Truist Financial Corp (TFC) 2017 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Third Quarter 2017 Earnings Conference.

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

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

Thank you, Lauren, 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 third quarter and provide some thoughts about the fourth quarter.

We also have Chris Henson, our President and Chief Operating Officer; and Clarke Starnes, our Chief Risk Officer, to participate in the Q&A session.

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.

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

And now I will turn it over to Kelly.

Thanks, Alan, and good morning, everybody.

Hope you're having a great day, and thanks for joining our call.

So we had a solid third quarter with growth in revenues despite the hurricanes, which as you know, impacted a meaningful part of our market.

We did have growth in core loans, and we had very good expense control.

Our net income available to common shareholders totaled $597 million.

Diluted EPS was $0.74, up 1.4% versus third quarter '16.

But if you adjust for the full P&L effect because of merger-related and restructuring charges, it would be an adjusted $0.78, which is up 2.6% versus third quarter '16.

Our adjusted return on assets, return on common equity and return on tangible common equity were 1.2%, 9.2% and 15.6%, which I think are very respectable performance ratios in this environment.

Positively, we did have adjusted positive operating leverage, which we are very pleased with.

Taxable revenues -- taxable-equivalent revenues totaled $2.9 billion, which is up 1.4% versus third quarter, and that was led primarily by a good core loan growth, and we did have the benefits of higher rates.

Net interest margin increased 1 basis point to 3.48% as did our core net interest margin, and we're pleased about that.

Our adjusted efficiency ratio improved to 58.3% from 58.6%.

You'll recall early in the year, we talked about our cost beginning to kind of peak in the middle part of the year and beginning to kind of come down.

That's proving out as we had hoped it would.

Noninterest expenses, excluding merger-related and restructuring charges totaled $1.698 billion, and that was notably a decrease of 7.8% annualized versus the second quarter.

(inaudible) we are spending a lot of time on reconceptualization around all assets of our business.

It's a new world.

Simply many available methods and strategies don't work anymore.

So we are continuing but on a more aggressive pace our reconceptualization strategy around all aspects of the business.

So you are seeing and you will expect to continue to see meaningful changes that will result in FTE reductions and have positive expense impact.

Still on Page 3, our nonperforming assets declined 1.4%.

Net charge-offs declined to 35.

Clarke will give you more detail if you like it.

The truth is we're just having great credit quality.

We did increase our quarterly dividend 10% to $0.33, completed a $920 million in share repurchases.

And our common equity ratio is still strong at 10.1%.

So good return of capital to our shareholders.

If you look at Slide 4, we just added this one merger-related and restructuring charges of $47 million, $0.04 a share after tax.

Almost all of those are restructuring costs, including severance accruals and facilities charges related to branch closings.

We closed 61 branches in the third quarter.

We project at a high probability level closing about 78 in the fourth quarter.

So we will have closed about 140 branches for this year.

This will, of course, produce positive run-rate savings as we go forward, and we would expect to continue to look aggressively at our branch distribution system next year, and I'll relate to that again in just a moment.

If you look at Page 5, we've started recently just trying to give a little report card in terms of our performance versus guidance.

With regard to loans we did miss, as we indicated at a midyear conference, what really happened was there was a huge spike in payoffs in August.

If you'll recall, there was a meaningful reduction in the 10-year, and that just drove a lot of people to go ahead and refinance.

So that drove our payoffs, which, frankly, we didn't see at the time we did our last earnings call, and I don't know that most anybody did.

And we did have some slow production due to hurricanes, not a dramatic impact but some, particularly in Florida, where power was out anywhere from 10 to 12 to 13 days, where lots of people across the entire state.

So obviously, when power is out and trees are down, people are back home taking care of their family versus at the bank making loans.

So we lost some production.

We think we'll get that back, but we did have some of that impact.

Credit quality, as I said, was just impeccably good.

Our net interest margin, we did hit our guidance there.

We were actually up a little bit, 1 basis point in each area.

Net interest income was stable.

Noninterest income, we did have a slight miss, but that was primarily because of lower performance commissions coming out of the hurricane effect.

If you want more detail on that, Chris is available to talk about that, but basically, the immediate impact of storms is that we have lower performance commission.

We tend to get that back reasonably soon as rates adjust, but that did have some impact on this quarter and will for next quarter probably.

And we did lose some insurance production during the hurricane as well because again some people just didn't have power for 10 or 12 days.

We think we'll get that back, but that was a diluted impact.

Expenses were in line with our guidance, and we felt good about that.

If you look at Page 6, as I said, we had problems with our loan growth.

I noticed it's a little bit messy, but let me try to help you see what we did.

So if you look, you will see that our total loans were down 1.1% annualized, but our subtotal for commercial is up 1.2%.

I would point out that there is a reclass, a onetime reclass between C&I and CRE-IPP coming out of our recent commercial loan system conversion.

So basically, what that meant was we shifted some loans out of C&I to CRE, but this is basically loans that are like think about our investment-grade drugstore, investment-grade grocery.

With land, we intend to call it IPP.

We think it's IPP, but the system wants us to call it CRE.

So it's not a change in quality.

It's just a shift in that.

So the best way to look at that is to put that together.

We had commercial growth of 1.2%.

We had some very strong growth in a number of our categories.

Premium finance is up 34% annualized.

Sheffield up 19% annualized.

Equipment finance up 15%, and so we think that those particular segment or categories we have are doing very, very well.

Just a little more color on the loan portfolio.

If you look at the next page, we've been trying to break out for you to help you understand what's really going on in our business.

It can look not so good if you just look at the decline of 1.1%.

But if you look at our core portfolios, we are growing 3.2%.

And as I've said, commercial is growing when you make that adjustment.

So we feel good about that.

And then our core segment portfolios are growing 28%.

So we're getting our core businesses are running well.

We're simply focusing on these strategies we have the last 2 or 3 quarters to improve long-term profitability by adjusting some of these optimizing portfolios.

So in terms of the our key strategies, we continue to focus on growing more profitable loans for better rate return trade-offs.

What that means is we're growing C&I.

We're growing appropriate level of CRE.

We are pricing prime auto at a level, which improves profitability and returns.

Frankly, that market had gotten so overdelivered, the returns were just too low.

And so we just don't want to book assets that generate terribly low returns for our shareholders.

And so we are adjusting that and it's causing some volume reduction, but that's okay because our relative profitability is going up.

We continue to sell most of our conforming residential mortgages while we're meeting all needs of our clients because we're booking all of them.

We just are selling us or conforming because we still think that the most likely rate rise and whole lot huge amount of mortgages at this time.

We continue to focus again on sales finance.

So sales finance, to give you perspective, decreased $670 million or 25%.

So that's a material impact in the short run.

Residential decreased 6.3% in the short run.

Now with regard to our expectations, going forward, we think core loans are expected to grow 2% to 4% annualized in the fourth.

So our basic core business is doing well, not great but well in this environment.

Prime auto and prime residential, I'm pleased to say we expect to take a lot of them first half of '18, so you'll begin to see our total loan growth begin to move up as we head through '18 because of those optimizing portfolios having gotten to where we want them to be.

So total loans will decline slightly in the fourth, but good, solid growth in the core portfolios.

Looking at the very challenging market out there, it is important from a long-term point of view to stay focused on quality and profitability.

It's tempting to have faster loan growth in the short run.

That is a fool's game, and we're not going to do it.

We're going to do all the good loan for our clients that are well priced and well structured that we can, and we're not going to try to improve short-term earnings by making bad loans.

I've been around 45 years.

I've seen things [break] many, many times.

It is not a good strategy.

We're not going to do it.

Still I would say to you that we are turning every dollar we can, so we have a number of special strategies running our Specialized Lending businesses.

Our core corporate portfolio is growing very, very well.

A number of things are clocking and our Community Banking are working on to enhance performance, and we think we can, but this will be in the context of proper quality and profitability.

Recent acquisitions I would say to you are beginning to gain traction.

They're not nearly where they need to be, but they've turned the curve.

Every time we do a merger, we know that you go through an 18- to 24-month period of time that it takes you to kind of stabilize and begin to grow.

We've been through stabilization period.

It's beginning to grow.

So that's good news and there are good benefits as we go forward.

A quick look at deposits on Page 8. I feel pretty good about this.

While our total deposits were down 7%, that is totally not planned.

Our noninterest-bearing deposits by plan are up 6.9%, which is very, very good.

We are beginning to see interest rates move up a bit, particularly in commercial.

We've been holding our betas pretty tight.

We'll probably give up a little bit of that as we go forward.

Daryl will talk about that in his report, and so we'll begin to see that.

That will correspond as we go along during the year with faster loan growth, and so that will be appropriate.

Importantly, our noninterest-bearing deposits did increase again from 32.8% of deposits to 34%, which is really important from a long-term point of view.

So just before I turn it to Daryl, just a couple of strategic comments.

We can have these calls every quarter.

Every quarter, we spend a lot of time talking about what happened to every little detail in the income and the balance sheet on this quarter, and that's fine.

We're happy to do that and answer questions about it, but it's not the most important thing for us to talk about.

The most important thing for us to talk about is what's going on in the world, what's going on in the industry, what's going on in terms of our strategy.

And I will just say to you, look the world has changed, and we need to be and we are focusing on every aspect of our business to make sure that we are jettisoning the old-time strategies and processes that don't work and reinvesting in strategies and processes that do work, recognizing the new environment.

For example, we're tightly focused on strategies where we can differentiate.

It makes no sense in the world today to focus on a strategy if you can't differentiate on unless you are the biggest player in town, where you can have really low prices and based on huge scale.

And because that's not where we are, we are focused on differentiation where we can operate with an inelastic demand curve, meaning by differentiation, we can get a meaningful price improvement because of the differentiation of the [core].

That's a whopping big deal conceptually, and we're spending a lot of time on that.

We have these areas that we really can differentiate in like our middle market commercial, our small business, our wealth, our insurance, our Specialized Lending businesses.

We are focusing more and more time on those and frankly, spending relatively less time on other areas, where we can't get the differentiated advantage.

We are spending a lot of time on digital, AI and all of the investments we need to make to be an aggressive player in the new world to play to the Xs, Ys, millennials, et cetera.

And we're focusing on rationalizing the branch network so we can pay for it conceptually, by focusing on branch conceptualization and conceptualization network strategy.

We're able to return some of that to the shareholders, and we're able to invest substantially in the new strategies of the future, which are really important in terms of growing the franchise as we go forward.

We believe very simply that going forward, the winners are going to be the ones that have solid strategies but have excellent execution, and that's exactly what we're focused on.

Now I'll turn it to Daryl for some more commentary.

Thank you, Kelly, and good morning, everyone.

Today, I'm going to talk about credit quality, net interest margin, fee income, noninterest expense, capital, our segment results and provide some guidance for the fourth quarter.

Turning to Slide 9. We had a really strong quarter with regard to improved charge-offs and nonperforming assets.

Net charge-offs totaled $127 million or 35 basis points, a decrease from 37 basis points last quarter.

Loans 90 days or more past due and still accruing increased 2.4% versus last quarter.

This was mainly due to government guaranteed residential mortgages.

Loans 30 to 89 days past due increased $113 million or 12.9%, mostly due to seasonality and the hurricane-related impacts.

NPAs were down $10 million or 1.4% from last quarter, mostly due to improvement in the commercial portfolios.

Looking to the fourth quarter, we expect net charge-offs to be in a range of 40 to 50 basis points, assuming no unexpected deterioration in the economy.

A slight increase in the expected net charge-off range is due to seasonality.

Continuing on Slide 10.

Our allowance coverage ratios remained strong at 2.93x for net charge-offs and 2.44x for NPLs.

The allowance-to-loans ratio was 1.04%, up slightly from last quarter.

The allowance includes $35 million qualitative adjustment for the storms.

Excluding the acquired portfolios, the allowance-to-loans ratio was 1.12x, unchanged from last quarter.

So our effective allowance coverage ratio has remained strong.

We recorded a provision of $126 million compared to net charge-offs of $127 million.

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

Turning to Slide 11.

Compared to last quarter, net interest margin was 3.48%, up 1 basis point.

Core margin was 3.32%, also up 1 basis point from last quarter.

GAAP and core margin benefited from higher loan yields, partially offset from funding rate increases.

Deposit betas continue to be very modest, exceeding our expectations.

Asset sensitivity was unchanged from the prior quarter.

GAAP and core margin are both expected to be down 3 to 5 basis points next quarter due to higher funding costs and asset mix changes.

Continuing on Slide 12.

Our fee income ratio was 41.4%, down from last quarter, mostly due to seasonality insurance.

Noninterest income totaled $1.12 billion, down $54 million compared to last quarter.

Both mortgage banking and other income had nice increases from last quarter.

Other income was up due to private equity investments, which is partially offset in minority interest.

A primary driver for the decrease in noninterest income was lower insurance income.

It was down $84 million, mostly driven by seasonality and lower performance-based commissions.

Looking ahead to the fourth quarter, we expect fee income to be up slightly versus the fourth quarter of last year.

Turning to Slide 13.

Adjusted noninterest expense was slightly under $1.7 billion, down $34 million from last quarter's adjusted expense number.

Personnel expense decreased $18 million, mostly due to lower benefit expense and lower production-based incentives.

While we had a modest drop in personnel this quarter, we expect a much larger reduction in salary expense to show up in future quarters.

Merger-related and restructuring charges increased $37 million, mostly due to facility charges and severance.

Professional services expense decreased $11 million, primarily from lower AML expenses.

Going forward, expenses are expected to be stable versus fourth quarter of last year, excluding merger-related and restructuring charges, which equates to $1.65 billion for next quarter.

We will achieve positive operating leverage in the fourth quarter for both like and linked quarters.

We expect fourth quarter effective tax rate to be about 31%.

Continuing on Slide 14.

Our capital and liquidity remained strong.

Common equity Tier 1 was 10.1%.

We are very pleased with this quarter with the third quarter payouts.

Dividend payout ratio was 44%, and our total payout ratio was 198%, reflecting $920 million in share repurchases.

The remainder of our approved $1.88 billion of share repurchases are expected to occur evenly through the next 3 quarters.

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

Community Bank net income was $396 million, an increase of $51 million from last quarter.

Net interest income increased $24 million from the second quarter, mostly due to positive performance in deposit betas.

Loan production was disrupted in part by hurricanes, while balances were impacted by larger payoffs.

We had a good increase in our commercial pipeline, which was up 15.4% from the end of last quarter.

As you can see, we closed 70 branches through the third quarter, and we plan to close, as Kelly said, about 78 this quarter.

Turning to Slide 16.

Residential Mortgage Banking net income was $67 million, up $21 million from last quarter.

Noninterest income increased $14 million, driven by increased gains in the sale of residential mortgages.

Production mix was 70% purchased and 30% refi, relatively stable compared to the second quarter.

And our gain-on-sale margin was 1.85% versus 1.61% last quarter.

Continuing on Slide 17.

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

Net charge-offs and Regional Acceptance had a slight year-over-year increase to 7.5%.

Net charge-offs in the prime portfolio remained excellent at 18 basis points.

Turning to Slide 18.

Specialized Lending net income totaled $54 million, unchanged from last quarter.

Compared to second quarter, we had strong loan growth in premium finance, Sheffield and equipment finance.

Turning to Slide 19.

Insurance Holdings net income totaled $13 million, down $42 million from last quarter.

Noninterest income totaled $399 million, down $84 million.

This was driven by seasonality as well as lower performance-based commission.

The fourth quarter fee income guidance includes lower expected performance-based commissions.

Like-quarter organic growth was down 0.8%, mostly due to timing of renewals and storm-related losses.

Noninterest expense totaled $378 million, down $18 million from last quarter, driven by seasonally lower incentives.

Continuing on Slide 20.

Financial Services had $106 million in net income, down $9 million from last quarter.

Fee income was up due to private equity investments.

Corporate Banking had strong loan growth of 8.4% while wealth generated strong loan growth of 18.2% from last quarter.

A decline in deposits was mostly due to managed runoff of larger balance rate-sensitive deposits.

On Slide 21, you will see our outlook for the fourth quarter.

While we continue investing in our businesses to drive improved revenue growth, we feel very confident that noninterest expenses will continue to decline, and we will strive to have positive operating leverage.

In summary, we had solid third quarter earnings, positive adjusted operating leverage, declining net charge-offs and nonperformers, an increase to the GAAP in core margins and good expense control for the quarter.

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

Thanks, Daryl.

So very good, Daryl.

It was a solid quarter, particularly in a challenging environment.

Our revenues grew.

We had good core loan growth.

We had good core deposit growth.

We have excellent expense control.

We have a lot of focus on the future, focusing on our rationalization of strategy, our digital strategy and most importantly we continue to retighten our focus on our vision, mission and values.

At BB&T, we clearly believe our best days are ahead.

Okay.

Thank you, Kelly.

At this time, we'll begin our Q&A session.

And we would ask our operator, Lauren, to come back on the line and explain how our listeners may participate in the session.

(Operator Instructions) We'll now take our first question.

In this differentiation that you're talking about and in this rethinking of the franchise, what has been the biggest impetus to this?

I mean, when you're thinking about the factors that are out there right now, what really plays into this?

So, Nancy, I think it's -- broadly speaking, it's that the world is changing, frankly, a lot faster than I would have thought 5 years ago.

It's largely around the whole digitization, artificial intelligence, robotics, all of which are allowing us in the back room to restructure.

And frankly, we can robotize many, many processes that were manually handled forever.

And we get better quality and more efficiency.

So the back room offers really for the first time in my career, offers huge opportunities to reconceptualize and do the same with less expenses.

In the front room, as you know, the world has changed a lot in terms of the expectations with continuous banking.

And it's not just the Xs and Ys and millennials although they are the most extremely focused on it, but everybody wants to have very, very high-quality mobile banking, et cetera.

So that is where we are having to spend an enormous amount of focus on being sure that we have the best offerings in terms of digitized delivery of services, think mobile banking, et cetera, and be able to do it in an efficient way.

So in order to pay for all of the front room, we're rationalizing back room, and we're rationalizing the branch structure.

So it's, in a simple way, Nancy, when I think about it just -- and you guys wrote a commentary about this some time ago, the world has just really changed.

And so I mean, I, we are thinking about every aspect of our business differently today than we were 3 years ago, 2 years ago.

Does that thought process include, and we just saw JPM buy WePay.

Does it include the -- bringing in Fintech franchises?

Have you thought that far ahead?

Is that something that would be attractive to you?

Absolutely.

We have for 18 months, you may recall, we were one of the first to have one of our executive officers as our Chief Digital Officer.

He is full-time focused on scouting the world; figuring out what the best Fintech offerings are; looking for opportunities to buy, partner, learn from.

We are just completely open-minded about how we can integrate the advanced techniques Fintech have brought to the world.

So answer is clearly yes.

And I will just ask as the final part of this.

In looking at the banking franchise and rationalizing the banking franchise, is it possible -- I mean, you guys have spend decades now building a franchise.

Is it possible that you will look at regions to exit?

End of day, Nancy, everything is possible.

So the way we think about that is we are first, frankly, focusing on -- pardon me.

We're first focusing on what I call residual businesses that we have that don't really make sense because it's not making money, but we just can't make much money.

So we're jettisoning those kind of strategies because we want to be tightly focused on the ones that do make sense.

In terms of regions, in terms of the market outreach, as I sit here, I don't have any particular regions that I would say we are in, but we don't want to be in.

But the clear thought process that we are focusing on is de-emphasizing regions that don't offer as much opportunity and improving our profitability.

Now that may ultimately, to your point, lead to actually exiting.

But right now, our focus is on improving profitability in those regions that don't offer substantial growth, but do offer good, solid relationships today.

We're focusing on providing still good, solid support, quality.

But because we have such huge brand value there, we think we can provide just solid service quality value with less expense, and then reinvesting those expenses in the markets that are higher growth markets and offer more long-term potential.

Our next question comes from Betsy Graseck with Morgan Stanley.

I just wanted to focus in on the loan growth opportunity here because I know that you are looking for the core portfolio to be growing in the 2% to 4% range or so.

Yes.

Near term, it's going to come in below that because of the run-off portfolios, which feel like they are going to be done running off in 1Q, 2Q next year.

So maybe if you can give us a sense as to that pace of change.

And what's the issues in the runoff portfolio that you really want them to be being moving off as opposed to sticking with them in this low growth-ish environment?

And then maybe highlight where you see opportunities in your regions for accelerating loan growth.

Betsy, I'll take a start at this, and Clarke can add some detail.

So we're really focusing on, as you heard us say, optimizing these -- the mortgage portfolio and the prime portfolio.

It's no surprise to anybody that portfolios were not generating adequate returns on equity and particularly when you think mortgage in terms of rising rates.

Now we're about to have the auto where we want it to be.

It's a business we want to stay in, but it's going to be in not chasing volume but chasing margins and profitability.

So that's heading towards stabilization.

Mortgage is headed towards stabilization just a natural runoff.

So you're right.

First half of '18, they'll be where they want to be.

But really the more important thing that doesn't really come through, I think, in our numbers is that we have really, really good traction in a lot of areas.

Our Corporate Banking strategy is growing extremely well, strong double-digit growth and has a good long runway because as you know, we weren't much of a player in the big -- the high-end market until the last few years.

We have a fantastic team in that area, and it is doing really well, and we'll continue to do well going forward.

Our wealth strategy is really hitting on all cylinders in terms of fees and asset generation.

It's doing extremely well.

All of our Specialized Lending businesses are doing fantastic.

I mean, you're growing double -- you're growing 20% -- 24%, 25% growth rates, and that's seasonal somewhat but, I mean, still, they're doing extremely well, and we are differentiated.

So I don't worry about the competitive pressures as much on that.

The biggest challenge is in the Community Bank where we're competing with everybody in the world, but what we're doing there is focusing on the quality of service delivery but also frankly, differentiation.

We are in the midst of rolling out today in our Community Bank a very, very exciting, I call it differentiating approach, which is around what we call financial insights.

And what that is, is rather than going to clients and talking about loans or deposits, we go in talking to them about how we can help them grow their businesses.

We try to get clear about what their goals and strategies are going forward, so that we can better augment their performance by supporting them.

For example, we, I believe, are the only bank out there that through our BB&T Leadership Institute goes into companies and talks to them about how to help their companies perform better by having better leash of talent.

And we have a very, very long history of providing excellent executive leadership training that we bring to our clients, and they really appreciate that.

They appreciate the fact that we don't come in day 1 and ask for the loans or deposits.

We come in and talk about how can we help them grow their business, how can we help them their individuals grow, and that's got really, really good traction.

There are number of others, Betsy, that we're focusing on as well.

So -- and I wouldn't want you or others to think that we got a decline in loans, and that's the whole story.

That's not the story at all.

The decline in loans is simply a smart profitability strategy of restructuring our portfolios that don't make as much sense and reinvesting more time and energy in the ones that do, and we think the performance in those areas are very strong.

Our next question comes from Matt O'Connor with Deutsche Bank.

I was hoping you can elaborate on the insurance performance-based commissions.

How much of the insurance fees do those represent?

What are the drivers?

And what's the outlook?

Yes.

Happy to do that, Matt.

This is Chris.

First thing I'd maybe point out because, I think, there might be some mistake about the in-line performance.

We come off our second quarter, which is our highest quarter of the year, to our lowest which is in the third.

When you pull out of that $84 million reduction, about $56 million of that is seasonality.

About $9 million was just directly related to hurricane losses through performance-based commissions.

$3 million was what Kelly said was just production loss, facilities that were shut down, and so we couldn't do business.

And there's about $16 million related to timing through various businesses where we might have received something in second quarter this year, and we received it in the first quarter and years prior.

So just to clear that up on seasonality.

But the outlook, it's a great question.

The storms do cause a reduction in performance-based commissions in the short term.

But we get improvement over the intermediate term.

So really, over the long term, this is good for brokers.

You have to go through this window short-term pain to really get pricing up over the long term.

I think what you could expect from us in the fourth quarter is commissions being up around the 5% level, and that includes any reductions we would have in performance-based commissions.

We still see economic expansion driving our unit growth.

This quarter, we had 5% new business growth.

The way you drive insurance.

One is pricing and it stabilized down from 4 into say the 2 to 3 range, and we have the opportunity now through the storms where pricing actually improved further.

Second will be client retention, and we are industry leading at 91%, 92% or so there.

So economic expansion I think is one pricing, new business growth we commented on.

But to your point, the outlook on performance-based commissions, it's really too early to impact -- to kind of get the impact of recent catastrophes.

We focus on hurricanes.

There've been 4 of those, but you also have the Mexican earthquake.

You've got wildfires in California.

So given there is lots of capital in the market today that the industry is in transition as it relates to all this.

Loss estimates that I read range up to $150 billion plus slightly.

Most of what you read is if you -- if it exceeds $100 billion, then it's going to put capital pressure in the industry.

So I think it is likely to cause pricing increases going forward.

Obviously, depends on levels of new capital coming in, but I think we will likely see some sort of price increase.

Then you've also got the impact of standard care to support the retail market that really frees pricing after the storms and what they're really trying to wait on is to see what the reinsurers do, which is a price reset at the first of the year.

So I think that also will likely drive pricing up for carriers.

Okay.

That's helpful.

And then if I could just squeeze in on -- a follow-up on expenses.

I think there was a comment about hoping to continue to push cost down obviously fourth quarter, good visibility on.

As you think about 2018, any early thoughts on can you reduce cost on an absolute basis?

Are you trying to offset inflationary pressures?

What are the thoughts on the expense plan heading into next year?

Yes, Matt.

This is Daryl.

We are still putting together our 2018 plan.

I think the best thing I can tell you right now is what Kelly said is that we're continuing to look for efficiencies and kind of redistribution of our cost structure.

And you will continue to see the salary line item and more severance payments, which will drive our personnel costs down for the next couple of quarters.

We're going to use that into '18.

We aren't going to give guidance on '18 yet, but know that we have pretty much wind in our sales right now from an expense basis because it's headed down right now.

And while we're going to make investments in our company, we still have a pretty good trajectory down.

Our next question will come from John McDonald with Bernstein.

Daryl, was hoping to ask just a little bit about the NII outlook and net interest margin.

For the net interest margin, down 3 to 5 basis points next quarter, can you give little details on the funding cost and asset mix pressures that you referenced?

Yes.

I think we made a decision, John, to grow our investment securities portfolio over the next quarter or 2, consistent with what we think we're going to see loan growth over the next year or 2. So our securities portfolio is going to ramp up a little bit, kind of close to what it was a year or so ago.

So consistent with maybe 3-plus percent.

That's basically given us a negative asset mix change, but gives us positive net interest income contribution from that perspective.

And then from a deposit beta perspective, if you look at the last 4 rate increases, our deposit beta has been about 14% to-date on interest-bearing deposits.

We continue to respond and be aggressive on the commercial side.

And we need to and, I think, retail side is still pretty tame though we are starting to have a couple of competition more for wealth clients and all that.

So we're trying to be responsive, but I think over the next couple of rate increases, you're going to see that 14% start to drift up probably not to normal levels yet, but closer to higher levels than where they are today.

Okay.

And the change in mindset about the securities is driven more about loan growth and challenges of loan growth rather than a rate outlook change or anything like that, it sounds like.

Yes.

I don't think we're smart enough to know exactly which way rates are going to go, let alone the shape of the curve and short end versus long end and all that.

I think just want to keep our portfolio approximately 20-plus percent of our balance sheet from a liquidity perspective.

We're really gearing up to have pretty solid loan growth into '18, and we just want to make sure we have liquidity.

So we want to make sure that we are funded with our core clients.

We have the liquidity with our securities portfolio as our loan portfolio starts to take off.

Okay.

And then just on the fourth quarter outlook for net charge-offs, can you remind us what portfolios see that seasonal uptick in the fourth quarter?

And also does that charge-off guidance, the 40 to 50 include any hurricane impact on charge-offs that you might expect for the fourth quarter?

Yes, John.

This is Clarke.

Primary seasonality impact in the fourth is always going to be in our retail portfolios.

More specifically, it's Regional Acceptance, our subprime auto lenders.

So while we're not expecting any increase in deterioration, it will be the normal year-over-year seasonality.

That's the biggest impact.

But also just to remind you all, we had extremely low third quarter number in our commercial losses, and we're just forecasting maybe a little more normal losses.

Hopefully, we'll do better, but those are the 2 primary factors.

Our next question comes from Gerard Cassidy with RBC.

Kelly, can you give us a little more color?

You talked about looking over the long term and not necessarily the short term when it comes to loan growth and some of the things that you folks are seeing in the marketplace on underwriting.

What are you seeing that makes you a little nervous, especially at this point in the cycle?

And can you break that up by loan category, whether it's CRE or commercial or consumer?

Gerard, I think the mega issue here is that we've been on a 9-year slow economy.

Asset returns for all investors have declined steadily.

That's driven their profitability down.

And so everybody scrambling for profitability.

They would seem to [scramble] with their assets.

And as it invariably happens as you know, when people are scrambling for assets, and there's a lot of people scrambling, then you get declines in prices and you get stretching in terms of terms.

So the mega issue here is to lower pricing and to liberal underwriting, to longer terms, not stretching covenants, et cetera.

I think that's generally occurring across the board.

It was more specific in like mortgage family although I will tell you that, that has improved.

2 years ago or 18 months ago, we were more worried about that, but I think everybody's kind of rationalized that down a bit more, a little more rational.

And so I don't think that there's any one particular area that -- there's a little bit of a spike in storage facilities, few things like that but nothing that's dramatic.

I don't know, Clarke, if you have anything to add to that?

I would just add to what Kelly saying on the corporate side, Gerard.

Generally, probably the most rational what we see agents trying to continue to get the mandate delivered, I think, to deliver the mandates for syndication or at least new covenants, reducing the number of covenants.

The subtle structural weaknesses that we know in the long term you've got to be careful on.

I think we see the most hyper competition in the small regional Community Bank lending space, which is again a lot of structural consideration, give ups and lower pricing.

So that's probably the most hyper competitive.

And your third point, I think you all ought to always look at is, not all growth is the same.

So I think everyone in the slow environment is trying to find a little niche or something to get growth that they're not highly experienced into kind of the herds chasing some of these new forms of lending that haven't been tested yet, and that's underneath a lot of these numbers.

So we're just trying to be mindful of all of those issues.

Could you guys equate this period to 2005?

Or is that -- or it's too aggressive back then when you think back about it?

I think it was too aggressive back then.

Then, you had a much less informed euphoria around chasing bubbles, and we had a much more inflated level of bubbles throughout all asset classes.

So this is nothing like 2005 and '06, particularly in the real estate category.

So I personally don't think any of the (inaudible) would make about lending today should not suggest that we think it's way out of control, and it's leading to a recession and all that.

Not at all.

Very good.

And then on the deposit side, obviously, you guys were very clear about taking down the interest-bearing deposits, and you grew your noninterest-bearing obviously quite well.

Aside from the betas that you've already touched on, was there something else in the interest bearing that prompted you to kind of take them down the way you did this quarter?

Yes, Gerard.

It was basically just lower funding play.

We had some deposits that was close to LIBOR flat that was indexed at the market rates, and we just made a decision to basically fund them off the Federal Home Loan Bank advances, which was sub LIBOR probably by 10 or 15 basis points.

So it was just an economic decision.

When you're being paid LIBOR flat, that's really not I would call a core client.

They're very, very sensitive from that perspective.

So we didn't lose any core clients.

It was just a economic decision.

Our next question comes from Erika Najarian with Bank of America.

My first question, Kelly, is on maybe asking for a little bit more detail on how you're thinking about the branch reduction strategy for 2018 and '19.

And as you think about your distribution channel, do you think that could naturally lower the efficiency ratio, all else being equal from the 58% that you've been booking all year?

Yes.

So conceptually -- excuse me, Erika.

We're going through kind of a process, and the first phase of the process is looking at kind of what we call the low fruit.

That's the way you have in a market, you may have 15 or 20 branches.

On this one particular street, you have 3 branches.

All that are within 5, 6 miles of each other.

So you close the one in the middle.

You move the associates to the other 2, and nothing really changes.

Only expenses go down.

So that's what we've been doing kind of this year.

As we head into '18 and '19, then what we have to do is think in terms of eliminating the branches, but being sure that we are investing properly in the other areas, other forms of distribution.

So, for example, you might see us there closing branches, but adding freestanding ATMs.

Or you might see us closing branches, but adding ATMs in drugstores or Walmarts or places like that because while most of the clients still go to the branches for more complex products, an awful lot are still just making deposits and cashing checks.

So as we go through '18, '19, it'll be a little more complex, but still plenty of opportunity.

It just may require a bit more add-back, not terribly expensive add-back in terms of the way to meet the convenience needs of the client.

In terms of the efficiency ratios, all of those together will improve our efficiency ratio because we're simply able to reduce expenses and have relatively small negative impact in terms of income.

So every one that we close improves our efficiency.

Yes.

The other thing I would add with that, Erika, is as we are closing branches, what we have found is our retention rates are really, really high in the high 90s.

So we are maintaining almost 100% of clients in revenue and deposits left from the closed branches.

So I think there have been really little impact on revenue or core deposits.

That's very helpful.

And a follow-up to that is so essentially, what you're telling investors is if the value of the branch in the changing world has declined, how should we think about this relative to the strategy in terms of how BB&T "grew up?" So in terms of you had been Community Bank roll-up story, and so as you think about potential other roll-ups going forward, does that mean you're less likely to do them?

Or does that simply mean that the natural cost savings going forward from here is a completely different and maybe higher mass than we had seen in the past?

So, Erika, that's a very good question.

I've addressed that at a couple of conferences.

So it does make a material change, and here's how.

So historically, we acquired an institution, you could very reasonably mathematically project the future of cash flows coming from the projected operations of our branch, discount those cash flows if I can figure out what to pay for, and it makes sense because the projected cash flows were relatively constant and, in many cases, growing.

Now as we look at a bank acquisition, we have to be thoughtful about the future cash flows of those branches going down because in the last 2 or 3 years especially, the level of branch activity has been going down for us and everybody else anywhere from 5, 6, in some cases higher percentage of lower activity per year.

And so what that means is if you're looking at an out-of-market acquisition, where you're going to keep the branches, it doesn't mean it's not valuable, but it means it's meaningfully less valuable because when you look forward, the predictability of the cash flow is less, and you're sure it will be a declining cash flow.

And so you have to factor that in so you'll be discounting back a lower projected cash flow with more volatility, and so necessarily, you'll pay less for that.

What all of that means in assets that the value of out-of-market acquisition for somebody like us just doesn't make much sense.

There's a price, you do it, but many of the advisers and sellers won't move.

So end market has the most change.

The reason for that is because you got the same factors with regards to the changes in the future projected cash flows of those branches.

But in a end market where you have dramatic overlap, you do what I would call effectively monetizing the value of that branch by closing it immediately and drawing those clients over to other branches and/or other forms of digital interaction.

And so you cut the expenses, you don't cut the revenue.

But you can't do that out of market branches, you just cut off your relationship with a client.

End market, you cut expenses just like -- it's exactly what we're doing in terms of right sizing our branch structure.

It's the same concept when you're doing end-market merger, and so we would continue to have a strong appetite for end-market M&A.

We haven't released our own internal polls yet, but we put it in place about 2.5 years.

But I would tell you we are very, very close to releasing that.

We basically have moved through the period we've been concerned about in terms of major projects and assimilating Pennsylvania and so forth.

So we are pretty close to release the polls.

In terms of M&A.

The other issue is the BSA issue.

We're in the bottom half of the eighth or the top half of the ninth on that.

We feel very good about where we are.

We've effectively done all that we need to do in terms of changing the systems and processes.

We're just working with our regulator in terms of their evaluation of that.

And while I can't promise anything, I am optimistic that in the not-too-distant future, we'll be removed from that order and have capability of participating back in M&A again.

I want to be very clear, however, that does not signal BB&T's getting ready to go out on some big rampage of M&A.

The M&A strategies I just described is very different than what it was a few years ago.

We're very conservative.

There will be some partners we'd be interested in doing business with, but it's good for everybody.

But we are most focused on our shareholders, and we are simply not going to do diluted deals.

Your next question comes from John Pancari with Evercore ISI.

Just right back to that M&A topic, can you just remind us though, in terms of bank versus nonbank acquisition interest?

And would you be interested in insurance properties if they come about or you are not looking to growing that inorganically anymore?

We are very interested in insurance acquisitions today.

We're not prohibitive regarding insurance acquisitions, and we are open for business, if you will, and we're very interested in doing insurance acquisitions today.

We like to think of our insurance business, and Chris can give you more color if you want.

We would like to ideally keep it at about 20% of revenues.

We are at about 17% now.

So we have room to expand there, and there are good opportunities out there for us.

We would consider other nonbank acquisitions, but to be honest, [all the] insurance I don't really see that happening today.

People talk about asset acquisition businesses.

Most of the times, the numbers don't work in those.

And so we are -- I'd say we are currently trying to focus on insurance.

There are few little kind of small things in the payments business we look at, but there are not many in terms of moving the numbers.

And then we'll reopen the bank acquisition opportunities as I just described to Erika.

Great.

That's helpful.

And then just remind me on the bank side, what will be your sweet spot again in terms of target asset size if you were to do whole bank deals?

I think the sweet spot would be $20-plus billion.

All right.

And then separately, back to the competition discussion, and I know you flagged it a few times here in terms of where you're seeing that pressure, particularly on the lending side.

Can you talk a little bit about what that means for your loan yield here?

Barring any incremental moves from the Fed, how do you think the competition could weigh on loan pricing?

And how that could play out in terms of your loan yield as we look in the out quarters?

Great question, John.

As we've said, it's highly competitive out there.

So this quarter, we did see some compression in the new loan spreads, not material.

So we've been doing a really good job despite the competition of generally holding up our spreads although they continue to be pressured comparatively.

Our raw yield was actually up as we benefited from the rate increases and as Kelly laid out very well earlier in the presentation, the mix strategies around better pricing schemes for things like our indirect auto, the benefit we get out of some of the subs, which have higher margins.

So we think those help offset some of those competitive pressures, but it is a real challenge as we look forward.

Daryl, you might want to comment on.

Yes.

The only thing I would add to that, John, is you have to look at it.

So we're optimizing mortgage and auto.

When you look at the spreads like, for example, auto, the big chunk of the book was put on in spreads that was a little over 100 basis points, call it 120 basis points.

We've now optimized it, so spreads are not close to 200 basis points.

So as those old loans renew and roll over, that's going to give us some lift.

And as Clarke said, there is competition in your typical C&I credit, whatever.

But if you blend it all together, I think our credit spreads are still hanging in there pretty well because of our optimization efforts that we have there.

And rate sensitivity wise, we are about (inaudible) the short end of about 2/3 weighted is how our net interest income might come up.

If the curve actually steepens and shifts, we will also benefit from that.

So really just depends on what the rate outlook is.

And our final question comes from Kevin Barker with Piper Jaffray.

So you, obviously, talked about M&A quite a bit here, and you're looking at that as a longer-term strategy.

You have to deal with consent order first.

But taking the other side of it, there's been increased talk of the SIFI buffer potentially moving to $250 billion or going to some type of qualitative approach.

Given that you're a little bit over $220 billion in assets right now, have you ever considered staying below $250 billion in assets in order to not have to deal with possibly the liquidity coverage ratio or having more flexibility with your capital ratios?

So, Kevin, first of all, the value of the $250 billion is very much in place today.

There are number of conceptual proposals in Congress, the [insulin] bill, et cetera.

It's not at all clear what's going to happen with regard to the value of the $250 billion.

Frankly, I think what's most likely getting ready to happen is they're going to eliminate the hard lines when the Fed is reshuffled in terms of their board of governors.

I think they will eliminate the hardcore 50 -- $250 billion and all those will go away and banks sort of will be gauged based on the weighted average assessment of their risk.

And so if that happens conceptually for us given that our weighted average category of risk relative to some of the biggest banks, we could be $400 billion, $500 billion and still not be judged G-SIFI or require huge amounts of excessive regulation.

So we're going to see how that plays out.

But independent of that, as we look at the next deal of some sort that gets us close to $250 billion, if that's the still existing current rules, then we'll be mindful of exactly how we do that deal.

But look, here's the thing, Kevin, for us to sit back here now and say that we're not going to go over $250 billion because there are some constraints that we have to deal with, we'd be dooming ourselves to long-term failure.

In this business, you're either growing or you're dying.

And we're a growth company, and we'll bust right through $250 billion when the appropriate time comes and feel happy about it.

Okay.

And then when -- you've talked about this in the past, but some of the expenses that you've built up or some of the investment that you've made in order to prepare for the $250 billion in assets.

At what point -- as far as the investments, how far along you think you are in preparation for $250 billion?

It really depends what happens to the rules, Kevin.

This is Daryl.

I would say that we were hopeful that the advanced approach kind of phased away when Governor Tarullo was in office.

He was not a fan of the advanced approach.

We believe that will continue on, but we really need to see and hear that from the new board of governors, but that would be one big expense that you can take off the table.

As far as the capital, the OCI Mark, that's just something that we would manage, and I think we're very comfortable managing that with our held-to-maturity portfolios.

LCR, I think I've talked about that in the past.

I think with the combination of our core deposits and our curb liquidity coupled with usage of letters of credit from the home loan bank, we can minimize that cost relatively significantly.

So there's a couple of other things.

But as Kelly said, we will grow over $250 billion.

So we will -- you pay us to manage our business and do it effectively, and we will minimize the cost as much as possible.

We don't see anything prohibitive there.

At this time, I'd like to turn things back to Alan Greer for any additional or closing remarks, sir.

Okay.

Thank you, Lauren.

This concludes our call for today.

I hope everyone had a great day.

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

Thank you.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.