Truist Financial Corp (TFC) 2018 Q3 法說會逐字稿

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

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

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

Please go ahead.

Thank you, Andrea, and good morning, everyone.

Thanks to all of our listeners for joining us today.

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

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

We will be referencing a slide presentation during the call.

A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website.

Let me remind you that BB&T does not provide public earnings predictions or forecasts.

However, there may be statements made on the course of this call that express management's intentions, beliefs or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

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

Please also note that our presentation includes certain non-GAAP disclosures.

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

And now I'll turn it over to Kelly.

Thank you, Alan.

Good morning, everybody, and thank you very much for joining our call.

Hope you're having a great morning so far.

We had a great quarter with record earnings driven by strong revenue, broad-based loan growth and solid expense control.

Now -- for now, we continue to execute on numerous strategies, which are creating more diversified and resilient profitability.

And at the same time, we are investing substantially in our digital platform, which creates outstanding client experience.

Net income was a record $789 million, up 32% versus third quarter '17.

Net income, excluding merger-related and restructuring charges, was a record $802 million.

Very pleased that quarterly [fully] tax equivalent revenue was $3 billion, up 7.1% annualized compared to the second quarter of '18, largely due to Regions Insurance, net interest income and investment banking.

Our diluted EPS was a record $1.01, up 36.5% versus the third quarter '17 and adjusted EPS was also a record at $1.03, up 32% versus third quarter '17.

We had really strong returns with adjusted ROA, ROCE and ROTCE at 1.52%, 11.88% and 20.33%, respectively.

More importantly, we achieved positive operating leverage on a linked- and like-quarter basis, a very strong operating performance.

Loans held for investments averaged $146.2 billion, which was up a strong 5.8% annualized.

Margin on a net and core basis improved, with net margin improving 2 basis points, core margin improving 3 basis points, and Daryl will give you more color on that.

Adjusted efficiency ratio was slightly down, and grooved at 57.3%.

Adjusted noninterest expense has totaled $1.7 billion, which was up 1.5% versus third quarter '17.

However, if you exclude Regions Insurance, our expenses would have been actually down slightly.

So we're exhibiting excellent expense discipline, even recognizing that we're making substantial investments in building what I call the new bank or the digital bank.

So we are controlling expenses very, very well.

Credit quality was excellent, and Clarke will give you some detail on that in the Q&A.

We did increase our quarterly dividend 8% to $0.405 per share.

We completed our acquisition of Regions Insurance, and that was a giant add from both a cultural and a market perspective point of view.

And by the way, the execution on that has gone extraordinarily well, and Chris can give you detail on that on Q&A.

And we did complete $200 million in share repurchases.

If you're following along the deck, on Page 4, you'll see that we did have merger-related and restructuring charges of $18 million pretax; $13 million after tax.

And that impacted EPS negatively by $0.02 per share.

Looking at Page 5, in terms of loans, I think it was a very good loan quarter.

Our average loans held for investment grew 5.8% annualized, as I mentioned a minute ago.

C&I was up 2.3%, but a broad base of very strong performance in that space.

Premium finance, Corporate Banking, dealer floor plan, mortgage warehouse all had strong performances.

Our leasing portfolio was up 16.8%, which is very strong.

Overall, retail was a very strong 11.3%, led by residential mortgage in some high-yielding, high-quality mortgage portfolios.

Our acquisitions that we are holding, 16.6%.

Direct was off a little bit, but that is turning, and we still feel very good in terms of the direction of that.

And our indirect performance was outstanding, with strong performances in Regional Acceptance and in Sheffield.

So overall, loans are performing very, very well in a good economy but not an easy economy.

If you're following along, we'll look at deposits on Page 6. Overall, a healthy core deposit growth with noninterest-bearing deposits of 1.6%.

While it's down some from previous quarters, it is very good relative to what's going on in the industry, and we feel very good about that.

So our percentage of noninterest-bearing deposits to total increased again from 34.2% to 34.4%.

And importantly, our cost of interest-bearing deposits was 0.66%, which is up 9 basis points versus being up 11 basis points last quarter, for improvement there.

Likewise, on the cost of total deposits, that was 0.43%, up 6 basis points versus up 7 basis points, so better management of expenses with regard to the core deposits, which we are focusing on and feel good about that.

So overall, before I push it over to Daryl, I'd say the economy is solid.

We don't think the tax cut has been fully realized in the economy.

Confidence is really, really high.

Rates are rising slowly, which is good for everyone.

It's good for the bank, of course, it's good for investors, CD holders, savings holders, et cetera.

It's really good, if you think about it, for borrowers because the implication of rising rates is the economy's good.

And so raising -- rising rates is a good thing for everybody.

Regulations are slowly but clearly being reduced to reasonable levels, and that's a really, really positive thing.

And importantly, we are spending a lot of time building what I call the new bank, and we're doing it by substantial investments but we're able to hold our expenses relatively flat, even though we're investing heavily there by pruning expenses out of the old bank so that we can invest aggressively into the new bank, which is good for our clients and good for our shareholders as well.

So let me pass it over to Daryl for some more color.

Thank you, Kelly, and good morning, everyone.

Today, I'm excited to talk about our excellent credit quality, improving margins and record fee income, effective expense control and our guidance for the fourth quarter.

Turning to Slide 7. Our asset quality remains excellent.

Net charge-offs totaled $127 million, up 5 basis points but flat compared to last year.

This was driven by seasonal increases in the Consumer portfolio.

Our NPAs continue to be historically low, with an NPA ratio of 27 basis points.

This is the lowest level since second quarter of 2006, and is primarily driven by a decline in nonperforming CRE loans.

Continuing on Slide 8. Our allowance coverage ratios remain strong at 3.05x for net charge-offs and 2.68x for NPLs.

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

We reported a provision of $135 million compared to net charge-offs of $127 million, a modest allowance build.

We provided $15 million to our allowance for natural disasters, now at $35 million to reflect for potential losses from recent hurricanes.

Turning to Slide 9. Reported net interest margin was 3.47%, up 2 basis points.

Core margin was 3.37%, up 3 basis points.

Both increases reflect asset sensitivity to higher short-term risks.

The cost of interest-bearing deposits was 66 basis points, up 9 basis points versus 11 last quarter.

Noninterest-bearing deposits are up as we continue to grow retail and business accounts.

As a result, total deposit costs increased only 6 basis points.

Since the beginning of the rate cycle, the interest-bearing deposit beta was 22% and the total deposit beta, including noninterest-bearing deposits, was only 12%.

The deposit beta for this quarter was 43%, almost flat from last quarter.

Interest-bearing liability costs increased 12 basis points.

Asset sensitivity declined as fixed rate assets grew more than floating-rate assets.

Plus funding mix changed more than shorter -- to more shorter repricing terms.

Continuing on Slide 10.

Noninterest income was a record $1.2 billion.

Our fee income ratio was down slightly to 42.3%.

Insurance income was down $33 million, mostly due to seasonality.

The Regions Insurance acquisition contributed $33 million in revenue.

It is going really well.

We are seeing better performance than what we have modeled.

Even when you include Regions, insurance income was up 4.5% from last year, reflecting improved organic growth.

Mortgage banking income declined $15 million, primarily due to declining gain-on-sale margins.

Turning to Slide 11.

Our expense management continues to be strong.

Adjusted noninterest expense came in just over $1.7 billion, up 1.5% from a year ago.

Regions Insurance added $31 million to expenses.

When you adjust for Regions and merger and restructuring charges, expenses were down $5 million from a year ago and $3 million from last quarter.

We added 654 FTEs with the Regions deal.

When you exclude that, FTEs were down 203.

Excluding merger-related charges, expenses are down for the year, excluding all the investments and the Regions Insurance acquisition.

We are doing a good job controlling expenses and that contributed to positive operating leverage versus last quarter and last year.

Continuing on Slide 12.

Our capital and liquidity remain strong.

Common equity Tier 1 was at 10.2%.

Our dividend payout ratio was 40% and our total payout ratio was 65%.

In addition to acquiring Regions Insurance, we repurchased $200 million worth of common shares.

We plan to repurchase $375 million in the fourth quarter.

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

Community Bank retail and Consumer Finance net income was $391 million.

The $14 million improvement was driven by loan growth in mortgage, auto and credit cards.

Higher spreads on deposits.

This is partially offset by lower mortgage banking income.

We continue to close branches where it makes sense.

We closed 9 branches this quarter, and we plan to close about 70 more next quarter.

This strategy isn't just about controlling expenses.

We are reinvesting these funds across the bank in areas such as digital and client experience.

Continuing on Slide 14.

Average loans increased $1.9 billion, mostly due to our strategy to retain high-quality mortgage loans.

The increase in prime and near prime loan originations drove up the auto portfolio.

Deposit balances decreased $506 million, driven by a decline in interest checking.

Noninterest-bearing DDA increased 5.5% from a year ago.

Turning to Slide 15.

Community Banking Commercial net income was $310 million.

The $33 million increase was driven by higher spreads on deposits and deposit growth, which was partially offset by higher personnel expense resulting from lower capitalized employee cost.

Our commercial pipeline was down from last quarter.

Continuing on Slide 16.

Average loans were flat.

Deposits increased $606 million, primarily due to money market and savings accounts.

Turning to Slide 17.

Financial Services and Consumer Finance (sic) [Commercial Finance] net income was $149 million.

The increase was driven by loan growth, improving deposit spreads and record investment banking and brokerage income.

Continuing on Slide 18.

Average loans were up $164 million, driven by Corporate Banking, equipment finance and wealth.

Deposits were up $387 million.

Turning to Slide 19.

Insurance and Premium Finance net income totaled $43 million.

The $30 million decline was driven by seasonality and was partially offset by income from Regions Insurance.

Like-quarter organic growth was up 6.7%, mostly due to a 9% increase in new business and improved property and casualty pricing.

On Slide 20, you will see our outlook.

Looking to the fourth quarter, we expect total loans held for investment to be up 1% to 3% annualized, linked quarter.

Slower growth guidance is due to the expected seasonal decline in Mortgage Warehouse Lending, Sheffield and premium finance portfolios.

We expect net charge-offs to be in the range of 35 to 45 basis points.

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

We expect GAAP and core margin to be up slightly, fee income to be up 2% to 4% versus like quarter and expenses are expected to be up 1% to 3% versus like quarter.

And finally, we expect an effective tax rate of 21%.

While we dropped the full year guidance from the table, there are no changes in that guidance.

We continue to grow revenue faster than expenses, resulting in positive operating leverage.

In summary, the quality of our earnings this quarter was excellent, resulting in record quarterly earnings, positive operating leverage, strong, broad-based loan growth, very strong credit quality and excellent expense management.

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

Thanks, Daryl.

So in summary, it's a lovely, great quarter.

As Daryl said, we had record earnings, expenses are being managed in an excellent manner.

And we have excellent execution of strategies that are designed to create more diversified and resilient profitability, which I think is very, very important.

And at the same time, we're investing substantially in our digital platform or what I call the new bank, creating outstanding client experiences, which is critical for the future.

The economy is good, rates are rising, regulations are improving.

That's a pretty good scenario for banking.

There are plenty of challenges out there, but we have huge opportunities to build our new bank while nurturing our old bank.

We have huge opportunities to realize organic growth in revenues and fees from strategies that we've been working on for a number of years.

Finally, I would just like to invite all of you to attend our investor conference day.

We're very excited about it, and hope you will come.

We're going to spend a lot of time talking about current and long-term strategies.

Hope you'd get a good feel for the essence of BB&T as we'll talk a good bit about our culture.

We are having the meeting on November 13 and 14 at our Leadership Institute, so I hope you'll come on over and join us.

We look forward to having a good time.

So for all of these reasons, we feel adamantly our best days are ahead.

I'll turn it over now to Alan.

Great.

Thank you, Kelly.

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

(Operator Instructions) We will now take our first question from Mr. John McDonald from Bernstein.

Wanted to ask about the loan growth.

You showed good loan growth this quarter, and I'm just wondering if you could break it down a little bit more between the Commercial side and the Consumer side.

Specifically, on Commercial, some of your peers have been running to elevated paydowns.

And I did notice on a period-end basis, your C&I balances were down.

So just wondering what you're seeing there.

And then on the mortgage side, it seemed like resi mortgage was a big driver of loan growth this quarter.

What were some of the factors there?

John, this is Clarke.

I'll take that.

Kelly mentioned earlier, on the C&I or the commercial side, we have pretty broad-based growth drivers, Corporate Banking was a positive.

Our dealer floor plan, mortgage warehouse, Premium Finance, our Sheffield C&I component, our small ticket leasing and our general leasing, so I think the takeaway was we got it in a number of different areas.

We are not just solely dependent upon traditional middle-market C&I, although we did certainly play hard there as well.

To your point about the quarter end, we did have some accelerated paydowns, both on lines and payouts as also the CRE side as we are seeing more clients, as rates are going up, taking stabilized properties, for example, out to the secondary market.

We're also seeing things like tech sponsors coming in, buying middle-market companies, some of those are paying out.

So certainly, we have paydown challenges, but we think the diversified set of platforms we have helped us overcome that as we look forward.

On the retail side, you're right, we had a nice improvement in the resi side.

We chose to hold some high -- very high-quality super conforming and jumbos out of our correspondent area as correspondent margins are really tight; but these are very high-quality, high-yielding assets.

It -- we had growth in our indirect platforms as Kelly mentioned.

I would mention, we also had outstanding results in our card growth.

We introduced a new set of products this quarter and we're getting outstanding reception from our clients.

So overall, I think it's a diversification story for us.

Yes, and John, I just want to stress 2 of the points that Clarke made, I mean as this was very, very important.

So we've been working for years on developing this diversified strategy around lending because we just think, in the environment we're in today, we've got a single focus in terms of lending strategy.

That's looks great; that particular category is good but it doesn't look so good when it's soft.

And so we try to get the best performance we can out of all the categories, but the key is to have a multifaceted loan asset strategy, which we do.

And then the other thing about these paydowns.

I think people saw the 10-year spike up.

I think people are just kind of -- it's a tipping point, they think rates are going on up.

They're probably right.

And so they're taking these portfolios on out to the market where they're qualified.

It's a fairly temporary phenomenon.

Next 1 or 2 quarters, you'll that subside.

And with good, solid production -- companies that have good, solid production will see substantial increase in loan growth.

Okay, great.

And then just wanted to ask, Daryl and Kelly, you've got a nice, it seems like, acceleration in operating leverage this year.

First quarter, it's about 100 basis points.

The last 2 quarters, you've been more like 200 basis points year-over-year operating leverage.

Is that the right level that you think you can hold or maybe even expand those jaws, widen those further in 2019?

Just want to get your thoughts on that.

I'll give you some thoughts and Daryl can get into more detail but we think that we can continue positive operating leverage because of 2 things.

One I just alluded to, we have a multifaceted approach on revenues.

I mean, it's not just our loan strategies.

I feel like our Insurance business, our wealth strategy, different number of strategies are producing fees that are very strong and getting better by the day.

And we are focusing intense energy on controlling our expenses.

Now we are investing heavily in digital, et cetera, et cetera, which a lot of people are doing, but we're not allowing that to drive our expenses up.

We're simply holding ourselves accountable.

We're saying, yes, we have to make those expense investments, but we have to prune the cost in the old bank, like closing branches and finding new, better -- new and better ways to do things.

And we've got a lot going on with regard to expense management in this company on a multifaceted set of fronts.

So I am personally very confident in terms of positive operating leverage.

Any color, Daryl?

Yes.

I think, John, as Kelly said, we have a lot more financial flexibility on the expense side as we kind of make the changes on the traditional bank.

I think we're reallocating expenses, and feel pretty good expenses are flat pretty much year-over-year.

When you look at it, we ended -- we're forecasting to be at $6.8 billion in expenses adjusted this year, which is flat from '17.

We hope to try to continue that into '19.

On the revenue side, we don't have the run-off portfolios that we had in the prior year.

Mortgage is growing.

Auto is growing.

We're getting real close to turning the direct retail fees in the next couple of quarters.

So we feel good that loan growth will be an engine for revenue growth.

Our margins are growing slightly, as rates continue to go up, so it's positive pressure on revenue there.

I think fee income, our core fee income businesses should continue to grow quite nicely.

I know mortgage is under stress but this next quarter, commercial mortgage should be really strong.

If you look at Insurance, Chris can comment on that, but that's growing nicely organically.

Service charges are up.

We're having a higher record account growth going on right now.

And then investment banking and brokerage had record revenue.

So I think we're starting to hit on most of our cylinders right now, and I think we're very -- feel optimistic about revenue.

We will now take our next question from Ms. Betsy Graseck from Morgan Stanley.

Okay, so a couple of questions.

One, just wanted to dig in a little bit on the loan growth here on the outlook because you had, obviously, very strong loan growth LQA this quarter but I noticed you have a 1% to 3% LQA expectation for next quarter.

Could you just give us a sense as to why you're anticipating that kind of deceleration or is that just conservatism on your part?

Maybe you can give us some color on that.

So Betsy, generally, it's 2 things.

We do have, as you well know, the seasonal slowdown in the fourth.

And we are, I think, being a little conservative, but we are expecting these paydowns to continue.

And that's built into our forecast.

Now if the paydowns were to subside earlier than we expect, that could give us a positive lift.

But it's basically seasonality and exaggerated paydowns.

Yes, if you back out the seasonal portfolios, Betsy, that we talked about, our 5.8% this quarter was aided by seasonality.

So 5.8% becomes to like maybe mid-4s, 4.5%, I would think.

And if you back that in and factor that in into the fourth quarter, our 1% to 3% would really be closer to 2% to 4% if we didn't have the rundown in those portfolios.

So we're really only slowing down loan growth a little bit, not as much as what you're seeing there, just because of seasonality.

Got it.

Okay, that's helpful.

And then secondly, separate topic, just on the outlook for reserving, fantastic credit quality this quarter and the AOLR ratio is holding steady.

The question I have is how you're thinking about that AOLR ratio and maybe you can give us some color around how you're also thinking about CECL.

There's been some news recently about some industry developments.

Maybe you can give us some thoughts on that as well.

Yes, Betsy.

This is Clarke, I'll take a stab at where we are today, and then Daryl will chip in on CECL.

So we're at 1.05%, and obviously, we've got very good coverage ratios right now, but I think our long-term perspective is we're in the long cycle.

It's been very good.

We're all [leaning] into a lot of new areas in the abnormal seasoning.

So to us, now is not the time to be releasing reserves.

But given the excellent credit quality, I mean, the outlook's still very positive, we think we should have stable to very solid performance.

So I think, in our view, it looks more like a stable reserve rate versus any big build.

Definitely no releases.

Yes, I think from a modeling perspective, we're working along the lines of being ready to go parallel sometime in early part of '19.

We have modified our CCAR models and are using most of them for CECL.

And what we're finding is that the models are very pro cyclical, which is a concern that we have on the impact on the economy.

I don't know if you saw it, but yesterday, the Bank Policy Institute sent out a letter, Greg Baer, representing the top 50 banks in the U.S., asking for FSOC, which is basically chaired by Secretary Mnuchin and all the regulators, to ask FASB for a pause to study the impact on the economy because of a procyclicality.

And the studies that we've seen and the analysis that we have basically shows that our ability to lend if we went through the last downturn that we just went through, would be twice as worse as what we had just because of the distortion of earnings and capital because of how the accounting is being accounted for with CECL.

So we feel that we'll prepare to go forward with it.

But if FASB could change the accounting such that it more reflects the reality of lending, that would be a positive and then the regulators could also impact and maybe have capital relief.

But both of those is something that we're hopeful for; the industry seems to be pretty united in that right now, from small banks all the way up to the largest banks, and we're hopeful that the regulators in FASB listen and do what's right for the economy and our clients.

And I just want to stress this for the entire audience listening, this is a really big deal.

I mean, the banks will be able to survive it but the problem is, if it goes into effect as now projected, it's really bad for the economy.

It's really bad for consumers.

It's really bad for business.

It is not the right thing to do.

And so we are asking FASB to slow down, take a breath, let's study this carefully and let's see what the real impacts are and likely, let's make some adjustments.

So we have Secretary Mnuchin, and we believe he will lead the effort through the Financial Stability Oversight Council to bring all the organizations together to look at how negative this will be from a systemic point of view.

So a lot of good momentum.

Anybody out there listening that has a chance to talk to congressional people and/or regulators, please put in your word for it because now is our time to get this changed and put it into a more proper light.

Okay.

And in the meantime, you are moving ahead with the parallel run next year, is that right?

Yes.

Since we have Investor Day next month, Betsy, I'll give you some projections.

It won't be finalized yet, but I'll give you some projections on the impact.

But since our portfolio is diversified 50% retail, 50% commercial, the consumer portfolios tend to get hit pretty hard in CECL especially under stress times.

Our allowance would probably be higher than what it is now, but we're really concerned with the volatility.

But we'll be able to show you all that.

We'll show you the pro cyclicality that we have and anything else, but it won't really get finalized until probably middle of next year when we have more exact changes on the allowance.

But it's really also dependent on the economy, what's going on in the economy.

(Operator Instructions) We will now take our next question from Ms. Erika Najarian from Bank of America.

So I just wanted to, first, thank you for reminding us of the diversity of your Commercial portfolio.

There's been a lot of talk about the emergence of nonbanks in traditional middle-market lending.

And I'm wondering if you can give us a sense and a flavor of what those competitive dynamics are like, particularly on structure.

And whether the competitive dynamics in businesses like premium finance or Sheffield are different and perhaps more defensible.

And really what I'm trying to get at is that if the economy continues to be good next year and nonbanks continue to be a factor in Corporate Banking, is BB&T's loan growth perhaps more defensible, given those competitive dynamics?

Yes, that is a really good, insightful question, and that's the point, Erika, we've been trying to make.

It is true that the nonbanks are still very, very aggressive and they are clearly penetrating further down into the commercial portfolio than they ever have.

My own view is they're taking enormous risk.

And when we do have a cycle, you're going to see a lot of them washed out and that will be a very good thing.

But today, they are a competitive factor.

They are driving structure down, they're driving rates down and it's making it substantially tougher for commercial banks to be able to compete in the market.

And that's not to say we don't try really hard, it's not to say we're out of the business, but they'll take our credit and they'll take it to an extreme of low-risk returns that we just aren't going to go into.

So to your point, that's why BB&T has been so focused over the last 10 years on developing these diversified strategies, and they are more defensible.

The nonbanks don't get into areas like Sheffield and premium finance and areas like that, that we have.

So I'm not saying we don't have competition there, but it's not the kind of competition you're seeing from these nonbanks.

And so if you put that whole portfolio and our whole portfolio together compared to some others, I would say that we're in a relatively much stronger position moving forward in terms of growth relative to competition -- aggregate competition.

So then our growth would be relatively more impacted by the general economy versus any specific competitor.

Got it.

And my follow-up question is, just wanted to clarify your response to John's question on operating leverage.

As we think about 2019, should we think about revenues and expenses relative to each other?

Or is it possible that the $6.8 billion level of expenses can be maintained, even if revenues are perhaps a little bit better than what consensus expects?

So Erika, we've been saying for the last, really, couple of years, that we are intensely focused on being disciplined with regard to expense [per team].

You can't just say that.

You have to do it a lot because your expenses are naturally going up, absent any intervention.

And so we've been working really, really hard for well over a year on multifaceted strategies.

And it's not just little strategies.

We have big strategies.

We have large projects going on across the company.

And it's all about reconceptualization and building the new bank and being sure we have the foundation laid so that we are very successful for the next 146 years.

And so we take all that very, very seriously.

We call it building the new bank.

And so that's allowing us to hold expenses relatively flattish.

As we said, over a year ago, we delivered; we think that'll carry into '19.

And certainly, we expect revenue to increase.

We expect to have decent loan growth as margins are improving, rates are going up.

But in addition to that, we have so many fee businesses that have such great opportunity.

Our Insurance business is -- and Chris is doing a great job, with John Howard, our President.

But it is really coming into its own and has huge opportunities in terms of improvement on our wealth strategy, our credit card businesses.

Across the board, we have multifaceted strategies that are driving up not just interest income but fee income.

So for all these reasons, we feel very confident about positive operating leverage.

We will now take our next question from Mr. Stephen Scouten from Sandler O'Neill.

I was curious if you could speak to the move in end-of-period deposits.

I know you have the slides talking about average deposits.

But it looks like end of period, we're down about $5 billion quarter-over-quarter.

I'm just wondering if there's any expected reversal in 4Q.

Or if you think you might face higher loan-to-deposit ratios as we move into 2019?

Yes, Steve, this is Daryl.

I would tell you our liquidity and core funding is really strong.

One of the categories that we use to fund the bank is Eurodollar time deposits.

That's not a client-funding source, it's a national market-funding source but it goes into our deposit totals.

We were pretty much out of that at the end of the quarter.

This past quarter, that was probably worth $2 billion or $3 billion.

We also have some seasonality on when just how deposits move back and forth.

So what I really look at is average deposits over like periods of the previous year because that's really -- [you can see in the] comp the seasonality that ebb, and I think our core deposits are growing nicely.

Our noninterest-bearing deposits grew a little over 1%, which is really strong in this rate environment right now.

So we feel very good from a deposit perspective.

But you did see a little attrition out of some public deposits.

During the quarter, 3 clients did move out.

But that was very much rate driven; those tend to be hotly competed funding sources in some situations.

But our core deposit growth is strong.

Our account growth, when you look at account growth, we haven't had account growth -- you think that as we are down over 300 branches and our account growth that we're getting right now is the highest it's been in 10 years in our system, it's coming through the branches that we have out there, through our direct channels, our digital channels, our niche businesses that we have that focus on deposits.

So all that is really strong, and I would say organic growth on deposits is the best it's been in a long, long time.

And all of that is driven by the fact that we are having substantial improvement in client satisfaction from our clients.

All of the things we're doing in terms of digital banking, our virtual call centers are really paying off.

And so satisfaction's up which, as Daryl said, is driving net account growth, which is really good.

Okay.

That's really helpful.

And then I guess as I think about that heading into 2019, if you're getting away from these Euro deposits and maybe you fund some of the gap with, it looks like, short-term borrowings at least in the near term, what does that do to your NIM outlook as we move into 2019?

Do you think if we get to, say, a 94%, 95% loan-to-deposit ratio, we could see less upside with further rate hikes that we may see?

Or how can I think about that funding gap and the impact on costs moving into '19?

Yes, Steve, I really don't think we have a funding gap.

I think our core deposits will grow in sync with our loan growth.

We will augment that growth through nonclient funding.

Now that comes and goes just because of seasonality in deposits.

So we could add Eurodollars back into this quarter.

It's really a funding decision, cost decision.

But over the long term, I think we are very focused on making sure core deposits grow with loans, and we think we can accomplish that.

From a margin outlook, we are still asset sensitive.

As rates rise, we think our core is still going to go up a couple basis points.

Our purchase accounting is pretty much out of our system, and there's only 10 basis points left.

So we're only really losing maybe 1 basis point a quarter now as that fades away.

So I think margining should be up slightly on a reported basis as well, as rates continue to rise.

Okay, great.

Thanks for the color on the branch closings versus the account growth.

That's good to know, I appreciate that.

We will now take our next question from Mr. Michael Rose from Raymond James.

Just wanted to get a little color on the share repurchases.

I know you purchased -- repurchased $200 million this quarter.

I think Daryl said $375 million.

Your authorization is $1.7 billion.

Any reason for the lag as we think about the next couple of quarters?

We're really just trying to manage our capital ratio.

As we said all along, we want to keep our ratios pretty consistent and not really lever up the company any more right now.

So if you look at our slides that we have there, our CET1 is at 10.2% for the last 5 quarters, and we're really just keep -- trying to keep it in that range.

And based upon what we think the balance sheet growth is going to do, it'll come up at that same number.

Whether we spend the whole $1.7 billion really depends on how much the balance sheet grows.

That's why we're giving you the amount that we're buying back quarter-to-quarter.

Very helpful.

And then maybe a follow-up.

And I know there's been a lot of talk around you guys' M&A strategy, the slides have come out of the deck.

I just want to see where you guys stand with the Consent Order and any thoughts on M&A going forward.

With the Consent Order, we're moving along, as we reported before, we've effectively done all that is required of us in terms of our BSA/AML program.

We are finishing up the final leg of an automation project that will be completed by the end of the year.

So we -- as you know, we already had the Consent Order [both with the] FDIC and the state.

We fully expect as we head into the first quarter, if not before, that the Fed will conform with FDIC and the state.

So there's no issue there, it's just a matter of timing and expectations of regulators in terms of when we actually dot every I and cross every T with regard to the automation of certain aspects of our BSA/AML program.

So that's all going very, very well.

As I said, we are laser focused on organic growth.

We are very excited about all of the things that we have going on.

We can grow this company in terms of revenues.

We can control expenses, we can increase earnings and EPS, which we think will result in improved TSRs for our shareholders and that's what we're laser focused on.

We will now take our next question from Mr. Matt O'Connor from Deutsche Bank.

I was hoping to follow up on kind of the last track of questioning there.

And I guess my question would be, your capital levels are very strong.

Some of your peers, like USB has an 8.5% target; SunTrust, 8% to 9%.

I'm not sure they're getting down though right away.

But why can't you bring your capital down as you think about the medium term to those levels?

And obviously, you've just addressed the fact that you're more focused on organic growth and less on deals.

So are you hopeful that loan growth accelerates that much?

Do you just want some cushion in case of a downturn?

Or what's the thought process on keeping capital so high, especially considering how well you performed in the CCAR process?

So that is an opportunity, if you think about our company.

We are conservative, you've got to start with that, but we're not irrational either.

So there are multifaceted reasons why at this very moment we are being conservative.

One is we want to get a better read in terms of future projected economy.

We feel good about it, but there's a lot going on in the world and so we're holding a little bit of [powder dry] because of that.

Banks, they want to see how the CECL thing plays out because nobody can tell you today what the underlying impact on capital can be.

And we just don't want to ever be in a place where we end up having to pull out our products out from the marketplace.

It'll cost you a little bit to (inaudible) together, it will cost you a lot if you have to raise capital potentially at such an opportune time.

And so for those 2 reasons, we're holding a little extra capital today.

I wouldn't say we're holding a huge amount of extra capital because of M&A.

We -- if we were to do any kind of deals, that the companies would be well capitalized or we wouldn't be interested in them anyway.

So I don't think that's a big issue.

So -- and to be honest, there's been a lot of movement recently with regard to discussions in Washington around the $250 billion level.

Independent of M&A, we will get to $250 billion at some point [between margin and] growth.

And so -- but there's a lot of movement right now.

You've heard from some of the speeches that Vice Chairman Quarles has talked about looking -- aggressively looking at above $250 billion.

So it's not self-evident that we would even have to have additional capital above $250 billion.

So when you see some clarity around all of those factors, there's clearly the opportunity for us to lower our capital relationships.

Okay.

And then just separately, the Regions Insurance acquisition, it was roughly breakeven, slightly accretive to earnings this quarter.

But obviously, the cost saves are still to come.

Can you remind us what the margin opportunity is there as we think about that business?

Yes, Matt, it's Chris.

So we actually expect the full year -- we had a 2-year model.

We expect the full year actually to be about 3x better than what we expected.

So you should see some improvement from here.

And we expect the margin -- as we are able to kind of harvest this $25 million to $30 million in synergies, we expect the margin to bump up about 15% really in the first year.

It could even be a little faster depending on timing.

And so the margin of that group should be actually accretive to our overall insurance margin.

So we expect it to be very helpful to go through.

We had great integration, retention.

I think we've lost 1 producer, and so we've had real strong retention across the whole company.

Systems conversion is coming up November 2, and we expect that to kind of go very, very smoothly.

So we think it's very helpful, as we get the synergies, to drive the margin.

(Operator Instructions) We will now take our next question from Mr. Gerard Cassidy from RBC Capital Markets.

Maybe Clarke can address this on credit quality.

Obviously, as you pointed out, Daryl, in your opening remarks, credit quality is extremely strong today for BB&T and for the industry.

A couple of questions.

One is what indicators are you guys monitoring to look for any cracks that may start to develop in credit quality?

Again, I know it's coming off of a very low base.

And then second, I was struck by your comment that this is the best credit quality since 2006, and we all know what happened following 2006 to the industry's credit quality.

So I'm trying to get my arms around that credit is great and what could cause the next issue for the industry as we look out over the next 2 years?

Gerard, this is Clarke.

That's a very good question.

I'll take a stab at it.

A couple of things, I just would remind you all that I think all banks are operating at very low levels of losses and nonperforming assets probably below long-term trend levels, even with stable risk taking.

So I think part of that is we've just been in a very good economy, long end of the credit cycle.

So at some point, it will normalize to more historical level.

It's just a matter of when -- we're trying to be very mindful of that.

So we think, obviously, any shock there or any change in the economy would certainly have an effect.

But some of the things we're looking at, just trying to be very careful about watching early seasoning in our portfolios, any characteristics of risk increasing or borrower deterioration I think is really important.

You can't just look at current performance metrics.

To your point, you have to look at forward-looking risk management.

You've got to do stress testing.

And I think the bigger risk for the industry right now, a lot of people are pushing into new, unseasoned areas of risk taking.

A lot of that coming out of open banking disruptors, things like digital unsecured lenders through third parties, lots of people going into areas they haven't been in before.

So I think if you're going to see a crack in the future, in my opinion, it would be not fully appreciating the fact that a lot of these portfolios are unseasoned now and may be taking more risk than people realize.

The other thing I would say is we're clearly seeing higher risk taking in traditional areas like C&I by the smaller banks.

I think some of the smaller institutions are clearly taking more risk than what you see the large regionals or mid banks take.

So Gerard, here's another interesting thing to think about.

I think all of us tend to think in terms of patterns, and I think the challenge maybe we all have today is we're trying to resort back to traditional 30-, 40-year patterns, which might not be rational.

This 10-year process we've been through is very unusual.

So as you know, typically, we have recessions that are relatively deep.

We have steep improvements, booms, and then we have another raise from the [asset buys].

We don't have that this time.

This has been a very slow, methodical recovery, which may lead, a, to a longer recovery than most people expect; and b, it may not lead to a steep negative credit correction.

And I'm with Clarke, it kind of feels like we're based on the bottom but that's based on my pattern of thinking.

And so I just -- I'm trying to challenge my own self in terms of just thinking in terms of patterns.

This is a new world, a new environment and there is a reasonable chance that we will see a relatively continued slow, steady type of market for a number of years, which may not end up in a substantial credit cycle, which I know everybody is expecting.

Very helpful, Kelly.

Speaking of patterns, turning the clock back even further, when you compare what we just went through in '07, '08, to the 1990 banking debacle, that debacle, as we all recall, was pretty severe and we had a great recovery coming out of 1990.

But as we got into the end of the decade, which led to some incredible consolidation amongst our biggest banks, I don't think anybody would have dreamed of Chemical, Chase, Manny Hanny and JPMorgan becoming one bank at some point in the future which, of course, happened.

Kelly, in your view, when you look out 2 to 3 years, do you see big bank consolidation, where $100 billion and a $200 billion or $150 billion and a $50 billion bank get together?

And if so, what has to happen to kind of get that catalyst going?

I remember, George, that the 1990 debacle, as you called it was -- and I lived right in the middle of it, it was a commercial real estate-driven kind of phenomenon.

We had a huge run-up in commercial real estate.

We had some profit lending, and most of the larger banks back then were much more commercially driven than they are today.

Most of them are diversified; maybe not as much as us, but most are diversified.

So we're not as totally commercially dependent.

So number one, I don't think we have the tendency to build up commercial risk that we had back then.

So I think it may be not quite as good a comparison.

But to the extent that there will be cycles and to the extent that there will be corrections in credit portfolios, et cetera, obviously that will put pressure on earnings.

That will cause organizations to have to contemplate their strategic futures.

But to be honest, I don't really expect to see a lot of big M&A, big bank mergers.

I really don't.

At one time I did, as you know, but I don't expect to see that today.

I think what's happening -- and this is a relatively recent phenomenon, and it's beginning to cause me to at least think again, out of pattern, a little differently about scale and size.

Historically, I thought in terms of -- and you had to get your scale to get your cost per unit down because you had to build all these systems and all yourself.

We're now looking at some systems improvements where we're not going to have to build it ourselves.

We're looking at -- so there's a real movement inside our industry and outside providers to use a shared utility concept where it's possible for organizations to plug into a shared utility and not have to have inherently the scale necessary to get the cost per unit down.

In fact, our banking industry through the Bank Policy Institute and The Clearing House, are working on some shared utility concepts today, where all the banks will own certain activities and will all have the maximum scale advantage.

So there's some interesting movements now that I'm really happy about that will potentially tap down the need for high scale in terms of getting real good operating decisions.

We will now take our next question from Mr. Saul Martinez from UBS.

Kelly, I wanted to follow up on your comments about the regulatory environment.

Then and you -- I think you mentioned that there's not a lot of movement related to above $250 billion banks, which makes sense, given the Fed's focus on S.2155 in banks of $100 billion to $250 billion.

But Vice Chair Quarles has been very clear that he thinks prudential regulation should move to a model based on complexity as opposed to size.

So I'm curious how optimistic you are that we do eventually move towards that model and whether -- and to what extent banks above $250 billion, which you will, obviously, cross at some point, will benefit and how that could play out over the next couple of years.

So I think Vice Chair Quarles has a really good handle on this issue.

I've talked to him directly and heard him in meetings.

He really understands this, and he gets that there are a number of institutions, including BB&T -- I'm not speaking for him, that's my opinion -- but institutions like BB&T that are above $250 billion that do not have the same kind of risk as some of the larger, more globally systemically important institutions.

He gets that.

And so I'm very optimistic that he is going to be moving towards modifying the prudential regulatory standards above $250 billion.

It's just a meaningless number and -- the Fed actually has a risk scoring card they've been using for 8 or 10 years that looks at institutions across a broad base, kind of a matrix look at the risk of the institution versus the number in terms of assets and that's -- and they've been using that internally for years.

And so I know that he is mindful of that.

But for example, if you look at that, BB&T, the scores range from like 0 up to like 450 or 500.

BB&T has a score on that thing of about 50 and some of the largest institutions have 450 or 475.

So the order of magnitude is really important here.

And I think Vice Chair Quarles gets that.

So I'm very optimistic that when we do -- whether this is 3 or 4 years or whenever it is when we organically most likely move above $250 billion, then I think we very well may not see a material issue in terms of regulatory changes in terms of how they regulate us.

Okay.

No -- that's helpful.

Maybe if I can switch gears a little bit.

And maybe this one's for Chris.

But on the insurance business, you guys have expressed optimism and pleasure about how the Regions deal is going.

But can you just give us a little bit more color there on the revenue environment and what your expectations are?

I think if I exclude Regions, the growth year-on-year is around 4.5%.

But I'm just curious, just kind of how we should think about the glide path going forward and if you can just comment on volume trends, pricing trends in that business, that would be helpful.

Sure.

I'd be happy to.

Actually, our core organic growth, if you exclude contingent, commissions and Regions, is actually for the quarter 6.7%.

And it's 5% for year-to-date.

And you're right, there are about 3 drivers.

One is pricing.

Pricing, from everything I've read recently, seems to be settling in, in the sort of composite rate of about 2.5%.

I mean, we've got certain things like commercial auto that's as high as 6% and transportation, but the composite is at about 2.5%.

So you've got a healthy pricing environment, and that's really on the heels of last year's $100 billion in losses that those 3 or 4 storms and wildfires, et cetera, created.

Our client retention is also a driver.

It's best-in-class, generally north of 92%, and that's been consistent for years.

Also very strong and industry leading in our wholesale business.

And then the one Daryl commented on that I'm most excited about is really the new business production, and that's really just the economy, having a solid economy driving new exposure units.

So if the business adds an extension on their building or they hire new employees, they need new coverage and they need new employee benefits.

So as the economy improves, the exposure units grow.

For example, this quarter, it was up 9%.

Year-to-date, it's up 12%.

It's been a long time since we've had 12% kind of numbers there.

So it's driving overall core organic growth of 5%, and we would -- I think I said last quarter, we were looking at something like 3.5% to 4% organic growth for the year.

We're really looking more like 4% and -- 4.5% to 5% now.

We feel very, very positive for all the reasons that I've mentioned.

In addition to that, we've got a number of things going, I mentioned the $25 million to $30 million synergies in Regions, that's a big deal.

We've got a lot of backroom activities going on, Kelly alluded to it earlier.

Backroom systems where we're applying robotics, and we've done a number of other things that we're actually taking cost out of the business, reconceptualizing our employee benefits business, which is also a big driver.

If you think about pricing going forward, yes -- this industry is unlike the way it used to be.

It now receives fresh capital pretty consistently through the capital markets in the way of cash bonds and that kind of thing.

So it serves to provide a less erratic and more stable kind of market.

But I think we're in a, instead of a down 2% to 3% pricing scenario last year, we're in kind of that 2%, 2.5% range.

And for us, property and small and large accounts are up about 1%, say, the total up 3%, and we're disproportionately slanted towards property and small and medium-sized accounts.

So I think we benefit a bit there as well.

We will now take our last question from Mr. John Pancari from Evercore ISI.

Kelly, just back to your M&A commentary.

Just -- I know you're emphasizing now a little bit less interest in a whole bank M&A.

What changed from only a few months ago?

I know you put the slide deck out talking about your parameters around deals but your tone has definitely changed now.

Is it that scale issue that you mentioned that changed your view on how you look at scale?

Is that the main thing that happened over the past few months or is there something else coming into play?

So John, there are 2 things.

One is the scale issues that I've talked about have definitely changed my views with regard to this whole issue.

And the other thing is that, truth be told, most of my comments were taken out of context.

Nothing has changed with regard to my view.

I've been laser focused on revenue growth, and I talked about it extensively for a long time now.

And so if you're referring to some reaction to the last quarter, it was taken out of context.

I did not intend to convey that we were actively pursuing.

In fact, I think I said I hadn't made any phone calls with regard to mergers in several years, which is true.

So we are laser focused on organic growth, and that's my message, and I hope it's understood.

Got it.

All right.

Thank you for clarifying, Kelly.

And then separately on -- I just have a question on 2019 expectations.

If you can just give a little bit of color.

It's in 2 areas but real quick on the loan growth side.

I know your guidance is 1% to 3% for the quarter -- for fourth quarter.

But for 2019, how should we think about loan growth?

I know you said 4% to 6% previously.

And then separately on the expense side, I know you're looking at 57% or better on the efficiency ratio for '19.

Is that still something you're comfortable with?

So John, we hope you'll come down to Greensboro for our Investor Conference in a few weeks.

We're going to give you some good color in -- on a number of areas, including the ones you asked about, at our Investor Day conference.

So we hope that you will be eager enough to have that question answered to come on down and visit.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.