large branch distribution operation out of market because there's no, there's no cost synergies in terms of overlaps so you have to get all of your profit improvement out of the back room.

On the other hand, if you're doing an end-market deal, you get the pretty easily achievable back room savings, which are very predictable and then you may get some -- you get the back room and you get substantial overlap of branches.

So end-markets still make a lot more attractive proposition today economically than out of market, not to say an out of market can't work but it means valuation has to take that into consideration.

As to size, we've always said that we're interested in larger deals than smaller deals, particularly in the last several years just because it takes about as much time to do a small deal as it does a large deal.

But I'm not ready to put any lot of concreteness around today's sizes and all that.

Because as I said, we're not in the market right now.

So when we get back in the market, we'll give you more definitiveness with regard to what we are exactly looking for.

What are your plans for the BB&T branch network this year?

Any rationalization plans at this point?

Yes, we will continue -- we had a long-term continuing trend of what I'd just call natural pruning.

That is to say you have an old branch that needs to be replaced, typically that looks like you have two that are two miles apart, they're both old.

You get rid of two and go to one.

That's natural pruning.

In some cases a market just dies and you just close out completely.

But we are -- we started this last year, we are being more aggressive in terms of, not what I call more than pruning or non-pruning, that is to say, we're being more aggressive in terms of some branch closures where they are actually profitable, but by combining two profitable ones into a new one, two plus two becomes five.

Because we are finding that because the branch traffic is less consistent, you can actually close more today than you could close five years ago because people use more mobile banking and our U platform, et cetera.

So we would expect to be more aggressive this year and coming years in terms of closings, but we're not going to do a radical go out and close 20% of the branches or anything like that in the scenario.

Chris, do you want to make any more comments with regard to that?

Yes.

I would just say transactions are down about 4%.

We closed about 2% of our branches this year.

I would say somewhere in the neighborhood of half of that number would have been what Kelly just spoke to what I'll call these sort of transformational type approach and we're going to be looking for more of those.

I think the opportunity exists to rationalize the structure over time where you have an opportunity to capture most of the client base but still have them run on your digital rail, so I think he's exactly right.

Thank you for the color.

Matt O'Connor, Deutsche Bank.

You gave some good NIM details for the first quarter.

But I guess I was hoping to just peel it back a little bit more as we think about some of the moving pieces and the GAAP NIM outlook of up 10 to 12 basis points.

Let me just fill in the blanks, you've got obviously the kind of step up or absence of the one-time amortization drag that was 5 bips this quarter.

I assume you get most of that back.

The rate hike you mentioned was for three before.

What's the benefit of the debt prepayment?

Then all other factors, what's going on there?

I think you've got the pieces.

If you just go back -- reconcile to the 10 to 12 GAAP improvement, we get 5 basis points for the home loan bank restructuring,.

We get 5 back from the duration adjustments.

Every quarter, we'll probably have a couple of basis points call it 2. We'll have run-off of purchase accounting going against that.

Then we get 3 plus right now for the rate increase.

So I think we feel very good.

Our margin will be in the mid 3.40%s.

Depending on how rates go, if they continue to go up some this year, we feel comfortable that those levels can be maintained in that area.

So it all depends on how much rates go up and what the betas are.

To be honest with you, we think if rates continue to go up, betas won't stay as low as they are they eventually will have to start to increase.

That said, we still feel pretty comfortable that margin should stay in the 3.40%s.

Okay.

So as a follow-up, the mid 3.40%s, if rates continue to move up.

Then if rates stay stable is the core NIM stable and then you just bleed down whatever the purchase accounting run-off would be?

I think so.

I think we're at a point now where assets are coming on and our mix changes.

With what's going on that I think we have a pretty good core stable margin right now.

With a little rate increases we might have improving core margins, so I think that's all positive for us right now, Matt.

Okay, agreed.

Thank you very much.

Michael Rose, Raymond James.

Just wanted to ask about insurance, if I back out Swett & Crawford, it looks like it might have been a little weaker year-on-year.

Can you give some color there and maybe what the outlook is as we move into 2017.

Thanks.

Sure.

Happy to.

You're exactly right.

Our growth year-over-year or fourth over fourth would have been about 10 bits of change percent.

If you pull out all acquisitions, our core organic growth would have been up 0.6% year-over-year, but that's in a very soft insurance market where there's just tremendous excess capital.

It is causing rates to be down in the neighborhood of 2% to 4%.

We're heavy in more commercial property, so that -- with a company we have called AMRISC, we are subject to the cat property rates.

They're down probably in the 10% to 12% range.

So we would certainly be on the high end of the reduction, so probably in the 4% range down.

Our new business on the other hand -- new business in retail was up in the 3% range.

So taking those together, that's what's enabling us to remain positive.

So we're still moving market share, it's just that you have that downward pressure on rates due to capital.

The other thing that occurred this year, we had some weather challenges but it was not enough to cause rates to go up but it was enough to cause the performance payments back to the brokers to decline.

So we actually had a declining contingent payments of about 12.5% year-over-year as well.

So even with the reduction in contingent payments and the soft pricing, we were still able to rise above that and have positive organic growth.

So I feel really good about the year overall in the neighborhood of 20% EBITDA margin.

So looking forward, what we have planned even with -- we see rates as having stabilized.

We don't see them jumping back up.

We've been in this now for about 18 months.

Normal soft market duration lasts about three years.

But we don't see them getting worse.

I think through some things we have going on internally, we think give us an organic opportunity.

We're actually planning to be up 3% to 4% this year.

So feel pretty bullish about the business.

Okay.

That's helpful.

Then maybe switching gears for Daryl.

Can you talk about what the net impact would be if there's any change to the corporate tax rate?

What the earn back would be on the DTA write-down?

Thanks.

So [Matt], if tax rates change -- so right now, corporate rate's 35%.

In essence we get almost 90% of it for our given tax rate change.

So if tax rates fall from 35% to 15%, we would get close to 18% lower taxes on it.

The reason we don't get all of it is really driven by how our State taxes impact the change in the corporate tax rate.

But we get the vast majority of it.

So it's close to 90% would basically flow through the bottom line.

Now our tax strategies are pretty simple.

We really have just tax exempt loans and securities.

We have [BOLI].

We have basically a low moderate income tax credits.

The assumption there is none of those are impacted.

If any of those get impacted then what I told you needs to get adjusted, but assuming just corporate tax rates fall, we'll get about 90% of it to the bottom line.

Okay, that's helpful.

Thanks for taking my question.

Erika Najarian, Bank of America.

Kelly, you mentioned we're in a new world.

You talked a lot about the potential upside on the revenue side.

I'm wondering if I could just dig deeper into John Pancari's earlier question and get your thoughts on where you think overall regulatory costs can trend?

I guess it's a two part question.

One is from a natural rate standpoint, how do you think regulatory costs are set to trend for BB&T over the next year or two?

If you do get some regulatory relief, what the opportunity could be in terms of potentially reallocating those costs?

Well that's a great question.

It's one that we're all trying to figure out the answer to right now, but I'll give you my thoughts.

So if you take kind of a steady course assuming there are no substantial rollbacks, then I think, you would think in terms of our regulatory cost over the next year or so being kind of flattish.

We have already dealt down a huge amount of ramped up regulatory costs over the last two or three years.

Some of that relates to a huge cost that we've had to put into some of these projects that are substantially driven by regulatory requirements, and ramp up that we've already put in BSA regulatory compliance, et cetera.

So independent of any substantial changes, I'd call it kind of flattish.

Now, if you have substantial regulatory changes, which I do believe we will have, then there is clearly the opportunity for a reduction in regulatory cost.

It's hard to get your hands on to be honest because it depends on how much.

I would say that if you get the maximum amount of regulatory changes, it's not going to be as much reduction in regulatory costs as a lot of people think.

I may be an outlier on this, but a lot of people are thinking euphorically that we're doing all of this stuff they are talking about and regulatory costs are going to zero.

That will not happen.

Number one, they're not going to get everything done that they want to get done.

Although they will get a lot done.

Even if they get a lot of these changes done, there are baseline regulatory requirements that are not going to go away and probably shouldn't go away.

We need basic, good solid regulation.

So I tried to give you a number off the top of my head, I would say over a couple of year period of time if you had the maximum amount of regulatory pullback, you could see a 20% kind of reduction in regulatory costs maybe 25% but not 50% or 75%.

It's meaningful but it's not dramatic.

The bigger changes of course for banking is tax reductions and increased margins and increased growth rates and GDP.

The regulatory cost reduction is icing on the cake.

It will be material, but a thing you can not quantify is that if we get what I hope to get, which is in addition to a number of specific regulatory changes, if you also get a substantial change in the tone or the intensity of regulation, then that is a big deal.

Because it's not just the regulations.

It's the degree of intensity with which the regulators apply those regulations.

So what happens is, it's not just an absolute direct cost that goes into regulations.

It's the indirect costs of all of the management times that is put on executing on all these regulatory changes.

So that's pretty big.

I can't quantify it for you, but if all of a sudden we had a less intense environment, we could get back to the way it was 10 years ago in terms of basic focus on good solid regulations and we could free up a substantial amount of our people's time with regard to focusing not on that but focusing on client relationship management and business development, it would be huge.

I can't even give you a number, but it would be huge.

So Kelly, just to follow-up, it sounds like what you're saying is a potential inflection point in supervisory leadership could be meaningful to your earnings power even before we start talking about Dodd-Frank repeal.

Did I interpret that correctly?

You've got it exactly right.

Okay, thank you.

Matt Burnell, Wells Fargo Securities.

First of all, Kelly, you mentioned a couple of acquisitions late in September and in the fourth quarter.

You also suggested relatively muted first-quarter growth, which seems seasonally appropriate but growth improving over the course of the year as GDP improves.

How are you thinking about future acquisitions if you are in terms of your full year 2017 thinking about loan growth?

I'm not factoring acquisitions into our 2017 loan growth expectations.

I'm not sure what you were talking about in terms of fourth quarter, I don't recall mentioning any acquisition.

Are you talking about portfolio purchases?

Oh, portfolio purchases, got you.

Correct.

Yes.

We're not really building that materially into our 2017.

It could happen, but it's not a part of our -- it's kind of a part of our normal consideration set, but it's not something we go out and spend a lot of time on.

So we're not factoring much -- it might be a little bit but not much on that.

So we are really trying to signal that our loan growth is going to be core loan growth.

It's going to be relatively soft for the first quarter and then while we're not prepared to give numbers, it will be building we think as we go through second through the fourth quarter.

Then if I could just follow-up on that.

It sounds like you're thinking about the future payout ratio rising to the 100% range.

I'm presuming that's incorporating your visibly stronger expectation for loan growth in the latter half of 2017, as it sounds like you expect GDP growth to ramp from roughly 2% plus real GDP growth to ramp from 2% plus to 3% or perhaps even better.

Yes, I think GDP will rout from the 2% range to 3% to 4%.

I don't think it will get to 3% to 4% for this full year.

It may be getting to 3% to 4% by the end of the year on a run rate.

But if you get to 2018, I think you've got a very good chance of a 3% to 4% run rate for the entire year.

So it'll be a building year in terms of GDP, a building year in terms of loan growth.

So the whole year of 2017 won't be as strong as the whole year of 2018 will be.

Right.

Daryl, if I can, just one very quick clarification.

You mentioned you expect expenses in the first quarter to be below $1.3 billion?

In the slide you have $1.7 billion.

Sorry, it's $1.7 billion.

Okay.

Thank you very much.

Sorry.

That's including the seasonality that we have.

Right.

Thank you.

Ken Usdin, Jefferies.

This is Amanda Larsen on for Ken.

How big is the capital hit you're expecting on the FHLB retirement in 1Q?

Then how are you thinking about the size of your overall long-term debt footprint in 2017?

Are there remaining $1 billion of FHLB still on the table?

So we do have more home loans on the table but they aren't really -- they are marked at market, so we can unwind those without any gain or loss without any impact.

So they're basically priced at market.

So that would just be whether we want to maintain that funding or go somewhere else from a funding perspective.

As far as the hit to capital, it's about $250 million, if you just take the $392 million and tax effect it.

We typically get a fair amount of equity credit from our comp plans in the first quarter coupled with continued exercises from the higher stock valuation.

That's a huge offset to our capital ratios that we have there.

So I would say capital ratios will still be pretty strong at the end of the first quarter even with this restructuring number that we have and doing a buyback that we're going to normally do, the $160 million.

I would just point out, this is just really good effective utilization of capital during a period of time where we are building excess capital.

Absolutely.

Okay.

Then thinking about average earning assets in 1Q given all of the moving parts?

Our average earning assets should be up just a touch depending on loan growth.

Our securities will be relatively flat as we reinvest those cash flows.

But NII growth will happen because our margin guidance is coming up significantly.

So I think you'll see pretty robust growth in NII.

Okay.

Just one last little one, can you quantify the PE gain in other?

The private equity was $15 million if I recall that we had in other assets.

There's a lot in that category but I think (multiple speakers) yes, it's $14 million to $15 million is what we had in that.

But we typically have a decent end of the year number every fourth quarter in private equity.

Okay, got you.

Thank you.

Saul Martinez, UBS.

I want to continue on the M&A theme.

Kelly, you've mentioned in the past that you think the optimal size of a bank may be somewhere in the neighborhood -- I believe if I recall correctly, in the $400 billion plus range.

You've also mentioned, hey, this is a new day.

The economic back drops improved.

We still don't know how exactly the regulatory environment will play out, but obviously there's the potential for at least a lighter regulatory touch.

Just curious how you're thinking has evolved if at all on this question of what the right size or what the optimal size of a bank is?

So I think as we reflect on the various changes, the optimum size might actually be -- could actually be somewhat lower because what we're seeing out of all of this is the premium organic growth has risen while the premium on acquisition growth maybe has gone down some.

So we still believe long term it would be advantageous to our shareholders to be larger.

But to be very honest, we can get to the scale we need to be through organic growth only.

Then again, unless you get acquisitions at a very attractive price, organic growth is going to be much more attractive.

Keep in mind, over the last eight years you couldn't count on as much organic growth because the state of the economy and state of regulation and all that was going on.

Looking forward, we think in this new day environment there's much more opportunity for organic growth, which puts less pressure on acquisition growth.

But I want to restate again to be very clear.

We're not an acquisition business now, so we are totally focused on organic growth.

We believe we can get to the size and scale we need to be strictly through organic growth without any necessary requirements on acquisitions.

If that becomes appropriate from an economic perspective at some point in the future we'll take a look at it.

Okay.

No, that's clear.

Thanks for that.

Daryl, if I can ask a question on NIR.

Maybe we could just talk about it a little bit more systematically, maybe what the outlook is for some of the key line items?

Obviously, you've talked a little bit about insurance, mortgage maybe has headwinds, some of the other lines are doing well.

But what are -- how should we be thinking about some of the major drivers, the major line items for NIR in 2017?

So if you look at our fee income ratio, Chris commented on insurance, so that should be up modestly on a year-over-year basis.

Service charges, we continue to make investments in service charges, growing accounts so that should continue to trend up.

As far as mortgage banking, we continue to build-out new markets.

The MBA forecasters think down around 15%, give or take, but we're hoping to be more flattish there just by building out our new market that we have.

Then we continue to make investments in Investment Banking and brokerage.

We did have that one restructuring this past year there.

But that said, they have a lot of momentum.

They are doing really well.

So I think all that's going well.

So I'd say overall, fee income up probably mid single-digit on a year-over-year basis.

Saul, this is Chris.

I would add, Investment Banking is probably core growth at 6% or 8% when you strip out that restructuring.

In that would be capital markets as well as the retail broker.

We're adding offices in the retail broker to complement our Wealth throughout the footprint.

Wealth for example, had a 22% revenue growth rate this year.

So it continues to operate really, really well.

Okay.

No, that's really helpful.

Thanks a lot.

That concludes our question-and-answer session for today.

I'd like to turn the conference back over to Alan Greer for any additional or closing remarks.

Okay.

Thank you, everyone for joining our call.

I apologize that we ran out of time and we had a few folks still in the queue.

Feel free to call Investor Relations, I'll be happy to take your questions.

Thank you.

We hope you have a good day.

That concludes today's presentation.

We thank you all for your participation.

You may now disconnect.