Truist Financial Corp (TFC) 2018 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation First Quarter 2018 Earnings Conference.

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

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

Please go ahead, sir.

Thank you, 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 first quarter and provide some thoughts for next quarter and for the full year.

We also have Chris Henson, our President and Chief Operating Officer; and Clarke Starnes, our Chief Risk Officer.

We will be referencing a slide presentation during today's comments.

A copy of the presentation as well as our earnings release and supplemental financial information are available on 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 actually 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 filing.

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.

At this time, I'll turn it over to Kelly.

Thanks, Alan.

Good morning, everybody, and thanks for joining our call.

So I think we had a strong quarter with record earnings and returns, very good expense control, continued healthy asset quality, and really, we had a strong commercial loan growth, if you adjust for the Mortgage Warehouse Lending.

Net income available to common shareholders was a record $745 million, up 97% versus the first quarter and adjusted net income was a record $767 million.

Diluted EPS was a record $0.94, up 104% versus the first quarter.

And if you adjust for diluted EPS for merger and loss on extinguishment of debt in the first quarter, it was up -- it was $0.97, up 31%.

But the way, I think about this and trying to get it to kind of a real comparable run rate, I go to pretax ex mergers and ex loss on extinguishment of debt to kind of get it to kind of real apples and apples.

And it's still up, I think it's around 5% versus the first quarter, which is really good on a 2% kind of environment.

Adjusted returns.

ROA was 1.49%, RO -- common equity was 11.75% and return on tangible was 19.89%.

So all very, very good returns.

And very importantly, we did achieve positive operating leverage on a GAAP basis versus the fourth quarter and the first.

Taxable-equivalent revenues totaled $2.8 billion, up 0.6% versus the first quarter.

Virtually, the net interest margin increased 1 basis point to 3.44%.

Our core margin increased 4 basis points.

Both were a little bit better than we expected.

Our fee income ratio was 41.9%.

Our adjusted efficiency ratio was 57.3% versus 57.2%.

But if you adjust for the system outage, which Daryl will give you more color on, the efficiency ratio would have been down.

Adjusted noninterest expense totaled $1.658 billion, a decrease of 9.3% annualized versus the fourth quarter and a decrease of 1% versus the first quarter.

So we haven't decreased the expenses length and like, including increased expenses for the future.

We're making substantial investments and the future investments for risk management, infrastructure transformation, digital product development platform enhancements and marketing.

And Chris is going to give you a special breakout commentary with regard to some of those investments.

Our credit quality remained excellent.

NPAs did increase a couple basis point, but we told you in the past, we're at the bottom.

You will see a little bouncing around the bottom, that didn't mean anything.

And importantly, it did decrease 6 basis points from a like quarter basis.

We did have seasonally higher charge-offs, 41 basis points versus 36 basis points in the fourth.

But if you go to like quarter, which you should, it's very, very comparable and a little bit down.

We did have a strategic announcement to acquire the Regions Insurance Group, which we're very happy about.

This is a great addition from both a cultural and a market perspective.

It strengthens our presence in many of our Southeast markets and importantly, it expanded us into new markets in Texas, Louisiana and Indiana.

And we did increase our common dividend 13.6%, which we're very pleased with it.

On Page 4, if you're following along on the deck, we did have some merger and restructuring charges of $28 million pretax, $22 million after tax, which was about $0.03 per share.

We didn't try to quantify for you the impact with regard to the outage, but Daryl's going to give you a little color with regard to that and its impact as well.

If you look at Page 5, we always like to kind of score ourselves relative to guidance we've provided for you.

So if you look at average loans, our guidance was 1% to 3%.

We came in at 0.6%.

I could say rounded to 1%, but I won't say, but it did come at a little shy of that.

But if you ex the Mortgage Warehouse, which you kind of really need to because it's very, very volatile, then it was an adjusted 1.8%, which is kind of right in the middle of the guidance.

Credit quality was right in the middle, at 41 basis points.

Net interest margin, I would say, was up on GAAP and core.

Noninterest income was a little light.

We had said 1% to 3%, it was 0.8%.

But again, if you exclude the estimated impact from the systems outage, fees would have been up 2%, so it would have been right in middle of guidance.

Expenses were a real positive, down versus the flat we had projected.

And so we've got really good focus on the expense control.

And frankly, expense control for the rest of the year looks good.

If you look at Page 6 on loan growth, we had, what I'd call, strong core commercial loan growth.

Now our total loan growth as you can see was 0.6%, but again, if you exclude mortgage warehouse, at 1.8%.

But importantly, we think if you look at core commercial loan growth, it is 5.2% ex the Mortgage Warehouse, had substantial growth in a number of areas: Commercial real estate was up 7.7%, revolving credit up 5.7%, commercializing leasing up 4.6%, residential mortgage up 3.8% annualized, government finance and Grandbridge experienced double-digit annualized growth.

So it's pretty broad-based in that commercial growth.

So I feel really good about 5.2% core growth in this kind of a market.

And I just want to point out that we told you in January that we expected mortgage to turn in the first.

It did.

We told you we expected indirect to turn by about midyear.

It will.

And so it's going exactly as we had expected, knock on wood, and we feel good about that.

I will give you just a bit of commentary with regards to market.

We've recently -- I've recently visited 10 of our 24 regions in the last few weeks.

I'll tell you, it's very interesting, even with a lot of the conversation coming out of Washington, the attitude of business owners and our officers that deal with them are very, very positive.

They seem to be focusing on what's happening versus what's being said, which is actually a pretty instructive way to think about it.

Our pipeline in all areas is at all-time highs, which is very, very positive as we think moving forward.

So we do expect loan growth to improve as we go forward for 2 basic reasons: the market we think is positive out there and that is going to begin to turn into loan growth as the pipeline begins to move through; and our optimizing portfolios are moving from a big tailwind -- I mean, a big headwind to a tailwind as we projected and that's a good thing.

If you look at the next page with regard to deposits, not a lot to say there.

Our noninterest-bearing deposits were down 6.7%, that's a seasonal adjustment.

It was down a little bit more then to seasonal adjustment would have called for.

So we think clients are beginning to use cash, which we've been talking about.

That's a very positive development.

We're beginning to see just a little bit of line drawdowns, which is a very positive development.

So all of that is moving, which portends the economy beginning to have a confidence to go ahead, make some investments and move forward.

So our cost of funds is moving up some, and we can expect some additional increase.

But I would point out that our betas are still at 17% since they started rising.

Now they were 24% in the first quarter and probably will go up little more, and Daryl can give you more detail on that.

But I'm pretty comfortable that betas are not going to just really takeoff unless loan growth takes off.

When the loan growth takes off, we're going to afford for betas to take off.

So I feel pretty confident in terms of earnings impact about that as we go forward.

Let me turn it now to Daryl for some additional comments.

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 provide some guidance for second quarter and full year 2018.

Turning to Slide 8. Credit quality remains strong.

Net charge-offs totaled $145 million or 41 basis points, up 5 basis points, but down 1 basis points from last year.

We have been running below normal levels for a while, and this increase reflects some normalization.

Loans 90 days or more past due and still accruing as a percent of loans and leases decreased 4 basis points from the fourth quarter and from a year ago.

Loans 30 to 89 days past due decreased 16 basis points from year-end, mostly due to seasonal improvement.

This was up slightly compared to last year.

The NPA ratio was up 2 basis points, but down 6 basis points from a year-ago.

The slight increase was mainly due to CRE and leasing portfolios and an increase on foreclosed properties.

Continuing on Slide 9. Our allowance coverage ratios remained strong at 2.55x for net charge-offs and 2.49x for NPLs.

The allowance to loans ratio was 1.05%, up slightly.

Reported a provision of $150 million compared to net charge-offs of $145 million.

Turning to Slide 10.

The reported net interest margin was 3.44%, up 1 basis point.

Core margin was 3.32%, up 4 basis points.

Excluding tax reform, reported margin would have been up 3 basis points.

The increase in GAAP and core margin reflects asset sensitivity to December rate hike and higher LIBOR rates.

We were successful in replacing our tax-exempt loans higher in the wake of tax reform.

Deposit betas continue to come in lower-than-expected with most of the increase in deposit costs coming from indexed accounts.

Since November 2015, cumulative deposit beta has been 17%.

During the quarter, deposit beta has been higher at 24%.

Asset sensitivity increased slightly due to the increase in free funds and balance sheet mix changes.

Continuing on Slide 11.

Our fee income ratio was 41.9%, down slightly mostly due to seasonality.

Noninterest income totaled $1.2 billion.

Investment banking and brokerage had a strong quarter and was $22 million higher than last year.

Insurance income was up $18 million, mostly driven by seasonality and employee benefits.

Service charges on deposits were down $18 million, mostly due to the system outage we had in February.

We decided to err on the side of the client, refunding many fees whether they were related to the outage or not.

The cost was about $15 million in lower deposit service charges and about $5 million higher operating expenses.

Other income decreased $40 million mainly due to the decline in private-equity investments and certain post-employment benefits.

When you exclude the system outage, we would have had positive operating leverage on an adjusted basis on a linked quarter.

Continuing on Slide 12.

Adjusted noninterest expense, excluding restructuring charges, came in at $1.66 billion, down $39 million from last quarter's adjusted expense number.

Personnel costs included a decline of $33 million due to last quarter's $36 million of bonuses related to tax reform, partially offset by the typical seasonal increase of $25 million due to compensation-related items.

Notably, FTEs declined 576 versus last quarter.

Other expenses were down $127 million, mostly due to a $100 million charitable contribution in the fourth quarter.

In addition, FASB changed how we account for our pension costs.

Only service costs are allowed in personnel expense -- only servicing costs.

That means that the benefit on investment returns now go into other expense.

These costs were down $15 million versus last quarter and will be repeated for the rest of the year.

Merger-related and restructuring charges were up $6 million, mostly due to our facilities optimization.

Continuing on Slide 13.

Our capital and liquidity and payout ratios remain strong.

Common equity Tier 1 was at 10.2%, our dividend payout ratio was at 39%, and our total payout ratio was at 82%.

This reflected $320 million in share repurchases, leaving the same amount in share repurchases authority for the second quarter.

LCR was 144%, and our liquid asset buffer remains very strong at 15.1%.

Looking ahead to CCAR '18, we plan to increase the common dividend while maintaining our capital ratios.

We expect our recent announcement to purchase Regions Insurance will impact the third quarter share buyback.

Now let's look at our segment results, beginning on Slide 14.

Community Bank Retail and Consumer Finance net income was $324 million, up $61 million.

Net interest income was $886 million, down $9 million, mainly due to fewer days partially offset by wider spreads on deposits.

Noninterest income was down $19 million, mostly due to the system outage.

Regarding residential mortgage and loan production mix was 65% purchase and 35% refi similar to last year.

And the gain-on-sale margin was 1.72% versus 1.53% last quarter.

Residential mortgage closings were down 16% similar to the MBA forecasted 17% drop.

Noninterest expense was down $22 million, mostly due to onetime bonus last quarter.

We closed a net of 2 branches and expect to close 80 in the second quarter and plan to close about 150 this year.

Continuing on Slide 15.

Average loans declined driven by seasonality in the Mortgage Warehouse Lending and runoff in prime auto.

As expected, the mortgage loan portfolio stabilized.

We continue to expect prime auto to turn and to begin growing in the second quarter.

Deposit balances increased $420 million with growth in DDA and money market accounts.

And interest-bearing deposit costs were up 2 basis points, implying a deposit beta of about 10%.

Turning to Slide 16.

Community Banking Commercial net income was $270 million, an increase of $36 million.

Net interest income decreased $12 million, mostly due to fewer days, partially offset by higher deposit costs.

We had a good increase in our commercial pipeline, which was up compared to year-end.

Continuing on Slide 17.

Average loan balances were up $642 million, C&I and CRE were up and annualized 6% and 4%, respectively.

Deposits were down $737 million due to seasonal decline in noninterest-bearing deposits.

Interest-bearing deposit costs were up 9 basis points, implying a deposit beta of about 45%.

Turning to Slide 18.

Financial Services and Commercial Finance net income was $144 million, up $8 million.

Noninterest income was down $14 million mostly due to lower trading gains and commercial mortgage banking seasonality.

However, compared to a like quarter, noninterest income was up $21 million, driven by investment banking and brokerage manage account fees.

Continuing on Slide 19.

Average loans were up $492 million, with all lines of business seeing growth.

Deposits were down slightly, reflecting seasonality.

Interest-bearing deposit costs were up 13 basis points, implying a deposit beta of about 65%.

Turning to Slide 20.

Insurance and Premium finance net income totaled $62 million, up $29 million.

Noninterest income totaled $439 million, up $11 million mostly driven by seasonality.

Like quarter organic growth was up 3%, mostly due to a 12% increase in new business.

Regional Insurance will add about $70-plus million in revenue for the second half of the year.

Noninterest expense was down $18 million, mostly due to a onetime bonus we paid in the fourth quarter.

On Slide 21, you will see our outlook.

Looking at the second quarter, we expect total loans to be up 1% to 3% annualized linked quarter, net charge-offs to be in a range of 30 to 45 basis points (sic) [35 to 45 basis points] and loan loss provision to match net charge-offs plus loan growth.

GAAP margin to be stable and core margin to be up slightly.

Fee income to be up 2% to 4% versus like quarter and expenses to be down 1% to 3% versus like quarter, excluding merger-related restructuring charges and other onetime items; and an effective tax rate of 21%.

Looking ahead to full year of 2018, we expect loans to grow in the 1% to 3% range.

This decline from previous annual guidance reflects the actual loan growth from the first quarter.

Taxable equivalent revenues are expected to be in the 2% to 4% range.

This includes the impact of Regions Insurance in the second half of the year.

Expenses are expected to be flat to down 1%, excluding merger-related and restructuring charges and other onetime items.

The improvement from the previous guidance reflects additional expense control initiatives and the reduction in FDI (sic) [FDIC] surcharges in the fourth quarter.

This also includes the impact of Regions Insurance in the second half of 2018 and an effective tax rate of 20% to 21%.

We expect our first quarter revenue momentum to continue, and we feel very confident a flat to down noninterest expenses will result in positive adjusted operating leverage for full year 2018.

In summary, we had record quarterly earnings, positive operating leverage, strong credit quality and excellent expense control.

Now let me turn it over to Chris to talk about some of the investments we're making to serve our clients and grow revenue for the company.

Thank you, Daryl, and good morning.

We are making significant investments, primarily around 3 areas: risk management, backroom infrastructure really to help drive efficiencies and then front room functionality to help drive revenue.

You first look at risk management.

We have invested significant amount of dollars, I think we're pretty transparent around that, in BSA/AML; also in cybersecurity as we've, we think, been a leader in that area; and also in fraud, where we sort of doubled down this past year in fraud expense.

In terms of backroom digital investments, most of that would be in the digital area, and I'm just going to tick through a list of items that we have underway as we speak.

This does -- this is not a all-inclusive list, but represents, I think, a good breadth of what we're doing.

First is to continue to invest in our leading U retail platform.

We're doing things like current debit card controls, where you have spend controls, where you can limit spend to a certain geographic area, on/off controls, et cetera.

One we're really excited about is Siri payment for Zelle.

So if you want to activate Zelle, you can do with through fingerprint or facial recognition.

That should be out in the next 30 to 45 days.

We're also embedding a financial planning tool to integrate it within U, called EMPOWER, for our private wealth funds that we think will be very helpful; and then assorted group of debit card for [auto alerts.]

We have really ramped up over the last 1.5 year our digital marketing campaigns.

They're really increased at a rate of about 70% and about 86% of those have a digital component.

And to give you an example, our retail checking opened online is up first quarter '18 over '17 by 13.5%, business checking is up about 43%, retail savings is up 96% and bankcard up about 70%, all opened online.

So we actually reached a really good success with that.

We began the fourth quarter implementing something we call Voice of the Client, which is a digital platform that integrates with our business lines, and we continue to roll it out this year and all through '19, that really provides near real-time feedback on client issues to our businesses, so they can deal with them immediately.

And we're seeing very, very good success with that in the early stages.

It also allows them the ability through an iPad to be able access that information, as I say, pretty near real time.

We've implemented Zelle.

To date -- our launch date was December 14.

We've enrolled 164,000 clients.

We're opening -- enrolling about 1,400 per day, and we're moving about $1 million a day to include both incoming and outgoing transactions.

In the second quarter, we'll implement TCH faster payments on the receive payment side.

And then, in third quarter, we should be able to originate payments for our business clients.

Another area that we're really excited about, in February, we rolled out a new mobile app for our auto business, really to help our clients self-serve and be able to do things like make payments, make promises to pay, just look at their servicing.

We've had 15,000 downloads and made 11,000 payments just since February '18.

We're implementing something called commercial portal, which is really to simplify the ability for our commercial clients to access our treasury systems really with a single sign on.

We think that's going to be very helpful.

And then, from an Agile DevOps perspective, we've really started couple of years ago, agile teams in the IT area.

And we're really beginning to build out our sort of built -- remove out our old world skills and sort of implementing our new world skills, if you will, to help us really begin to elevate, I'm going to focus on 3 primary areas, initially.

One is, building a small business on-boarding project as well as some retail online accounts or ability to open accounts like home equity, unsecured auto and also digital mortgage platform.

And as Kelly has mentioned in some calls past, we've -- we started really about a year ago now rolling out robotics in our organization.

Today, we have stood up about 25 bots in 10 processes or so and growing fast.

We've got about 75 additional ones we're in the process of evaluating and implementing.

And then e-signature really across the whole company.

So it's a list of digital initiatives just to give you kind of a sense.

Other areas we're really excited about is the front room functionality, and I really comment on a few items we have going on in retail, commercial and also in insurance.

You heard Kelly say that in second quarter, we expect our auto business to turn, and one of the primary reasons for that is, we historically, as you know, had a prime and a subprime business, but we really have not had a near-prime business.

A couple of months ago, we rolled out near-prime and it's really working well, and we've seen a ramp-up in revenue opportunity out of that business.

Also, implementing a branch home equity loan product, [closed in the branches] it runs on our mortgage rail.

Expect to have that up in a couple of months.

And in June, we're rolling out a whole new credit card lineup that really offers, we think, aggressive market-based features, gives travel products to all segments of our clients.

So real excited about that.

In mortgage, we're strongly considering and will likely open, as we have really over the last 2 or 3 years, some additional de novo markets within our large corporate business in St.

Louis, Denver and Northwest, all under evaluation.

We're now participating in syndicated credit through national auto dealerships.

We really began back at the end of last year, and we think that can bring some additional balances in this year.

In insurance, as Kelly and Daryl both commented on, the acquisition of Regions Insurance was something we were very, very pleased about.

We think it really provides us strategic catalyst to really restructure our retail side of our business.

And they have -- it's kind of in our backyard, been in 10 states.

They provide -- we have overlap in 6 of those states.

And in the -- in Arkansas and Pennsylvania -- I mean, Louisiana, where we did not have effective markets, they had acquired the largest agencies in those markets.

So we're going to the new markets in a sizable way, real excited about that.

And then finally, in insurance, we have really got sort of a head start in implementing robotics there.

So really good opportunities in robotics and also machine learning.

So really excited about some of the revenue opportunities and investments that we have made and stand to harvest kind of looking forward.

But Kelly, I'll turn it back over to you.

Thanks, Daryl and Chris.

So in summary, that was a record quarter, record earnings and returned strong core commercial strong loan growth.

Optimizing portfolios are turning, that's a big deal.

We have really strong disciplined expense focus.

But as you just heard, we have substantial future investments to increase our relationship with our clients.

We have positive operating leverage expected going forward.

We have excellent asset quality.

We have strong market momentum.

By the way, there was a recent study that came out that looked at the best markets in the country in terms of economic opportunity, and we're in 7 of the 10.

We have 3 of our largest new markets that we've invested in, that being Florida, Texas and Pennsylvania, all of which are turning and relatively making a big positive benefit as we go forward and have enormous opportunities.

So all of that put together helps me to still conclude our best days are ahead.

Alan?

Thank you, Kelly.

At this time, I'll ask the operator to come back on the line and explain how our listeners can join and participate in the Q&A session.

Yolanda, if you would come back on explain, please?

(Operator Instructions) And our first question will come from Mike Mayo with Wells Fargo Securities.

You're guiding for 2018 for 200 to 500 basis points of positive operating leverage, and you just spent about 10 minutes going through all the investments.

So can you just tell us why you're confident about that positive operating leverage and highlight maybe some other segments including insurance?

So Mike, the way we can do that is because we've been talking for the last couple of years about our consistent focus.

And it's been building in effectiveness with regard to reconceptualizing our business.

So if you look at it just on the surface and say, how could that be, kind of implicit to your question.

Well, how it can be is that we are restructuring, reconceptualizing all aspects of our business, front and backroom.

And so basically, what we're doing is, we're harvesting expenses from the backroom and shifting it to the front room.

It's kind of like -- I'll use an analogy with our board.

It's like you're living in a house and you're building a new house for the future.

You have to take care of that house you're in and you have to invest for the future, but you don't have to spend the same kind of money on the existing house that you're in while you're investing for the house for the future.

So it's about reconceptualization.

That's why robotics, AI, all of that is critical.

The change over the last 15, 20 years, Mike, is this: We now have the tools through advanced automation to be able to do all the things we have to do better, more efficiently and reinvest that money for the future, which will drive client satisfaction and revenue.

Okay.

Well, and by business line, I'm actually here with our insurance analyst, maybe she can ask as far as the improving efficiency or what you expect in the insurance line, you said the Regions Insurance acquisition could perhaps help you restructure the retail insurance.

But [Elise Greenspan] my colleague, on the insurance thing.

Yes.

So my specific question on insurance was hoping you can give us more color on the pricing environment.

You guys seemed a little bit more optimistic in the fourth quarter.

Did you see improving prices in the first quarter?

And how do you see the improving pricing environment translating into a pickup in your revenue growth within your insurance business during the balance of 2018?

Sure.

It's a great question, very insightful.

So in the first quarter, we absolutely did see a pickup in pricing.

We saw, as you probably heard me on the fourth quarter, talk about pricing in the down 2% to 3% kind of range.

We actually saw pricing in the up 2% kind of range following the hurricanes we saw in the fall.

And I'll talk about outlook in just a minute, but more about the first quarter.

And our retention really is industry leading, in retail in 92%, 93% wholesale is probably more in the 75% range, which is also very strong.

But one thing we also saw, which is driven by just a better economic environment is, we had a 11.8% new business production.

I haven't seen that kind of business -- new business production in probably 2 or 3 years.

And that is purely driven by new exposures and opportunities in the economic market.

By comparison, fourth quarter was 3.7%.

So our core organic growth really jumped from what would have been last year in the 1.5% range to 3% given those factors, the pricing, the new business and the retention.

On the other side of that, we also have a number of operating opportunities.

One is very obvious to you was the acquisition of Regions.

You might recall, if you paid attention to our business over the last, say, 5, 6 years, we've done several strategic large-scale items.

We had CRC wholesale.

In 2012, we acquired Crump, which frankly was Marsh's old wholesale business.

And then in '15, we acquired, Swett & Crawford, which was Aon's old wholesale business, and we really have scaled up in that channel.

There's not a lot else we need to do there.

We are now focused on trying to do something similar in retail and the Regions Insurance gives us an opportunity to do that.

It really -- it's about 15% of the size of our retail business.

So it enables us to -- with the business in our backyard to really begin to do some of the same scaling we did in wholesale.

We've already, as you heard me say, had robotics and machine learning with some really good opportunities.

Some areas where we already have perfected workflow, we just need to go back now and have bots kind of turn into some of the digital workers, if you will, and there's good opportunities there in the backroom, I would say, to drive margin over the next 2 to 3 years.

In terms of outlook, which I think is where you were headed with your question.

We expect just through our normal seasonal pickup, next quarter commissions to be up in the 7% to 8% range.

We expect economic expansion continue to be good, which we think is going to help drive unit growth in the new business production that we've already seen.

And I should say that the contribution is coming from both retail and wholesale.

In this insurance cycle, wholesale obviously is stronger than retail.

You follow that just because following large catastrophes, capital tends to lean toward the wholesale side of the business.

Still pretty tough to impact -- the full impact of the catastrophes, given excess capital to market.

We know it is kind of centered on that $135 billion, $150 billion in losses, but you also have offsetting that fresh capital coming into the market.

So I can just tell you that we're up a couple of percent currently.

What we're seeing is property rights continue to increase at a modest pace.

Carriers are really trying to get casualty rates up and professional's fairly flat.

You're seeing reinsurance markets raise their rates in kind of the low- to mid-single digits.

But we think there is a good opportunity to kind of hold this sort of 2% up, which is a lot different than a 2% to 3% down kind of market for the balance of the year.

Now that could change.

We'll have new reinsurance rates come out in the middle of the year.

But we feel good about pricing.

We feel good about our own retention is industry leading, our business production is as good as it's been, and we've got a number of operating items to work on the bottom line.

We really feel pretty positive about being able to drive better operating performance over the next couple of years in this business.

We'll move next to Gerard Cassidy with RBC.

Hello?

Can you hear me?

Sure, we can hear you, Gerard.

All right.

It was a sound there on the line.

Kelly, you mentioned that you've been out in your markets over the past couple of months and there is a lot of optimism.

What do you think is going to be the catalyst to take that optimism to actually see an acceleration in commercial loan demand through your franchise?

Gerard, I thought a lot about that.

And I think it comes down to what I called a boomer effect.

So most of the businesses in this country are either owned or run by boomers.

And when 2008, '09 came along, boomers -- most of which came from fairly meager backgrounds, not all, but most.

They got scared because they had built a nice comfortable position -- financial position.

They lost half of it.

They got scared.

And so it's taken them a while to get their confidence back and be willing to actually execute.

So what you're seeing now is optimism there, confidence is there, but they're very deliberate in evaluating all those projects.

When I hear that discussions is like -- normally, they might have taken 2 months to evaluate it, now they're taking 6 months to evaluate it, just cause of being really cautious.

But I think all of that's just about to play out.

And so true to their nature, these boomers are still -- they're achievers, they're growers and they're not go quit.

And so I think it's right around the corner in terms of turning into actual loan executions and plant expansions, equipment purchases and enhanced growth in the economy.

We'll see, but by -- I'd say by third quarter, you'll begin to see it evidenced in loan growth for us and others and in growth in the economy.

Very good.

And then, following up about loan growth, your commercial real estate loan growth was decent in the quarter.

Can you share with us two things?

One, what type of commercial real estate loans are you having the most success with?

And in your region, geographically, are you seeing more growth in Florida versus North Carolina?

And then I don't know if Clarke's in the room, but if he is, is there any comments you can make about the underwriting?

What are you guys seeing in terms of underwriting standards in the commercial real estate area?

Gerard, this is Clarke.

I'm definitely here.

As far as areas of focus for us, we're seeing some really nice opportunities as the economy is transforming more digitally in e-commerce, much more in the industrial and the distribution -- large distribution centers, so we're taking advantage of that.

And I would say that's pretty much across the board in a lot of our markets, across the Mid-Atlantic and the Southeast.

We're also doing some hospitality, very conservative select retail, things like single-credit tenants, local-anchored grocery, conservative opportunities there.

And then, we are still seeing some in the right markets, certain selective multi-family opportunities.

So I think for us, it's fairly widespread.

So I wouldn't say one market over another stands out.

I think it's pretty broad-based.

Now as far as underwriting considerations, we are being very careful.

One of the things that we are seeing that is a little unique right now is it seems a little counterintuitive.

Some of your construction and development opportunities are probably maybe lower risk than some of the permanent, in the fact that you can get really strong equity sponsorship and terms if you're willing to take the seasoning and lease-up risk, and if it all works, then your ongoing cash flow coverages and debt yields look very strong.

Whereas -- but if a loan is fully leased up right now, the market's extraordinarily aggressive as far as the amount of leverage and the low coverages they're willing to take.

So we're little more cautious on the permanent side, and we're letting a lot of that go to the secondary market.

But overall, I think we're -- our underwriting standards are pretty consistent with a more through-the-cycle look.

Clarke, in the permanent market, are you referring more to the insurance companies then and other types of financial companies rather than other banks?

Or is other banks included in that as well?

It's the nonbanks, it would be the insurance companies, any capital markets executions, and then, a big one on the multifamily side are the GSCs.

We'll move next to Erika Najarian with Bank of America.

So really appreciate some of the specifics that you laid out in terms of your investment spend.

And you have kept your efficiency ratio stable at 57%.

And your guidance for 2018 is pretty clear.

As we look to 2019, the Street has a 58% efficiency ratio, which is ahead of what you have posted over the past 2 quarters.

I'm wondering if you could sort of just take what you told us a step further, and maybe talk about the impact on efficiency as the revenue opportunities or the -- that you mentioned -- that Chris was listing out, actually become more mature in '19?

And also, what that means for the expense trajectory beyond this year?

So Erika, I think what you're hearing us say is that we are making these investments, a, we are substantially paying for these investments by expenses we're extracting from the old business, the backroom, if you will.

You're right, as we head into '19, those investments will turn into revenue enhancements.

And so I would say, if the Street's thinking 58% efficiency for '19, the Street's too high.

So we see as we move through '19, assuming revenue does as I projected, I'm projecting the economy is getting better, so I'm assuming decent revenue growth, which is obviously a part of that equation.

But with our tight control of expenses, even with these investments and with these investments turning into more revenue and the economy doing better, I think what we are guiding you towards is 57% to down in terms of efficiency ratio versus up.

And in that context, it seems as if you have a very disciplined process for allocating investment spend.

Can expenses stay similarly flat in 2019 as you contemplate future expenses?

Erika, I got the same question in January.

I'm not going to make '19 projections at this point.

But honestly, I think there is a decent chance as we look through '18 and '19 that (inaudible) the best way to think about our expenses are kind of flattish to downish.

I don't see any major driver that's going to be driving expenses up.

I think we can make all the investments that we described by harvesting the expense opportunities on the other side.

And frankly, we're just really, really intense.

I'm really intense about expense control.

And so yes, I think we can think in terms of that.

I don't want everybody to say, you made a projection for '19, I'm not doing that, it's too early.

But the concept I'm willing to commit to is that I see forward-looking focus on expenses very constant as we head through '19.

And if I could just slip one more in, I really want to hear what you think, Kelly.

The Fed's proposal for the stress capital buffer seem to be positive for high dividend paying banks like BB&T and also regional banks like BB&T.

And I'm wondering if the stress capital buffer proposal poses or rather passes as written, does that change how you're thinking about capital strategy or capital allocation going forward?

Yes, so I don't think that changes the way we think about because we -- our stress capital is under the 2.5% [of the floor.] So that affects some of the big banks that take a lot of risk and (inaudible) different kind of organization than we are.

So all the math of that doesn't change.

So basically fundamentally still 7% floor for us, 4.5% plus 2.5% is 7%.

So the way to think about our capital is, we've got a 10.2%, call it, a common equity Tier 1. We got a 7% floor.

We really got about 1% that we're holding in reserves for OCI when we pop up at [250], which we will at some point.

So we're really at 9% versus 7.5%.

And so the debate is, can you give back some of that 1.5% as you think about moving forward?

We're having a lot of discussions about that.

We're also very focused on our tangible capital level, however.

And so while I would say there is some opportunity for some additional capital deployment, I'm not ready to commit at that at this point.

We'll hear next from Steve Moss with B. Riley FBR.

Just want to flesh out the loan growth outlook here going forward.

Couple of things.

Wondering if you could quantify the increase in loan pipeline this quarter?

And also, how we should think about loan growth over the next couple quarters?

Will it perhaps be a little bit more weighted towards commercial real estate in the near term?

And then perhaps broader-based and higher in the second half of the year?

So the pipeline is broad-based, and frankly, it continues to build every quarter.

And -- so the real key is the -- as to the questions that related earlier, the real key is when will the pipeline turn into actual loan growth?

As I said, I think that's being a bit protractive now because of the psychology I've described, but I think that's moving so that you're getting ready to see that pipeline turn into loan growth.

It'll be very similar kind of growth composition, however, as you're seeing today.

It's not going to be slanted more towards real estate, towards anything else.

With one possible exception, that is, we have executed a new national CRE strategy, frankly, on our Grandbridge platform, and I think, you know, Grandbridge is one of the very best in the industry.

We've been constraining it in the past in terms of its traditional [GSC] kind of strategy.

We've now opened it up under our very experienced leader [Tom Denor] to a national strategy, which will produce relatively more high-quality seasoned CRE types of asset opportunities for us.

So you may see some lift in CRE because of that different strategy.

But that's a strategy versus a market change.

The general market is going to continue to give us broad-based loan opportunities as we've experienced.

The other thing, Steve, is on the retail side.

You saw residential mortgage start to grow this quarter.

That will continue.

We expect our indirect portfolio to turn in the second quarter.

It's been running off now for a while, and we expect that to start to grow in the third quarter.

So that will be a big difference.

And then, in our direct retail, we're launching some new products that should help that stop running off and also start to grow later in the year.

So I think on retail coupled with that commercial and CRE, I think you're going to see much more robust loan growth out of us in the second half of '18.

That's helpful.

And then, you guys have steadily continued to increase your asset sensitivity over the last couple quarters and has showed up in the margin here.

Just wondering, should we expect further increases in your asset sensitivity position?

And just how to think about the margin over the next several quarters with additional hikes?

We are a little bit more asset-sensitive.

We are trying to become a little bit more asset-sensitive, but it's really a function of the assets we're putting on the books and what happens to funding.

So I would say, we will stay asset sensitive, and if we move a little bit more that will be a positive thing.

It's hard to call because so many moving parts of what goes on there, but we are trying to become a little bit more asset sensitive.

Our next question will come from John McDonald with Bernstein.

Just wanted to follow-up on the NIM and the NII, Daryl.

What led the core and reported NIM to do better than you're expecting this quarter?

And what are some of the puts and takes for the core NIM to be up next quarter in your outlook?

Yes.

So John, I think the key drivers obviously is we continue to outperform on deposit betas.

And deposit betas basically came in, we only were up 24% in the quarter.

We expect that to be higher than that.

So that was a positive.

Our credit spreads that we made on the commercial side, all kind of increased.

C&I spreads were up, CRE spreads were up.

We're doing a good job in retail.

So credit spreads seem to be positive.

So while the volume's not showing up yet, our spreads that we're putting on the balance sheet is also positive.

As we go forward into the year, we expect -- right now, our forecast has 2 more rate increases, one in June and the other in September and then we have one in '19.

So we should benefit as those occur.

And as we become a little bit more asset sensitive, we believe that will continue to have positive core growth in net interest margin and think will probably eke out some growth in reported and GAAP margin later in the year, possibly.

Great.

And could you remind us, Daryl, at the current level of betas that you're seeing now, how much does 125 basis points hike help you?

And then, what kind of terminal beta assumptions are you guys using when you look ahead?

So our margin this past quarter from the December rate hike, we would have been up 3 basis points this past quarter.

We didn't have the adjustment on the tax-exempt assets because of the corporate tax rate change.

So I would say on a [25] move right now, we're seeing 3 basis point expansion in margin, plus or minus, but it's around 3 basis points.

As far as terminal betas go, I think in our disclosures when you look at the segments, it's sliced and diced, very easy to see.

So on the retail side, right now our beta is about 10%.

That will continue to climb over time, but that's still going to stay really, really low versus historical pieces.

On the middle-market commercial areas, those betas are in the mid-40s today.

They're probably going to continue to go up maybe 50% plus, that's about right.

And then, on the more rate sensitive that you see in our corporate and wealth areas, we're at 65% and that's probably going to go in the 70s.

So we aren't too far away from terminal betas on the 2 later segments that we have, but it's the retail is what's staying a lot lower.

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

I was wondering if it's possible to parse on the loan growth how much lift you might get from new products or kind of the expansion, for example, into the near prime and auto?

Just those efforts collectively, I guess, the home equity and I think there was 1 or 2 others you mentioned as well.

But how additive do you think that could be as you're thinking about loan growth picking up in the back half of the year overall?

So Matt, this is not an exact science.

But in our forecast, I would say that we're going to have more growth.

If we grow, call it, in the 2%, maybe 2% to 3% range for the rest of the year, call it, we're probably going to have the commercial and CRE be in the 4% to 6% range.

And then, the retail areas, including the resi mortgage portfolios probably be in the 1% to 3% range, if you kind of look at it that way.

And we're split about 50-50 from that, if that helps.

Okay.

That is helpful.

And then, I guess, just how meaningful do you think some of these expansion efforts or however you wanted to define them?

Obviously, auto is not a new product but is a new target of customer.

I mean, how big can some of those efforts be as you think out, I don't know, a couple of years or so?

Matt, it's Chris.

Near-prime, kind of tough to know 3 or 4 years out.

I mean, it's already just out-of-the-box in a couple months at $30 million, $40 million a month.

So I mean, I think it can continue to grow.

Where it kind of goes is tough to call.

Honestly, it depends a lot of on kind of the auto market, et cetera.

But what it does for us is it provides a real filling in for a void that we've had.

And we are already talking to sort of both sides prime and subprime, so it really is a pretty quick startup.

The other thing I would mention is, I didn't mention earlier, before that business, we moved from a flat fee to back to dealer retention, which has also had a nice pop.

We started that really at the end of March, and we're only probably 2/3, 3/4 through taking that back to the dealership.

So that's also going to have a nice move for us.

And we've had very, very good receptivity.

So that -- all that is a good drive.

The home equity loan in the branch is something we used to have before QM back in 2014.

And frankly, we're just putting it back in or forcing it back in because it's a product we did for years that could be substantial.

For years, it was substantial.

We think that we get a run rate back there that it will be -- how to quantify it kind of hard to know.

But conceptually, I would say that if you think about our growth going forward, about half of the lift will be from, I'd say, the broad-based markets, the traditional execution, the regions, et cetera, et cetera, and about half of the lift will be the improvement of the optimizing portfolios, the new products initiatives that Chris talked about.

All of that rolled together will be about half because we got a lot of new stuff happening.

So whatever the exact number is will be whatever it will be.

As I've told you, we think it more in the 2% to 3% kind of number.

But we're not counting on the whole market lifting.

We are presuming the market's going to -- may not deliver.

If the market delivers more, that's even great, but with all these new initiatives in to make sure that we cover ourselves in the event the market doesn't gives us what we hope it would give us.

And I didn't even comment on our full-service brokers, Scott & Stringfellow and Will, who work together to move into markets commercially much like we have corporate for the last 3 or 4 years.

I mean, we're going into Cincinnati, Fort Worth, Texas and Nashville and Tampa.

And both of those businesses have revenues that are up 15%, pretax income up 30%, as we're running right now.

So we got -- yes, we got really good momentum as we kind of move through these new markets.

Our next question will come from Ken Usdin with Jefferies.

This is Amanda Larsen on for Ken.

Can you talk about deposit growth and overall balance sheet size as we progress through '18?

I think the average deposits were down 3% year-over-year.

And you took down the '18 loan growth guidance modestly.

Do you see a similar amount of average earning asset growth and some improvement in deposit growth rates?

Yes, I think it's real important to manage that, as our loan grows, our deposits will grow.

They're really attached at the hip.

And we really try to manage that process so that if we start getting more growth on the lending side, we're going to have more core deposit growth.

We're doing a great job just attracting transaction accounts.

Chris mentioned that all the digital marketing that we're doing and the account growth initiatives that we have going on with our retail and corporate areas, we're getting great growth in our net account growth there.

So that's going to continue.

And then, on the margin, we are starting to finally grow our CD deposits.

Those haven't grown in a long time.

They actually grew this quarter on a core basis.

So as rates go up, we're able to attract some growth there, that's helping our asset sensitivity.

So that's a positive.

So I would say, I would plan for deposits to grow in sync with the loan growth that we're going to have.

Okay.

And then therefore, average earning assets should also grow in '18?

Yes, I mean, as that -- average earning assets will grow as loans grow.

I mean, that's the function.

As we are more successful in growing loans, it's going to drive earning assets.

The investment portfolio will not be a growth opportunity for us and might be flat to down from that perspective.

And we really just want to optimize that earning assets that we have on our balance sheet and our returns and really drive profitability in the company.

Okay.

And then can you talk about the systems outage.

What exactly caused it?

And what you learned from going through the experience of having the outage?

Are you thinking about tech and infrastructure spending any differently?

Given your improved expense outlook for '18, I would assume your plans have not changed.

But if you can give us some detail on your thought process there, that would be helpful.

Well, the system outage was a significant event in terms of some client impact.

I will remind you, however, that it actually was a fairly short-duration event.

I mean, it happened like on Thursday afternoon and by Friday afternoon, we basically were up and running.

It took a little bit longer for some of the wrinkles to work out, but it was a fairly short event.

It was a very simple but serious equipment malfunction.

It was new equipment.

And it was just an unfortunate event.

I personally went over a couple of days late and examined it myself.

I'm not going to get into detail because of the discussions that are going on that prohibit me from discussing the exact detail.

But I will tell you that it was a very simple thing that should cause no alarm with regard to our infrastructure in terms of IT and its resiliency and its redundancy.

In fact, Amanda, we are just finishing a $300 million new data center that has a duplicate redundant data [hauls,] which is where this occurred.

So we have already made the investment for the high level of resilience and redundancy.

So there is no additional investment required to respond to that event because that -- the cost structure was already built into place.

And the event occurred because some of the investments that we made were not fully executed on the way they should have been.

The learning from that is and working with all the parties that are involved in these new big investments, there will be mistakes made.

And the only thing you can do is to increase your focus in terms of managing the risk around that and checking and double-checking.

I've used analogy with the board and maybe to help you is kind of like buying a new car.

I hate to buy a new car.

I'm still driving a 2001 Lexus with 140,000 miles because I hate buying new cars.

Because every time you buy a new car, you got to go through about 3 months and working out all the wrinkles.

And so it's fine when you work through the wrinkles, but it's a hassle going through the wrinkles.

And that's just kind of what you're getting a bit off here is that $300 million great, high quality new investment that we made dramatically improves our capability for our clients, our resilience, our redundancy, reduces our risk and it's just that simple.

Our next question will come from Brian Klock with Keefe, Bruyette, & Woods.

I just wanted to follow up on 2 things.

One, Kelly, you mentioned that 2019 is a little bit further out.

But you did say that it's possible to have flattish to down-ish expenses in '19.

Should we think about that including full year of operations of the Regions Insurance acquisition of those operations or is that a core?

No, that includes that.

Okay.

Okay.

And a follow-up on that insurance business and the potential impact on capital.

I guess, is there any disclosures or give us an idea of what kind of a purchase price you might have paid?

Or what kind of impact it could have on the intangibles created from that deal?

Brian, it's Daryl.

We do not disclose the terms of the transaction.

We don't view it as a significant number and feel that we're going to basically -- all of our guidance incorporates the revenue and the expense that we gave.

And it's going to impact some of our buyback in the third quarter.

Brian, it's a situation where in these deals you want to stay active in the future and you're competing with private equity and it just sort of needs to stay that way.

Our next question will come from Betsy Graseck with Morgan Stanley.

Okay, so just to make sure I understand on the acquisition piece, the revenue expenses that's in the guidance that you already gave for the full year 2018 because it's going to hit in Q3, right?

Is that correct?

Yes.

Yes.

We plan to close it early third quarter.

Okay.

And then, I guess, the only reason why this is getting asked a lot because it does have some impact on the buyback, but is this smaller than a breadbasket impact?

Or is this, "Hey, we should take the buyback out in 3Q?"

Betsy, do you want Daryl to have to repeat exactly what he just said?

Depends on what you want your EPS to look like.

You know our bank very well, Betsy.

You'll figure it out.

Yes.

All right, fine.

And then, just lastly, when you were mentioning about how the competition with PE, et cetera.

Is that -- do I sense a tone from that on, "Hey, there's other opportunities in insurance brokerage as well?" And that -- because I thought there was a little bit of a slowdown in the acquisitions in insurance brokerage.

But I'm wondering if the conversation that we've just been having suggests that we should see more in the coming quarters?

Yes.

We've had for years sort of our cap, if you will, at 20%.

This gets us to 17%, 17.5%.

So it kind of does what we need to do.

There is no real need for us to do anything other significant.

If there was a small something that had a product or a smaller geography that made mention -- I mean, made sense, then maybe that would make sense.

But there is no real reason for us to do anything large.

We're fifth largest in the U.S. and the world as it is.

I think, our focus is really to improve the profitability of the business as we sit.

Right.

So what did the footprint that Regions had give you?

Because there is some overlap there already, but I know they extend into more of the central area of the country and upper Midwest.

Was that a geography that you didn't have before?

Or what was it they had that you could benefit from?

Yes, there is 10 states.

We overlap in 6. We did not have Arkansas, Louisiana.

They have a little bit in Indiana, but the biggest is Arkansas, Louisiana.

They bought the largest agencies in those markets.

So we kind of go in with the substantial kind of opportunity.

They were also in parts of Tennessee, we weren't in, like Memphis.

And so those are meaningful to us.

Ladies and gentlemen, that will conclude our question-and-answer session for today's call.

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

Okay.

Thank you.

And thanks for everyone for joining us today.

Hope you have a good day.

This concludes our call.

Again, that will conclude today's conference.

Thank you once again for your participation.

And you may now disconnect.