Edited Transcript of BBT earnings conference call or presentation 18-Apr-19 12:00pm GMT

Kelly Stuart King, BB&T Corporation - Chairman & CEO [3]

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Good morning, everybody. Thanks for joining our call. So we think the first quarter was a very good start to the year. We had record adjusted EPS, strong returns, strategic loan growth, very good expense control and excellent asset quality and very importantly, a great strategic move in terms of our MOE with SunTrust, which I'll talk about in a bit.

Our net income was $749 million, up 0.5% versus the first quarter of '18. Our net income, excluding merger-related and restructuring charges, was a record $813 million, up 6% versus the first quarter of '18. We did have diluted EPS, which was $0.97, up 3.2%. We did wrap up our disrupt-to-thrive initiatives, which you know we've been working on for better part of 1.5 years. We wrapped that up this quarter and we did announce SunTrust MOE, so we have some substantial charges related to that. So as a result, our first quarter adjusted diluted EPS was a record $1.05, which is up 8.2% versus the first quarter of '18.

Our adjusted ROA, ROCE and ROTCE, respectively, were 1.55%, 12.01% and a very strong 19.86%. I'm on Slide 4. Followings the highlights, our taxable equivalent revenue was 2.9% (sic) [$2.9 billion], which was down 5.7% annualized versus the fourth quarter. Of course, remember there's some seasonality there, but I think a very good 3% increase versus the first quarter of '18.

Loans held for investment averaged $148 billion, up 1.4% annualized versus the fourth quarter. Our reported NIM increased 2 basis points to 3.51% and our core NIM increased 4 basis points. Insurance income was very strong, a record $510 million, up 19.2% annualized versus fourth quarter, and Chris will give you some specific information on that in just a bit.

Our adjusted efficiency was essentially flat at 56.6% versus 56.5%, which, as you know, is very strong from an industry point of view. And our adjusted noninterest expenses totaled $1.7 billion, which was down 4.7% annualized versus the fourth quarter. So we're doing exactly what we said in terms of maintaining extremely strong expense control. Our credit quality was great. Nonperforming 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 announce strategically our combination with SunTrust, which we're very excited about. We'll talk about that in just a little bit. And related to the merger, we did suspend share repurchases in anticipation of that combination.

On Slide 5, you will see the merger-related and restructuring charges I referred to. It was $80 million on our pretax, $64 million after-tax, so an $0.08 negative impact on EPS from a GAAP point of view.

If you follow along on Slide 6, we'll look at loan growth. It's kind of interesting what's going on in loan growth. So our 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%. Now our 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 the quarter.

We had a 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're 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 saw a 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 noninterest-bearing deposits were down 10.9% versus the fourth annualized. Now on a year-over-year, it was 2.1%. So the 2.1% is a 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 accounts. The market has 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 to be seen, that we're on a whole new world in terms of how people are responding to this still relatively low interest rate environment, so we'll see how that works out. The percentage of noninterest-bearing deposits to total funds 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 were a little higher this quarter. Daryl will give you some detail on that, but it was mostly because of a 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 efforts in the first quarter and we think that'll ramp back down as we head into the second and third quarter. So Daryl will give you a little more color on that, but I just want to explain it was -- the beta increase was not independent of marketing strategic actions that we chose to make.

So with that, let me turn it over to Daryl.

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

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Thank you, Kelly, and good morning, everyone. Today, I'm 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 2.62x net charge-offs and 2.97x NPLs. The allowance to loan ratio was 1.05%, unchanged from last quarter. We recorded a provision 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 on 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 deacceleration from last quarter's 14 basis point increase.

Balance growth and time deposits and money market and savings drove the interest-bearing liability costs higher. We expect the rate of increase in interest-bearing liability costs to significantly moderate next quarter. Asset sensitivity declined due to an increase in fixed-rate assets and a decrease in DDA.

Continuing on Slide 11. Noninterest 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.