BB&T Corp (BBT) Q1 2019 Earnings Call Transcript

Our credit quality was great, non-performing asset ratio was 0.26, flat versus fourth quarter and a decrease of 4 basis points versus the first quarter of '18. Charge offs were 40 basis points versus 38 in the fourth quarter with some seasonality impact there, but lower than the 41 basis points in the first quarter of '18. We did announced strategically our combination with SunTrust, which we were excited about, I will talk about that in just a little bit. And related to the merger we did suspend share repurchases in anticipation of the combination.

On Slide 5, you will see the merger-related restructuring charges I referred to, it was $80 million (inaudible) on our pre-tax, $64 million after-tax or an 0.08% negative impact on EPS from a GAAP point of view.

If you follow along on Slide 6, we look at loan growth. It is kind of interesting what's going on in loan growth side. Total loan growth was 1.4%, which is not super strong, but remember, we focus on the categories more than we do the aggregate. And our C&I was a strong 5.5%, CRE was down 7.5%, but that's really because of our focus on conservative underwriting. And so we actually feel good about that as we move through quarter with strong performance in Corporate Banking, Community Banking, Equipment Finance and Equipment Capital Finance. We did see a lot of competition in the market this year, I mean, this quarter, particularly in CRE, underwriting is really, really very competitive. And as I indicated we are simply not willing to go where some are with regard to CRE underwriting, and so that's why we saw the softness there.

Retail was, overall, strategically where we wanted it to be. Residential mortgage solid 3.5% annualized increase. Our direct was down 3.7%, but we are finally seeing the bottom that we have been projecting. We've been doing a lot of things in terms of restructuring our direct offerings and our processes, volumes are increasing. So we see that bottoming kind of as we expected. And then indirect was soft this quarter. But as you know, we always have that particularly driven by Sheffield. So overall we were pleased with loan growth for the quarter.

If you look at page 7, Slide 7 on deposits; total deposits were up 5.7%. Now we are seeing a shift here that we just want to mention. Our non-interest bearing deposits were down 10.9%, first to fourth annualized, now on a year-over-year it was 2.1%. So the 2.1% is the meaningful number to look at. And that's really not a function of losses to BB&T as much as it is movement between DDA to interest bearing account.

The market finally gotten sensitive to interest rates and so as we expected, we would see some internal and external disintermediation and that's occurring, although we're pleased that most of ours is just internal shifting. We think that will continue to occur, but probably at a decelerating pace that remains the same that we are on a whole new world in terms of how people are responding to. It is still relatively low interest rate environment, so we'll see how that works out. The percentage of noninterest-bearing deposits, total deposits was 32.7% versus 34%. So that reflects that softness in that. Overall, I would just say that our cost was a little higher, our betas was little higher this quarter. Daryl will give you some detail on that, but it was mostly because of substantial marketing effort that we had in terms of some markets that we were concerned about some market share dilution and so we ramped up our marketing-up since first quarter and we think that ramped back down as we had in the second and third quarter. So Daryl will give you little more color on that, but I just wanted explain, it was the beta increase, was not independent of the marketing strategic actions that we chose to make.

So with that let me turn it over to Daryl.

Daryl N. Bible -- Senior Executive Vice President and Chief Financial Officer

Thank you, Kelly, and good morning, everyone. Today I am going to talk about our excellent credit quality, margin and fee income dynamics, strong expense management and provide guidance for the second quarter and full-year 2019.

Turning to Slide 8; credit quality remained strong. Net charge-offs of $147 million were up 2 basis points and improved 1 basis point from a year ago. This quarter's increase reflects an uptick in CRE and seasonal revolving credit, offset by a decline in lease financing and the mortgage portfolio. Our NPA ratio of 26 basis points was unchanged and remains historically low.

Continuing on Slide 9; our allowance coverage ratios remained strong at 2.62 times net charge-offs and 2.97 times NPLs. The allowance to loan ratio was 1.05% unchanged from last quarter. The quarter provisions for credit losses of $155 million, which exceeded net charge-offs of $147 million. This resulted in an allowance build of $8 million in the first quarter.

Turning to Slide 10; the reported net interest margin was 3.51%, up 2 basis points. The core margin rose 4 basis points to 3.44%. The improvement was driven by dividends received and assets for certain post-employment benefits, which occurs in the first quarter of every year. This added 4 basis points to the margin. This dividend income is partially offset by higher personnel expense. The cost of interest bearing liabilities rose 13 basis points, a modest deceleration from last quarter's 14 basis-point increase. Balanced growth in time deposits and money market and savings through the interest-bearing liability costs higher. We expect the rate of increase in interest-bearing liability cost is significantly moderate next quarter. Asset sensitivity declined due to an increase in fixed rate assets and the decrease in DDA.

Continuing on Slide 11; Non-interest income of $1.2 billion grew 1.9% versus like quarter. However, our fee income ratio declined 50 basis points to 41.5%, as record insurance income was offset by declines in other fee categories. Insurance income increased $23 million reflecting seasonality and solid organic growth. Regions Insurance contributed $46 million to the insurance income. Excluding regions, insurance income rose 6.4% from the like quarter reflecting continued strong organic growth. Investment Banking and brokerage fees and commissions declined $28 million following a record fourth quarter of '18.

In addition, mortgage banking income decreased $23 million due to seasonally lower commercial and residential volumes. Service charges on deposits declined $14 million as there were fewer revenue days, but up 3.6% versus last year. Other income rose $18 million, primarily due to income on assets for certain post-employment benefits, which is offset by higher personnel expense.

Turning to Slide 12; our expense management continues to be strong. Adjusted non-interest expense which excludes MERCS (ph) , was $1.7 billion, a decrease of $20 million. Compared to the first quarter of '18 adjusted non-interest expense increased $30 million. However, excluding regions insurance this quarter's adjusted expense was about flat versus last year. Personnel expense declined $9 million due to lower salary expense with 518 fewer FTEs.

Professional services expense declined $12 million, primarily due to lower consulting expense. Merger-related and restructuring charges, increased $4 million, largely due to investment banking fees related to the merger of equals. You will note that the current quarter's effective tax rate was down. This is primarily due to excess tax benefits from equity-based compensation plans, which also incurred in the first quarter last year.

Continuing on slide 13; our capital and liquidity remain strong. Common equity Tier 1 capital increased to 10.3%, reflecting the suspension of share repurchases associated with the merger of equals. Our dividend payout ratio was strong at 41.3%. On April 5th, BB&T submitted a stand-alone capital plan to the effect, requesting a common dividend increase for the third quarter from $0.405 to $0.45 per quarter. We expect the Board to authorize this at the July Board Meeting. Our modified average LCR ratio was 130%.

Now let's turn to Slide 14 for -- to review our segments. Community Bank Retail and Consumer Finance generated net income of $379 million, down $8 million. Revenue decreased $46 million, driven by lower loan spreads and fewer revenue days impacting deposit service charges and a seasonal decline in payment related fees. Loan production decreased due to softer mortgage market conditions and seasonality at Sheffield. We rolled out a new branch, Direct Auto products in late February, reducing the timeframe for loan approval from over a day to just minutes. And just the first month we saw a 225% increase in loan production, which translates into an annual run rate increase of about $500 million.