Truist Financial Corp (TFC) 2018 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Earnings Conference Call.

(Operator Instructions).

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

Thank you, Gail, 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 revenue the results for the second quarter and provide some thoughts for the third quarter and the remainder of this year.

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 reference a slide presentation during our call today.

A copy of the presentation as well as our earning's 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 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 the presentation contains certain non-GAAP disclosures.

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

And now I'll turn it over to Kelly.

Thank you, Alan, and good morning, everybody.

Thanks for joining our call.

We always appreciate your time and attention.

So I'd say the second quarter was overall very strong, particularly when you look through all the parts.

We had record earnings, record returns, strong revenues, very good expense control, great asset quality and improved loan growth.

Net income was record $775 million or up 22% versus the second '17.

Excluding mergers, it was a record $792 million.

Diluted EPS was $0.99, up 28%.

Adjusted diluted EPS was a record $1.01, which was up 29% versus the respective quarter.

I would point out that if you looked at the pretax ex merge earnings, they are up 6% versus the second quarter '17, which is simply showing that independent of the tax reductions, our business is meaningfully improving.

Our ROA, common equity and return on tangible were 1.49%, 11.74% and 19.78% respectively.

And I think importantly if you look at adjusted ROA, ROCE and ROTCE, it was 1.52%, 12.01% and a very strong 20.2% on return on tangible.

Importantly, we did achieve positive operating leverage in the second and also quarterly revenue totaled $2.9 billion, which was up 9.2% annualized compared to the first -- there was [insurance] seasonality in there but it's still very strong revenue quarter.

Loans held for investment did perform very, very well at 3.5%, so we're seeing the turn that we have been expecting over the last 2 quarters or 3 quarters.

Net interest margin increased 1 basis point to 3.45% and our core was up 2 basis points to 3.35% (sic) [3.34%].

Had a strong fee income ratio of 42.5%, which was up from 41.9% in the first quarter.

Adjusted efficiency ratio was 57.4% versus 57.3%, so about flat.

Adjusted noninterest expenses totaled $1.6 billion, which was a decrease of 2.1% versus 2017.

I'm very pleased with our expense discipline.

I would say to you that our flat guidance for the year, remember, includes Regions so is net down, which is, I think, very good when you hear in a minute when I'll talk about a lot of the things we are doing.

Credit quality was just great.

NPA ratio was 0.28%, decreased 2 basis points.

Charge-offs were 30 basis points versus 41 in the first, and 37 in second, last year.

So great credit quality.

If you're following along, I'm on Page 3. In terms of strategic highlights, I would point out we did close the Regions Insurance deal, which was a really attractive deal, we closed it on July 2. Great addition from both a cultural and market perspective, strengthened our presence in many southeastern markets, and importantly, expanded into new markets in Texas, Arkansan, Louisiana and Indiana.

In our capital plan, we did not have, as you know, a Fed objection.

We have an 8% increase in quarterly dividend planned on top of the 13.6% increase that we did in the first quarter and up to $1.7 billion in share repurchases -- some of that we used in the Regions' acquisition.

But if you look at the combination of the first and the projected third quarterly dividend increase, it's up 22.7% on the fourth quarter of '17.

We're maintaining a strong and growing dividend for our shareholders is very important, and we are executing on that.

On Page 4, we just had fairly straightforward selected items, mostly related to real estate losses in closing branches and backroom facilities, and that was about $0.02 a share.

On Page 5, let's talk a little bit about loan growth.

[Reverse these] that we've seen the turn that we've been expecting, so we had 3.5% growth in loans, very strong in C&I, which was up 6.3%.

Strong performance in a number of areas -- our Corporate Banking, Mortgage Warehouse Lending.

Sheffield was up 32% annualized and that's seasonal but still strong.

Commercial equipment capital was up 16% annualized, dealer floor plan, premium finance.

I'll point out Community Bank was up 3.5%.

That's a big deal because you recall, over the last several quarters, I've been talking to you about how for the last number of years, Main Street has been kind of dead in the water, and we've been expecting it to recover.

Well, it is recovering.

Optimism is strong; equipment purchases and other types of acquisitions and purchases are happening.

So we're really pleased to see Community Bank.

That's an engine for our company.

CRE is up 2.8% annualized and that's very, very strong.

I would also point out that our end-of-period loans are up $3 billion greater than end-of-period loans for the first quarter, which is 9% annualized.

Our auto portfolio made the turn in the quarter as we expected.

Our mortgage loans grew on average as we expected.

So really both optimizing portfolios have now turned and that will be a positive push in terms of more total loan growth as we go forward.

So when we think about loan growth, I'll get Daryl to talk about the -- our guidance in a little bit, but I personally think that loan growth should be plus or minus 4% as we go into the third, barring any major changes in the economy.

If you look at Page 6, in terms of deposits, it was a healthy quarter for us.

I'm very pleased our noninterest-bearing deposits or DDA growth, we were at 4.3%, that's very strong compared to the industry and reflects a lot of our integrated strategies that are really paying dividends now.

Our noninterest-bearing deposits grew very strongly, increased $567 million.

Percentage of noninterest-bearing deposits increased to 34.2%.

I do want to make a comment about betas.

So cost of interest-bearing deposits was 57% -- or 0.57%, up 11 basis points or a 41% in flat beta.

I would just comment to you that, that was a bit outside maybe from what you expected.

But we have frankly a few markets that we were getting some outside competition, and we made a conscious decision to react in those markets.

That's not a kind of normalized beta increase; that was more of a marketing strategic change.

So I would expect the betas to lower from that level, Daryl will give you a little bit of commentary on that, but I would expect to see that lower.

So I know that looked a little outsized, too, but that's why that is.

I want to make just a comment, before I turn it to Daryl, in terms of the economy in general what we're seeing out there.

It's really very positive, even very strong.

I've just completed 23 of our 24 regional visits.

As you know I go out and spend a whole day in the region; I did 2 of them last week.

When I talk to business CEOs, they are very optimistic.

They are spending and planning to spend on CapEx.

Interestingly, competition's heating up, they are facing intense wage pressure and difficulty in finding the people that they need.

One construction CEO told me that in certain cases he was having to raise prices 25% to get the kind of people that he needed.

So my takeaway from that, from an economic perspective, is we can expect higher inflation and higher rates as there's no incongruent information out there contrary to that, so I think that's most likely as we look forward, which is good news for the economy and good news for banks.

I'm going to comment a little bit later on some of our key strategies that I think are very important in your view of how things are going at BB&T, but for right now, let me let Daryl give you some more color in terms of more the numbers.

Thank you, Kelly, and good morning, everyone.

Today, I'm excited to talk about our excellent credit quality, improving margins and loan growth, strong expense control and our guidance for third quarter and full year 2018.

Turning to Slide 7. Credit quality remains very strong.

Net charge-offs totaled $109 million, down 11 basis points.

We had improvement across most loan categories but indirect loan charge-offs drove most of the decline.

Loans 90 days or more past due and still accruing as a percent of loans in leases decreased 4 basis points from both link and 9 quarters.

Loans 30 to 89 days past due increased 5 basis points due to seasonality and 1 basis point from a year ago.

The NPA ratio was 28 basis points and matched the lowest level since 2006.

We saw declines in nonperforming assets in most categories.

Continuing on Slide 8. Our allowance coverage ratios remained strong at 3.49x for net charge-offs and 2.74x for NPLs.

The allowance-to-loans ratio was 1.05%, flat from last quarter.

We recorded a provision of $135 million compared to net charge-offs of $109 million.

The provision was $26 million higher than net charge-offs, contributing to a flat allowance-to-loans ratio with period-end loans up more than $3 billion from March 31.

Turning to Slide 9. The reported net interest margin was 3.41% -- 3.45%, up 1 basis point.

Core margin was 3.34%, up 2 basis points.

Both increases reflect asset sensitivity and higher short-term rates.

The deposit beta for this quarter was 41%, slightly less than our modeled about 50% beta.

In addition to the index accounts repricing this quarter, deposit costs were impacted by many rate specials in many of our markets.

We expect this to abate in the next quarter.

Since 2015, our cumulative deposit beta has been 24%.

Asset sensitivity decreased due to changes in our loan mix and deposit mix, offset by the decline in the investment portfolio.

Continuing on Slide 10.

Our fee income ratio was 42.5%, up slightly mostly due to seasonality.

Noninterest income totaled $1.2 million.

Insurance income was up $45 million, mostly due to seasonal increase in P&C commissions.

We don't expect prior year storms and other events to significantly impact profit-based commissions for the rest of this year.

Our July 2, Insurance Group acquisition will benefit insurance income starting the third quarter.

Keep in mind that insurance income is seasonally lower in the third quarter.

Service charges on deposits returned to normal levels following last quarter's system outage.

Mortgage banking income declined $5 million primarily due to gain on sale margins declining 30 basis points, mostly due to retail originations.

Investment banking and brokerage income declined $4 million, mostly due to deal timing.

Turning to Slide 11.

The adjusted expense came in just under $1.7 billion or $38 million.

Personnel costs increased $35 million due to annual merit increases and the increase in performance-based incentives.

FTEs declined 126.

The initiative to reduce the amount of space continues to have a positive impact on occupancy and equipment expense, down $7 million.

About 740,000 square feet of BB&T occupied space has been vacated since January.

Other expenses were up $12 million, mostly due to the increase in the Visa indemnification reserve, which was not expected.

Merger-related and restructuring charges were down $4 million.

Nearly all these costs were related to real estate losses, due to our branch closing strategy.

Expenses will include the impact of Regions Insurance acquisition starting in the third quarter.

Well-controlled expenses contributed positive operating leverage versus second quarter of 2017.

Continuing to Slide 12.

Our capital, liquidity and payout ratios remained strong.

The approved capital plan includes a dividend increase and share repurchases.

Our $2.9 billion capital plan is similar to what we did last year, weighted more heavily towards dividend payout.

The 7.5% dividend increase represents a cumulative 22.7% increase since the fourth quarter 2017.

The Regions Insurance acquisition will impact third quarter share buyback.

Now let's look at our segment results beginning on Slide 13.

Community Bank retail and consumer finance net income was $377 million.

The $53 million improvement was driven by balance sheet growth, improving deposit spreads, seasonal increase in card-based fees and deposit service income, offsetting the negative impact from the February system outage.

Residential mortgage originations were up 17%.

Our production base mix was 77% purchase and 23% refi.

And the gain on sale margin was 1.40% versus 1.72% last quarter.

We closed 80 branches and plan to close about 85 more later this year.

This strategy continues to help us control expenses and provide more funds to invest in our businesses.

Continuing on Slide 14.

Average loans increased $721 million driven by residential mortgage and a seasonal pickup in the Mortgage Warehouse Lending.

As expected, the auto portfolio has stabilized, and we expect it to grow going forward.

Deposit balances increased $983 million [when] growth in both DDA and CDs.

The deposit beta was 19%.

Turning to Slide 15.

Community Bank Commercial net income was $277 million.

A $7 million increase was mainly due to improving deposit spreads.

The commercial pipeline was up compared to both link and like quarter.

Continuing on Slide 16.

Average loan balances were up $268 million.

Growth in C&I, construction loans were partially offset by the decline in income producing property loans.

End of period, loans grew 4.4% annualized.

Competitive pressures on loan pricing remain as we saw a decline in loan spreads.

Deposits were down $203 million due to decline in public fund deposits, which was partially offset by increases in commercial deposits.

The deposit beta was about 67%.

Turning to Slide 17.

Financial Services and Commercial Finance net income was $145 million, driven by loan growth and improving deposit spreads.

This was offset by slower fee income due to the timing of investment banking deals and an increase in incentive-based compensation.

Continuing on Slide 18.

Average loans were up $292 million and deposits were flat.

Corporate Banking, Wealth and Grandbridge all showed good loan growth.

Interest-bearing deposits were up 20 basis points and a beta of 74%.

Turning to Slide 19.

Insurance Holdings and Premium Finance net income totaled $73 million.

The $11 million improvement was driven by seasonality and [C&C] commissions, partially offset by the related increase in incentive-based compensation.

Like quarter organic growth was up 5.2%, mostly due to a 15% increase in new business.

The Regions Insurance acquisition will add about $70 million in revenue for the second half of this year, and its EBITDA margin for the second half of 2018 will be about 20%.

Turning to Slide 20, you will see our outlook.

For the second quarter, we met all of our guidance except for noninterest income, which we talked about publicly last quarter.

This was mostly due to mortgage.

Investment banking was also a little soft this quarter due to the timing of some of the deals closing.

Looking to the third quarter, we expect loans to be up 2% to 4% annualized link.

Our guidance has improved in light of the quarter's performance and strong momentum, such that the high-end of the range plus or minus 4% looks promising.

Net charge-offs to be in a range of 35 to 45 basis points.

The loan loss provision to match net charge-offs plus loan growth.

The build this quarter is the result of strong end-of-period loan growth, which positions us well for future quarters.

The GAAP and core margin to be up slightly.

Fee income to be up 3% to 5% versus like quarter.

Seeing deals closed already in investment banking this quarter gives us more confident that we'll be at the higher end of this range.

Expenses to be up 1% to 3% versus like quarter and an effective tax rate of about 20%.

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

Taxable equivalent revenues are expected to be up 1% to 3%.

The decline from previous annual guidance reflects slower mortgage banking income growth.

Expenses are expected to be flat.

This is a bit higher due to the FDIC surcharge, which was added back into the fourth quarter.

And an effective tax rate for the year of 20% to 21%.

We continue to feel confident that revenue growth along with flat noninterest expenses will result in positive operating leverage for the full year 2018.

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

Now let me turn it over back over to Kelly for additional comments.

Thanks, Daryl.

So as you've just heard, Daryl summarized very well, the overall integrated very positive results for the quarter.

But I want to talk to you a minute or 2 about what's really more important.

I mean focusing on what's going on every quarter and the detail of every quarter is interesting.

So much more importantly, it's key is what do we do and as we look forward for the future of this company for our shareholders and our other constituencies.

So we are working very, very hard on what I've been calling for several quarters our disrupt or die strategy.

You can see that in a graph on Page 21.

We laid it out in terms of disrupt or die to simply to get our own people's attention because the world is really changing.

It's changing really, really fast.

It's going to continue to change at a more rapid pace.

I think AI, machine learning, digital, all of the various components we all know about, are real.

And so we are very, very seriously focusing on the front room and the backroom of our businesses, focusing on reconceptualization and figuring out how to operate our businesses more efficiently and more effectively.

For example, right now, and this has been in place for a number of weeks, we've already got major projects going on in terms of reconceptualizing operations in our whole IT area.

I think Agile and DevOps and all of the things that go with that.

Our insurance business is going through a top to bottom reconceptualization process incorporating the Regions Insurance acquisition, and we expect substantial improvement in our insurance business as a result of that.

We have major projects going on in reconceptualizing our commercial and retail banking in the Community Bank.

That's just to give you a couple of anecdotes.

So for example, we have a project going on right now that will reduce the turnaround time in making a small business loan from 28 days to 3 days.

That's really, really important stuff in terms of making it more convenient and easy for our clients.

In terms of our branches, auto loan business, by the end of this year we will have our loan approval time down from 1.5 days to 4 minutes.

This is big stuff, this will change the business.

As Daryl pointed out, we'll be closing like 160 branches this year to be able to reinvest in other aspects of our branch system and other aspects of the bank.

And our commercial area, we are working on a project that will evaluate and improve performance from end to end, that's from the very, very beginning of the request, all the way through the final booking of the loan.

We're considering and are very likely soon going to start a major project on general expansions including things like layers of management.

So you can see we're looking top to bottom, every aspect of the company because we simply have to reinvest in the future of the business.

It's basically an old line banking business that we and everybody else has.

We have to protect that, but at the same time, we have to streamline it and harvest expenses out of that old bank and reinvest it in the new bank.

And it needs to be focused primarily on client interaction and relationship management.

So what do we do it?

We're developing right now an entirely new ATM strategy.

We have a substantially improved retail product line; for example, we just introduced in the last couple of weeks 5 new credit cards.

Feedback from the field is fantastic.

We are encouraging and really kind of pushing our market leaders, our branch managers, to be out making calls in the market 3 times per day, which is a dramatic improvement.

We have in the retail and the commercial side a new program we call Financial Insight.

This is a big deal.

So historically we and other banks have gone out and called on clients and to ask about their loans and deposits and fee income.

We don't do that anymore.

We go out and talk to our clients about their dreams, their goals, their hopes in life.

What are their financial plans?

And we particularly focus on talking to them about their leadership because we believe everything starts and stops around leadership.

And so if we can help our clients and prospects improve their leadership, we know they will do better; that's a good thing, and then in return, we will do better.

We focus on helping them grow their business, inherently we get more loan deposits and fee income.

We have a number of things on the marketing support side that are really big deals.

We have a new program called Voice of the Client.

Historically, we would basically only be able to give our people in the branches and other parts of the bank feedback about once a year.

This Voice of the Client is essentially real-time feedback.

So if a branch -- a person comes in a branch in Dallas, Texas today, within a day or so at the latest, sometimes the same day, that banker and that banker's supervisor and all of the way up to me, we know exactly whether it was good or bad -- our interaction.

If it was good, we pat them on the back; if it was bad, we coach them in terms of how to improve.

We set up a new program called client-first solutions, where when we are looking diligently, continuously on how we can improve our business to make it easier, simpler, faster and more secure for our clients.

This year-to-date that group has uncovered 32 client enhancements, we just instituted a couple of months a virtual banking center.

So that when our clients are less likely to come into the branch, we could be much more active in terms of touching them on a regular basis, in the manner they want to be touched from a digital perspective.

We are enhancing our merchant and marketing and digital sales.

Frankly, we're getting fantastic 4-5:1 paybacks on the investments in those areas, and we're very excited about it.

In the Retail Community Bank, we have an agile revenue team that meets once a month -- actually it's multiple teams.

Their challenge is to continuously look for ways to improve what we do, product line up, the way we deliver any aspect of the business and get it into effect really fast, kind of an agile kind of approach that's very, very exciting.

And we back all of that up by a much more enhanced focus on client insights and analytics.

So the concept is to disrupt the old bank, cut costs, relocate, innovate and reconceptualize the business and it's working very, very well.

Keep in mind that we are investing a substantial portion of those cost reductions back into the new bank.

But at the same time, we're holding expenses flat for '18 and expect to in '19.

That's a pretty big deal and it's what we need to do.

So our people are working really, really hard to work on all of that.

But most importantly, beyond all of that, I would just remind you, at BB&T, we're a little different than some companies.

We are intensely focused on why we are here.

We believe that when we focus on the fundamental purpose for our organization, we are more effective and more successful.

Now we make loans, we get deposits and we get fees and all that, but that's not why we are here.

We are here to make the world a better place to live, we're very serious about that.

And that's why we focus on things like Financial Insights.

When we make the world a better place to live by making loans and deposits, et cetera, of course, our bank does well and our shareholder does well, but when you get up in the morning and you're focusing on other people, other companies and doing what's best for them, good things in life happen.

If you get up in the morning and you're focusing on yourself, how many loans you can make and how much margin you'll get and how much -- what your personnel raises will be, what your personal bonuses will be, life doesn't work out so well.

So we are making sure that our culture is consistent across our organization that everybody in our company has to be on this same page in terms of why we are here.

But that's a big deal, we're going to talk to you more about that when we have our Investor Day.

So I just want to mention to you, if you look at Page 22 on our deck, we are having our Investor Day on November 13 and 14 in Greensboro.

We're having it at our new BB&T Leadership Institute, we're very excited about it.

That's almost a $40 million new project.

It's set back in a nice tranquil wooded setting, walking trails, has 48 attached rooms.

I've been to a lot of these leisure programs in different places around the country.

This is the best in class.

So I'm excited about showing it to you.

I hope you will come on the evening of the 13th, we will have a special presentation and show you around the institute.

I think you'd be really impressed with it.

I will mention that we do have 48 rooms attached to the institute.

So the first 48 investors that sign up, you'll get to stay in these brand new really nice rooms there at the institute, and of course, there's a nearby really nice hotel for the rest.

So we're looking forward to seeing you in Greensboro on November 13 and spending the next day with you.

So with that, we'll turn it back to Alan, and we'll go to questions.

Okay.

Thank you, Kelly.

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

(Operator Instructions) Our first question is coming from John Pancari from Evercore.

Want to just ask on the expense side.

I know you just indicated that you do expect expenses for the year to be flat.

I believe that you indicated previously flat to down modestly and for the year.

Did anything change that is impacting that outlook, and if so can you give us a little more color on it?

Yes, John, this is Daryl.

I'd said in my beginning remarks that, that we used to have, in the fourth quarter, FDIC surcharge coming out.

We put that back in.

When you look at the dif, the dif numbers from the last 2 quarters are flat basically.

So while there's still a chance it may come out in the fourth quarter, we weren't sure about that, so we wanted to be conservative to make sure that we were giving proper guidance.

So if it did -- does come out in the fourth quarter, that would be an upside for us.

But, John, keep in mind that, that is flat including Regions.

So our core expenses are still down including the FDIC and [such forth].

Okay.

And then for loan growth, I know you just indicated, Kelly, that you feel better that it could reach 4% plus or minus.

What is that time frame for when you think you get to that level?

Is that more of a longer-term thing?

And I believe, previously, you had indicated maybe a longer-term range of 4% to 6%.

So I just want to get your thoughts on that.

Yes, so the plus or minus 4%, John, is for the third.

I know we technically showed in our deck 3% to 4%, but I'm just saying based on what I see.

And as I've said, I've been to 23 regions.

I've been to 2 regions last week.

And based on everything I see and talk to our people, I think we've got a very good chance.

I can't guarantee, of course, I think we've got a very good chance that they're going to get to plus or minus 4% for the third, and then the guidance we've given before still stands as a -- beyond that.

John, there are specific categories for the next quarter, we're seeing -- beside C&I and mortgage, which really helped us this quarter, we're seeing really good traction in our indirect businesses in auto and Sheffield and also credit card.

So all those should get us to that level.

Okay, got it, got it.

And then one last thing if I could.

On the insurance side, the -- your insurance revenue was flat year-over-year.

We had looked for a few percent growth.

Can you give us a little bit more color on the -- what's impacting that?

Yes.

Sure, John.

Keep in mind, a year ago we had $12 million in performance-based commissions that we did not receive because of the storms in the fall.

So if you exclude that, really we were up 5.2% core organic growth in the quarter, and so far 4.2% year-to-date.

And we're seeing actual acceleration in our new business production.

First quarter, it was up 11.8%, we were up 15% in the second quarter, and I haven't seen those kind of numbers really in years.

So the economic expansion's really helping drive that, and pricing is up 2%, 2.5%.

We see that sort of stabilizing as opposed to sort of down 2% like it was in the year 2017.

So -- and I'll just leave you with this.

As a result, we've been kind of guiding up 2.5% to 3% in organic growth.

And really for the year, '18, what we're really seeing is up now about -- we think we're going to be up in the 3.5% to 4%.

So we're kind of moving it up 1%, if you would.

Our next question is coming from Jennifer Demba from SunTrust.

I have 2 questions.

First, Kelly, can you just talk about your capacity and interest for bank M&A now.

And secondly, that the slide, the disrupt or die slide on number 21, very helpful.

Which strategies on that slide are -- do you think present the most opportunity for BB&T over the next couple of years?

Yes, so on the M&A front, keep in mind that we've been in this pause in terms of M&A.

I haven't officially lifted that pause, but I will be candid with you, I think we're basically ready to get back in M&A in terms of our internal capacity.

We took this pause because we needed to make sure we got all these major projects working and that they're all in really good shape.

We're still in the process of working through the final step with regard to the Consent Order.

You saw we have been released from the Consent Order with the FDIC and State.

But not yet been released with regard to the Fed.

And we're working with them on that.

I expect that to be released in the not too distant future but I can't control that.

And so -- but in any event at some point that's going to be released.

And there's some possibility even before it's released we can still do M&A, so I'm not overly worried about that.

But the bigger issue is the availability of mergers and the economics.

I will tell you that there is a meaningful increase in activity in really just the last couple of months.

We've been approached by a number of institutions in the last 60 days that would like to consider a partnership with us, and we're very humbled by that and we very much appreciate that.

And of course, we will look at them.

But it's all about economics, and I've said repeatedly that the economics of M&A has changed because when we talk about this change in terms of digital banking and the change in demand for convenience for our clients, that's real stuff.

And so we're seeing declines in the 5-plus-percent range in terms of branches, all the binary banks are seeing the same thing.

And so when you particularly price an out-of-market deal, unlike in the past, where you would forecast an increasing cash flow and discount it back to where the price is, now you're forecasting a declining cash flow and discounting it back.

So -- and then the market has really not yet quite caught up with that.

They'll figure it out but they haven't quite figured it out yet.

So I think the odds of us doing out-of-market deals are pretty slim.

I think the odds of us been able to do in-market deals are pretty good.

But I know every time I say that, sometimes people say they want to go sell our stock.

I tell you that's not a smart move because if we do deals, it's going to be good for our shareholders.

We're just not going to do stupid deals.

We're not going to do deals that have long-term diluted economics that makes no sense to our shareholders.

So we're going to look at deals, and we'll do what makes economic sense.

When we do a deal, you'll be happy we did the deal.

With regard to the disrupt or die, I appreciate your question on that.

I think that's the important thing because it sets up all of the investments and it sets up improved EPS and improved stock prices if we do M&A.

So it all integrates together.

I would say the most immediate substantial impact is the reconceptualizations in the Community Bank.

It's -- our guys, David Weaver and Brant Standridge, are doing substantial changes in terms of the cost structure and reallocation of resources and the penetration of the market.

It's a big deal.

I'd say that it's followed closely by our IT reconceptualization, which was a complete change top to bottom in terms of how we do that.

And then I would say followed closely by insurance.

And so and then a number of others, but that's kind of the top 3 I would say.

But all of it together is what's allowing us to have flat expenses and making these major investments in the future of the bank, and that's -- I can't overemphasize how important that is for investors who look at banks.

Banks that are out there just cutting expenses willy-nilly and not investing for the future, may not have a very bright future.

And so we're going to have a very bright future, and we think doing what we're doing is appropriate.

So thanks for the question and that's where we see it.

Our next question is coming from Betsy Graseck from Morgan Stanley.

So a couple of follow-ups.

One on the reinvesting in the business.

Very passionate presentation you gave on Page 21, Kelly.

The question I have is, as you look out over time, and we're talking 2 years to 3 years, 4 years, do you think that this has an impact on the expense ratio of the organization?

Or does everything that you're doing keep pace with the expense ratio to that?

Well, Betsy, we're in a new world.

And it's hard to -- of those of us that have been around a long time, we can think -- we can speak more clearly about historically because we know what the facts are.

When you're whole -- when you're in a whole new world, and you're trying to develop new understandings of what the various costs are, it makes it a little harder.

So given that, I think we will be able to make the kinds of reconceptualizations, invest in the business and still see a slow downward pressure on our efficiency ratio.

Now insurance businesses are growing really fast and that's pushed upward pricing, you know how that works.

But when you put all of that together, I still see -- in the short run, my target is 55% and I think longer-term as revenue kicks up, you can even push a little lower than that.

But over the next few years, I would be thinking in terms of doing all we're doing and see -- still seeing positive operating leverage and downward pressure on the efficiency ratio.

Got it.

(inaudible)

Betsy, you're breaking up a little.

(technical difficulty)

We have now a question coming from Ken Usdin from Jefferies.

This is Amanda Larson on for Ken.

Can you talk about the balance sheet and liquidity and management strategy here given the expectations that loans will continue to grow?

What's your outlook for deposit growth and mix?

And what betas are you assuming over the next few quarters?

Yes, Amanda.

So we are starting to get traction on our loan growth.

You saw that this quarter, and we're guiding to stronger loan growth next quarter and hopefully continuing on from there.

So we want to have both oars in the water, so we will and as we're starting to see deposits also start to grow.

We -- I think we're still fortunate that our DDA is growing.

That is growing not as fast as it was but it's still positive.

But we are getting growth in our checking as well as MMDA products.

The last couple of quarters, we've got growth in CDs.

We will toggle our deposit growth to match our loan growth the best that we can.

As far as deposit betas go, we did see a big spike up in our deposit beta from last quarter from 24% to 41%.

If you look at it, we had increases both in REIT, consumer, commercial and in the wealth and large corporate.

Yes, our guess is that, that will moderate this next quarter.

We believe that it would go probably from the low 40s back into the 30s as we continue to have more traction and growth in deposits.

We're pretty much -- what we see in the pipeline right now, feel that we're going to have a good deposit growth quarter -- this next quarter with what the [sights] that we see now and that should match very well with the loan growth.

But we'll continue to monitor that.

But I think on next quarter or 2 basis, I think deposit pressures will abate a little bit.

Okay, great.

And then can you talk about your expectation for purchase account accretion in now 2H and your expectations for the extent of decline in 2019.

And how that interplays into your NIM expectations for both 2H and 2019?

Yes.

So purchase accounting, probably by the end of 2019, probably won't even be asking the question whereas it continues to fall off.

Right now, the difference between our reported margin and core margin's 11 basis points.

We see that contracting probably by the end of '19, going down to maybe only 4 or 5 basis points difference.

And you think each quarter that goes by it's 1 or 2 basis points GAAP change between the 2 of them.

So it is coming in over that time period -- over the next 4 quarters to 6 quarters.

Did that help?

Our next question is coming from John McDonald from Bernstein.

Daryl, I wanted to ask on the fee revenue.

Looks like the guidance came down a bit, looks like it was 2% to 4% previously, and now 1% to 3% for the year.

Is that more of a year-to-date performance or do you expect lower growth in the second half?

Maybe you could talk about the drivers there on the fee revenue side?

Yes, since half the year is in there, it's really driven by what we've seen in mortgage to date.

And quite honestly, while mortgage volumes are very strong, spreads continue to be very tight.

As Chris mentioned, insurance rebounding, so we should have some nice growth -- organic growth on the insurance side to help offset part of that.

And then the investment banking what we believe that is timing.

This past quarter, we missed our forecast on investment banking, but with the deals that we've seen close already this quarter, we feel very confident investment banking and brokerage will have a strong second half of the year.

But I think we're going to have with investment banking, service charges and insurance, a decent and relatively strong fee income for the second of '18, just with mortgage being a little bit softer.

So the timing I saw just to the extent the full year is a little lighter then you might have thought coming in.

It's really mortgage as the driver there for the full year.

Yes, we've been through these cycles many times when refi volume goes down there's less volume and people just [split] up very competitively, very -- lower pricing and you see that dramatically in the retail businesses.

Our spreads are just down a lot, and I think you're seeing that across the whole industry.

But we're positioned very well, our purchase activity is strong.

Our producers, our originators out there are gaining share.

So I think we're equal to or gaining share in the marketplace, it's just that spreads are tighter.

Okay, and then a follow up on expenses.

You mentioned the FDIC charge is the driver of the change in expense guidance for the full year.

So you're assuming the FDIC surcharge remains.

How much is that -- can you just remind us how much that FDIC charge is?

And then how you're feeling about the ability to generate positive operating leverage in the second half of the year and for 2018?

So the surcharge is worth $21 million a quarter.

I would say, if you look at linked quarter between second and third, that's a tough comp for us just because we have seasonality in some of the fee businesses, insurance.

And Regions.

And we have Regions coming in.

Yes, from the Regions Insurance, we will not get any synergies really in that business until we get through the system conversion; system conversion is scheduled for November of this year.

After that, Chris can comment on it but what we think margins will go from about 20% up to about 30% over the next year through '19.

So we think margins will rise there.

So I would say, linked quarter, third quarter challenging and we're giving it a really good run, but it's going to be close.

So it could go either way, but for the -- half a year, fourth quarter definitely year-over-year we're very, very good that, that should also have operating leverage up there.

So I think we really have a lot of good momentum going on.

I basically see revenue growing 2% to 3% and expenses being flat.

That's kind of the story that we have right now.

Absorbing the expense base of Regions.

Got you, got you.

One last thing guys, when we look at CECL coming on, what kind of progress are you guys having with the preparations for CECL?

If you looked at it, there was a good white paper that came out this past week by the Bank Policy Institute.

They did a research white paper, and we've been talking about CECL now for a couple of years, and it really confirmed what we've been saying in that it's very pro cyclical, and it's a major threat to the economic stability and a financial crisis.

Greg Baer, their CEO, testified in Congress this past week on that.

But if you go and look at it, what came out in the study, which is amazing, is that CECL expects that you have perfect knowledge of what's going to happen.

If you looked at the economic forecast in '07, nobody was foreseeing a big recession coming.

So if you model in what expectations were, and they did this in those white paper, it actually doubled the contraction of the recession, if you had CECL in place back 11 or 12 years ago.

So I think that, that's a huge risk to the country, to the economy, that people really need to think about.

When you look at CECL, while the economics of lending hasn't changed, accounting has departed from the economic.

When you front-load all of your expenses, it impacts earnings and capital.

Since we are an industry where capital is part of an accounting number and is part of how we manage the company, you have to pay attention to the accounting piece.

So I would say, we have one foot in economics, one foot in accounting.

And the regulators and hopefully FASB will make some modifications before they put a lot of risk into the economy.

It's not good for the term assets that you see in the consumer portfolios.

It's not good for portfolios that have higher risk and subprime.

So there are a lot of negatives out there.

Ironically, the way that CECL is actually set up, we're actually seeing less reserves on the commercial side because you're actually reserving to the maturity and not really to the expected life of the asset.

So the whole economics of CECL versus accounting has been totally disconnected.

The next question is coming from Gerard Cassidy from RBC.

Kelly, I took with some interest your comments about visiting your different regions of the franchise and talking to your customers, particularly the one you highlighted in the construction owner and what they had to do for raising prices.

And you've been passing on your thoughts about maybe interest rates will go higher than what were currently forecast by the Fed.

So my question is when you guys underwrite your variable rate loans, what kind of interest rate assumptions or interest rate increase assumptions are you using in that underwriting?

And second, will you change them where they'll go up even higher if you start to see higher inflation?

Gerard, this is Clarke.

That's a great question and I think that a -- we think it is something differentiates our approach to CRE lending from others for many years.

We don't underwrite specifically on current cap rates.

We always look at stress, exit underwritings.

So we always look at least a couple of hundred basis points over the current accrual rate with the floor, and our floor has been in roughly the 6.5% range, but because of the issue you and Kelly just raised, we're evaluating whether that floor needs to go up or not.

So we always try to get ahead and make sure we stress these projects for the potential rate shots and don't fool ourselves about how we size the loan.

And -- but we certainly see less of that focus by others in the markets, which creates a lot of -- we believe oversizing of credits in many cases.

Does it -- Clark, does it make it harder for you guys to compete then because you're doing it more conservatively than some of your peers?

Absolutely, in certain aspects.

For example, I would tell you right now it's very difficult to compete on fully stabilized IPP project for what I just said.

They tend to have very high sizing based upon trended rents and extrapolation of expenses and low vacancy and so -- nonrecourse.

So we're just not playing there.

We think that, that's just too much leverage.

So we're doing more C&D where we have very strong initial equity, guarantees, stress underwriting.

So we're well protected for we believe the risk we're taking.

So we're having to pick our positions to play based upon that.

But we still think we can compete effectively even that said.

But, Gerard, as you all know, we run the business from a long term through the cycle perspective.

And when we get into this period of the cycle, we always see it, many competitors scrambling for asset growth, very short-term focus, and they're willing to price and structure whatever it takes to get growth.

That feels good today.

But doesn't feel so good when depression comes.

So we run through the cycles so that we're good on both sides.

But, yes, it does make it harder for us today.

We work harder at it.

We don't give up.

But we're not going to go out there and make loans at the prices some of these people are making them.

The [stretch] that some people are making just to get loan growth, it's a fool's game.

And then as a follow-up question.

Kelly, going back to Slide 21.

I took with interest how you're going to increase the national lending business, and I recognize that in equipment finance, mortgage and Sheffield, you're basically already there.

But I'm more interested in the corporate and commercial real estate.

When you don't really have a national customer base, and I know you have some customers but it's not in your footprint, how do you avoid adverse selection if you're going at the national level?

Well, you have really good people.

And you hire local-knowledge people.

So we have a great team headed by [Route Forget] and Cory Boyte.

And when we ask them to expand as we have, we give them the resources to go into the markets and hire local-knowledge people.

Because we've learned and you've seen over the years, somebody can leave one market and send some people on the plane and fly out to the West Coast to make a few loans, it doesn't work out so well.

So our strategy is to domicile people in the marketplace with that local knowledge.

And so we're not at a competitive disadvantage in terms of appropriate knowledge.

So we will be able to expand.

And it's really just a matter of resource allocation, and we're allocating more resources there because our people have performed extremely well.

And Gerard, this is Chris.

I would just add, we have our Grandbridge business, which is really a national business and has been for years, and we have people throughout the country today.

And so it's really about Rufus working with Grandbridge and sort of duplicating what he did on the corporate side and bringing in bank balance sheet lenders to kind of sit alongside the Grandbridge folks, which are really kind of secondary marketing kind of lenders.

And we think that'll work really well to be able to put more on the balance sheet and to be able to do construction-type financing that we might not have done in the past as well.

Next question is coming from Mike Mayo from Wells Fargo Securities.

Can you elaborate more on your efficiency guidance?

I mean, record EPS, lower guidance for efficiency.

So it's a little bit of a disconnect.

I know you've addressed that but you're lowering the range from 100 to 400 basis points of positive operating leverage to 100 to 300 basis points of positive operating leverage.

And I think what you said is the FDIC benefit you pushed out and so a little bit of mortgage softness, maybe there's some investing in there.

That's still a pretty wide range for just 2 quarters left.

And I don't know if you can be more specific to the 100 to 300 basis points annual positive operating leverage.

And I think the reason for the sensitivity to this is you guys did miss your efficiency targets a few years ago.

Your efficiency did become the worst it's been for BB&T in a decade.

And look it's still good progress, it's still good efficiency, but it's -- hasn't been the best efficiency like it once was.

So what's your commitment to that 55% short-term?

I guess, can you define short-term.

Is that maybe in 2020?

Could it be next year?

What's your commitment and conviction to improving that efficiency since you're pulling back a little bit, your guidance here?

So Mike, I'll give you the conceptual and Daryl can give you some detail.

Our commitment and conviction is absolute.

But you just need to remember, Mike, what happened to us.

During the -- frankly, during the '90s and the 2000s, we were growing really, really fast with mergers.

We kind of had to, and we did that well.

But in that period of time, we didn't invest as much as investors thought maybe should have in the backroom.

So as we headed into the last 10 years, we simply had to substantially ramp up our investment in updating a number of our systems like our -- in our new accounting system, our new commercial loan system, our new data center and a long list of other systems.

So we've had an accelerated, I'd say, 3-year or 4-year period of substantial ramp-ups.

I told our people at the time, I told them the market at the time that it would drive our efficiency ratio up, but it would start to subsiding.

That's exactly what happened, it popped up to 59.5% as I recall on an adjusted basis.

It's now down to about 57.3%.

And it's moving in a trajectory, as we projected, in that 55% kind of range.

Obviously, the denominator matters, and we've talked about that in the past.

But denominator aside, if it's somewhat neutralized, yes, I feel good about there being able to make all the investments we're making, and moving towards that 55-ish kind of target because we are really figuring out some neat ways to do our business better.

I mean, this isn't just about trying to work harder and do what you did, just working a little harder.

This is about working smarter.

In this business today, that's required, and the good news is there are substantial new tools -- think AI, machine learning, robotics, et cetera, that we've never had before.

And so yes, we're confident and excited about it.

Okay.

So a little detail, Mike.

You want to focus on the things that we can control.

So on the expense side, we've been doing a great job this year on controlling expenses.

If you look at our FTEs year-over-year, we're down 1,600 FTEs and we haven't missed a beat in how we're operating our company.

As that goes forward, I would expect our FTEs also to continue to be rightsized going into the future.

As Kelly mentioned, in the branches, we're rationalizing the branch system.

We also have the big program within our back office facilities.

We're just starting some testing and learning on the front office facility.

So when we started this venture we have about -- had about 21 million square feet in the company.

Right now we're about 18.5 million, and that's continuing to come down.

We'll probably, over the next 2 to 3 years, everything else being equal, be close 16 -- 16 million square feet, maybe a little bit better than that.

We're going to use those costs, as Kelly said, redeploy them in robotics and digital to help drive revenue, help continue to drive costs.

All that comes together.

So if we can continue to keep costs flat and continue to make the investments, we feel that, based on the economy, revenue could be 1% or 2% or could be 3%, 4%, 5%.

We will get what we can within our risk appetite, but we will definitely generate positive operating leverage.

And then one follow-up.

Since mergers have impacted the efficiency, and, Kelly, I agree with you, since the Southern National, mergers absolutely have propelled outperformance by BB&T; we're talking several decades.

So if you look at your stock price versus peers or the S&P, absolutely.

But the deals most recently in Pennsylvania, I'm not so sure they helped.

And I think you talked about -- I think I was triggered when Daryl said its oars are in the water because of your fishing analogy.

If the fish aren't biting on one side of the boat, well maybe you catch the fish on the other side.

So I think in-market deals are better received than out-of-market deals.

So what additional confidence can you can give us if BB&T were to pursue acquisitions, it'd be more like the 25-year record than say in the stock price performance after the Pennsylvania deals.

And also if you can define -- you said a meaningful increase in activity.

If you could define activity, it's not like we've actually seen a lot of deals.

So what does that mean?

Yes, I think I would generally agree, Mike, with your assessment over the last 25 years with one caveat.

When you peg it to the Southern National thing, that's a lofty peg.

As you know, that was the most effective MOE in the entire country.

We were 10, they were 9. We were all over each other.

I think we cut costs 50%; I mean it was a sweetheart deal.

Comparing that with Pennsylvania, it's apples and oranges; it might even be apples and turtles.

And so you can't really make that comparison.

But yes, Pennsylvania was not as attractive as Southern National, but it was very attractive.

Now has it gone a little slower than I expected?

Yes.

But I'll tell you, Mike, it's -- they have really turned.

I mean I was up there 2 times last week, in fact.

It has really turned.

It's a stable kind of market.

And it's not a go-go market like Atlanta or Dallas.

Stable kind of market, particularly where we are, mostly around Lancaster and Allentown in that area.

So it takes a little longer but when you get there, it's a really good place to be.

So -- and remember those were done right at the beginning of the substantial change in terms of economics around digital, et cetera.

So as we go forward, the kind of stock price impact, EPS impact, et cetera, that we've had historically on deals I think is what you would expect going forward.

And so you do fish on the side of the boat where the fish are but sometimes the fish on the side of the boat that are biting aren't the kind of fish you want.

And so that's what I've been trying to say about out-of-market.

There are a lot of fish out there for us on that side of the boat today.

Out-of-the-market is just -- the price isn't going to work.

But in terms of the activity, we've had 4 pretty attractive candidates approach us in the last 60 days.

We haven't even gone back down and started looking yet, because I think we're preferred acquirer.

So we're going to have -- I'm sorry, go ahead.

No, last short follow-up.

So what size -- are these tadpoles?

Are these blue -- sharks or -- I'm not a big fisherman.

But what size [drugs] are you looking for here?

They're a couple of -- they're a couple of -- I wouldn't call them tadpoles, I'd call them little bream.

They're a couple of little bream.

But the -- so wouldn't be particularly interested in them.

But we -- there are some that are good-sized catfish.

I'm not a fisherman either, Mike.

But let me be more specific.

I'm thinking kind of our minimum target area today is $20 billion.

And we really kind of like $30 billion more than $20 billion.

So the days of -- in all those years we used to do, Mike, you remember there were $2 billion, $500 million, $1 billion -- all those days, those days are gone.

So it's more like $20 billion to $30 billion I'd say, up to say $50 billion.

We will now take a final question from Saul Martinez from UBS.

I just wanted to come full-circle on the discussion on deposit betas and make sure I understand the logic.

So you -- obviously you're expecting it to tick down from the 41% this quarter into the 30-plus-percent range.

Having said that, the cumulative beta's been about 24%.

I think you mentioned that you're modeling about 50%.

And frankly, 41% doesn't seem that high given where we are in the cycle -- in the tightening cycle right now.

So how do we think about the progression just say beyond the next couple of quarters?

Do we see a bit of a downtick?

But as we progress in the interest rate cycle and get closer to whatever the terminal Fed funds rate is, where do you see the incremental deposit beta tracking to?

And how do we think about sort of the cumulative deposit beta in this cycle?

So I think what we're trying to convey is that we had a spike up in the second.

That was part the market itself, but a substantial part of our own strategic decisioning to respond to some market conditions.

That part will subside as we head into the third and the fourth.

Now if we continue to see substantial increases in rates, and if corporations continue to use their available cash, which they are doing today, and there's more demand for lending, lending price goes up, there'll be more demand for -- I mean more demand relative to supply for funding and that'll drive betas.

So my own personal view is, it will -- for us, it will subside some in the next 3 or 4 -- couple of quarters and then depending on what happen to rate, it will more slowly, more naturally tick up.

Because you're right, I mean, 41% in of itself is not inherently bad.

It's just that it popped up real fast, and we wanted to try to explain why it popped up really fast.

You would expect it to have gotten to that level more over a several quarter kind of period.

Yes, if you look historically, in the past cycles it's between 40% and 60% deposit beta.

Right now, our cumulative number is 24%.

I don't see it getting over 50% cumulatively.

It's going to be at the low end of that range.

But as Kelly said, once we abate the next quarter or 2, it will probably gradually grow up but we'll probably stay in this -- in the lower range of that going forward.

No, that's helpful, got it.

And then just a quick follow up on Regions.

Have you disclosed or given a sense of what the magnitude is of how much the acquisition could impact your buyback in 3Q?

We haven't.

Best take right now, we'll probably buy back about $200 million of shares this quarter.

And then as depending on the size of the balance sheet, we communicated to the marketplace last quarter that we want our capital ratios to have a CET1 that's over 10%.

The reason we're doing that is that if we cross over $250 billion over the next couple of years, we have the AOCI risk that goes through our numbers.

And right now with higher interest rates, the capital hit with our portfolio and pension that we have out there, it's about 100 basis points.

So our CET1 would fall when you cross over 250 from, call it, 10% to 9% on day 1 of what you cross over.

So that will probably -- the long answer to, we won't probably spend all of the $1.7 billion that we asked for.

Some of it was used up with the Regions Insurance acquisition and some of it we won't able to spend just because we want to keep it over 10%.

But it really depends on how much our balance sheet grows and how fast.

We will update every quarter what we're looking at, to buy and repurchase in the earnings call, but right now for this quarter, I'd say about $200 million.

That will conclude today's conference call.

I would like now to turn the call back to IR for any additional or closing remarks.

Okay, thank you, Gale.

And thanks for -- to everyone for joining us.

I apologize to the questioners in the queue that we didn't have time to get to, and we will call you later today.

Thank you, and I hope everyone has a good day.

Ladies and gentlemen, that will conclude today's conference call.

Thank you very much for your participation.

You may now disconnect.