U.S. Markets open in 7 hrs 16 mins

Edited Transcript of BBT earnings conference call or presentation 20-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 BB&T Corp Earnings Call

WINSTON-SALEM Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of BB&T Corp earnings conference call or presentation Thursday, April 20, 2017 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alan W. Greer

BB&T Corporation - EVP of IR

* Christopher L. Henson

BB&T Corporation - President, COO and President of Branch Banking & Trust Company

* Clarke R. Starnes

BB&T Corporation - Chief Risk Officer and Senior EVP

* Daryl N. Bible

BB&T Corporation - CFO and Senior EVP

* Kelly Stuart King

BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company

================================================================================

Conference Call Participants

================================================================================

* Amanda Beth Larsen

Jefferies LLC, Research Division - Equity Associate

* Gerard S. Cassidy

RBC Capital Markets, LLC, Research Division - Analyst

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* John Eamon McDonald

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* John G. Pancari

Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst

* Kevin James Barker

Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst

* Marlin Lacey Mosby

Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies

* Matthew D. O'Connor

Deutsche Bank AG, Research Division - MD in Equity Research

* Matthew Hart Burnell

Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst

* Nancy Avans Bush

NAB Research, LLC, Research Division - Research Analyst

* Saul Martinez

UBS Investment Bank, Research Division - MD and Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the BB&T Corporation First Quarter 2017 Earnings Conference. (Operator Instructions) As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Alan Greer of Investor Relations for BB&T Corporation. Mr. Greer, please go ahead.

--------------------------------------------------------------------------------

Alan W. Greer, BB&T Corporation - EVP of IR [2]

--------------------------------------------------------------------------------

Thank you, Debbie, and good morning, everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the first quarter of '17 and provide some thoughts for next quarter.

We also have other members of our executive management team who are with us to participate in the Q&A session: Chris Henson, our President and Chief Operating Officer; and Clarke Starnes, our Chief Risk Officer.

We will be referencing a slide presentation during today's comments. A copy of the presentation, as well as our earnings release and supplemental financial information, are available on our website.

Let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs or expectations.

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

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

Please also note that today's presentation includes certain non-GAAP disclosures. Please refer to Page 2 and the appendix of the presentation for the appropriate reconciliations to GAAP.

And now I'll turn it over to Kelly.

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [3]

--------------------------------------------------------------------------------

Thanks, Alan. Good morning, everybody. Thank you very much for joining our call as always. We really, really appreciate your interest in our company.

So it was a very good start to 2017. We had record quarterly revenues, good expense control and strong returns.

The net income available to common shareholders was $378 million, down 28%, but remember that included several major items I'll discuss in just a moment. So adjusted net income was $611 million, which was up a significant 15.1% versus first quarter of '16. Adjusted EPS totaled $0.74, up 10.4% versus the first quarter of '16, and our returns were really good. Our adjusted ROA was 1.21%, adjusted return on common equity was 9.18%, and return on tangible common equity was 15.56%. And our risk-weighted adjusted assets return was 1.52%. So very, very good returns.

We had record taxable-equivalent revenues totaling $2.8 billion, up 9.1% versus first quarter of '16 and up 7.6% annualized versus fourth quarter. So good revenue momentum, driven in part by our net interest margin, which increased 14 basis points to 3.46% versus fourth quarter. Our fee income ratio declined slightly to 42.1% versus 42.6%, but let me just make a point of emphasis here.

Remember, that it's down from where we typically had, at around 44%. The reason is because our fee income ratio, every time we do a merger, gets diluted because the smaller institutions just don't have all of the fee services that we have. That's one of the reasons we acquire these companies. And so while it's down, it's really an indication of an opportunity because, over 2, 3 years, we'll build that fee income back into those companies. So that is not a negative, it's just an implicit opportunity.

If you're following with me still on Slide 3, our GAAP efficiency ratio was 75%, again it has the unusual items. So the adjusted efficiency ratio was 58%, which was down from 59.5% in the fourth quarter.

Credit was just another outstanding quarter. Credit improved across the board. So NPA, performing TDRs, delinquencies, net charge-offs all declined versus last quarter. Absolutely great credit quality.

If you're looking at the end of the deck on Slide 4, I just want to mention a couple of the selected items. The first is the loss on the early extinguishment of debt, where we -- remember, we announced in early January that we terminated $2.9 billion in FHLB advances on a pretax charge of $392 million, which reduced earnings $0.30 per share, but remember this increases run rate and margin going forward.

We did have merger-related and restructuring charges of about $36 million pretax, and that was $0.02 negative impact to diluted EPS. And then we did have excess tax benefit on equity-based awards, which you've been hearing about from other companies as well. This will be a recurring item, in typically the first quarter, but remember, it could be up or down. So we chose to take it out. We debate that, but because it's volatile, we just don't consider that a normal type of recurring item.

If you'll look at Page 5, we just want to give you a quick report card, if you will, kind of how we did relative to our guidance for the quarter. So with regard to loans, we were a little bit shy of guidance, but that's probably had a steeper decline in mortgage warehouse. That may be getting ready to come right back with rates being back down, but that's a little volatile and substantially out of our control.

Credit quality was very consistent with our expectations. Margin was a little better than our expectations given in our guidance. Noninterest income was as expected. Expenses were a little better, and operating leverage at 10.5% was a little better. So overall, we got most of the checks, a few check pluses, and just one little minor negative. So we felt like that was a -- we gave ourselves an A on that. You could argue it's an A-plus. We gave ourselves an A anyway.

So if you go to Page 6, let's take a look at loans. This is a really absent quarter area for us all to think about. So our underlying loan growth was very good relative to the market. I'll explain what I mean by that. If you look at our actual GAAP loan growth annualized, it was down 0.9%. But if you look at average loans underneath that, we had really good growth in a number of areas.

So equipment finance was up 21%. Grandbridge, up 16%. Commercial credit capital was up 10%. Now sales finance increased $297 million or 11%, but I would point out, that was primarily due to a portfolio purchase late in the fourth quarter. We do not plan any additional portfolio purchases in our -- for the foreseeable future certainly for '17.

The good news is that I'm seeing high growth, excluding mortgage warehouse, was 4.5%, which was very good. That was driven substantially because of our Community Bank production, which was up a lot compared to the first quarter of '16. In fact, our first quarter production bank was our best in history, and that's substantial because of improvement in our Main Street, which I'll talk about in just moment. Our expectations for GAAP growth for the first quarter is 1% to 3%.

If you'll look at Page 7, this is giving you a little bit more color with regard to what I call the underlying loan growth. So we are really focused on optimizing our use of capital for lending. We think the marketplace today is not like it's been in over the last couple of decades. You can't just grow loans in and of itself and think that's a good thing. It's really important to look at the kind of loans, the kind of credit implications and, in particular, the kind of returns you get relative to capital allocation because, as you know, capital allocation in our business today is a big deal since we are required to keep so much more capital than we historically have.

So we're thinking in terms, as you can see on that chart, we're thinking in terms of our loans today in 3 categories, our core categories, which is basically C&I, Community Bank, et cetera; our seasonal portfolios, which is Mortgage Warehouse Lending and all the lending subsidiaries, which go up and down based on seasonal factors; and then what we're calling an optimizing portfolio, which are portfolios that we have decided for a number of reasons to allow to try over some period of time. It doesn't mean we're automatic out of the business, it just means for, right now, we don't want to grow it, we're letting it just kind of run off.

So if you think about our growth strategies within those 3 areas, you obviously, we're trying to grow the more profitable loans with better risk profiles. We are reducing exposure to prime auto loans, given the low profitability and uncertain market outlook. And not that we're concerned about our quality, it's just that, because we're very conservative on underwriting, we don't take long-term positions, et cetera, but the price you get on these loans today is just not attractive relative to the capital we had to allocate. So we're not out of the business, we're just making our decisions about pricing and turn more conservative, more profitable.

We continue our strategy to reduce exposure to residential mortgage, and that's simply because of low profitability and expectation of rising rates. So if you look at our core and seasonal portfolios, our expectations for the second quarter is that they will grow at a range of 5% to 7%.

So if you take those 5% to 7% minus the optimizing portfolios, they get you to the 1% to 3% growth, which I mentioned earlier. But it's important to look at the underlying areas that we are trying to grow, they are growing nicely at 5% to 7% in this kind of market. And that core growth is driven primarily by our corporate strategies, but largely by our Community Bank.

I just want to make sure you understand that with regard to Community Bank, this is a bit esoteric, but over the last 8 years, Main Street has really struggled, and we are primarily a Main Street lender. As you know, most of the growth in the market over the last several years had been by large companies who have been doing large capital-type restructurings and have participated actively in very strong international markets, which we don't participate in. So relative to a lot of our competitors, we had a harder go of it because of our focus on Main Street.

Now we believe Main Street is changing, which I'll talk about in a moment, and so -- and getting better, and so if it does -- (inaudible), but if it does get better, then you should expect to see BB&T's loan production be relatively better than many of our competitors, who have been depending on the loan growth coming from a lot of the largest corporations and their international exposure. So we just think BB&T's time has come.

If you'll look at Page 8, on deposits, not a lot to say there. Our noninterest-bearing deposits were down, but that's seasonal. I think you all know that. I would point out that our betas remained low in the 10% to 15% for the last rate increase, and frankly, we think they're going to stay low. It's hard to know exactly, but we think they are going to stay low.

Now we'll take a minute before I turn to Daryl to give you a little bit of color with regard to what we're really trying to do from an executive leadership point of view in terms of moving forward.

First, with regard to the marketplace. There is a lot of volatility and politically emotionalized marketplace today. You know Congress is kind of moving forward 1 day, moving backward the next day, not a lot we can do about that, practically nothing we can do about that. We do believe, though, that most likely is that they will get their act together. We think that most likely is that over the next several months, maybe by the end of the year, there's a decent chance you will see a revised health care program, combined types bill with infrastructure and improvement in regulation.

No guarantees, of course, and there's a thousand opinions about that, but that's what we believe. And so we think the market is getting better, but we're not waiting for the market to get better. We just think if that comes, that's nice, but we're doing what we can do.

So there's 6 focus areas that we are really, really energized about today, all have big lift to our company. One of those is we're accelerating our growth in the Community Bank. As I said, as Main Street improves, then we will improve. And I'll tell you, regardless of all the skeptics about what's going on out there today, I've been in 8 or 9 of our regions in the last few weeks and in talking to our lenders and in talking to clients, whom I have lunch with every time when I'm out there, I'll tell you, the optimism is palpable. People are really excited, they're energized, and they are not listening to all the stuff in Congress. They might change their mind. But today, they are excited, and they are translating that into action. They're talking about loans, we're getting a lot of request about new equipment, new buildings, adding more associates. So it is happening. I can't guarantee it will continue to happen, but it is happening today.

We're going to accelerate our Corporate Banking loan growth. That's been a real star for us for the last several years, but we do have a really unique opportunity to continue to grow that at a faster pace.

We are still really, really conservative in terms of our whole positions in large corporate exposures. We are going to increase that some. We're still going to be very conservative relative to a lot of peers, but we can increase many plans out here and still be very conservative. So you can expect to see our corporate loan growth continue to be very good.

We're going to accelerate our growth in wealth business. We've been working several years on getting that wealth strategy developed. It is working extraordinarily well. In terms of assets under management and in lending, they're doing great, but we can ramp it up to another gear, which we're doing. We are optimizing our consumer portfolios. As I mentioned, we are deemphasizing prime auto.

With regard to Regional Acceptance, we have a really good quality portfolio there relative to that particular space. You should know, though, the last couple of years, we have been tightening the risk controls with regard to that area, and our performance to date is very good relative to the industry. I know there's some industry concern about this. But if you look at the facts, you will see that our performance is relatively very good, and that's because we've been tightening way in advance of the slippage in the market. And frankly, we are increasing our pricing so that our returns are better, so that's part of that optimization portfolio.

We are accelerating our focus on digital transformation. There are 3 areas in that, that we are really focused on. One is to continue to update our U platform. Recall that 1.5 years ago, we introduced our U mobile interaction platform. We believe it's the best in the industry today. It's certainly in the top decile and -- but you have to keep investing in that everyday, and so we will do that.

We are substantially ramping up our investments in advertising and social media. And a very exciting area, we are investing in improving processing cost. This is a big opportunity for us, and frankly all banks, to improve our processing cost by the use of AI and robotics. We will be pretty aggressive about that. We just think there's huge ways to reduce costs in the back room by the use of that.

And then we have a very focused mortgage, Residential Mortgage profit improvement plan, which Chris is driving. And that's all about driving efficiencies and annual producers, and we think we'll get substantially more performance out of that as we go forward.

That's just a little bit of color in terms of our key focus areas. We think the rising tide will help us, but we're not going to wait. We're going to focus on these areas, and they're all very opportunistic and very exciting. So let me turn it now to Daryl for some more color.

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [4]

--------------------------------------------------------------------------------

Thank you, Kelly, and good morning, everyone. Today, I'm going to talk about credit quality, net interest margin, fee income, noninterest expense, capital, our segment results and, lastly, provide some guidance for the second quarter.

Turning to Slide 9. We had a really strong quarter with regard to credit quality, improving in all categories. Net charge-offs totaled $148 million, down slightly.

Loans 90 days or more past due and still accruing decreased 14.8%. Loans 30 to 89 days past due decreased 25.3% due to seasonal improvement in our consumer-related portfolios. NPAs were down 1.5% from last quarter.

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

Turning to Slide 10. Our allowance coverage ratios remained strong at 2.49x for net charge-offs and 2.05x for NPLs. The allowance-to-loans ratio was unchanged at 1.04%. Excluding acquired portfolios, the allowance-to-loans ratio remained at 1.13%, so our effective allowance coverage remains strong. Provision for credit losses matched net charge-offs at $148 million. Going forward, we expect loan-loss provision to match charge-offs plus loan growth.

Turning to Slide 11. Compared to last quarter, net interest margin was 3.46%, up 14 basis points. Core margin was 3.28%, up 10 basis points versus last quarter. The increase in GAAP margin resulted mostly from higher-earning asset yields, security duration adjustments from prior quarter, the impact of the Federal Home Loan Bank termination offset by slightly higher deposit betas due to the recent rate increase.

As a reminder, we restructured $2.9 billion of Federal Home Loan Bank advances at the beginning of the first quarter and recorded a pretax loss of $392 million. Asset sensitivity improved, driven by shrinking fixed rate loans, such as auto and mortgage, and continued growth in core deposits.

Looking at the second quarter, core margin will be up 2 to 4 basis points due to the March rate increase. Looking at our GAAP margin, we will be relatively flat on a linked-quarter basis due to the decline in purchase accounting benefits.

Continuing on Slide 12. Our noninterest income ratio was 42.1%, down slightly, primarily due to the increase in net interest income. Noninterest income totaled $1.2 billion, up 3.1% from last quarter.

Our fee income changes included an increase of $39 million in insurance income, mostly driven by seasonality and employee benefit commissions. This was offset by investment banking and brokerage commissions due to several large deals that closed last quarter. Looking ahead to the second quarter, we expect fee income to increase 6% to 8% versus second quarter of last year.

Turning to Slide 13. Noninterest expenses totaled $2.1 billion. Excluding the $392 million Federal Home Loan Bank restructuring charge, merger-related charges and the reserve -- mortgage reserve adjustment from the prior quarter, core noninterest expenses were slightly below $1.7 billion, down 2.9% from last quarter.

Personnel expense was up slightly, driven by a $34 million increase in payroll, taxes and equity-based compensation. Approximately $25 million of that increase was due to seasonal FICA expense and 401 (k) match. This was offset by FTE reductions and a $28 million decrease in salaries and incentives.

Loan-related expense increased $36 million largely due to our prior quarter release of $31 million in mortgage repurchase reserves. Going forward, expenses are expected to be flat to up 2% versus second quarter of last year, excluding merger-related and restructuring charges. Also, please note the effective tax rate is expected to return to a 30% range next quarter.

Turning to Slide 14. Our capital and liquidity remained strong. Common equity Tier 1 was 10.1%, fully phased in. LCR was 124%, and our liquid asset buffer remains very strong at 12.7%. Our dividend payout ratio was 64% on a GAAP basis due to the Federal Home Loan Bank restructuring, with a total payout of 106%. We are currently targeting a total payout in excess of 100% with our recently submitted CCAR '17 capital plan.

Now let's look at segment results beginning on Slide 15. Community Bank net income totaled $334 million, essentially flat, but our commercial loan production is a very good indicator of where Main Street is right now. This is the best quarter we've ever seen. We're continuing to focus on efficiency, and you can see that our operating margin improved to 40.6% in the first quarter. We believe we can further improve efficiency in the Community Bank as we continue to look at opportunities to rightsize the branch network.

Turning to Slide 16. Residential Mortgage Banking net income was $48 million, down from last quarter. Net interest income decreased $12 million, primarily due to the lower average balances. Noninterest expense increased $36 million due to higher loan processing expense driven by a $31 million release of mortgage repurchase reserves. Production mix was 52% purchased and 48% refi, and the gain-on-sale margins were 1.01%, up from 0.86% last quarter.

Looking to Slide 17. Dealer Financial Services income totaled $29 million, down from last quarter. This was due to the slight decrease in net interest income, driven by the decline in credit spreads on loans caused by a more competitive marketplace. The provision for credit losses increased $9 million, mostly driven by higher charge-offs in Regional Acceptance and higher loss severity trends.

Charge-offs and Regional Acceptance increased to 8.9% this quarter. However, the risk-adjusted yield remained strong at 8.7%. We continue to manage to lower LTVs. Next quarter's charge-off rate should be much better due to seasonality, dropping significantly lower than 8%. Charge-offs for the prime portfolio remain excellent at 16 basis points.

Turning to Slide 18. Specialized Lending net income totaled $50 million, up $4 million from last quarter. We had strong year-over-year loan growth and production growth in premium finance, Sheffield, equipment finance and government finance. We expect seasonally strong growth in Specialized Lending in the second quarter, approaching mid-teens annualized versus first quarter of this year.

Looking on Slide 19. Insurance Holdings net income totaled $47 million, up $13 million from last quarter. Noninterest expense totaled $389 million, up $15 million from last quarter, driven by higher incentive expense and payroll-defined contribution expense, partially offset by a decline in salary expense. The higher noninterest income from last quarter primarily reflects seasonality in employee benefit commissions. Adjusting from the timing of profit commissions, organic growth was up approximately 1%.

Turning to Slide 20. Financial Services had $91 million in net income, down from last quarter. This was mostly due to lower investment banking, client derivative and private equity investment income.

Corporate Banking had strong loan growth of 8%, while wealth generated strong loan and deposit growth of 11% and 36% from last quarter.

On Slide 21, I'd like to summarize our outlook for the second quarter. We expect loan growth in the range of 1% to 3% annualized versus first quarter. We expect to see growth in commercial, specialized, Direct Retail and Revolving Credit. In credit quality, we expect net charge-offs and NPAs to be stable compared to first quarter.

We expect linked-quarter GAAP margin to remain stable and linked-quarter core margin to be up 2 to 4 basis points, driven by the March rate increase. We expect net interest income to increase 2% to 4% annualized versus last quarter. We expect noninterest income to increase 6% to 8% versus second quarter of last year. Excluding merger-related and restructuring charges, expenses will be flat to up 2% versus second quarter of last year.

In summary, we had strong earnings performance, excellent credit quality, increasing core and GAAP margins and good expense control for the quarter. Now let me turn it back over to Kelly for closing remarks and Q&A.

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [5]

--------------------------------------------------------------------------------

Thanks, Daryl. So just to reemphasize, we think it was a great start and solid operating earnings, good expense control, as Daryl described. We have future opportunities to continue to rationalize expense structure in our mergers and rationalize expense structure in our branches, including branch closures. And so when you put all that together with our focus on our 6 focal areas, we think the opportunity for us to continue to improve is very good. The key is on consistent execution, which is what we continue to feel very good about.

Now I'll turn it to Alan.

--------------------------------------------------------------------------------

Alan W. Greer, BB&T Corporation - EVP of IR [6]

--------------------------------------------------------------------------------

Okay. Thank you, Kelly. At this time, we'll start the Q&A session. Debbie, if you will come back on the line and explain how our listeners may participate in the session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go first to John McDonald with Bernstein.

--------------------------------------------------------------------------------

John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [2]

--------------------------------------------------------------------------------

The fee income look good this quarter, and the guide for growth for the second quarter, 6% to 8% year-over-year, wondering what you see as some of the drivers of the fee income improvement year-over-year. And then also on the insurance, you had a good quarter. Could you speak to the economics of that business, whether you're seeing any improvement in pricing and some of the trends there?

--------------------------------------------------------------------------------

Christopher L. Henson, BB&T Corporation - President, COO and President of Branch Banking & Trust Company [3]

--------------------------------------------------------------------------------

Yes, John. This is Chris. Fee income, certainly, one of the drivers next quarter will be insurance. I'll come back to that in just a moment. We're going to see, we believe, investment banking doing much better. We had just, as Daryl said, a little bit of pullback. In fact, we had a number of deals that sort of popped into fourth quarter. So we see that pipeline building back. We think that could be up in the 10% to 12%, maybe even 13% kind of range. We think mortgage has -- mortgage pipeline, with rates down, is beginning to rebuild a bit. It won't be a big quarter, but we think we could see a little bit of pickup there. And then trust investment advisory up slightly. So then all the other card fees will be up a bit as well. Going back to insurance to follow-up on your question. First quarter is always seasonally strong in the sense, as Daryl said, we get good EV pick up because that's generally when those contracts were kind of built. But second quarter is actually our best quarter of the year. So we see possibility to be up in the 5% to 6% kind of range second quarter. And that business I would say, underlying, we're very happy with the trends we're seeing. While pricing is still down in the 3% to 4% range, our core organic growth is up 1%. So we're really outpacing the pricing through underlying new business growth, and we're seeing that in our core business and Insurance Services, which is across the banking footprint. That grew 11% in new business production this year -- I mean, this quarter. Our California business grew about 15%. And wholesale, you might recall, we converted Swett & Crawford into CRC, our primary wholesale business this quarter. We actually expected it to be down a shade, and it was really about flat. So really a good pick up there. And then our life business was up about 8.3%. So all in all, we had a really good core. Seasonally, you tend to see McGriff, which is our large retail, down that fourth quarter is sort of their best quarter. So all in all, really good overall performance in insurance, and I mean, it's clear that we're taking market share in the footprint.

--------------------------------------------------------------------------------

John Eamon McDonald, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [4]

--------------------------------------------------------------------------------

Okay. And Daryl, just a follow-up. When you couple that fee income outlook with the expense guide, what are you thinking for the progression of the efficiency ratio as you look at your adjusted number first quarter going into second quarter and the rest of the year?

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [5]

--------------------------------------------------------------------------------

John, every quarter, we always are out trying to achieve positive operating leverage. When you look at second quarter, we do have an uptick in expenses just for seasonality, and we continue to have our technology investments. So I would say second quarter is too close to call right now, but we feel very confident we will have positive operating leverage and improved efficiency on a year-over-year basis, basically in the second half of the year, where we're seeing it kick in.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [7]

--------------------------------------------------------------------------------

Kelly, I wanted to follow up on your comment about artificial intelligence and robots. Where do you think you are in that process? Is it the first inning or not even -- the game hasn't even started yet? And what do you envision over the next 2 to 3 years on what this could do to your operating expenses by making you more efficient?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [8]

--------------------------------------------------------------------------------

So, Gerard, I'd say we're clearly in the first inning. We've actually tested some areas to be sure that we feel comfortable with the whole concept of AI, robotics working. Just to give an example. Daryl did a test in his financial reconcilement area. So we took one process where a human working with a computer took 2 hours to do this reconcilement process. Once we applied AI robotics, it was done in 15 minutes. And so we are engaging some people that specialize in this area to help us over time. We'll learn how to do this ourselves, but we're using outside expertise. I think it's a big deal, Gerard. When we did our methodology with the client team, we'll go throughout the entire company, starting with the most lucrative opportunities and then moving down. It's hard to know at this stage of the game, but this is the kind of thing that allows us to invest into new areas that we need to invest in like digital, new markets, et cetera, and really keep a tight lid on the back room expenses. That's why we're optimistic in terms of longer-term operating leverage because we will have to continue to invest in new technologies, et cetera, but at the same time, we will be simultaneously reducing the cost on traditional process-oriented activities. And frankly, I'm pretty excited about it. It's a bit early to claim victory, but the concept is really sound.

--------------------------------------------------------------------------------

Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [9]

--------------------------------------------------------------------------------

And in talking about this, what's your total technology budget for -- not just for this, but when you look at tech spending this year, what kind of number are you looking at?

--------------------------------------------------------------------------------

Christopher L. Henson, BB&T Corporation - President, COO and President of Branch Banking & Trust Company [10]

--------------------------------------------------------------------------------

Gerard, this is Chris. About $11 billion in revenue, we probably -- our CapEx is probably in the 4% to 5% range. So $400 million, $500 million. The grand majority of it, frankly, would be technology spend. A good bit of it is infrastructure, some of it is compliance, but we actually are spending a lot of time, we actually changed the way that we have visibility to spend to really begin to try to tweak away from compliance and allocate more of those dollars toward discretionary, digital and revenue, client service kind of efforts. That obviously will take some time, but that pivot is appropriate, we think, for this point in time. And a good chunk of that would be digital as well.

--------------------------------------------------------------------------------

Gerard S. Cassidy, RBC Capital Markets, LLC, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Great. And then just as a second question, Daryl, on the LCR, I think you said you're at about 124%. If regulations change, and you're not held to an LCR ratio as other banks, and I again, I know this is kind of far-fetched, but what's a more comfortable number if you weren't mandated to be carrying this LCR at the level you're carrying it at now?

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [12]

--------------------------------------------------------------------------------

Yes, we probably have some room for it to come back down, maybe down about 20%, 25% give or take. I mean, it's definitely adding a lot of value. It's lowering everybody's profitability return. It's not efficient use of the balance sheet. So we can definitely bring it down, and over time, we can continue to optimize portfolio on the balance sheet.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

We'll go next to Matt O'Connor with Deutsche Bank.

--------------------------------------------------------------------------------

Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [14]

--------------------------------------------------------------------------------

I was wondering if you could talk a bit more on the expense side. The expenses were lower than certainly we had expected this quarter. The rhetoric around expenses and the efforts that you have to manage cost seems quite positive, but then the outlook for the second quarter was a little bit higher than I would have thought. So maybe just square it all. And I -- if I recall correctly, you talked about cost being below $1.7 billion on average. I think you'd imply a little bit higher for the second quarter. So just square all the kind of the expense moving pieces that I laid out there.

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [15]

--------------------------------------------------------------------------------

So Matt, obviously, there are a lot of moving pieces. Second quarter, you know you get some seasonal increase in all of our salary increases kick in, in the 1st of April. So you get that. We are still in the midst of spending, frankly, a lot of money on resolving our BSA/AML issue, improving that tight form. We'll weigh down the road with regard to that, but the expenses are still building in that and will probably continue to build through the second quarter, after which it will plateau and come down. At the end of the year, that will be down, but it's probably up in the second quarter. So -- and then technology, of course, is always kind of high. So you got your normal seasonal in the second quarter. You've got your consistent technology and some spiking in BSA, which will cause your expenses to go up in the second quarter relative to first, and then you get that back as you head towards end of the year.

--------------------------------------------------------------------------------

Matthew D. O'Connor, Deutsche Bank AG, Research Division - MD in Equity Research [16]

--------------------------------------------------------------------------------

Okay. And I just think about the $1.7 billion on average for this year or below the $1.7 billion, is that still a reasonable target all in?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [17]

--------------------------------------------------------------------------------

Yes, I think so. Would you agree, Daryl?

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [18]

--------------------------------------------------------------------------------

Yes, I think, once we get through the peak that Kelly talked about through the next quarter or so, I think, we will be back closer to $1.7 billion or maybe a little bit below that.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

We'll go next to Kevin Barker with Piper Jaffray.

--------------------------------------------------------------------------------

Kevin James Barker, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [20]

--------------------------------------------------------------------------------

In regards to your comments regarding Regional Acceptance Corp. you mentioned 8.9% net charge-off rates this quarter, and you've changed your underwriting standards. Have you seen a dramatic improvement in your credit losses and your charge-offs following the change in the underwriting standards? Or you can still see some credit softness across the space in auto for those type FICOs?

--------------------------------------------------------------------------------

Clarke R. Starnes, BB&T Corporation - Chief Risk Officer and Senior EVP [21]

--------------------------------------------------------------------------------

Kevin, this is Clarke. Certainly, we have seen improvement, particularly starting to turn in our 30 to 60, 60 to 90 and nonperformers, and that makes us feel really good about the losses coming down and leveling off as we move forward. I would remind you actual losses were actually 8.6% for the first versus 8% last year. Full year last year was 7.33%. We think there is a high probability if things hold that we could bring losses in for 2017 at a similar level to '16. So what we've been experiencing and the industry has been experiencing is a big hit on severity. Majority of the subprime lenders are financing smaller compact cars. And while the overall Manheim has been fairly stable, it's really been hit hard on the small cars, and so the severity is what we've been hit with. The good news is our underwriting changes that we began really in third quarter of 2015 are kicking in and have offset a lot of that. So I think you look at a lot of the ABS subprime pools, losses are still going up, and they're north of 10%. So that we think we're doing a lot better, but we think it will be a continued challenge for those that have not made the appropriate adjustments.

--------------------------------------------------------------------------------

Kevin James Barker, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [22]

--------------------------------------------------------------------------------

Okay. And then in your opinion, do you feel that you're going to start to see a settling out of residual values sometime this year? Or do you feel like it's something that could occur next year, given some of the stress we've seen in used car prices?

--------------------------------------------------------------------------------

Clarke R. Starnes, BB&T Corporation - Chief Risk Officer and Senior EVP [23]

--------------------------------------------------------------------------------

It's a great question. I think there's still a risk of more deterioration. However, I will say, in March as we came through the quarter, we did see some firming to a degree, particularly in that smaller car segment. But -- and the overall index was more or less flat. But generally, we're hopeful that we may have seen the worst, but we may not have been, and we -- but we believe the underwriting changes we've made will help mitigate even if it softens a little further.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

We'll go next to Matt Burnell with Wells Fargo Securities.

--------------------------------------------------------------------------------

Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [25]

--------------------------------------------------------------------------------

Kelly and Daryl, maybe you could drill down a little bit into your commentary about increasing the efficiency within the Community Bank. Obviously, there was a nice improvement this quarter. But what are you doing now to drive that efficiency ratio down going forward, specifically?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [26]

--------------------------------------------------------------------------------

So let me give you a general response, and then I'll ask Chris to drill down a little bit further. So we've been on a several year process of rationalizing our expense structure in the Community Bank. The most obvious of that is downsizing the number of tellers and platform people as the number of transactions have been coming down, about 4% a year for us for the last several years. So we've been kind of methodically following that decrease in transactions with relatively downsizing the number of platform participants. In fact, that continues. We are accelerating our focus on the consolidations, closing branches. We did 40 or so last year. We expect to do in the 100 or so neighborhood this year. We don't believe branches are going away, but the fact is the dynamics around what you can close today versus what you could close 5, 10 years ago has changed because of the substantial increase in digital transactions capability and usage of our clients, and so our digital capabilities are very, very good. People are gravitating to that, and that's given us more comfort in terms of different kind of branch closures than we've done in the past. But let me let Chris give you more color on that.

--------------------------------------------------------------------------------

Christopher L. Henson, BB&T Corporation - President, COO and President of Branch Banking & Trust Company [27]

--------------------------------------------------------------------------------

Yes. Thanks, Kelly. I think Kelly's exactly right. I mean, consolidate the teller and the relationship banker role into something we call branch banker, that's really was done 18 months or so ago. And we're really kind of hitting our stride there, and that has certainly created some efficiency sort of in the branch. Secondly, as you heard, we've had 2 of our best quarters in terms of just outright revenue production and loan production. Just to give you some sense, commercial loan production over a year ago was up 22%. Retail up about 25%. So we are -- as he commented to front end of the call, we really are seeing Main Street come back. I mean, these are the people. Our portfolios are much more granular than peers typically our size. And I mean, these are the people that really sort of put our President in office. So they believe, and we're seeing them kind of vote with their financials. I think thirdly, the comment on the branches is something that we really try to take and heed and be surefooted about but yet be on our front foot. And so we did about 2% reductions last year. As Kelly said, transaction is down about 4%. We think we'll do 100 or so this year, and these are typically branches that are within markets, where we have good brand feel in those markets. So we don't think -- we've been testing them a lot, and we don't see a lot of loss of business. We're monitoring that pretty closely. Part of the reason is beginning to transition more towards our digital efforts, and so we've got in our retail business of our 4.6 million clients, we have about 60% of them that are using -- that are actively using digital technology today. In business, about 50% are using digital technology. Of the retail clients, which is really about 2.5 million that are digital clients, about 3/4 of those are using our new U platform. So it gives us a real opportunity to kind of scale up, not only those that are using to help them fully utilize that technology but then also bringing another couple of million overall in the system. So tremendous amount of opportunity gives us, I think, a really good platform that it kind of offloads some of these branches, frankly, because they have a new channel that they've become accustomed and comfortable to working with. And so today, we've got about 30% of our transactions being done digitally, and I think that helps enable this whole branch optimization strategy.

--------------------------------------------------------------------------------

Matthew Hart Burnell, Wells Fargo Securities, LLC, Research Division - Senior Financial Services Equity Analyst [28]

--------------------------------------------------------------------------------

And then for my follow-up, could you provide a little more color on your commentary about improving the Corporate Banking loan growth? You mentioned increasing the hold size as one area that you're considering. But are there specific industries within the Corporate Banking platform that you're going to target as well?

--------------------------------------------------------------------------------

Clarke R. Starnes, BB&T Corporation - Chief Risk Officer and Senior EVP [29]

--------------------------------------------------------------------------------

Matt, this is Clarke. I'll answer that. As far as specific industries, we may have mentioned that over the last 4 or 5 years, we built a number of specific industry verticals and seeded experienced corporate bankers in those. And those would be the focal areas. For us, it's a pretty diversified set of industries. So nothing real new there. It's just -- we're still early in that, taking advantage of that build out that we've already done. So that's where we would play, areas where we have expertise and specialization. But as far as our relative commitments, we are very granular. We look at syndications among -- where we are in the same transaction with our peers, we tend to have commitments that are anywhere from 50% to 2/3 of the average of the group. So we think we can move that up marginally, given the size of our company and still have a more granular portfolio, but that alone combined with those new verticals gives us a great growth opportunity.

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [30]

--------------------------------------------------------------------------------

And as we increase those exposures, we're going to get a bigger piece of the wallet and the other ancillary businesses and win more client.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Marlin Lacey Mosby, Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies [32]

--------------------------------------------------------------------------------

Wanted to ask you about capital payout ratio. You mentioned that it was going to be above 100% as you look into next year. I think the 100% -- 106% this quarter, would that be against with merger-related cost and some of that restructuring in the number? So are we looking at next year with all the merger-related cost and everything. So total kind of...

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [33]

--------------------------------------------------------------------------------

Yes, Marty. To be honest with you, we really don't expect many more merger-related. We might have a little bit more restructuring costs as Chris talked about maybe in branches and all of that, but it's not going to be a meaningful number going forward. So the total payout ratio of 100% will be off of our GAAP net income, but I wouldn't see that to be any significance from a run rate perspective.

--------------------------------------------------------------------------------

Marlin Lacey Mosby, Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies [34]

--------------------------------------------------------------------------------

Got you. And then on -- when you look at the liquidity coverage ratio at 124, you already, even without changing it, have room to deploy that liquidity. If I kind of roll back to where you sliced out the loan portfolio, you've got about 30% of your old portfolio in that optimizing kind of category. If you think about there is the ability like you said, this is deflating returns and earnings to utilize that excess capital even under the current construction of the regulation and constraints, why are we looking at this optimizing portfolio, especially residential mortgages, which while you -- rates could go up, you still can build that portfolio with a high-yielding portfolio to use some of that liquidity?

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [35]

--------------------------------------------------------------------------------

Yes, I think that's in the lines of what we're thinking. As we rightsize and optimize both prime auto and mortgage businesses, those will probably come down some over time, which will give us higher returns for the whole balance sheet, will increase overall profitability. We aren't exiting those businesses. They're still core to our company, it's still very important. But they are just really low-return businesses. So from mortgage, we're still selling anything we can conform but we're keeping good jumbo clients and some low to mod borrowers from that perspective. And prime auto is just really, really competitive right now, and I think there's probably better uses of our capital in other loan areas.

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [36]

--------------------------------------------------------------------------------

So Marty, so to your question, the way I think about this is while those portfolios are optimizing, remember, we are accelerating growth in our core portfolios. And the best case is that as optimizing portfolio rundown, the core portfolios run up because you get better yields, you get better client relationships, et cetera, et cetera, and you use up -- you don't build up -- you don't build additional liquidity, which I think is underlying issue in your question. So if that were not to happen, yes, we do have some opportunity to reduce some of that liquidity and to reduce fundings or consider other types of security types investments. So we've got a lot of levers to pull, but the big lever is replacing the optimized portfolios with the core portfolios.

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [37]

--------------------------------------------------------------------------------

And as you increase the profitability in the company and our balance sheet growth wouldn't be as much because we're kind of trading, that gives us much more confidence to have a much higher payout, and so stay very strong from a capital perspective.

--------------------------------------------------------------------------------

Marlin Lacey Mosby, Vining Sparks IBG, LP, Research Division - Director of Banking and Equity Strategies [38]

--------------------------------------------------------------------------------

That just seems with the optimizing portfolio being almost 1/3 of the overall loan portfolio, the math of trying to balance the acceleration to offset it becomes pretty challenging to try to overcome the drag that's coming from that large of a percent of your loan portfolio.

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [39]

--------------------------------------------------------------------------------

So it is, but keep in mind, Marty, the mortgage portfolio runs off very slowly. So it's not as quick of a restructuring as you might think.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

We'll go next to Ken Usdin with Jefferies.

--------------------------------------------------------------------------------

Amanda Beth Larsen, Jefferies LLC, Research Division - Equity Associate [41]

--------------------------------------------------------------------------------

This is Amanda Larsen on for Ken. Are you at the point where you've looked to grow securities balances? Or do you expect to save a bit cash heavy with the anticipation of better loan growth in 2H?

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [42]

--------------------------------------------------------------------------------

Amanda, where we look at it right now is we're very comfortable with our security balances. We're a little about 20%, give or take, of our balance sheet is in securities, very bearish from that perspective. We've got that question earlier if LCR goes away, should we adjust that, we'll kind of see if -- how that plays out. As far as increasing security balances, at the end of the day, it's still a lower earning asset. So you really don't want to have -- you want to have enough on the books for your liquidity, but you really don't want to have too much on there because it's not going to improve your returns, and it's probably not a great capital use.

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [43]

--------------------------------------------------------------------------------

Yes, it's not a particularly good time to invest in securities when you think rates will rise.

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [44]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Amanda Beth Larsen, Jefferies LLC, Research Division - Equity Associate [45]

--------------------------------------------------------------------------------

Okay. And then your deposit betas continue to be very low. Can you talk about how industry deposit pricing is faring versus your expectation? And also your willingness to be more competitive, given the opportunities that you see on the asset side?

--------------------------------------------------------------------------------

Daryl N. Bible, BB&T Corporation - CFO and Senior EVP [46]

--------------------------------------------------------------------------------

Yes. So I think the whole industry, including us, have been modeling deposit betas to be moving much higher than what's actually playing out in reality. If you look at the first 2 increases that we had last year and then this year in December, our deposit betas were less than 10%. The one that we just had in March, we're expecting that to be probably 10% to 15% range. So we've been modeling betas between 40% and 60%. We're pricing much higher, and I think we're just seeing it much more muted on the retail side. We are paying out and being aggressive to our corporate clients than we have to, but for the most part, it's just much lower. The forecast that we gave you, what that includes is 2 more rate increases later this year, one in the middle of the year and one at the end of the year, and we've modeled a conservative beta. So we're looking for beta to be up 30% to 35% next time. That could be opportunity if that's not going to happen. And then the one at the end of the year, we're modeling that to be in the 40% to 50% range, which we'll see if that plays out or it could be another opportunity price.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

We'll take our next question from Saul Martinez with UBS.

--------------------------------------------------------------------------------

Saul Martinez, UBS Investment Bank, Research Division - MD and Analyst [48]

--------------------------------------------------------------------------------

First question is more of a big-picture question, Kelly. You've been pretty consistent in terms of expressing optimism about policy reforms, sentiment amongst your clients, Main Street America improving, the outlook for better economic growth. But until now, there has been something of a disconnect between sentiment indicators and hard data, whether it be loan growth or economic data more broadly. Do you think there is a risk that, that optimism starts to fade if we don't get policy changes if the dysfunction in Washington continues, however you want to term it? At what point do you think your client -- at what point do you start to worry that the optimism that is building that you've expressed starts to become more muted?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [49]

--------------------------------------------------------------------------------

Well, I think that's kind of the big, really big question for us all right now. First of all, with regard to why has the increased optimism not yet shown up in hard data, that's not surprising at all to me, because remember, it takes a period of time. Remember, we've only had 90 or so days, and it takes a period of time for that optimism to translate into evaluating what kind of projects you're going to do, what kind of equipment you're going to buy, et cetera. But as I said earlier, we are already seeing that. We are seeing actual hard data the way our clients are talking to us about expansions, making loan request for expansions, which frankly, at a rate we haven't seen in 8 years. So that's why we said our Community Bank's having its best production ever. So it is happening for us on Main Street. Now the question implicit in your question is if they don't do anything in Washington, could that kill it? Could it stop it? And the answer is obviously yes. If they make no progress in Washington at all, then eventually that optimism will turn to pessimism, and that will turn into a reduction in spending, and that will return into a slower economic growth. And as you do -- really do it badly, which we're certainly capable of, then it will obviously turn into a recession. But here's the reason that the resiliency of the activity in the marketplace will be stronger than you might think. Remember, that for 8-plus years, these companies have not been investing. They're using 20-year-old computers. They're driving trucks with 300,000-plus miles. At some point, regardless of how frugal you want to be, you kind of got to replace a few computers and buy a few trucks. And then the other thing is kind of a psychology, and that is, after feeling bad and conservative and not investing for 8 years, you kind of want to invest. So number one, they need to invest. Number two, they want to invest. And so that's why you're seeing this really level of excitement out there today. I don't think it will wane immediately, but if by the end of the year, let's say, if there's been no positive movement on taxes, regulation, healthcare and all that combined, then I will be very worried, to be honest. And so my message to Congress, which I've sent every chance I get is, there's a lot riding on them getting their act together and we're talking about the future of our kids and our grandkids. We have a wonderful opportunity here to grow this country at a much faster pace, and shame on them if they don't execute.

--------------------------------------------------------------------------------

Saul Martinez, UBS Investment Bank, Research Division - MD and Analyst [50]

--------------------------------------------------------------------------------

That's helpful. Have you seen any increases in utilization rates thus far?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [51]

--------------------------------------------------------------------------------

No, not really. It's -- what we're seeing is the actual loan request, which are moving through the pipeline. So we've got the production numbers we show are substantially up, the pipeline is substantially up. As we head on into the second quarter, that will begin to -- that will begin to actually show up an increase loan activity. That's why we would say in our core portfolio, we are projecting 4%, 5% growth in that for the second quarter because of that activity flowing through to reality.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

We'll take our next question from John Pancari with Evercore ISI.

--------------------------------------------------------------------------------

John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [53]

--------------------------------------------------------------------------------

Given the size of the optimization portfolios and everything, can you just talk about your expectations for where loan growth could trend in '18 if we do see the macro improvement? And Kelly, as you said, if we see the tax reform and the infrastructure reform, et cetera? Is there likely to be optimization portfolios at that point? Or do they go away and we get overall loan growth in the high single digits instead of mid-single digits? How can we think about that?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [54]

--------------------------------------------------------------------------------

Well, I'll give you a reaction and Clarke can respond. I mean, we're expecting in this quarter the core portfolio of 4% to 5%. That will continue to increase if everything else holds constant in terms of the political climate, et cetera. Then, as mathematic of the optimizing portfolios gets lower and lower then that will translate into higher and higher. So we're already moving up this year's total -- this quarter's total loan projections from slightly down last quarter to 1% to 3% this quarter, that will certainly move them up. When you get to a run rate of the optimizing portfolio being merged out yes, you could be in high single digits, but this will take a little bit of time to happen.

--------------------------------------------------------------------------------

Clarke R. Starnes, BB&T Corporation - Chief Risk Officer and Senior EVP [55]

--------------------------------------------------------------------------------

Absolutely. Yes, I certainly think you could see the 5% to 6% to 6% to 8% as this thing gets legs and moves forward. So certainly the opportunity is there.

--------------------------------------------------------------------------------

John G. Pancari, Evercore ISI, Research Division - Senior MD, Senior Equity Research Analyst and Fundamental Research Analyst [56]

--------------------------------------------------------------------------------

Okay. All right. And then can you talk a little bit about the bank's overall exposure to the retail industry. Sorry if I missed any comments on that front, but just interested in the exposure and the CRE book, as well as in your C&I portfolio.

--------------------------------------------------------------------------------

Clarke R. Starnes, BB&T Corporation - Chief Risk Officer and Senior EVP [57]

--------------------------------------------------------------------------------

Sure. John, we think about it generally in 3 buckets. I know there's a lot of ways to define that when you all ask that question, but the way we think about it as far as our CRE book so where we have specific exposure to retail centers and retail leases to operators, it's about a $4.1 billion exposure. We feel really good about that. Almost 70% of that would be what we considered neighborhood-anchor type, grocery centers, those sorts of things, very granular, very high occupancy right now. So certainly while there's a risk, we feel good about that. We have about a $600 million level of outstandings to the REIT space and retail. I would say 80% of those are investment-grade and very conservative in how we underwrite there. And then as far as direct retailer exposure, we have about $1.3 billion in outstandings there and probably 30%, 40% of that plus moves to investment-grade. So while we're certainly cognizant of issues and the structural changes that the e-commerce and other trends are having in that space, we feel like it's certainly performing well now and manageable as we look forward.

--------------------------------------------------------------------------------

Operator [58]

--------------------------------------------------------------------------------

Our next question is from Nancy Bush with NAB Research.

--------------------------------------------------------------------------------

Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [59]

--------------------------------------------------------------------------------

I just, Kelly, wanted to ask, I mean, you talked about the optimism in the economy, et cetera, et cetera. North Carolina has had some of its own unique issues to deal with over the past year or so. So I mean, have you mean seen any blips in business activity there? There were all kinds of threats made, et cetera, et cetera. And has that issue impacted things?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [60]

--------------------------------------------------------------------------------

No. There are a lot of talk about it. There are a lot of innuendos and -- but the actual optimism out in North Carolina is very, very bullish, very positive in the business community. The growth on our regions in North Carolina, very strong. I'm not saying it couldn't happen, Nancy, it turns out we're protracting that over a long period of time but -- and I'm not saying it's not nice, we have the best terms here and all, but that's not the drivers of the primary economy. So the drivers of primary economy have not been impacted by this, and so I'm glad we've kind of got it behind us because it puts a negative look on North Carolina that is not deserved. And so I'm glad it's behind us, but it hasn't had a material impact on the real economy.

--------------------------------------------------------------------------------

Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [61]

--------------------------------------------------------------------------------

Okay. Just as a follow-up, this sort of dividing of the loan portfolio into these 3 buckets, is this something that just happened? Or is this been ongoing? And I'm very curious about the growth optimizing portfolio. Is that a new designation? Or is this been around for a while and you just now named it?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [62]

--------------------------------------------------------------------------------

We just named it, Nancy. Frankly, it's been a strategy we've been using for some period of time. We've just -- but we felt that, frankly, our message wasn't being as clearly understood. And so we just thought naming it would help. And we'll see if it does, but I think it will because it's pretty rational. I mean, you kind of look at our quarter negative 0.9% loan growth and you say well, what's good about that? But then you look under it, and you see the core is doing well, the seasonal government all season was down, and yes you got to optimize because you're improving profitability, that makes me feel pretty good.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

We'll go next to Jennifer Demba with SunTrust.

--------------------------------------------------------------------------------

Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [64]

--------------------------------------------------------------------------------

Just curious if you could give some more color on the anticipated resolution of your BSA/AML issues? And what your thoughts are about your M&A hiatus and when that might be lifted?

--------------------------------------------------------------------------------

Kelly Stuart King, BB&T Corporation - Chairman, CEO, Chairman of Branch Banking & Trust Company and CEO of Branch Banking & Trust Company [65]

--------------------------------------------------------------------------------

So on the BSA/AML front, we're making really good progress even though as the market only heard about in the last few months, we've been working on it diligently for probably 1.5 years. I think in terms of execution on the actual processes to be a first-class BSA/AML shop, look, we're in the ninth inning, more work to do, but we're in the ninth inning. And then you've got the validation period of time, where you have to satisfy yourselves and the regulators that your processes are working. That'll take a period of time. I think we have a pretty good shot of moving through this consent order in a relatively rapid period of time. I certainly don't see this as a 3 or 4 year prolonged. Which is what people worry about, and I think that's extremely remote for us because the kind of problems we have were pure process. We didn't have any outside violations, any money laundering, that kind of thing. We just had some process things we need to change to meet the standards today. And so we're well along well there. We have a really, really great experienced BSA Officer that wrote -- actually worked for the federal reserve and wrote most of the regulations. So we're very confident in that we'll be exiting this in the recently foreseeable future. Of course, the M&A thing is restricted in terms of typical banks, commercial banks in the area. It's not absolutely determined that you can't do one, but as a practical matter, you probably wouldn't do a branch on a regular commercial bank acquisition during this period of time. We do have flexibility to do other acquisitions in terms of technological space and insurance space, et cetera. And we certainly are still continuing to pursue those. But I don't think the future of our M&A activity is as far out as some people may think. And we certainly, as I said earlier, that's still an important part of our long-term strategy. I still believe we're going to see a pretty fast consolidation of the industry because once you get through all of the proposed or talked about changes of taxes, regulation, et cetera, et cetera, hopefully that rising tide lifts all the ships and then all the ships are on the same rising tide. So the issue of scale that we've talked about repeatedly are still there. We think this consolidation still makes sense and we still think that will be a part of our future.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes our question-and-answer session. Mr. Greer, I'll turn it back to you for closing remarks.

--------------------------------------------------------------------------------

Alan W. Greer, BB&T Corporation - EVP of IR [67]

--------------------------------------------------------------------------------

Okay. Thank you, Debbie, and thanks to everyone for joining us today. We do have a few left in the queue, so we'll kind of call you later this morning or feel free to call Investor Relations. This concludes our call, and we hope you have a great day.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may now disconnect.