Truist Financial Corporation (TFC) — Q3 2017 Earnings Call Transcript

Thank you, Laura and good morning everyone. Thanks to all of our listeners for joining us today. On today's call, we have Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter and provide some thoughts about the fourth quarter. We also have Chris Henson, our President and Chief Operating Officer; and Clarke Starnes, our Chief Risk Officer to participate in the Q&A session. We will be referencing a slide presentation during our comments. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made 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 our 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 will turn it over to Kelly.

Thank you, Alan, and good morning, everyone. I hope you are all having a wonderful day, and I appreciate you joining the call. We experienced a strong third quarter, demonstrating revenue growth despite the hurricanes that significantly affected parts of our market. Our core loans also saw growth, along with effective expense management. Net income available to common shareholders was $597 million, resulting in a diluted EPS of $0.74, an increase of $1.04 compared to the third quarter of 2016. When adjusted for a four-penny effect due to merger-related and restructuring charges, the adjusted EPS would be $0.78, reflecting a 2.6% rise year-over-year. Our adjusted return on assets, return on common equity, and return on tangible common equity were 1.2%, 9.2%, and 15.6%, respectively, indicating respectable performance ratios in the current environment. We are pleased to note adjusted positive operating leverage. Taxable revenues reached $2.9 billion, an increase of $1.04 compared to the previous quarter, driven mainly by solid core loan growth and benefits from higher rates. Our net interest margin rose by 1 basis point to 348, and our core net interest margin did the same, which is encouraging. The adjusted efficiency ratio improved to 58.3 from 58.6. Earlier this year, we highlighted that our costs would begin to peak mid-year and subsequently decrease, and that is proving to be accurate. Non-interest expenses, excluding merger-related restructuring charges, totaled $1.698 billion, representing an annualized decrease of 7.8% compared to the second quarter. We are concentrating on reconceptualizing all aspects of our business, recognizing that many traditional methods and strategies are no longer effective. Therefore, we are advancing our reconceptualization strategy more aggressively, which will lead to meaningful changes, including FTE reductions and positive expense impacts moving forward. On Page 3, we noted that our non-performing assets increased by 1.4%, while our net charge-offs fell to 35. In detail, our credit quality remains excellent. We raised our quarterly dividend by 10% to $0.33, completed $920 million in share repurchases, and our common equity ratio remains robust at 10.1%, providing good returns to our shareholders. Regarding merger-related restructuring, we incurred a charge of $47 million, or $0.04 per share after-tax, primarily related to severance and branch closing costs. In the third quarter, we closed 61 branches and expect to close around 78 more in the fourth quarter, totaling approximately 140 branches closed this year. This will generate positive run-rate savings moving forward, and we plan to continue evaluating our branch distribution system aggressively next year. In Slide 4, we introduced a progress report comparing our performance to our guidance. In terms of loans, we fell short, as we indicated during the mid-year conference, mainly due to a significant spike in pay-offs in August. Many people chose to refinance, leading to a considerable increase in pay-offs that we did not anticipate during our last earnings call. There was also a minor slowdown in production due to the hurricanes, affecting areas in Florida where the power was out for 10 to 13 days, diverting focus from banking activity. While we anticipate recovering this lost production, it did have some impact. Our asset credit quality remains exceptionally strong, and we met our guidance for net interest margin, seeing an uptick in basis points across the board. Net interest income remained stable. Although we experienced a slight miss in non-interest income, this was primarily due to lower performance commissions related to the hurricane effects. If you need more information, Chris is available to discuss this further. The immediate impacts of the storms caused a decline in performance commissions, but we expect to regain that promptly as rates improve. There were also temporary losses in insurance production during the hurricane period due to power outages. We believe this will also rebound soon, but it did slightly dilute our results. Our expenses aligned well with our guidance, which we are satisfied with. Looking at Page 6, we noted solid loan growth, although there was a slight annualized decline of 1.1% in total loans. The subtotal for commercial loans increased by 1.2%. There was one-time reclassification between C&I and CRE due to our commercial loan system update, but this did not affect quality. Therefore, when combined, commercial growth stands at 1.2%. We experienced strong increases in specific categories, such as premium finance, which rose 34%, Sheffield at 19%, and finance at 15%. Overall, our core portfolios grew by 3.8%, and our core seasoned portfolios increased by 28%. We are actively focusing on strategies to improve long-term profitability by optimizing our portfolios. Our key strategy emphasizes growing more profitable loans that offer better risk-return ratios. We continue to grow C&I and deferred levels of CRE, while pricing prime auto loans for profitability, exceeding market guidance. Although this strategy may cause some volume reduction, we view it positively as our relative profitability improves. We are selling most of our confirming residential mortgages to meet client needs while avoiding a significant inventory of mortgages until rates stabilize. Our focus remains on sales finance, which has seen a decrease of 25%. Looking ahead, we expect core loans to grow by 2% to 4% annualized in the fourth quarter, indicating that our core business is performing well, though not exceptionally, in the current environment. We anticipate further growth in the first half of 2018 as our total loan growth gradually increases due to our optimizing strategies. While we expect total loans to slightly decline at the end of the fourth quarter, we project solid growth in core portfolios. It is crucial to maintain our focus on quality and profitability in this challenging market. Seeking faster loan growth in the short-term can be counterproductive, and we aim to cultivate well-priced, well-structured loans. With 45 years of experience, I have witnessed many ineffective strategies, and we are committed to avoiding those pitfalls. We are turning EBITDA effectively, with various specialized lending strategies in place. Our corporate portfolio is performing admirably, and our team continues to enhance performance while prioritizing quality and profitability. Recent acquisitions are starting to gain momentum, though they have yet to reach their full potential. Typically, we experience an 18 to 24 month integration period after a merger, and we are now entering a stable growth phase, which is encouraging. Concerning deposits on Page 8, our core deposits have decreased by 7%, but this aligns with our projections. Our non-interest bearing deposits increased by 6.9%, which is a positive sign. As interest rates rise, particularly in commercial banking, we expect to gradually adjust our deposit rates. Daryl will elaborate on this in his report. Our non-interest deposits rose from 32.8% to 34%, which is significant for long-term prospects. Before I pass the floor to Daryl, I want to emphasize that while we discuss the specifics of this quarter's financials, it's essential to focus on broader strategies and the evolving landscape. The world has changed, and we must adopt new strategies that effectively address the current environment. Focusing on differentiation is critical; it makes sense to prioritize strategies that set us apart, especially when we are not the market leader capable of offering low prices due to scale. Thus, we are concentrating our efforts on differentiation in areas such as middle-market commercial, small businesses, insurance, and specialized lending while spending less time on regions where we cannot achieve that competitive edge. We are also investing in digital advancements to effectively engage with younger demographics, such as millennials. Simultaneously, we are rationalizing our branch network strategy, enabling us to provide returns to shareholders and invest significantly in future strategies crucial for expanding our franchise. We believe those with robust strategies and exceptional execution will emerge as the leaders, and that is our focus. Now, I will turn it over to Daryl for further insights.

Thank you, Kelly, and good morning everyone. Today I'm going to talk about credit quality, net interest margin, fee income, non-interest expense capital; our segment results and provide some guidance for the fourth quarter. Turning to Slide 9, we had a really strong quarter with regard to improved charge offs and non-performing assets. Net charge offs totaled $127 million or 35 basis points, it decreased from 37 basis points last quarter. Loans 90 days or more past due and still accruing increased 2.4% versus last quarter. This is mainly due to government guaranteed residential mortgages. Loans 30 to 89 days past due increased $113 million or 12.9% mostly due to seasonality and hurricane-related impacts. NPAs were down $10 million or 1.4% from last quarter mostly due to improvement in the commercial portfolio. Looking to the fourth quarter, we expect net charge offs to be in a range of 40 to 50 basis points assuming no unexpected deterioration in the economy. The slight increase in the expected net charge off range is due to seasonality. Continuing on Slide 10, our allowance coverage ratio remains strong at 2.93x for net charge offs and 2.44x for MPLs. The allowance to loans ratio was 1.04% up slightly from last quarter. The allowance includes $35 million qualitative adjustment for the stores. Excluding the acquired portfolio, the allowance to loans ratio was 1.12x unchanged from last quarter. So our effective allowance coverage ratios remain strong. The third quarter provision of $126 million compared to net charge offs of $127 million. Going forward, we expect loan loss provision to net charge offs plus longer. Turning to Slide 11. Compared to last quarter, net interest margin was 3.48% up 1 basis point. Core margin was 3.32% also up 1 basis point from last quarter. GAAP and core margin benefited from higher loan yields partially offset from funding rate increases. Deposit betas continue to be very modest exceeding our expectations. Asset sensitivity was unchanged from the prior quarter. GAAP and core margin both expected to be down 3 to 5 basis points next quarter due to higher funding cost and asset mix changes. Continuing on Slide 12. Our fee income ratio was 41.4% down from last quarter, mostly due to seasonality and insurance. Non-interest income totaled $1.12 billion down $54 million compared to last quarter. Both mortgage banking and other income had nice increases from last quarter. Other income was up due to private equity investments which is partially offset in minority interest. A primary driver for the decrease in non-interest income was lower insurance income. It was down $84 million mostly driven by seasonality and lower performance-based commissions. Looking ahead to the fourth quarter, we expect fee income to be up slightly versus the fourth quarter of last year. Turning to Slide 13. Adjusted non-interest expense was slightly under $1.7 billion down $34 million from last quarter's adjusted expense number. Personnel expense decreased $18 million mostly due to lower benefit expense and lower production-based incentives. While we had a modest drop in personnel this quarter, we expect a much larger reduction in salary expense to show up in future quarters. Merger-related and restructuring charges increased $37 million mostly due to facility charges and severance. The professional services expense decreased $11 million primarily from lower AML expenses. Going forward expenses are expected to be stable versus the fourth quarter of last year excluding merger-related and restructuring charges, which equates to $1.65 billion for next quarter. We will achieve positive operating leverage in the fourth quarter for growth in linked quarters. We expect fourth quarter effective tax rate to be about 31%. Continuing on Slide 14. Our capital and liquidity remained strong. Common equity tier 1 was 10.1%; we are very pleased with this quarter with the third quarter payouts. Dividend payout ratio was 44% and our total payout ratio was 198% reflecting $920 million in share repurchases. The remainder of our proved $1.88 billion of share repurchases are expected to incur evenly through the next three quarters. Now let's look at our segment results beginning on Slide 15. Community Bank net income was $396 million an increase of $51 million from last quarter. Net interest income increased $24 million from the second quarter mostly due to positive performance in deposit betas. Loan production was disrupted in part by hurricanes while down since to the large pay-offs. We had a good increase in our commercial pipeline which was up 15.4% from the end of last quarter. As you can see we closed 70 branches through the third quarter; we are planning to close, as Kelly said, about 78 this quarter. Turning to Slide 16. Residential mortgage banking net income was $67 million, up $21 million from last quarter. Non-interest income increased $14 million driven by increased gains in the sale of residential mortgages. Production mix was 70% purchased and 30% refinance relatively stable compared to the second quarter. And our gain on sale margin was 1.85% versus 1.61% last quarter. Continuing on Slide 17. Dealer financial services net income totaled $38 million unchanged from last quarter. Net charge-offs and regional acceptance set a slight year-over-year increase to 7.5%. Net charge-offs for the prime portfolio remained excellent at 18 basis points. Turning to Slide 18. Specialized lending net income totaled $54 million unchanged from last quarter. Compared to the second quarter we had strong loan growth in premium finance, Sheffield, and equipment finance. Turning to Slide 19. Insurance holdings net income totaled $13 million down $42 million from last quarter. Non-interest income totaled $399 million down $84 million; this was driven by seasonality as well as lower performance-based commissions. The fourth quarter fee income guidance includes lower expected performance-based commissions like-quarter organic growth was down 28% mostly due to timing of renewals and storm-related losses. Non-interest expense totaled $378 million down $18 million from last quarter driven by seasonally lower incentives. Continuing on Slide 20. Financial services had a $106 million in net income down $9 million from last quarter. Fee income was up due to private equity investments, corporate banking had strong loan growth of 8.4% while wealth generated strong loan growth of 18.2% from last quarter. A decline in deposits was mostly due to managed runoff of larger balanced rate-sensitive deposits. On Slide 21, you will see our outlook for the fourth quarter. While we continue investing in our businesses to drive improved revenue growth, we feel very confident that non-interest expenses will continue to decline and we will strive to have positive operating leverage. In summary, we had solid third quarter earnings, positive adjusted operating leverage, declining net charge-offs and non-performers, and increases to take GAAP and core margins and good expense control for the quarter. Now let me turn it back over to Kelly for closing remarks and Q&A.

Thanks Daryl. So very good Daryl, it was a solid quarter taking on a challenging environment. Our revenues grew; we had good core loans and growth; we had good core deposit growth; we have excellent expense control. We have a lot of focus on the future, focusing on our branch rationalization, our strategy, our digital strategy, and most importantly we continue to be tightly focused on our vision, mission, and values. At BB&T we clearly believe our best days are ahead.

Okay. Thank you, Kelly. At this time, we'll begin our Q&A session, and we would ask our operator to come back on the line and explain how our listeners may participate.

Good morning Kelly, how are you?

Hi, Nancy. How are you?

Good. In this differentiation that you are talking about and in this rethinking of the franchise, what has been the biggest emphasis to this? I mean when you are thinking about the factors that are out there right now, what really plays into this?

So Nancy, I think it's, broadly speaking, that the world is changing frankly a lot faster than I would have four, five years ago. It is largely around the whole digitalization, artificial intelligence, robotics, all of which are allowing us in the back room to restructure and, frankly, we can automate many, many processes that were manually handled forever. And we get that quality and more efficiency. So the back room offers, really provides, in my career, offers huge opportunities to recentralize and do the same with less expense. In the front room as you know the world has changed in terms of their expectations of convenience banking. It is not just about executing transactions in the many years although they are the most strategically focused on it, but everybody who just has very, very high-quality mobile banking et cetera. So that is where we are putting an enormous amount of focus on being sure that we have the best offerings in terms of digitized delivery of services like mobile banking and et cetera and being able to deliver it efficiently. So in order to pay for all of the front room, we are rationalizing our back room and we are rationalizing our branch structure. So it's a simple way to answer; I think about you actually wrote to our commentary some time ago, the world has really changed and so we are thinking about every aspect of our business differently today than we were three years ago, two years ago.

Did this thought process include, we just saw JPM buy WePay, doesn't include the bringing in fintech franchises? Have you thought that ahead? Is that something that would be attractive to you?

Absolutely, we have for 18 months; you may have heard how we wanted first to have one of our executive officers as our Chief Digital Officer. He is full-time focused on scouting the role, figuring out what the best fintech offerings are, and looking for opportunities to buy or partner with them. We are completely open-minded about how we can integrate the advanced techniques fintech can bring to the world. So, the answer is clearly yes.

And I would just ask as the final part of this, in looking at the banking franchise and rationalizing the banking franchise: is it possible, I mean you guys have spent decades building a franchise. Is it possible that you will look at regions to exit?

In today's world, Nancy, everything is possible. So, what we think about is we first frankly focusing on what I call residual business that we have that don’t really make sense. Because, we are not that we might not be making money, but we just can't make much money. So, we get as I mean those kind of strategies recall they won't be tightly focused on the ones that do make sense. In terms of regions, as I sit here, I don't have any particular regions that I would say we are in that we don't want to be in. But, the clear thought process that I will be focusing is, de-emphasizing regions that don't offer as much opportunity and improving our profitability. Now that may ultimately lead to your point lead to actually exiting, but right now our focus is on improving profitability in those regions that don't offer substantial growth but do offer good, solid relationships today. We are focusing on providing still good, always quality, but because we have such huge brand value there, we think we can provide solid service quality value with less expense. And then reinvesting those expenses in the market instead our higher growth markets and offer more long-term potential.

Thank you.

You bet.

Hi, good morning.

Hi Betsy.

I just want to focus in on the loan growth opportunities here because I know that you are looking for the core portfolio to be growing in the 2% to 4% range or so; yet in the near term it's going to come in below that because of the run-off portfolios which feel like they are going to be done running off in 1Q, 2Q next year. But maybe if you can give us a sense as to that piece of change and what's the issues in the run-off portfolio that you really want them to be moving off as opposed to sticking with them in this low growth environment? And then maybe highlight where you see opportunities in your regions for accelerating loan growth? Thanks.

Betsy, I'll take a start and then Clarke can add some detail. So we are really focusing on, as how to say optimizing these mortgage portfolio and the prime portfolio; there is no surprise those portfolios are now generating adequate returns on equity. And in terms of when you think mortgage in terms of rising rates, now we are about to have auto where we wanted to be, I mean the business we're going to stay in, but this would be and not chasing volume but chasing margins and profitability that's heading towards stabilization, mortgages heading towards stabilization just a natural run-off. So, you are right first half that being, they would be from where they want to be. But really the more important thing doesn't come through I think in our numbers is that we have really good traction in a lot of areas. Our corporate banking strategy is growing extremely well, strong double-digit growth and has a good long runway. We weren't a natural player in the big, high-end market until the last few years, we have a fantastic team in that area, and it is doing really well and we'll continue to do well going forward. Our growth strategy is really hitting in all cylinders in terms of fees and asset generation is doing extremely well. All of our specialized lending businesses are doing fantastic. I mean you grow in double digits, you grow in 20%, 24%, 25% growth rate and as seasonal somewhat, but I mean still, they are doing extremely well and we are differentiating it. So, I don't worry about it comparative prices much on that. The biggest challenge is in the community bank, where we are competing with everybody in the world, but what we are doing there is focusing on the quality service delivery, but also frankly differentiation. We are in the midst of rolling out today in our community bank a very, very exciting quality differentiating approach which is around what we call financial insights. What that is, rather than going to decline, so I'm talking about loans and deposits, we go and talk to them about how we can help them grow their businesses; we try to get clear about what their goals and strategies are going forward. So that we can better augment their performance by supporting them. For example, we, I believe, are the only bank out there that through our BB&T leadership institute goes into companies and talks to them about how to help their companies grow better by having better leadership talent and we have a very, very long history of providing excellent executive leadership training that we bring to our clients. And they really appreciate that; they appreciate that we don't come in day one and ask for a loan, but the positive is we come in and talk about how can we help them grow their business, how can we help their individuals grow, and that's got really, really good traction. The number of all those, Betsy, that we are focusing on is well so, I wouldn't want you or others to think that we got a decline in loans and that's the whole story; that's not the story at all. The decline in loans is simply a smart profitability strategy of restructuring our portfolios that don't make as much sense and reinvesting more time and energy in ones that do. And we think that forms in those areas are very strong.

Okay, thanks. Very helpful answer. I appreciate it Kelly.

Thank you.

Good morning.

Hi Matt.

I was hoping you could elaborate on the insurance performance-based commissions, how much of the insurance fees does that represent? What are the drivers and what's the outlook?

Yes. Happy to do that Matt, this is Chris. First thing I would maybe point out that, I think there might be some mistake about the inline performance. We come off our second quarter which is our highest quarter of the year to our lowest which is in the third, when you call out that $84 million reduction about $56 million of that is seasonality - about $9 million was just directly related to hurricane losses due to performance-based commissions; three was, like Kelly said, was just production loss; facilities were really shut down, so we couldn't do business. And there is about $16 million related to timing through various businesses where we might have received something in the second quarter of this year that we received in the first quarter in the year's prior. So just to clear that on seasonality, but the outlook, I think it's a great question. The storms do cause a reduction in performance-based commissions in the short term, but we get improvement over the intermediate term. So, really over the long-term this is good for brokers; you have to go through this window of short-term pain to really get pricing up to the long-term. I think what you could expect from us in the fourth quarter is commission is being up around the 5% level and that includes the reductions we would have in performance-based commissions. We still see economic expansion driving our unit growth. This quarter we had 5% new business growth, and when you drive insurance one is pricing and it's stabilized down from 4 and to say the 2 to 3 range and we have the opportunity now through storms for pricing to actually improve further. Second, it would be client retention, and we're industry leading at 91%, 92% or so there. So economic expansion, I think, is one pricing new business growth we commented on. But to your point, that outlook on performance-based commission is really too early an impact; you can't get the impact for the recent catastrophes - we focus on hurricanes there have been four of those, but you also have the Mexican earthquake, and you've got the wildfires in California. So, given there is a lot of capital in the market, today the industry is in transition as it relates to all this. Most of what you read is if you, if it exceeds $100 billion, it's going to put capital pressure on the industry side, I think it is likely to cause pricing increases going forward. Obviously, it depends on levels of new capital coming and I think we will likely see some sort of price increase. We've also got the impact of standard cares and support to the retail market that really freeze pricing after the storms and what they really trying to wait on; so see what the reinsurers do which is a price reset at the first of the year. So, I think that also will likely drop pricing out for carriers.

Okay that's helpful. And then if I could just squeeze in on a follow-up on expenses, I know there was a comment about hoping to continue to push cost down obviously fourth quarter, the ability on does you think about 2018 any early thoughts on can you reduce costs on an absolute basis or are you trying to offset kind of inflationary pressures? What are the thoughts on the expense plan heading into next year?

Yes Matt, this is Daryl. We are still putting together our 2018 plan. I think the best way I can tell you right now is what Kelly said is that we are continuing to look forward our efficiencies and kind of redistribution of our cost structure and you will continue to see the salary line item and more severance payments which will drive our personnel cost down for the next couple of quarters. We're going to use that into 2018; we are going to give guidance on 2018 yet, but know that we have pretty much wind in our sails right now from an expense basis because it's headed down right now and well we're going to make investments in our company, we still have a pretty good trajectory down.

Okay, thank you.

Good morning, Daryl, I was hoping to ask just a little bit about the NII outlook and net interest margin on. For the net interest margin down 3 to 5 basis points next quarter, can you give a little details on the funding cost and asset mix pressures that you referenced?

Yes, I think we made a decision John to grow our investment securities portfolio over the next quarter or two consistent with what we think we're going to see loan growth over the next year or two. So our securities portfolio is going to ramp up a little bit kind of close to what it was a year or so ago. Consistent with maybe three plus percent that's basically given us a negative asset mix change but gives us positive net interest income, a contribution from that perspective. And then from a deposit beta perspective if you look at the last four rate increases, our deposit beta has been about 14% today on interest-bearing deposits. We continue to respond and be aggressive on the commercial side as we need to and I think retail side is still pretty tame though we are starting to have a couple of competition more for wealth clients and all that. So we're trying to be responsive, but I think over the next couple of rate increases you are going to see that 14% start to drift up probably back to normal levels you had, but closer to higher levels than where they are today.

Okay, and the change in mindset about the securities is driven more about the loan growth and challenges of loan growth rather than a rate outlook change or anything like that it sounds like?

Yes, I don't think we're smart enough to know exactly which way rates are going to go, but alone that the shape of the curve and you have adverse as long and all that, I think we just want to keep our portfolio approximately 20 plus percent of our balance sheet from a liquidity perspective. We're really gearing up to have pretty solid loan growth into 2018 and we just want to make sure we have liquidity, so we want to make sure that we're funded with our core clients; we have been liquidity with our securities portfolio as our important loan portfolio starts to take-off.

Okay. And then just on the fourth quarter outlook for net charge-offs, can you remind us what portfolios see that seasonal uptick in the fourth quarter and also is that charge-off guidance the 40 or 50 include any hurricane impact on charge-offs that you might expect for the fourth quarter?

Yes. John, this is Clarke. The primary seasonality impact in the fourth is always going to be in our retail portfolios, but more specifically its Regional Acceptance or some of the problem or wind. While we are not expecting any increase in deterioration it would be the normal year-over-year seasonality; that's the biggest impact, but also just to remind you we had extremely low third quarter number in our commercial losses, and we're just forecasting maybe a little more normal losses; hopefully we'll do better, but those are the two primary factors.

Okay, got it. Thank you.

Thanks.

Good morning, guys.

Good morning, how are you doing?

Kelly, can you give us a little more color you talked about looking over the long-term and not necessarily the short-term when it comes to loan growth and some of the things that you folks are seeing in the marketplace on underwriting. What are you seeing that makes you a little nervous especially at this point in the cycle and can you bring that by loan category whether it's CRE, commercial, or consumer?

Yes. Gerard, I think the mega issue here is that you know we've been on a nine year slow economy. Asset returns for all investors have declined steadily; that's driven the profitability down and so everybody is scrambling for profitability which means they are scrambling for assets, and it is invariable happens as you know when people are scrambling for assets and there's a lot of people scrambling, then you get declines in prices and you get stretching in terms of term. So, the mega issue is we did a lot of pricing and to two levels of underwriting, two longer terms not special covenants, et cetera. I think that's generally occurring across the board; it was more specific. And, like more to family although we would tell you that it's improved two years ago, 18 months ago, we've heard about that, but I think everybody is going to rationalize that down a bit more, little more rationale. And so, I don't think there is any one particular area that we were, there is a little bit of a spike in story facilities, fee links like that, but nothing that's dramatic. And Clarke would you add anything to that?

I would just add to what Kelly said, on the corporate side; it's generally probably the most rationale, but what we see it's time to continue to get a mandatory, to deliver the mandates for the syndication or loosening covenants, reducing the number of covenants, etc. there are some structural weaknesses that we know in the long-term, you got to be careful on. I think we see the most hyper competition in the small regional community bank winning space which is again a lot of structural consideration given ups and little pricing for, that's probably the most hyper compared to. Your third point, I think you'll have to always look at is not all growth is pursuing; so I think everyone in the slow environment is trying to find a little niche or something to get growth that they are not highly experienced into kind of the herbs chasing some of these new forms of lending that haven't been tested yet and that's underneath a lot of these numbers. So, we're just trying to be mindful of all those issues.

Could you guys equate this period to 2005 or is that too aggressive back then when you think back about it?

I think it was too aggressive back then. Then you had a much less informed; you for around chasing bubbles. And you know we have a much more inflated level of bubbles throughout all asset classes. So this is nothing like 2005 and 2006, but totally in the real estate category. So, I personally think anything impressive we would make about lending today should not suggest we think it's way out of control and it's leading to recession and all that not at all.

Very good. And then on the deposit side, obviously you guys are very clearly about taking down the interest-bearing deposits and you grew your non-interest bearing obviously quite well. Aside from the betas that you've already touched on, was there something else in the interest-bearing that prompted you to kind of take them down the way you did this quarter?

Yes. Gerard, it was basically just lower funding play; we had some deposits that were close to LIBOR flat that was indexed to market rates, and we just made a decision to basically fund them for federal more bank advances which was sub-LIBOR probably by 10 or 15 basis points. So it's just an economic decision when you are being paid LIBOR flat that's really not a, I would call core client. They are very, very sensitive from that perspective. So we didn't lose any core clients, it was just an economic decision.

Great, thank you.

You're welcome.

Yes, hi good morning.

Good morning.

Good morning.

My first question Kelly is on maybe asking a little bit more detail on how you are thinking about the branch reduction strategy for 2018 and 2019? And, as you think about your distribution channel, do you think that could naturally lower the efficiency ratio all those being equal from the 58% that you've been booking all year?

Yes. So conceptually, we're going through the cannibal process and the first phase of the process is looking at kind of what we call the life free, that's where you have, in the market you may have 15 and 20 branches on this one particular street you have three branches that are within 5 or 6 miles of each other. So you close the one in the middle, you move the associates to the two and it doesn't really change, and your expenses go down. So that's what we've been doing kind of this year, as we head into 2018 and 2019 then what we have to do is think in terms of eliminating the branches but being assured that we are investing properly in the other areas, other forms of distribution. For example, you might see us there closing branches but adding free-standing ATMs or you might see us closing branches but adding ATMs in drug stores or Wal-Marts or places like that, because while most of the declines still go to the branches for more complex products, I'll now for a lot I feel just making a deposit in cash and checks. As we go through 2018, 2019 it will be a little more complex, but still a plenty of opportunity, it just may require a bit more add back not terribly expensive add back in terms of the way to meet the convenience needs of the client. In terms of the efficiency ratio all of those to get will improve our efficiency ratio because we're simply able to reduce expenses and have relatively small negative impact in terms of income. So, everyone that we closed improves our efficiency.

The other thing I would add with that, Erika, is as we are closing branches what we have found is our retention rates are really, really high in the high 90s. So, we are maintaining almost 100% of clients in revenue and deposits that are from the closed branches. So, I think there has been really little impact on revenue or core deposits.

That's really helpful. Thank you. And the follow-up to that is, so essentially you are telling investors the value of the branch and changing world has declined, how should we think about this relative to the strategy in terms of how BB&T grow up? So, in terms of you had been community bank roll-up story, so as we think about potential other roll-ups going forward does that mean you are less likely to do them or does that simply mean that the natural cost savings going forward from here is it completely differently and maybe higher math than we had seen in the past?

That's a great question, Erika. I've discussed this in several conferences. It represents a significant change for us. Traditionally, when we acquired a bank, we could reasonably forecast future cash flows from branch operations, and this made sense due to the relatively stable, often growing, projected cash flows. However, in recent years, particularly the last two or three, we have seen a decline in branch activity, both for us and others in the industry. This decline has been around six percent or even more in some cases. This has implications for out-of-market acquisitions where we intend to keep the branches. While these branches still hold value, their worth is diminished because the predictability of future cash flows has decreased, and we expect cash flows to decline. As such, you have to factor in a lower projected cash flow subject to more volatility, which naturally leads to paying a lower price. Consequently, out-of-market acquisitions, particularly for a company like ours, don't make as much financial sense anymore. The value perception remains unchanged in an end market, as the same factors affecting future cash flows apply. In scenarios where there's significant overlap, we can effectively monetize branch value by closing underperforming locations and reallocating resources to other branches and digital platforms, which helps reduce expenses. In an end market merger, we take a similar approach by rightsizing our branch presence. We remain keen on pursuing end market mergers and acquisitions. Recent major projects are now behind us, so we've approached a point where we can reassess our strategy. Regarding M&A, although we are navigating certain regulatory issues related to the Bank Secrecy Act, we feel confident about our position and are actively engaging with our regulators to evaluate our processes. While I can't make any promises, I am hopeful that we will soon be cleared from current restrictions and able to resume M&A activities. However, I want to clarify that this does not indicate that BB&T is planning a large-scale M&A push.

Got it. Thank you.

Good morning.

Good morning.

On the topic of mergers and acquisitions, could you remind us about the interest in acquiring banks versus non-banks? Would you be open to considering properties if opportunities arise, or are you not looking to pursue growth through inorganic means at this time? Thank you.

We are very interested in insurance acquisitions right now and are open for business in that area. We view our insurance operations positively, and Chris can provide more details if needed. Ideally, we aim to maintain around $2010 in revenues, and currently, we stand at about 17%, which allows for expansion. There are good opportunities available. While we would consider other non-bank acquisitions, I don't foresee that happening outside of insurance. Discussions about asset acquisition businesses have not led to much, so we are primarily focused on insurance at the moment. We do look at smaller payment business opportunities, but they don't significantly impact our numbers. We are also considering the bank acquisition opportunities I mentioned earlier.

Great and that's helpful. And just remind me on the bank side, what will be your sweet spot again in terms of target asset size, if you were to do whole bank deals?

I think the sweet spot would be $20 billion plus.

Thank you. Good morning.

Hey, good morning.

So, you obviously talked about M&A quite a bit here and you are looking at that as a longer-term strategy, you have to deal with consent or first but taking the other side of it, there has been increased talk of the SIFI buffer potentially moving into $250 billion or going to some type of quality approach. Given then, you are a little bit over $220 billion in assets right now, have you ever considered staying below $250 billion in assets in order to not have to deal with possibly the liquidity coverage ratio or having more flexibility with your capital ratio?

So, Kevin, first of all, the $250 billion value is quite complex; there are several proposals and discussions around the upcoming bill, and it's unclear what will happen regarding that value. Most likely, I will address the tougher issues when the Fed reshuffles its board of governors. I think they will eliminate the strict cap at $250 billion unless banks can be evaluated based on a weighted average of their risks. If that occurs, given our risk profile relative to some of the largest banks, we could find ourselves at $400 billion or $500 billion and still not be classified as a systemically important financial institution or face excessive regulations. We'll see how that develops. However, as we assess the next deal, it is approaching $250 billion, and if that remains the current rule, we will be careful about how we execute that deal. But the reality, Kevin, is that if we were to sit back and say that we won't exceed $250 billion because of certain challenges, we would be limiting our long-term potential. In this business, you're either growing or declining, and we are a growth company. When the right moment comes for us to reach $250 billion, we'll be very pleased about it.

It really depends on what happens regarding the advanced approach, Kevin. We are hopeful that the stance taken when Governor Tarullo was in office will change, as he was not supportive of it. We believe this sentiment will persist, but we need to hear the new board of governors' perspective. This would eliminate a significant expense. Regarding capital, we will manage the OCI market comfortably with our held to maturity portfolio. As discussed previously, with our core deposits and current liquidity, along with utilizing letters of credit from the home loan bank, we can keep costs to a minimum. There are a few other factors to consider, but as Kelly mentioned, we are aiming to exceed $250 billion. Our responsibility is to manage our business effectively, and we will strive to minimize costs wherever possible. We don't foresee any major obstacles.

Okay. Thank you for taking my questions.

Okay. Thank you, Laura. This concludes our call for today. Hope everyone has a great day. If you have further questions, please don't hesitate to contact Investor Relations. Thank you.