Truist Financial Corporation (TFC) — Q1 2015 Earnings Call Transcript

Thank you, Amber, and good morning everyone. Thanks to all of our listeners for joining us today. We have with us today Kelly King, our Chairman & CEO, and Daryl Bible, our Chief Financial Officer, who will review the results for the first quarter of 2015 and give you some thoughts about the second 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 Chief Operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer. We will be referencing a slide presentation during our comments today. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Before we begin, 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 those forward-looking statements. I refer you to the forward-looking statement warnings in our presentation and our SEC filings. In addition, please note that our presentation includes certain non-GAAP disclosures. Please refer to page two in the appendix of our presentation for the appropriate reconciliations to GAAP. With that, I will turn it over to Kelly.

Thank you, Alan, good morning, everybody, and thanks for joining us on our call. I hope you are enjoying a nice spring day. While this first quarter is seasonally a challenge for us, as most of you know, I believe it is a very clean and solid quarter. And while the environment is challenging, we are really well positioned for the rest of the year and for the long term. The reason I say that is because we are building a business which has a very strong diversified and resilient balance sheet. It produces steady revenue, less volatile earnings, and we believe long term, less volatile steady growth as well. Relative to the world, we are really excited about the future and will explain to you why as the course of the conversation. If you're following along on deck 3, our net income totaled $488 million in the first quarter. Diluted EPS was 67. We did have a penny in MRC charges so we would say core at 68. Revenues totaled 2.3 billion which was up 1.5% compared to the first quarter of 14. Had a strong performance in fee businesses and particularly in insurance where we had a record quarter. Our fee income ratio is up to a very strong 45.8% versus 43.6% in the first quarter of 14. ROA was 1.18%, ROE was 9.05%, and importantly our return on tangible common was 14%. With regard to loans which I'll give you a little bit more detail on in just a moment, excluding residential mortgage they did grow 5.4% which is pretty good in this environment. It was led by C&I, direct retail, and sales finance. If you look at slide four, we'll give you – in just a moment I'll come to slide 4. Let me stay with slide three for just a moment. On some strategic points we did announce an agreement to significantly increase our partnership interest in AmRisc which is MGU underwriting risk, not taking risk, and to sell American Coastal to the AmRisc management team. This is a de-risking transaction, no material impact on results, and it does eliminate some exposure we had to hurricane exposure there, so we feel really good about that. Successful completion of the Texas branch acquisition, just to remind you, we did an earlier tranche of about 21 branches a few months ago. We just a few weeks ago closed 41 branches. Our combination of that is over $3 billion in deposits. It's a really good way for us to expand our franchise on a cost effective basis in Texas, and when we started in 2009, we were 53rd in market share, and this moves us up to 12 in market share. So we still have a long way to get to number five – or top five, but we have come a long way. So we feel really good about that. I mentioned I was in Dallas twice in the last few weeks in a meeting with our people and some community leaders, and I will just tell you the positive momentum of our people in that market and in Houston and the other parts of Texas is really fantastic. We are being very well received in Texas, and we are very thankful for that. We did have a successful conversion of our general ledger system which was a big deal. And now we're looking forward to benefits of the efficiency and flexibility of that new system. We continue to move down the path that would evolve to the mergers for Bank of Kentucky and Susquehanna moving through the approval process, moving as expected. We expect Bank of Kentucky to close in the second quarter and Susquehanna in the last half, likely in the third quarter. Both are going very, very well. We have huge opportunities there. Ricky and I spent a lot of time at both of them, and we can give you more color in Q&A if you would like. But I will just say that both opportunities are fantastic and at this point we feel more excited about them than we did the day we announced it. With regard to expenses it was a good quarter for us, non-interest expense was $1.4 billion. We did say in our guidance that we would have seasonally higher expenses which we always do. The first quarter includes an $18 million increase in pension, a $22 million increase for payroll taxes. And so our efficiency ratio was 58.5%, but it's important if you x out these two items, the pension and the payroll, our GAAP expenses were lower this quarter. That's the overall kind of summary. Now I will take it to slide four with a little color with regard to the lending area. In the C&I area, growth was strong. Average C&I was up $1 billion which was 10.7% annualized. That was led by corporate, mortgage warehouse, and government finance. C&I, I would tell you, is mostly in large participations, but that's what you would expect given that we are still fairly new in that whole space. And so we are able to get good participations in old names that have been out there for a long time, and we just haven't been a part of the lending group. So that is working very well for us. I will say that it is very competitive out there. Spreads are tight. We have done well in terms of its impact on our spreads because we are still pretty picky, but it is tough out there. We do expect C&I to grow in the second quarter. It would be modest – a little bit slower though because we will have less growth in mortgage warehouse, but that depends on rates, but that's right now what we'd do. CRE in construction and development declined $38 million down 5.6% annualized. That was due to several large payoffs primarily. We are seeing growth in single-family construction and modest growth in office and retail. Multifamily was down, but here again we are being careful in multifamily. We think it is kind of peaking, and so we are being cautious in underwriting and certainly in some markets we have really curtailed lending, because we think it is overheated. We do expect CMD to be seasonally stronger in the second quarter. CRE income producing was flat. We have some production in multifamily, hospitality, and industrial, but again offset by a lot of large payoffs. I think everybody knows with these extremely low protected interest rates there are a lot of actors out there looking for assets with any kind of yield, and so we and I think for everybody in the industry are seeing abnormally high runoffs which will, of course, separate when rates adjust, but for right now we are seeing that happening. The market we think in multifamily is improving, but again, we think it's kind of at the top. So it's not a problem today, but we just think we need to be careful where we're going. We expect income producing to be seasonally stronger in the second quarter which will be good. Average direct retail was a strong quarter increased $106 million or 5% annualized. It continues to perform really well. I've got good volume in HELOCs, direct auto, made out of the branches. Our wealth production is still very strong, record production every month. It just keeps building, and we do expect the direct retail to grow at a faster pace in the second, maybe in the double-digit period. Average sales finance, which is again as a reminder largely prime auto order for us grew $251 million almost 10%. That was our normal production and some acquired portfolios. We expect it to be a little slow in the second, as we're being careful about tight underwriting. We mentioned last time that this is an area also in prime auto where there's a lot of money chasing these assets and spreads are getting to be really, really tight, so we are just not willing to take growth at unacceptable spreads. And so we can expect that to be a little slower in the second. Average residential mortgage was down $619 million or 8% annualized. This is consistent with our strategy of selling off essentially all of our conforming mortgages and the impact of last year's quarters sale of $142 million of mostly non-performing mortgage loans. That whole portfolio is performing exactly the way we want it to. In terms of production we had $4 billion versus $3.9 billion in the fourth. I will tell you the applications were up substantially in the last quarter, and that should flow through as we head through the last year, and the application flow was stronger than any quarter last year. Of course rates were way down, but we will see what happens with rates as we go forward. I am pleased that the gain on sale margins were up at 1.54% versus 1.18% for the last quarter, so we are improving our margins and still getting pretty good applications, so that is pretty good. We do expect some decline of residential mortgage based on the strategy, though, even though applications and productions are good. Other lending subs were down $33 million or 1.2% annualized. This is as you know a seasonally slower quarter, but we did have strong performance in equipment finance, Regional Acceptance, and Grandbridge. The second quarter will be seasonally stronger for Sheffield and afrokeso, so we can expect probably double-digit growth in this category in the second quarter. So overall ex mortgage as I said grew 5.4%. We think that is very good. With regard to the second quarter, we'd expect loans to grow 3% to 5%, but if you exclude mortgage, we would expect a pretty strong 7% to 9% which is a little increase in our guidance with regard to loan activities, so our strategies of very, very diversified are working very, very well. If you look at slide five, with regard to deposits there is another very good quarter in deposit performance. Our non-interest bearing deposits grew $571 million or 5.9% annualized. Interest checking was very strong, $1.3 billion up 27% annualized. The accounts we really wanted to grow were up 8.7% which we feel really good about. So total deposits were down 2.4%, but again that's because we are managing our mix and our costs, and we will continue to do that. I really am very pleased to say that our non-interest bearing deposit mix was 30.6% in the first quarter of 2015, up 200 basis points from 28.2% in the first quarter of 2014. So making a lot of progress in that area in terms of mix and our costs continue to come down, 0.25% in the first quarter versus 0.27% in the first quarter of 2014. So it was a solid quarter and positions us very well in terms of this protracted low interest-rate environment. And again we think we look good going forward even though this is a tough environment because our non-bank businesses generally aren't feeling the same kind of spread pressure the community bank is, and our mergers provide excellent opportunities for efficiency improvement as we go forward. While the market is challenging we feel relatively bullish. Let me turn it to Daryl now for some color in some additional areas.

Thank you, Kelly, and good morning, everyone. This morning I'm going to talk to you about credit quality, net interest margin, fee income, non-interest expense, capital, and our segment results. Continuing on slide six. As Kelly stated a few moments ago we are pleased to report a solid first quarter. Our performance includes outstanding results in credit quality. Net charge-offs were better than expected coming in at 34 basis points, down 13% and well below our long-term normalized range. Excluding Regional Acceptance, charge-offs were 18 basis points. Loans past due decreased a combined 20% showing continued improvement in almost every lending category. Going forward we expect net charge-offs to remain below 35 and 40 basis points in the second quarter assuming no material decline in the economy. NPAs declined 2% compared with the fourth quarter. NPLs declined 8%. NPAs as a percentage of total assets remain at the lowest levels since 2007 at 40 basis points. We expect NPAs to remain stable for the foreseeable future. Turning to slide seven, our allowance coverage continues to remain very strong to 3.6 times from 3.2 times net charge-offs last quarter and grew quarter provision of $99 million for the quarter compared to net charge-offs of $101 million. During the quarter, we completed a full review of our energy-related credit portfolio. The allowance includes an adjustment related to this review. Even with this, our criticized and classified ratios declined this quarter. Going forward we continue to anticipate no reserve releases. Continuing on slide eight. Net interest margin was 3.33% this quarter, down three basis points and well within our expectations. Core margin was 3.18%, down two basis points compared to the last quarter. The small decline in GAAP margin resulted from lower yields on new loans, runoff of acquired assets, offset by improved funding mix. Looking forward to the second quarter, we expect GAAP margin to decline six to eight basis points driven by lower interest rates and runoff of acquired assets. Core margin will likely be down a couple of basis points mainly due to lower yields on loans and increased competition. We expect net interest income to be flat next quarter. We became a bit more asset sensitive in the fourth quarter due to funding mix changes. This positions us to benefit when interest rates begin to rise. Turning to slide nine. Effective January 1, we adopted new accounting guidance related to qualified affordable housing investments. So you will see some reclassifications in 2014 related to this new guidance as well as a couple other immaterial reclassifications to conform more closely with industry practice. We had a strong quarter from our fee income producing businesses. Our fee income ratio came in at a very healthy 45.8% for the quarter. Total fee income was $1 billion for the quarter down $25 million compared to the last quarter. The change in fee income was driven primarily by a decrease in mortgage banking income, mostly due to lower net MSR income, a decrease in investment banking and brokerage fees driven by a decrease in capital markets activities and lower service charges on deposits due to fewer days and higher compensating deposit balances. We did however experience seasonal growth and employee benefits commissions resulting in a record quarter for our insurance business. For the second quarter, we expect growth in all major fee categories. Turning to slide 10. As expected, our non-interest expenses were up due to seasonal factors. Personnel expense increased $36 million. This was mostly due to a $22 million increase in payroll taxes and an $18 million increase in pension expense offset by a slight decline in FTDs. In non-interest expense, loan-related expense decreased mostly due to a $27 million charge in the fourth quarter. Other expenses increased $42 million due to prior period benefits for franchise taxes and insurance-related expenses. Professional expenses declined $14 million due to lower legal fees and costs associated with strategic projects. Looking at taxes, our effective tax rate was 30.6% for the fourth quarter and should remain at a very similar level in the second quarter. Looking forward we expect second-quarter expenses to increase 2% to 4% driven by annual merit increases, production-related incentives, professional and IT services expenses, and the impact of the Texas branches and the Bank of Kentucky. We expect to achieve positive operating leverage in the second quarter. Turning to slide 11. Capital ratios remained very strong with common equity tier one capital at 10.5%. Fully phased in common equity capital was 10.3%. Looking at liquidity our LCR remains very strong at 130%, and our liquid asset buffer at the end of the quarter was very healthy at 13.7%. We were very pleased to receive a non-objection to our capital plan. Later this month we plan to increase the quarterly dividend by $0.03 per share to $0.27, a 12.5% increase. Additionally, we are approved for share buybacks of up to $820 million beginning in the third quarter of this year. Our capital plan also included the Texas branch acquisition, the Bank of Kentucky, Susquehanna, and the AmRisc deal. Looking briefly at our segments, on slide 12 the Community Bank's net income was down $41 million compared with last quarter due to seasonally lower revenues. The segment had very good loan production. Compared with the same period last year, commercial loan production was up 5%, and direct retail lending was up 50% due to an increase in home equity lines of credit. Additionally, Bancorp production increased 9%. Non-interest expense decreased 3.1% compared to the like quarter. The Community Bank successfully converted the branches in Texas. Finally we are preparing for the upcoming acquisition of the Bank of Kentucky planned for the second quarter and Susquehanna for the second half of 2015. Turning to slide 13. Residential mortgage banking net income declined $18 million. This was driven by the runoff of the mortgage loan balances and lower production volumes sold offset by higher gain on sales spreads. On slide 14 dealer financial services had net income of $43 million, an increase of $9 million compared to last quarter driven by lower provision expenses and continued strong loan growth. Asset quality indicators for Regional Acceptance continued to perform very well within our risk appetite. Turning to slide 15, our specialized lending net income declined $7 million to $57 million compared to last quarter due to seasonally lower loan production. Like quarter loan growth was up 19% due to Grandbridge, Sheffield, and Commercial Finance. On slide 16, insurance had a strong quarter with segment net income of $72 million, up $7 million linked quarter. Revenues were up 3% for retail, 2% for wholesale, and 3% in total. Additionally, insurance enjoyed strong like quarter new business growth of 32% for retail and 23% for wholesale. Regarding the transaction with AmRisc and American Coastal, we expect to have a $30 million to $40 million merger-related charge next quarter. Remember that this transaction eliminates our exposure to underwriting risk and enhances an investment in a high-growth business. Lastly, on slide 17, the financial services segment experienced excellent linked quarter loan and deposit growth driven by corporate banking. Wealth also had record lending production, an increase of 39% compared to the fourth quarter. In summary, we had a strong performance in a seasonally challenged quarter driven by excellent credit quality, record insurance income, and controlled expenses. We have great momentum going into the second quarter with a stronger outlook for loan growth and fee income. We are excited about our two upcoming bank acquisitions, the Bank of Kentucky and Susquehanna. Now let me turn it back over to Kelly for closing remarks and Q&A.

Thank you, Daryl. So overall again I think it was a very solid quarter. Relative to the market we had really good loan performance, excellent deposit growth, good fee income, record quarter for insurance, expenses were lower except for seasonal pension expense. Most importantly we are well positioned for the rest of the year and going forward. Our non-bank businesses have really given us diversified income which is less volatile. Efficiencies in M&A are really going to begin to pay off for us. In this environment it's really about consistent strategies and excellent execution. That is what BB&T is good about. Alan…

Thank you, Kelly. Amber, at this time if you would come back on the line and explain how our participants can call in and ask a question. Thank you.

Morning.

Morning.

My first question, Kelly, is on your updated outlook on the rate environment. I remember the last earnings call you were optimistic about potential Fed actions this year and I think investors in the market are a little less so. If you could give us an update on how you think rates are going to trend for the rest of the year? And then Daryl, maybe as a follow-up to that, if rates don't go up in 2015, what the trajectory is for BB&T's core margin, both on the standalone BB&T basis and then overlaying Susquehanna?

Erika, that is obviously the question of the day I think for every. So, I tell you what I personally think. I think the Fed is going to raise short-term rates in the June to September timeframe in spite of all their rhetoric about the recent changes and so forth. The reason is because I think they believe they need to get started on moving off the zero-based level. The economy is not great, but it's not bad. They really need to begin getting to psychology for a movement in rates, because at some point you've got to get rates up so when you go down you have some cushion. Now, having said that, I don't think you can expect a quarter every time they meet. And so, it is going to be a quarter that kind of signals that it started and I think they're going to be very cautious about their wording and maybe even they'll say give you a quarter and kind of take it back, you know? Don't spend things come right back. My point is they will start the process. So, I don't think over the next year and a half or so you should expect a material change in rates even though there will be a change in the direction. That means the rate environment will still be challenging for us and everybody else. And so, you know, our plans in general are we keep hoping and it would be nice if rates went up a lot. We're not counting on that. We're planning on running our business assuming that the environment about like it is, and we think we've got strategies to enable us to do that.

Erika, on your second part of your question, the guidance that we gave for margin, even though Kelly believes the rates are going up, we always use the forward curve when we model our projections. And we ran our models this month, we basically had no rate increases for 2015. It was really the month of December which basically had no impact for our company and margin. So, to answer your question, you know, I would expect our core margin to probably drop about three basis points in the second quarter. From that standpoint you are assuming we are able to get our loan growth targets projecting for the next several quarters we expect core margin to be flat. GAAP margin will probably be about 10 basis points higher than that for the next couple of quarters. As Susquehanna comes online in the second half of the year, that will improve our GAAP margin probably in the neighborhood of 10 to 15 basis points potentially and as that gets closer we will probably give a little bit more color by then.

Great. Just my follow-up question, you have been open in terms of potential consolidation activity going forward and we've seen in some of the small and midsize peers in your footprint starting to see credit trends create even outside of energy. I guess the question here is do you think the willingness to sell or at least the willingness to negotiate a more reasonable price is sort of the issues in credit – is that going to change the tone of your conversations in 2015?

I think, Erika, everybody is experiencing the same environment you're the interest rate you just alluded to has challenges in terms of technological costs going up a lot. Regulatory costs are going up, and you can't beat that environment by making poor quality loans and low-priced loans. It is a very challenging environment. To be honest, in this kind of environment it is a cost-control game. You can't do so much in – that looks like adding scale. Do as much as you can organically but you can't push that because you might get scale and expenses, but you lose it on net income as a provision. Our answer is mergers make more sense for us. I do believe to your point, Erika, others are beginning to see the same thing and I don't think that's a sign of weakness for them. I think it's just a sign of scale advantages in a tough environment that's going to persist for some time. I expect the conversations to be more kind of practical and realistic about M&A going forward because I think everybody is settling into the recognition that it's going to be a protracted tough environment.

Thank you.

Thank you, good morning guys. Kelly, can you share with us, you were talking about some of the lending areas where the competition is really intensified and more actors have come into play here. Is it non-bank competitors you are seeing more of for more just traditional depositories? Could you compare to the last time you saw this type of competition? Was at 06 or 05 for that time period?

Gerard, you have been watching us a long time Mike I have. This time it is tougher and the reason is because there are more actors out there. What we've got going on globally is obviously an extended period of really low interest rates and what's that is doing is causing assets all around the world to be chased by a lot of money. The U.S. has relatively higher yields anywhere except in China. Money from everywhere is – higher-yielding assets in the U.S. ensure enough in private equity funds and hedge funds and business development corporations, all kinds of factors out there competing with us – this environment is tougher than it was before. Bank to bank competition first time versus last time, it is probably a little tougher – this kind of long-term extended – I think everybody is reacting to a really tough environment. I think some frankly of getting a little overzealous in terms of trying to chase – and taking a look bit more risk than they ought to. Everybody says everybody else does it and we don't do it so I'm not trying to be critical. I'm saying it is a tough environment and everybody is trying to do the best that they can do. At least for us we have said consistently we are not going to chase loan volume and expense for quality. Loan volume, as I tell our board, is extraordinarily good relative to the environment we are experiencing.

Thank you. To follow-up, you guys have obviously converted over to a single general ledger. Maybe Daryl can you share with us how much further do you have to go for updating your systems? And second, how big of an acquisition could you do with the systems that you have implemented? What's the capacity of those systems?

Gerard, the system we went to is an SAT general ledger system. It is a very proven ledger system in the industry. Not as much in the U.S., but around the world in Europe and other countries. I think this is very scalable and easily double our size and maybe much more. One of the large competitors in the U.S., one of the top four banks, also just converted to this general ledger system and they are a trillion-plus company so I think it is very scalable.

Gerard, to prove that point, Chris and I about three weeks ago went to Australia in Sydney and Melbourne and visited three banks using SAP and we got extremely confirming feedback in terms of quality – we could certainly double easily our size with this foundation.

Kelly, are you looking to expand your footprint into Australia?

I really like Sydney, Gerard, but it might be a few years before we get there.

Okay, thank you.

Hi, good morning. A couple of questions. One was on the expenses, you know you called out where we are expecting to see them go; one of the reasons it was acquisitions. I was wondering if you could give us some color as to which are thinking there especially with Susquehanna – and maybe if you could speak to acquisition impact on revenues in the various lineups you called out?

So for the acquisitions and the second-quarter impact, Betsy, if you take the 2-4% increase I would attribute 1.5% of that to city and the Bank of Kentucky. It is real there and it is mainly in line items and personnel and occupancy are the main drivers for that category. As you get into third quarter, Susquehanna will have a much more significant impact. If you look at their expense base today it is about $500 million on an annualized basis. In the – days we have phased in going over 12 to 18 months so it's going to have an impact initially on our run rate. I think it will update that a little bit better next quarter as we get closer to that acquisition closing, but you can kind of look at Susquehanna's numbers they released yesterday and use that as a gauge and layer in expenses. We say we get a 32% – we think that is definitely doable over a 12 to 18 month period peak.

On the revenue side – you didn't call out the acquisitions impacting revenue so just wondering if it just wasn't as big of a benefit that you see in Q2 and more of it Q3 event or too hard to parse it out?

The city deal is one that is in for the second quarter for the whole amount and that is basically there is not a real difference between the revenue expense pretty much matching each other. I think over time is where we get the accretion. The loan growth and the headcount growth over time, that is how we get that accretion and we have been very successful. We expect this went to be on track so that is how that will be accretive. For bank of Kentucky we do get a loan portfolio of about $1.3 billion that we're going to get towards the second quarter and that will have an impact on the first quarter from a revenue perspective.

Betsy, remember file there is a little bit of a lag time, in all three of these cases we think the light will be shorter than typical. The reason is because in all three cases we are entering very large markets with very, very low market shares, with more products, more services. Our strategies are very effective in this kind of market. Rick and his team think that, and I totally agree, that we will be able to ramp up the revenue side of all three of these acquisitions very quickly relative to other traditional mergers.

To get some positive operating leverage in the second quarter, but it should accelerate from there as the revenues come through from these deals.

That's right.

I think, you know, these deals close, Betsy, and as we achieve cost saves, positive operating leverage for the next six to eight quarters should be very achievable.

Good morning folks, thanks for taking my call. Daryl, maybe just a question if you can sort of on a BB&T standalone basis. With the general ledger system now up and running, is there much in the way of cost benefits that you're getting from that conversion, or are you still running sort of dual systems at this point and you don't expect to see much in the way of savings in the next few quarters?

We converted over Presidents' Day weekend in February. We really decommissioned the old system, that is going to take place later this quarter or into the third quarter. I think that will phase in over time. I would say the efficiency of the system plays out as we continue to automate and improve our manual processes to automated processes. It's going to take time for that to happen. The real benefit of these systems is there is any efficiency play for automation but it's really the more you can attach to the systems so now we have basically a workhorse general ledger system. The key now is to try to get all of our other systems onto this system to get more efficiency to scale rather than have lots of other ancillary of the systems that support and convert more to the SAP environment so we have better control and more efficiencies and more automation. So that will play out over probably the next two to three years.

And maybe a question for Clarke, in terms of the delinquencies, those were down quite nicely both in an early stage and 90 plus basis yet you were still suggesting no additional reserve releases going forward. How are you thinking about the trend in delinquencies and criticized assets going forward?

Great question, Matt, and I think our view is that we're operating more or less at or below normalized levels in a very benign current performance environment. While we feel really good about that and that's an opportunity to outperform and hopefully have a lower provision if our losses are lower, at the same time we are growing our loan book nicely, particularly in large corporate and other areas and we want to make sure we are properly and adequately reserved so that is why we said we don't believe it's appropriate right now to be releasing but we still feel good about the opportunity to outperform on credit in the near term here.

Good morning. Back to the margin outlook, on the core margin, what gives you confidence that the core margin flattens out in the third quarter excluding rates and excluding deals following the compression you do expect in the second quarter and the compression we saw this quarter?

John, we have talked about this before over the last year or two. For us to have our core margin flattens out, we are really hoping and getting – loan categories. We need to get to the loan growth in our specialized businesses and our CRE businesses and those businesses to actually outgrow. But we are slowing their growth – lowest spread businesses. We are slowing the growth in prime auto which is also a slower spread business. As we slow that growth down and increase the growth in the others it is really the asset mix that is really what is driving the quarter stabilize. On the liability side there really isn't a whole lot of room to come down. That is really what we need to have happen for the core margin to stabilize.

And can that happen without commercial real estate really picking up all that much because buyer tone –

We believe it is so with the forecast we have.

Okay. Thanks for the color on the margin trajectory. I am wondering what is your margin guidance particularly with the back half of 15? What does that imply in terms of your spreading – expectations?

If you just look at the core bank, we would expect – income to start to rise as our loan growth kicks in. As Bank of Kentucky basically comes in towards the end of the second quarter and have the full effect in the third quarter, that would also be a benefit there. As Susquehanna closes sometime hopefully in the third quarter, that would also have a huge benefit. But just all core basis by itself, we believe and are I will start to grow from second to third to fourth.

Okay, all right. Lastly, Daryl, based upon your earlier answer around – mortgage abatement, is it fair to assume the declines – portfolio should continue here?

Yeah, we have projections – it came down a lot this past quarter about 8% but that was driven partially by the loan sales as well as the refi and everything. I think the pace of it coming down will be slower the next couple of quarters that it should also shrink. So you will see a pretty good delta between the core portfolio as well as the portfolio excluding mortgage. So I would expect it to continue to shrink not as much.

Hi, good morning. I just wanted to see if there's any more precise estimate of the timing of the Susquehanna close, Daryl? In terms of our modeling, should we think about that you're open to close right at the beginning of the third quarter or is it just still very uncertain?

John, this is Kelly. You know, this environment is a different environment than any other we have played in. In the old days you could predict with a lot of precision exactly when things could occur. It's really not that predictable today. As I said in the opening remarks we have a lot of confidence that will close in the second half. In all honesty, I think it will close in the third quarter but I can't be precise enough whether it is July or August, I just can't be that precise.

Okay. Maybe, Daryl, you could help us think a little bit now, I know you said you would be more details later about the initial impacts in the first quarter when you do close that deal. Is it dilutive upfront before you get these saves? Just any sense of the timing of these saves and also the merger charges, how should we think about those as the first close the deal? Thanks.

The merger charges obviously will be pretty heavy in the first quarter too when we close it. I would say from an earnings per share basis in the first quarter it's probably not that accretive, maybe a penny or two. Early on it is getting the cost saves and getting the businesses to perform and getting the growth engines and getting all of our products and the people in Susquehanna trained. When Ricky does his magic with the community bank, that really plays out but it doesn't happen in the first quarter. It takes a year or two.

Okay, but it could be accretive by a penny or two – even in the first quarter or two?

It's possible, yes.

Okay and then one follow-up question on deposit service charges. What did you see this quarter in terms of seasonal pressure on that line and how much are you seeing in maybe behavioral changes with folks managing their balances better and having less overdraft and fewer deposit service charges?

This is Ricky, I think I answered your question. Obviously seasonality – but balances increasing are offsetting analysis service charges so they are using balances to pay for service challenges instead of hard fees. Certainly overdraft behaviors are becoming more managed by our people. I think a lot of that is the benefit they are getting. They are using these savings to not necessarily spend more but manage opportunities in their existing lives so that not over drafting as much. Those impacts together had the decline you saw in service charges. We are still seeing great deposit growth. Balances are continuing to increase. That momentum continues and that could continue to put some pressure on service charge income as those behaviors continue. Certainly want to continue to try to grow accounts and with the increase in accounts you get the potential for more service charges based on volumes – as we go into the second, third, and fourth quarters of the year.

Thank you very much. On the mortgage banking side, you talk about this segment the mortgage income was down to lower servicing costs, – I'm a little confused about why it was down.

In the fourth quarter, we had a reevaluation in our MSR assets that take that revaluation away, I would say mortgage banking was essentially flat which is actually pretty good because usually the first is a weaker quarter. It is really set up to have a pretty strong second quarter after a good start so we have pretty good momentum in mortgage revenue right now.

And secondly, a couple of your competitors are saying the purchase market especially in Florida is doing very, very well, probably better than most people but given the purchase world was a disappointment a couple of years ago, I'm just wondering if you could – add any color to that?

Paul, this is Ricky again. Paul, we spent a lot of time down there the early part of the year visiting our regions there and in every market, we are seeing very strong active purchase activities spanning price ranges from low to high. Another thing we will see – we heard a lot about the weather in the Northeast causing people to say I'm coming to Florida and I'm going to be there. That impact is probably anecdotal but I think it shows you that Florida is back and people are again moving to Florida. They are buying homes – particularly in South Florida with – coming in buying condos. We see Florida just as you describe it, a much bigger more robust purchase market.

The context of assets you're looking at essentially buying, how do you think about the assets of the businesses, the GE capital selling – BB&T?

Jeff, we think the asset sales – frankly going context in your especially – optimize the use of capital. We think that is a good thing for banks like us because as we talked about organic growth on a good quality basis is challenging so we're looking at everything that's available out there in the marketplace. Obviously we would be interested in any huge megadeals like Wells Fargo as has been talked about but we look at deals that make sense for us. We are fairly positive that some of those acquisition opportunities will come to fruition.

If you look at our three to 3.5% on new originations and if you get rid of that the only thing you can put it into is securities. Kelly didn't think rates were going up that quickly so I'm just curious what's driving the overall thought process here? I know Marty you are an old CFO finance guys so you understand all this stuff, but if you look our match funded basis and you look at these assets, these assets have a credit spread we are putting on the books well north of 100 basis points if you actually try to fund these assets call it 80 basis points. The negative complexity you have an rates eventually do go up these assets will really start to extend out and it's just a really tough asset to fund properly over the long term. I think selling as much as we can out and getting the revenue that we can is the right thing for our company right now. All about overload businesses are growing really well. We are growing even with this running off so I think that's positive. We are stabilizing core margin with basically flat interest rates which is really pretty good in this environment.

Marty, you have to keep in mind, our primary driver in this is diversification. Even if it's – were just not – not consistent with our long-term diversification strategy. We wanted to bring it down some. It's not dramatic but we wanted to bring it down some to get it in line with our justification plan.

All about overload businesses are growing really well. We are growing even with this running off so I think that's positive. We are stabilizing core margin with basically flat interest rates which is really pretty good in this environment.

Absolutely. I think that's an area that will create the training of the deposits in the system. I think it will create an opportunity for this asset investors to – and all of that will create asset pricing increase with the banking segment.

Thanks.

Good morning Kelly and Daryl, how are you?

Good morning.

Most of my questions have been answered but I wanted to go over the accounting change in the quarter. That improves our operating leverage overnight, correct? – the offset is not an expense –

That's correct. We basically move a negative income item out and put it into the – item. We also restated 2014 financials so if you go back and compare numbers versus last quarter you're going to see the 2014 change. This is proportional accounting we had to do for our tax credit businesses.

Thanks, Amber. Thanks for joining us today. This concludes our call.