Truist Financial Corp (TFC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the BB&T Corporation Second Quarter 2017 Earnings Conference.

(Operator Instructions) As a reminder, this event is being recorded.

It's now my pleasure to introduce your host for today, Alan Greer of Investor Relations for BB&T Corporation.

Alan, please go ahead.

Okay, thank you, Debbie, and good morning, everyone.

Thanks 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 second quarter and provide some thoughts for next quarter.

We also have other members of our executive management team who are with us to participate in the Q&A session: Chris Henson, our 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 our presentation includes certain non-GAAP disclosures.

You may refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP results.

And now I will turn it over to Kelly.

Thanks, Alan, and good morning, everybody.

Thanks for joining our call.

We really appreciate it.

So we had a strong second quarter, record earnings, record revenues, good expense control and best returns on almost 3 years.

So looking at some of the highlights.

Our record net income, $631 million, up 16.6% versus second quarter '16.

Diluted EPS was $0.77, but when you adjust for depending on MERC charges, it's $0.78, up 9.9% versus common quarter.

Our returns were strong.

ROA, RO common equity, return on tangible common were 1.22%, 9.30% and 15.6%, respectively.

Record taxable-equivalent revenues totaled $2.9 million (sic) [$2.9 billion], up 3.9% versus second quarter and also up 10.7% annualized versus the first quarter.

Our net interest margin on GAAP increased 1 basis point to 3.47% versus first quarter.

Our core net interest margin increased 3 basis points to 3.31% versus the first quarter.

And we had a nice increase, and our fee income ratio increased to 42.7% from 42.1%.

That's a function of our continuing to leverage our fee income businesses into the new acquisitions up in Pennsylvania and in other new markets.

Our GAAP efficiency ratio was 61%.

But if you adjust, as we normally do, efficiency ratio was 58.6% versus 58%, so up a tick.

But I would point out to you that we've been talking about for the last 2, 3 years, these major projects we've been working on.

These major projects are ramping up.

Expenses are peaking.

We would expect over the next several months and quarters that these projects continue to be ramped up, that these expenses will not only peak, but slowly decline.

I would point out specifically that most of the BSA/AML work has been done.

We're in the 90th-plus percentile in terms of getting all of that work done.

There will be some time in terms of it to mature in terms of the exodus from the consent order.

But that's not the same kind of expense level in building the program.

So you can expect our BSA expense levels to begin to decline as we head into the third and fourth quarter.

Credit quality is fantastic.

Our core and financial questions about that was just fantastic all over across the board.

NPAs, performing TDRs, 90 days or more past due, net charge-offs, all declined versus the last quarter.

We are clearly at pristine credit quality at the company.

Importantly, in terms of our CCAR application, as you saw, it was approved.

That includes a 10% increase in the quarterly dividend to $0.33, which we expect the board to approve next week.

We also have approved up to $1.88 billion in share repurchases.

We indicated we would repurchase $920 million in the third quarter.

That is this quarter, and that will be done as soon as possible.

Even so, our common equity Tier 1 ratio remains strong at 10.3%.

I did point out on Page 4 the one special item.

I won't spend much time on that.

That's just $10 million, $0.01 impact in terms of merger and restructuring charges.

On Page 5 in your slide deck, just to point out that we think we did a good job with regard to meeting or exceeding guidances.

On the loans side, we were on the high side of our loan -- total loan range of 1% to 3%.

Core guidance was 5% to 7%, and we were on the outside of that, in fact, beat it at 7.5%.

Credit quality was low, on the low side.

NPAs actually declined.

Our net interest income was above the range.

We've said 2% to 4%, and we were at 6.3%.

And all the others are net.

So the point is we thought we had relatively aggressive guidances, and we met or exceeded those guidances.

Now if you turn to Page 6, I want to give you a little commentary with regard to the loan area.

So we've been talking the last few quarters, and we really want to make sure everybody understands what we're trying to do.

I think about it in terms of excellent execution of a complex set of process improving loan strategies.

So what it means is that if you look at our total loan performance, it was up 3%, which is very good in the industry today.

But if you look at C&I, for example, we were up 6.1%.

If you look at CRE combined between IPP and construction and development, it's a strong 7%.

We had strong performance, seasonally adjusted, to some degree, but in a number of our fee -- Specialized Lending areas, for example, Sheffield was up 20.2%, premium finance was up 15%.

So a very, very strong performance there.

I would point out to you that our Community Bank experienced the best quarterly commercial production in its history.

Main Street is optimistic.

I will comment a bit more on that in a minute, but it is definitely beginning to flow through in terms of better production and closings with regard to our Community Bank.

A little more color on these various portfolios we're looking at on Page 7. So we told you last quarter, to try and make it clear, we're breaking our portfolio out into 3 categories, and we have strategies around those.

So we have our core nonseasonal portfolio, our core seasonal portfolio and then the portfolio which is sales finance and residential mortgages, which we call an optimizing portfolio.

I will explain to you what that means.

So in the longer strategy, we are simply focusing on growing the more profitable loans with better risk profile.

This is not a game about how fast you grow loans.

This is a game about how fast you can grow profitability.

And so we are focusing on growing, albeit a little slower than we could be growing, but growing profits faster by focusing on the most profitable loans.

We continue to price our prime auto portfolio at a level which substantially improves profitability and returns.

That has caused that portfolio to shrink, to some degree.

We're better off currently and in the long term by having better profitability.

Now I would point out to you though that, that does not mean that we're getting out of auto, does not mean we're getting out of mortgage.

We are simply rationalizing while optimizing the portfolios to stabilize them at a level that gets to the current profit projections that we are expecting.

So if you think about our loan growth going forward, we will have stronger core growth for a quarter or 2 than the total because of those optimizing portfolios.

But you should not expect, like prime auto and residential mortgage, to go away.

In fact, we expect it to stabilize as we're in '18 around the second quarter.

It's not as hard to project exactly, but probably around the second quarter of '18, we expect those to stabilize.

And I would presume to point out we are still in the auto business.

We're still in the business of meeting our clients' needs on home mortgage financing, and we expect to remain there.

So our third quarter expectations are that our core loans are expected to grow 5% to 7%, which I think is pretty strong in this economy, which has still not totally taken off yet.

As you combine, again, this 1% to 3%, and I would guess on the high side of that.

I just want to mention to you again that Main Street continues to rebound.

Our confidence is up.

I've been in 23 of our 26 regions in the last few months.

Every single region is reporting in terms of -- and I'm talking to the people that are making the loans, everyone is talking about increased optimism on the part of small- and medium-sized businesses.

Main Street, as I've talked about over the years, has been kind of dead in the water for the last 7 or 8 years.

Larger businesses were doing well because of a lot of international transactions.

Main Street business, though, didn't participate in that.

And so they are now seeing more activity in terms of confidence, in terms of clients buying from them.

They are, therefore, more willing to invest.

We see that, in fact, in our pipelines.

And we see that, in fact, into production as I continue -- as I mentioned earlier, Community Bank's having a strong production ever.

So I think that will continue to build as we go forward, and it's really good for BB&T.

BB&T is basically a Main Street bank.

We've struggled over the last 7 or 8 years in loan growth while Main Street was struggling.

Main Street is improving.

BB&T is improving.

I believe that will continue.

If we have positive movement on the tax reform, which is most important, and infrastructure, to a secondary degree, I believe GDP will continue to improve.

I know there's a lot of conversation about the waffling around in Washington.

Who knows what will happen with regard to health care.

But at the end of the day, it doesn't matter that much in terms of the GDP, but the tax reform and infrastructure spending is a big deal.

We believe it will occur, and we believe it will have a big impact on our business and the industry in general.

On Page 8, just a brief comment with regard to deposits.

We believe we're having excellent deposit growth, and we're doing a really good job managing our cost of funds.

Our noninterest-bearing deposits grew 11.6%, yet our total deposits declined about 2.8%.

We're simply replacing more expensive, less core-oriented deposits with noninterest-bearing free deposits, and that seems like a rational thing to do.

And frankly, we get a lot of stability out of the markets that we're in, particularly markets like Kentucky and West Virginia, et cetera.

So you saw that the percentage of noninterest-bearing deposits increased again from 31.7% in the first quarter to 32.8%.

And while it won't continue to increase at a rapid pace forever, that is still a very steady, nice increase.

So before I turn it to Daryl, I just want to make 3 points.

We are really, really focused on revenue growth.

We, as I indicated, are putting a huge amount of effort in our core loan performance, loan performance on our core loan portfolios, and we have several other revenue strategies.

In fact, we have 5 core revenue strategies that we start out every executive management meeting talking about.

We're getting excellent execution on every one of those.

We are focusing intensely on our margin.

We believe we will continue to have low betas.

The main reason for that is because we have a really solid core deposit base.

Over the years, as we went into places like West Virginia and Kentucky and remain in places like Houston, North Carolina and South Georgia, these are very stable, rural markets, not as volatile, not as driven by national funding organizations where prices don't push up as fast.

So we believe we'll be able to serve our clients well because, in many cases, we're one of the few suppliers of banking services there.

So they get excellent client service quality, but we just don't have to pay as higher interest rates, and we believe that will continue.

Finally, with regard to expenses, we are laser-focused on expenses.

We have a number of expense initiatives.

We are using, for example, artificial intelligence, AI, robotics and moving across our backroom.

Just to give you a flavor for that, Daryl did a really nice job earlier this year in taking just one project, one smaller project where we have in the accounting area, account reconciliation one person with a computer, one software reconciling account that took 2 hours.

We put robotics on top of that.

And in a virtual period of time, the new robotics software could do it in 15 minutes.

So we now have 6 or 7 more substantial projects that we are moving through to further improve the case, after which we will be going enterprise-wide in terms of finding ways to take these repetitious activities and apply good digitization and artificial intelligence to find more efficient and effective ways to reduce our cost.

Finally, I would point out as an update that we told you early on that we expect to have a more aggressive posture with regard to branch closings.

We've said early on in January that we thought we'd be north of 100.

We're now revising that to north of 130.

We've simply done more work on it.

And we're finding that we have a number of branches that are overlapping or in very close proximity to other branches that we can close.

And our marginal profitability goes up meaningfully because we really don't lose any material business there, and our service quality remains good because our remaining open branches are very, very close.

So that's just an overview of the most important things we're focusing on now.

Let's let Daryl give you some more color.

Daryl?

Yes.

Thank you, Kelly, and good morning, everyone.

Today, I'm going to talk about credit quality, net interest margin, fee income, noninterest expense, capital, segment results and lastly, provide you guidance on the third quarter.

Turning to Slide 9. We had a really strong quarter with regard to credit quality, which continues to show improvement.

Net charge-offs totaled $132 million or 37 basis points, a decrease from 42 basis points last quarter.

Loans 90 days or more past due and still accruing decreased 9%.

Loans 30 to 89 days past due increased $69 million or 8.6%, mostly due to expected seasonality in our consumer-related portfolios.

NPAs were down 13.9% from last quarter, mostly due to the decline in nonperforming C&I and the residential mortgage loan sale, mostly of nonperforming loans and TDRs.

Looking at the third quarter, we expect charge-offs to remain in a range of 35 to 45 basis points, assuming no unexpected deterioration in the economy.

Given that NPAs are close to historical lows, we expect NPAs to remain about the same.

Turning to Slide 10.

Our allowance coverage ratios remain strong at 2.8x for net charge-offs and 2.43x for NPLs.

The allowance-to-loan ratio was 1.03%, down slightly from last quarter.

Excluding acquired portfolios, the allowance-to-loan ratio was 1.12%.

So our effective allowance coverage remains strong.

We received a provision of $135 million compared to net charge-offs of $132 million.

Going forward, we expect loan loss provision to match charge-offs plus loan growth.

Turning to Slide 11.

Compared to last quarter, net interest margin was 3.47%, up 1 basis point.

Core margin was 3.31%, up 3 basis points versus last quarter.

Both GAAP margin and core margin benefited from short-term rate increases, partially offset by funding rate increases.

The GAAP margin was also impacted by the runoff of purchase accounting.

Asset sensitivity was relatively unchanged from the prior quarter.

Given that we don't expect further rate increases this year, GAAP margin is expected to be down 1 to 3 basis points next quarter, while core margin is expected to be stable.

Continuing on Slide 12.

Our fee income improved to 42.7%.

We attribute our 1.5% year-over-year improvement to positive results from the acquisitions we made and our team's success in implementing BB&T sales culture.

Noninterest income totaled $1.2 billion, up $49 million compared to last quarter.

Our fee income growth included an increase of $23 million in insurance income, mostly driven by seasonality in P&C commissions.

Investment banking and brokerage and bank card and merchant both had strong quarters.

Mortgage banking income was down from last quarter, primarily driven by lower net MSR income.

Looking ahead to the third quarter, we expect fee income to increase 1% to 3% versus third quarter of last year.

Keep in mind that insurance will be seasonally lower in the third quarter.

Turning to Slide 13.

Adjusted efficiency came in at 58.6%, down 1% from the same period last year.

We are committed to improving our top-tier efficiency along with making right investments to generate revenue.

Adjusted noninterest expenses totaled $1.7 billion, up $58 million from last quarter's adjusted expense number.

Personnel expense increased $31 million, mostly due to the performance-based incentives and merit increases.

Merger-related and restructuring charges decreased $26 million, largely due to prior quarter's write-off of software and write-down of real estate.

Professional services expenses increased $16 million, offset by $10 million decrease in outside IT expenses, both related to BSA/AML efforts.

In addition, other expense increased $16 million, mostly due to operating charge-offs, charitable donations and employee travel.

Our FDIC costs are up minimally from last year due to the improvement in performance, which is offset by the increase in the FDIC surcharge.

Going forward, expenses are expected to be stable to up 2% versus third quarter of last year, excluding merger-related and restructuring charges.

We believe expenses will be well below $1.7 billion.

We expect third quarter effective tax rate to be above 31%.

Turning to Slide 14.

Our capital and liquidity remained strong.

We're very pleased to receive a nonobjection to our capital plan.

As a result, next week, we will seek board approval to increase our quarterly dividend to $0.33 per quarter.

We received approval to repurchase $1.88 billion over the next 4 quarters.

And our capital plan calls for us to repurchase $920 million in the third quarter.

Common equity Tier 1 was 10.2% fully phased-in.

LCR was 122%, and our liquid asset buffer was very strong at 13%.

Now let's look at our segment results, beginning on Slide 15.

Community Bank net income totaled $345 million, an increase of $5 million from last quarter and up $43 million from second quarter of last year.

Net interest income increased $32 million from the first quarter and $99 million from second quarter of 2016.

This is the best quarter of commercial production we've seen, growing 25% year-over-year.

This shows increased activity we're seeing on Main Street and the job our great bankers are doing in continuing to build quality relationships.

Continuing on Slide 16.

Residential Mortgage net income was $46 million, down from last quarter.

Noninterest expense increased $4 million, driven by higher retail production.

Production mix was $68 million -- or 68% purchase, 32% refi, and gain on sale margins were 1.61%, up from 1.01% last quarter.

Looking at Slide 17.

Dealer Financial Services net income totaled $38 million, up $9 million from last quarter.

This is primarily due to the decline in provision for credit losses due to lower net charge-offs and prime auto and Regional Acceptance.

As expected, net charge-offs and Regional Acceptance decreased to 6.5% this quarter.

And our risk-adjusted yield was strong at 10%.

Regional Acceptance loans 30 to 89 days past due were 6.6%, up from last quarter due to seasonality.

Charge-offs for the prime portfolio remain excellent at 10 basis points.

Turning to Slide 18.

Specialized Lending net income totaled $54 million, up $3 million from last quarter, primarily due to lower loss provision.

We had strong year-over-year growth and production in premium finance and government finance.

Additionally, year-over-year growth was strong in equipment finance in Grandbridge.

Looking at Slide 19.

Insurance Holdings net income totaled $55 million, up $9 million from last quarter.

Noninterest income from the second quarter of last year reflects the timing of wholesale commission payments.

Adjusting for the timing of these commissions, like-quarter organic growth was up approximately 1%.

Noninterest expense totaled $396 million, up $7 million from last quarter, driven by higher personnel expense.

Looking ahead to the third quarter, insurance income traditionally has the lowest revenue quarter of the year.

Turning to Slide 20.

Financial Services had $115 million in net income, up $23 million from last quarter.

This was mostly due to higher investment banking, brokerage fees and commissions and improved funding spreads on deposits and increased loan volume.

Corporate Banking had strong loan growth of 9.1%, while Wealth generated strong loan growth of 18.2% from last quarter.

On Slide 21, I'd like to summarize our outlook for the third quarter.

We expect loan growth to be up 1% to 3% annualized versus second quarter.

We expect to see faster core loan growth in the 5% to 7% range annualized.

Our guidance for credit quality is about the same as last quarter.

We expect net charge-offs to be in the 35 to 45 basis point range and NPAs to be relatively stable compared to second quarter.

We expect GAAP margin to declined 1 to 3 basis points and linked quarter core margin to be flat compared to last quarter.

Net interest income is also expected to be stable, similar to last quarter.

We expect noninterest income to increase 1% to 3% versus third quarter of last year.

Excluding merger and restructuring charges, expenses will be stable to up slightly, but below $1.7 billion versus third quarter of last year.

Restructuring charges will include real estate charges as we rightsize our branch network.

In summary, we had stronger earnings performance, good revenue growth, excellent credit quality, increasing core and GAAP margins and good expense growth for the quarter.

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

Thanks, Daryl.

So let me also provide my summary.

As I said, I think it's a solid quarter, record revenue and earnings, good expense control and really much improved returns.

We are having excellent execution on our key revenue strategies.

We have improving and growing loan portfolios.

We have excellent Specialized Lending performance, and our insurance business is doing very, very well.

We are very energized about reconceptualizing our systems and processes through AI and robotics and other techniques.

We are laser-focused on expense management.

Main Street is alive, and we believe our best days are ahead.

Okay.

Thank you, Kelly.

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

(Operator Instructions) We'll take our first question today from Matt O'Connor with Deutsche Bank.

I was hoping to follow up on the outlook for the stable NIM on a GAAP basis.

And I guess, specifically, why aren't we expecting or why shouldn't we expect some increase in the NIM, given the Fed hike in June and some of the optimization that you're doing both on the loan portfolio and deposit side?

I think right now, Matt, we're forecasting our beta and deposits to be in the 20s from the June rate increase, and there is opportunity that we might be able to be better than that.

We have some contractual deposits and borrowings that will be priced up higher, which is kind of canceling out some of the core and GAAP margin from that perspective.

In purchase accounting, it is somewhat predictable.

In essence, it could be down 2 to 4 basis points.

It really depends, and we're just trying to give you an estimate that we sure we can meet from that perspective.

Okay.

And then just a quick clarification on the expenses.

What's the expense base that you're using from 3Q '16 when you're saying flat to up 2%?

Yes.

So if you look at third quarter '16 and you take out merger-related costs, it's $1,668,000,000 is what I have as core expenses for the third quarter of '16.

And we believe, as Kelly said, with our emphasis on expenses, we will be well below the $1.7 billion for third quarter of this year.

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

So just to keep the conversation going, the well below $1.7 billion, can you just give us a sense as to the core run rate that you're looking for in the quarter you just did?

And then when you say well below, is that really being driven primarily by the AML/BSA that you've referenced in the prepared remarks, Kelly?

Betsy, I think it's the peaking out and defining of the BSA/AML, but it's also the other projects.

CLIP is our big commercial loan project that we've been working on for last 2 years.

We did that conversion July 2 or 3. It's gone extremely well largely, but that will be tailing off.

And then, as I said, we're being more aggressive with regard to branch closings.

I think right now, we'll be 130 plus in branch closings this year.

And we are taking an enterprise-wide look, Betsy, at every area that we're doing business in.

We believe we have been through 8 years of having to deal with an extreme amount of micro management regulatory pressure.

We believe that is lifting.

And we are going to be focusing on how to run our business based on what makes sense to us.

And so I'm challenging everybody to go back and reconceptualize their business and, frankly, be prepared to run their businesses with less resources.

Yes.

So specifically, Betsy, I'd say you should see decreases in personnel costs and occupancy costs, IT and professional costs and maybe other expenses will be the areas of focus over the next couple of quarters.

Okay.

And so then based on the outlook that you gave for 3Q specifically, I know it's only one quarter forward look that you give, you're triangulating to positive operating leverage for us on a year-on-year basis.

Is that -- would that also be on a Q-on-Q basis, do you think?

Or is that more flattish?

I believe we have a good chance of getting it for a quarter-over-quarter basis, but definitely on a year-over-year, and we didn't quite make it this quarter, but we gave it our best shot.

I think we have a good shot to get a quarter-over-quarter basis.

We'll take our next question from Michael Rose with Raymond James.

Maybe just a question on the portfolio optimization.

I mean, what's really driving that?

Is it concerns around any sort of credit issues as we move forward?

And are there other areas that you might look to optimize in the next couple of quarters?

Well, Michael, let me give you a shot, and then I'll have Clarke to fill in.

This is a big deal.

There are no credit issues.

Our current portfolio is clean as a whistle.

We just have these 2 portfolios, about $30 billion in mortgages and about $10 billion in auto, that are sub-optimizing in terms of performance.

And so in a rising rate environment, you don't exactly want to keep growing real fast your mortgage fixed rate portfolio, and I think everybody understands that.

And the auto portfolio, we started 1.5 years or so ago changing the nature of how we have our revenue-sharing arrangement with these dealers.

We are an outlier in the industry, but it is a better, more consumer-friendly approach that we are taking.

And so that's causing some of the loan rundown.

But the other thing is that we are simply pricing up the assets.

The market has driven down the pricing in auto to where it was just unacceptable returns.

And so we said we are going to get our pricing to more acceptable returns, and we'll accept less volume.

That's exactly what's occurring.

So the profitability is not going down commensurate with the volumes.

And so you'll see that all stabilize because we are continuing to add new dealers in the Northeast, et cetera, around the country with our model.

And so it is not a -- I mean, it is sub-optimized today.

It is optimizing.

Soon, the structure will be set for the future, and auto will begin to grow again, and mortgage will stabilize and probably slow a little bit again then grow again.

Would you agree with that, Clarke?

Absolutely.

Okay, that's helpful.

And then maybe if you can just give, just switching gears, give some broad color and context on what you guys are seeing in the insurance business, the life and just generally what the expectations would be for that business as we move forward?

Sure, this is Chris.

We've said in the past that rates pricing was down about 4%.

We are beginning to see some stabilization of pricing.

So the way I would characterize it is it's slowing at a slower pace.

So instead of 4% down, you're probably seeing at something in the neighborhood of down 2.5%, 3%, which we think gives us the ability to, over time, potentially even by the end of the year, elevate our 1% core growth closer up to the 2% kind of category.

And the things that were driving that, one, we have a disproportionate share of property.

Property seems to have less pressure the last couple of quarters.

We've been in a down pricing market for 10 consecutive quarters.

It normally runs about 3 years.

So it's going to be down, but we think down less.

Our current new business growth was -- year-to-date, we're up 2.2%.

Our current second quarter new business growth was up 8%.

So we've got really good momentum in growing faster than the market and offset the decline in pricing.

And I think with respect to that, we also have some optimizing efforts in place.

We've got a couple cost initiatives that are, think of them as restructured ones in the EB business, and a real opportunity we've gotten all the synergies out of our Swett & Crawford conversion.

We've converted in February, so we've really been able since then to take advantage of that.

So I think we told you we expected the improved margin.

We think we've got potential to improve the margin from '16 to '18 up 2% to 3%.

We're kind of right in the middle of that, and that's going really well.

Right.

We finished the quarter at 22.5%.

By the end of '18, we'd hope to be in the mid sort of 23% range.

So we think there's opportunity there to expand profitability.

And you mentioned life.

Life is another bright spot because life companies really put out more capital when rates rise.

In a rising rate environment, we have upward leverage in life insurance.

And so year-to-date, our life insurance revenue is up 5.3%, which is a net helpful area for us.

So all the core businesses, the BB&T Insurance Services, the McGriff on the retail side, and CRC on the -- and Swett on the wholesale side, really are performing as expected or slightly better to date.

So I would say, generally, it's much more positive momentum than we would have seen, say, 2 quarters ago, the margin expansion and general growth.

We'll go next to John McDonald with Bernstein.

I was wondering about the capital, kind of optimal capital levels and how you're thinking about payout sustainability.

You've had a great CCAR and ramped up the payout to above 100% this cycle.

Just wondering, when you look at the CET1 of 10%, north of 10% now, given your risk profile and size, it seems like that might be pretty high.

Where do you think you could run it over time?

So right now, with what we're doing in the third quarter, John, our CET1 ratio come down about 30 basis points, so we'll have about 10% CET1.

As we continue with the repurchase, we may dip a little bit below 10%, but not much below, maybe 9.9% could be the lowest, depends on how much the balance sheet grows from all that.

As the outlook goes out farther, I think it really depends on what happens in D.C. and regulatory.

And from that perspective, if the industry allows ratios to come down more, we will follow to come down.

If it doesn't, we're comfortable here.

We believe we can get our return on equity over our cost of capital at the 10% level.

We think with the leverage and growth that we're seeing on revenue and our expense actions that we're going to take, we'll be over 10% and moving higher than that from the next several years.

Okay, that's helpful.

Daryl, just a ticky-tack item here, on the bank card fees had a big jump this quarter.

You called out a reduction in the accrual for rewards.

Is that a permanent change that pulls through, so this is kind of a new run rate on that revenue line?

Or is that a one-timer?

I would say it was probably $5 million or $6 million one-timer in there.

It was some of our commercial card clients were not utilizing all their rewards, and we adjust the number.

Got it.

Okay.

And then could you guys just comment, obviously, credit quality, very good across the board, talk about what you're seeing in auto and maybe just distinguish between the auto, sub-prime auto and what you're seeing in the prime?

John, this is Clarke.

Just full disclosure, our total retail auto portfolio is about $13 billion.

About $3.9 billion is sub-prime lending in Regional Acceptance.

The other $9 billion is prime, as Kelly said before.

The quality and the performance in the prime portfolio remains pristine.

We had 10 basis points of loss year-over-year, flatness in delinquency.

We're seeing no indication at all in the prime portfolio of any deterioration even with some of the concerns that certainly industry has around overcapacity and off-leased vehicles and those sort of things.

But the profile of that portfolio is so clean, we just don't see any real issues.

We never did any 84 month.

We have a conservative advanced rate.

So the prime portfolio, I'm extremely comfortable with.

We are also cautiously optimistic about our results with Regional Acceptance.

They had nice seasonal improvement.

For the third quarter, their losses were $649 million versus $598 million common quarter.

And if you look at -- while we don't know what our full year forecast will be, we think it will be around 8% or less, and that's not up much from last year.

So we're starting to see stabilization in our pools based upon underwriting changes we started 2 years ago.

But we think that this, when we put it in there and we've moderated the growth rate, that we'll continue to perform well.

And as Daryl said, our risk-adjusted yield, even after losses, is north of 10% in that portfolio.

We'll take our next question from Erika Najarian with Bank of America.

My first question is just a clarification to Betsy's line of questioning.

Kelly, you mentioned that expenses were peaking during your opening remarks.

And I'm wondering, as we look beyond this year and into 2018, do you mean that they're peaking in the specific categories that Daryl mentioned when he was answering Betsy's question and that's related to compliance and BSA?

Or are you talking about expenses peaking generally for the franchise?

I'm talking about peaking generally for the franchise for 2 different reasons.

The ones that Daryl referred to are peaking because the projects are moving through completion status, and that includes our general ledger and our commercial loan system, our new data center and then there will be BSA, and all of those kind of project-related.

The other is we're rationalizing the cost structure in our branch network.

That's a tailwind for us in terms of controlling expenses in the branching network.

And then broadly across the company, as I indicated Erika, we believe there's an opportunity to get all of our expense structures more efficient as we move from the last 8 years of intense regulatory pressure to where we believe we're going to have a more reasonable regulatory environment going forward.

And that is going to give us the opportunity to take a fresh look at all of the things we do across the organization and find better ways to do what we do, find ways to eliminate things that we're doing that we don't really need to do.

We're going to go -- we're going to basically go back to the future.

We're going to go back and run the bank the way we think it ought to be run and eliminate all of the nonessential stuff that's been added during this period of time.

Got it.

Just a follow-up question.

A lot of your peers have been asked about what the potential impact would be on deposit growth and then subsequently, deposit betas if -- as the Fed starts reducing their balance sheet.

Given your commentary that you are the bank of Main Street, I'm wondering, is it fair for us to conclude that your wholesale or nonretail deposits could possibly be less sensitive to attrition in the event of a Fed balance sheet reduction?

Absolutely.

Fed balance sheet restructuring has nothing to do with Main Street.

It has nothing to do with BB&T.

We'll go next to John Pancari with Evercore ISI.

I wanted to get a little bit more detail on the loan growth outlook and what you're seeing there in terms of trends and demand.

I mean, when you look at the loan growth, Kelly, in your comments, you sounded optimistic.

You indicated that there's improving optimism at mid-market and small business and activity there.

And you've come in at the high end of your guidance now for a couple of quarters around the 3% annualized range.

So why the 1% to 3% range?

Why not guide to the higher end of that or give us a little bit of color?

Is there anything that's keeping you at that 1% to 3% range firmly?

No, John.

The only thing is you know us, we tend to be kind of conservative.

In fact, the most recent information I got last night would suggest to me that the 3% would be more like a reasonable number.

But you guys ask us to hang guidances out there, and then you come back and hang us if we miss it.

So we tend to want to be a little conservative.

And you got some...

That's our job.

Yes.

I get that.

We love you for it.

So yes, your evaluation would be accurate.

Everything we're seeing in terms of commentary from the client, this is I'm getting from talking to our lenders.

I'm getting it from talking to the business people.

I've had 23 lunches where I'm sitting and talking to 6 to 8 business people over the last few months.

I've gotten this across our entire footprint.

I've got a pretty good feel what the clients are directly saying.

I've got a really good feel of what our production people are saying.

And I've got a good feel for what the actual pipeline shows.

All of that is very, very positive.

And can I guarantee that all the craziness in Washington will not derail that?

No.

But I'll be honest with you as I've talked to business people out there, they're not worried about all this craziness going on in Washington.

They're just focusing on growing their business.

Now I will say I think they are expecting a tax reduction bill and, to a lesser degree, they're counting on infrastructure.

But if we get the tax reduction bill, they'll continue.

So what they're doing today is what I call replenishment investment.

So for 8 years, they've not been investing.

They're driving trucks for 300,000 miles, they're using 20-year-old equipment.

They kind of got to do something or shut their business down.

The changes of late have given them a level of optimism causing them to go ahead and do different replenishment investment.

Then if we get tax reform, I believe we'll go into an expansion investment where they'll be able to grow their plant, add more trucks and add more associates.

And so I think that most likely is we've been pretty conservative, and we'll see next quarter how a prognosticator I am.

Okay.

All right.

And then on the expense front, regarding the BSA/AML commentary you had, I know you indicated about 90% of the work is done, and you expect the cost could begin to abate in the back half of this year.

Have you -- can you help us quantify the run rate of those costs, the amount of them and then separately, the timing, any type of guesstimate around when you could be out of this consent order?

Let me give you a general comment.

So we've spent about over $80 million this year in terms of developing this program.

As I said, we're about through with that.

Now a lot of the $80 million is just the consultants and all of the work of building the program.

That will kind of go away, but then you do have to run the program that you just built.

That won't go away.

So for example, if I had to guess right this minute, I'd say of the $80 million, $50 million to $60 million will stay and $20 million to $30 million will go.

It's hard to know exactly because we have to evaluate the responses from the regulators, et cetera, but it's very expensive to build these programs, whether it's a commercial loan system or AML/BSA programs.

Their expansion to build takes a lot of consulting expense, takes a lot of our time.

All that is going away.

So I think that you would definitely see it peaking and going down.

I think it will be going down at a major, consistent pace over the next 4, 5 quarters, and then you'll find the new norm.

We'll take our next question from Marty Mosby with Vining Sparks.

I have a couple of questions, a little different process.

Daryl, when you talk about deposits and deposits actually declining, you talked about retail and commercial are still growing, but public funds was really the driver of that, is that a shift in the way that liquidity requirements don't give much credit for those types of deposits?

Or is that just a different way of looking at it?

Marty, when we look at public deposits, and we've been in the business for a long time, but as we rationalize, like we're doing on the asset side of the balance sheet, we're also rationalizing the other side of the balance sheet.

And a lot of times, when you negotiate and deal with the public funds, you pay them really attractive interest rates and you also-- they don't know why they really discount your fees or whatever.

So we're just going through a rationalization of who makes sense from a funding perspective.

So I really wouldn't be concerned of losing any of those deposits.

We also lost some contractual deposits, non-client, also this quarter if you look at our end-of-period numbers.

But Kelly said, all of our core retail and commercial clients are staying with us and growing very nicely.

These are just on the edges as we just rationalize and optimize the balance sheet.

And so Marty, you just need to think about the public funds balances largely as a substitute for other forms of short term, noncore funding.

And we move those around just like we do short-term funding.

And the good news is our core fundings are going really, really well.

And the fact that we can let some of the others run down is just a real positive story, not a negative story.

Yes, I was more looking at the collateral, the price you pay, everything is really just more expensive than other sources of funding that you can get on the market.

So with no liquidity, good will, anything coming from it from a liquidity standpoint, then I thought that was an optimization that was probably going on, on that front as well.

You're absolutely right, Marty.

We have to price collateral, we charge the business lines for that collateral of those deposits, and it's a real cost, especially when you're using HQLA 1 type security.

When we look at -- you're buying back about half of your shares that you just got approved.

Is that because you generally envision your stock price moving up over the year?

I mean, what's the -- you said even as soon as possible.

What is the thought process when you are doing much more accelerated than across the year evenly?

So Marty, the reason is, number one, we have the excess capital today.

We don't need it, and we think returning it to the shareholders as quickly as possible makes sense.

I'm certainly never going to own these cost project what our stock price is going to do, but I'm quite happy to do an accelerated repurchase of these funds at their current prices.

I just didn't know if that gave you a bias.

And then going to AML/BSA, just a real kind of side curveball here.

Two things with this.

The bank has spent so much time, effort and money on AML/BSA.

And yet, behind the scenes, we now have Bitcoin emerging, which is not regulated.

So I mean, are we spending so much money on this to just push all the activity to where it's not even going to be able to be looked at, at all?

So is there any real productivity from this?

And then the second part of the question is, are you getting other things besides just satisfying the regulation out of this $80 million that you spent?

I mean, is there some business things that you can do better because you spent this money?

So overall, is there a return rather than just checking a box from the consent order?

Well, Marty, I would say, don't make the mistake of trying to apply your really well-developed sense of logic and rationality to this whole area of what we're doing and everybody else is doing with regard to this.

If you and I ran the whole country with regard to this, we'd figure out a dramatically more efficient way to deal with this, but that's something we obviously can't control.

So yes, we're doing exactly what the regulators tell us to do.

And we get some benefit, yes, because the system we're developing is better.

It will allow us -- I mean, one of the things, while you're looking for tariffs, you're also looking for fraudulent type of transactions.

And your system being made more efficient, I think Clarke will get to some lift with regard to that.

Absolutely.

We -- Marty, we've added a new very comprehensive commercial lending screening process as part of this that we do get value out of, so that is a positive.

We'll take our next question from Gerard Cassidy with RBC Capital Markets.

A question I had -- and I apologize if you addressed this earlier, I had to jump off the call for a minute.

When you look at the treasury's proposals that they came out with about a month ago about some of the regulatory changes that they suggest should happen, they had to identify a couple of them that would benefit BB&T the most.

Can you tell us what those would be?

Yes, so I think what Secretary Mnuchin came out with is a really, really good blueprint of kind of what the regulators ought to be moving towards.

And I would say, Gerard, the most important thing is what most people don't focus on.

The most important thing he basically said is we ought to kind of let the banks run the banks, and we need to get the regulators out of micromanaging, I'm paraphrasing, but micromanaging the banks.

There are enormous benefits for us and everybody else when we move down that road because we have just added in so many micromanagement types of processes and systems that have been required that are not productive, that I think the Secretary understands as a former banker.

And as a smart person, I think he understands that is ineffective for the banking system, and I think he understands it's hurting the banking system and is, therefore, hurting the economy.

So the biggest thing, in general, that if they can -- if they will follow through, the regulators will follow through and remove themselves from micromanaging the banks, get back to where it's always been through most of my career where they looked at the most important issues like capital adequacy and profitability and liquidity and the thing that regulators always look at.

And I think if we go down that road, this could be substantially more profitable for us.

The other thing that he focused on, which is really important, is it will allow the banks to improve lending.

One -- if you know that the -- everybody tends to ask why is the economy not running more than 1.5%, 2% the last 8 years.

It's not surprising.

It's mathematical.

I mean, when you go through and you dramatically increase the capital, you dramatically increase the liquidity and you dramatically change the cost structure of the bank so that they take money away from trying to grow loans into

dot the i's and cross the t's, you get less loan growth.

And so -- and that not only affects the banks, but it affects the businesses.

The businesses out there have not been willing to borrow because, and I've said this on many, many of these calls, when you talk to them over these last 8 years, they have said I'm not going to borrow a nickel because of taxes, regulation, Obamacare, et cetera, et cetera.

And so number one, the businesses -- remember, they're dealing with regulatory bodies beyond us, think EEOC, DOL, EPA, et cetera, et cetera, all of those agencies have been putting undue pressure on those businesses.

So when it all whitens up, you'll see the businesses more willing to borrow, you'll see the banks have more capacity to lend and you'll see the banks more able to lend because we have more time to lend because we're doing less minutia.

The other thing I would point out -- yes, Gerard, just one other point, in case you don't know this, this is incredible.

So mortgage lending.

Mortgage lending is a whopping big part of our economy because housing construction is a big part of our economy.

Mortgage drives the housing market.

And the mortgage processing business has been decimated by all the changes that have been made.

When I started in banking in 1972, I could have made you a mortgage with 8 or 10 pages, and you do understood what we were doing.

And now we've got -- the average mortgage out there is 615 pages, and the more complex ones go up to 800.

And Secretary Mnuchin gets that.

So if we can get the CFPB to understand how damaging this is to the economy and potentially young borrowers out there, they need the bank's help.

And they're making this so cumbersome, so expensive, banks can't afford to make $100,000 to $125,000 loan for a young couple to get their first house.

So what he is doing is trying to help the banks improve lending, which will improve the economy.

Kelly, as a follow-up, obviously, you've been through a few cycles with the bank on credit.

Can you compare this -- credit, obviously, for your organization and others is very strong.

Can you compare it to other parts of the cycles when you go back to maybe the late '70s or following the 1990 banking debacle we ran into?

What do you compare this period to in your career?

I think, Gerard, this is a relatively stable period.

It's not a period like the early '90s when we had a really boom in commercial real estate.

It's not a period like 2007 and '08 where we had a really booming residential mortgages.

There are a few little things that bother me out there, like mode of family kind of got out of hand for a while, but it's been jacked back in.

So I would call it, today, the loan portfolios in general and the banking system are really good, and I would say about as good as I've seen it in any of the cycles in my career.

I will say to the extent that there are any excesses being built up in the system, it is yet once again out in the shadow system.

And the banks are doing a heck of a good job in general in managing our portfolio, but we can't do anything about controlling what happens otherwise.

But I don't think, Gerard, as you read going forward, I don't think, by the way, that the shadow system is of such today that we are heading into a major recession because of anything like 2007 or '08.

I'm just saying the tendencies of that system or they don't operate as prudently as the banking system.

They don't have the controls and they don't have the capital requirements and liquidity requirements that we have.

And so naturally, they drift to where they can make loans that are less well-structured and less well-priced because they got lower capital and less liquidity and less regulatory expenses, and so they create excess capital that causes excesses in certain areas that get built that shouldn't get built.

But specifically, I'm proud to say, I think, overall, the banking system today is in really good shape.

Ladies and gentlemen, we'll take our final question today from Christopher Marinac with FIG Partners.

Kelly, as a couple of quarters passed, and you have more visibility on cost controls and being able to execute some of the points you made earlier on the call, what does this mean for M&A that you may look at?

Does this create new opportunities because you can grab greater cost efficiencies?

I was wondering, Christopher, if we will get through this call without somebody asking about M&A.

I was wondering.

So yes, so to the extent that we are able to figure out how to operate more efficiently, that factor causes M&A to be more attractive because you can bring in less efficient organizations into a more efficient platform.

That increases the economics and the desirability.

On the other hand -- and that the whole scale thing is still a really big driver of M&A.

That's why you're seeing a lot of M&A today in the smaller institutions, and they're seeing it.

I mean, they have no choice.

It's true, the larger size is just more complex.

So the scale is a big issue, will continue to be a big issue, and finding ways to reconceptualize the business and become more efficient will improve across banks of M&A.

On the other hand, as I've mentioned, there are some other factors that cause M&A to not be as attractive.

I mean, we -- if you have large retail networks out of market prospects, they would not be as attractive to us today as they would have been 10 years ago because when you do an end-market deal, they're still very attractive because you can monetize the net present value of the branches immediately.

When you buy an out of market where you don't have the overlap, you are buying the risk of what is the net present value or the stream of earnings of those branches, and nobody knows the answer to that except this will be less with digitalization.

So we will be looking, as we go forward, whenever we get back in M&A business, we are not today, I'm not releasing our pause, but I would say it's not as far away as it has been in place.

When we look at it, we will be very eager to look at end-market opportunities, and out-of-market opportunities will have to be looked at more carefully.

Alan, I'll turn it back to you for closing remarks.

Okay.

Thank you, Debbie, and thanks to everyone for joining us today.

If you have further questions, please don't hesitate to contact Investor Relations.

This concludes our call.

We hope you have a good day.

Ladies and gentlemen, thank you for your participation.

This does conclude today's conference, and you may now disconnect.