Truist Financial Corporation (TFC) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the BB&T Corporation Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Alan Greer. Please go ahead.

Thank you, Carrie, and good morning, everyone. And thanks to all of our listeners for joining us today. We have with us Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter, as well as provide some thoughts about the fourth quarter. We also have with us 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 reviewing a slide presentation during our remarks today. A copy of the presentation, as well as our earnings release and supplemental financial information, are available on our 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 these forward-looking statements. I'll refer you to the forward-looking statement warnings in our presentation and our SEC filings. Our presentation also includes certain non-GAAP disclosures. Please refer to Page 2 and the Appendix of our presentation for the appropriate reconciliations to GAAP. And now, I'll turn it over to Kelly.

Thank you, Alan. Good morning, everybody, and thanks for your continued interest in BB&T. I would describe our quarter overall as a solid performance in a very challenging environment. Looking at a few of the highlights starting on Page 3 on the slide deck, net income was $268 million or $0.37. You'll recall that we had a substantial tax adjustment in there following our adverse opinion on STARS. So if you exclude the $235 million on tax adjustment, net income is $503 million, which was up a pretty strong 7.2% versus the third quarter of '12. Excluding the tax adjustment, diluted EPS of $0.70, which is an increase of 6.1% versus third quarter of '12, so we felt good about that. Total revenue was $2.4 billion, it was down from second quarter because of seasonality on insurance and mortgage. We had stable net interest margins, though, which we felt good about, so that was good. We did have some growth in some key areas, kind of normal blocking and tackling areas like service charges, bank card fees, trust and investment advisory income. And we do expect revenues to grow in the next quarter because Insurance will be stronger from a seasonal point of view. And even though mortgage will probably still be declining, we think the insurance rebound will cover that. So the fee income ratio was 41.6%, which is still a strong industry number. In terms of loans, they increased 3% versus second quarter. We do have seasonally strong growth in our other lending subsidiaries; they grew 23.3%. Sales finance was up a strong 22%. Adjusted C&I was 2.1%. Now that's adjusting for the mortgage warehouse, which is down, I think, for us and everybody. Direct retail lending is beginning to grow pretty reasonably now, 4.4%. Revolving credit was up a strong 7%. I will point out that we did sell $500 million in loans through the sale of our consumer lending subsidiary. We'll give you a little bit more detail on that in a little bit. If you want to look at -- follow along, continue on that Slide 3. Average deposits decreased $2 billion. That's managed because of some non-client deposits and our focus on margin. Very importantly, DDA or noninterest-bearing deposits increased 7.8%. Deposit mix did improve, while total cost declined. I think it's important to recognize that in -- just in the last year, our DDA as a percentage of total deposits increased from 23.7% to 27%, which is one of our most important long-term diversification strategies. Big story for the quarter was our credit quality. Charge-offs declined to 0.49% of average loans and leases, lowest since 2007, and below our long-term normalized range of 55% to 75%. Several factors there: substantial recoveries which is encouraging to see at this point of the cycle. And we're really winding down our advantage asset workout strategy, which is a big part of that. The NPAs were down 8.9%. NPLs were down 10.4%. ALLL coverage ratio was 1.66x from 1.55x. And expenses, they decreased on an annualized basis, 6.6%, so we've got good management on basic expenses. That was primarily because of decreased reduction in personnel expense. We had less FTEs and lower restructuring cost. I would point out, though, that we've mentioned during the quarter that we are having some elevated costs related to systems and processing changes in the company. We're using a substantial number of consultants on a temporary basis to do some of these projects. These expenses are temporary. They are not to be considered in our long-term run rate as they will go away. So the way to think about these expenses is we're doing these systems and some of these projects. The project-type expenses will go away pretty quickly. The systems costs are kind of a staged in; some of these projects take 2 or 3 years. And so the expenses, early on, will go up because you're kind of running a duplicate in systems. And then what happens is, as the new system's ready, the duplicate of systems drops off. That cost fades away. And then you get additional cost benefits as you get efficiencies of the characteristics of the new systems. So it's a really good long-term story, but it does give you a little bit of noise in the short-term. But I promise you, we are really dealing with and focused on expenses today as we have been in the past. If you look at Slide 4, we did have a substantial unusual item and then a smaller one, I just want comment to you about. If you recall, we did have a $235 million after-tax adjustment, which was primarily related to our adverse STARS opinion. We are now fully reserved and there's no remaining exposure to that transaction. I would just mention 2 developments since our opinion. Another bank had a positive ruling after they filed a motion to reconsider a portion of their previously decided case. So that was a positive step relative to our analysis. And a second institution received a partial summary judgment in their favor on a STARS transaction. So different courts are looking at these things different ways. And while there's been some positive developments, we think the appropriate position for us to be in, given our case, is to be very conservative. And therefore, we are fully reserved in this area. I know there are probably a couple of questions. For example, what is the -- in the $235 million versus the STARS. That was just another smaller issue that we'd received a draft notice on from the IRS, a very small issue, we decided to go ahead and fully reserve for that as well, to be conservative. I know some of you will ask a question about what about the previously disclosed worst case of $328 million versus the $235 million. Well, that was our worst case. We always try to be conservative. And the fact is the numbers just came in better. But the main point is, we are now fully reserved. No additional exposure with regard to STARS, which is a good thing. Another small thing, which was just $0.01 on EPS, but we did have some land bank for potential new branch expansions, and we decided to reevaluate and mark those down in terms of their valuation. So that was a small item, but I did want to point that out. If you turn to Slide 5. I thought our average loan growth was strong given the economy, and thankfully, our conservative risk appetite. We did have C&I, as I mentioned, adjusted on 2.1%. I would point out that our total loan growth was 4.4%. Now we did have a substantial and continual runoff in covered loans. So that's adjusted down to the 3% we're reporting. But the 4.4% is more meaningful in terms of ongoing kind of run rate. We had strong retail at 4.4%; sales finance, 22%; revolving credit, 7%. Our other lending subsidiaries are really performing well for us, part of our diversification strategy. For example, Sheffield was up 46%; AFCO/CAFO was up 40%. So while seasonal, they give us very strong results in the seasons when they're very, very strong. Now we'll get some backdown on that as we head into the fourth. So we do expect modest loan growth for the fourth. Auto demand, expected to be strong; double-digit growth expected there. Growth in other lending will be lower, as I mentioned. Commercial loans and direct retail's kind of like we're going into the third quarter. We did have the $500 million disposition as a part of the sale of a subsidiary. Just to give you a little color on that, this was a subsidiary that we chose to divest of because, frankly, looking forward, the risk-adjusted return in this business was not what we expected in terms of our cost of capital. And so we expect to redeploy that capital into other businesses, such as Regional Acceptance, for example, which does, looking forward, have a really good expected risk-adjusted return, as it has in the past. And so if you sort of look at that together, it's basically a continued part of our diversification strategy. While I hate to lose $500 million today, it is definitely a much better allocation of capital in terms of running the business going forward. So we think that this is kind of an overall tough loan market, to be honest. The economy is just not growing that fast, and not likely to grow that fast in the near-term, particularly given all that's going on in Washington. Fortunately though, we have some really good niche businesses. And I think this is a -- that's the market where you get what you get from the market, but then you grow above the market based on your niche strategies. For example, our national corporate banking strategy has really got several years of legs under it in terms of -- plus we just put a new team in Chicago and they're already off to a really good start. Specialized Lending, as I mentioned, just doing fantastic. Our wealth strategy is going extremely well. We have huge untapped potential in places like Florida, Alabama and Texas. And so, while we are pretty conservative frankly in terms of our thinking with regard to the economy, we feel relatively better in terms of our own situation because of the new strategy opportunities that we have. If you look at Slide 6. Had another strong DDA performance. Continued our mixed improvement, continued our -- reducing our cost. So DDA, as I said, was at 7.8%. We think that's very strong in the marketplace. Our CDs are running down, but that's a managed process for our non-client CDs. We're just simply not going to pay up for those when we don't need the funding. So we did reduce cost by another basis point. We still think we'll get that to slightly below 30 basis points in the fourth quarter, and we would expect DDA to kind of grow on a similar basis as we go forward. So that's a quick look at some of the highlights. Let me now turn it to Daryl for some more color.

Thank you, Kelly, and good morning, everyone. I'm going to talk about credit quality then interest margin, fee income, noninterest expense, capital and our segment reporting. Continuing on Slide 7, we continue to see significant improvement in our credit metrics. Third quarter net charge-offs, excluding covered, were $142 million, down 34% compared to the second quarter. A significant drop in inflows resulted in lower net charge-offs as a percentage of average loans and leases. Net charge-offs dropped from 75 basis points last quarter to 49 basis points this quarter. This represents our lowest charge-off rate in nearly 6 years. We also dipped below our normalized charge-off guidance of 55 to 75 basis points. The primary drivers for continued improvement in net charge-offs were older vintage loans that were largely through the process; improved recoveries, which increased 25% from second quarter; and continuing improvement in real estate values. The fourth quarter, we believe net charge-offs will fall into the lower end of the range of 55 to 75 basis points, with a modest seasonal impact on our consumer loan portfolio. Nonperforming assets, excluding covered, declined 8.9% during the third quarter, and represent our lowest nonperforming assets as a percentage of total assets in nearly 6 years. We continue to expect nonperforming assets to improve at a modest pace in the fourth quarter assuming no significant economic deterioration. Turning to Slide 8. As you can see, the 23% drop in commercial NPA inflows led to the loan loss improvement and the lower provision. Even though delinquencies can fluctuate due to seasonality, both 30 to 89 and 90 days past due improved during the quarter. Also, our allowance in nonperforming loans increased from 1.55x to 1.66x, reflecting continued strong coverage. We had a reserve release of $52 million during the quarter compared to last quarter's $36 million. Turning to Slide 9. As you recall, we provided net interest margin guidance for the third quarter to be down 5 to 10 basis points. However, margin was better than we expected. As reported, net interest margin came in at 3.68% and core margin came in at 3.39%. The primary reason for the difference between guidance and what we reported is: better-than-expected credit spreads in several large loan categories, and positive duration adjustment in the investment portfolio. In addition, the margin impact from the covered assets was better than anticipated. Looking at margin outlook for the fourth quarter, we expect a decline of approximately 5 to 10 basis points. The decline in margin guidance is driven by lower rates on earning assets, runoff of covered assets, tighter spreads on retail loans, and the sale of the subsidiary of loans of approximately $500 million, which will lower core margin run rate by 6 basis points. Offsets to the decline in margin include lower funding costs and favorable funding and asset mix changes. As you can see in the rate sensitivities graph, we became slightly less asset sensitive due to an increase in fixed assets and variable rate liabilities. Turning to Slide 10, our fee income ratio for the third quarter decreased to 41.6%. This was driven primarily by seasonality of our Insurance line of business and a decrease in mortgage production due to the interest rate environment. Insurance income was $71 million lower than the second quarter, which reflects normal seasonality in the Insurance business. It also reflects the impact of a $13 million experience-based refund of reinsurance premiums recognized in the prior quarter. Mortgage banking income declined $51 million primarily due to decrease in margins and lower production due to the rise in interest rates. Mortgage originations slipped to 59% purchase versus 44% purchase last quarter. Investment banking and brokerage income decreased $10 million primarily due to seasonality compared to the second quarter. The decline in other income primarily reflects lower income related to assets for a certain post-employment benefit, which is offset in personnel expense. Finally, FDIC loss share income was $11 million better than the second quarter primarily due to the offset in the provision for covered loans. Looking at Slide 11. Noninterest expense decreased $25 million or 7% annualized compared to the second quarter. Personnel expense decreased primarily due to lower production-related incentives and commissions; a decrease in post employment benefit expense, which is offset in other income; decrease in pension expense; and a seasonal decrease in social security expense. Additionally, FTEs were down 192 compared to last quarter. Merger-related and restructuring charges were $23 million lower than the prior quarter. This was a result of the optimization activities related to the Community Bank that were initiated in the second quarter. Professional services and other expenses increased $13 million and $3 million, respectively. These increases were driven by increased legal expenses, cost associated with system and process enhancements, and fair value adjustments to land previously held for future branch expansion. We would expect these expenses to decline in coming quarters, driving total noninterest expense lower. Also, while the efficiency ratio increased this quarter, that was largely due to lower revenue, given the seasonal decline in insurance and a slowdown in mortgage banking income. We expect to produce positive operating leverage and see an improvement in our efficiency ratio in the fourth quarter. We continue to target an efficiency ratio in the mid-50% range. Finally, our effective tax rate, excluding the adjustment, was 28.3% for the quarter. We would expect a similar rate in the fourth quarter. Turning to Slide 12. Capital levels remain strong and are up from the second quarter, Tier 1 common at 9.4% and Tier 1 of 11.3%. Under final rules, our estimated Basel III Tier 1 common is 9%. Now here are a few highlights from our segment disclosures. Starting on Slide 13, Community Bank net income totaled $268 million, showing strong growth on a linked and common quarter basis. Dealer floor plan loans increased $273 million or 77% common and 24% linked quarter. In addition, Direct retail loans increased 6% and 4%, respectively, for common and linked quarters. Turning to Slide 14. Residential mortgage net income was $77 million in the third quarter, flat compared to the prior quarter. Noninterest income declined $56 million driven by lower gains on residential mortgage production and sales. Higher interest rates during the quarter reduced refinancing volume. Pricing also tightened due to increased competition. Total loans serviced exceeded $110 million at the end of the quarter. Finally, the provision for loan and leases decreased $57 million driven by improved credit trends in the residential mortgage portfolio. Looking at Dealer Financial Services on Slide 15. We continue to generate strong production with year-to-date loan originations up 31% compared to prior year, and 52% on like-quarter basis. Regional Acceptance, our nonprime subsidiary, generated solid loan growth despite intense market competition in this spectrum. This subsidiary is one of our national businesses. We entered 2 new markets in the third quarter, California and Minnesota. Going forward, we plan to expand into other new markets. On Slide 16, our Specialized Lending segment experienced another solid quarter with net income of $83 million. Average year-to-date loans grew 8% compared to 2012 with strong performance in our Sheffield, premium finance, commercial finance and equipment finance businesses. Loan loss provision decreased $26 million, primarily driven by improved credit trends in the commercial finance portfolio and recoveries recognized in the quarter. Moving to Slide 17. BB&T Insurance Services generated $22 million in net income, down linked quarter primarily due to seasonality, but up on a common quarter basis. This was primarily driven by organic growth in wholesale and retail property and casualty due to improved market conditions and continued firming of pricing. Additionally, we are placing strong strategic emphasis in preparation for health care reform. There is a good opportunity for our employee benefits business. Turning to Slide 18. Our Financial Services segment generated $77 million in net income, primarily driven by Corporate Banking and wealth management with fund growth of 22% and 23%, respectively. Total assets invested increased to $106 billion or 12% growth compared to third quarter 2012. Finally, Financial Services segment finished the quarter with a couple of major accomplishments. First, BB&T Wealth, again, ranked among Barron's annual listing of top 40 wealth management firms. Also, we announced the hiring of an experienced Corporate Banking team based in Chicago. That team will serve as a base for our national effort to serve the needs of companies in food, agribusiness and beverage industries. Both of these accomplishments emphasize our continued effort to grow both our Corporate Banking and wealth businesses. And with that, let me turn it back over to Kelly for closing remarks and Q&A.

Thanks, Daryl. I appreciate it. And so overall, it was a strong quarter, as I said, given the challenges, excellent asset quality improvement. Our diversification strategy has continued to work. And looking forward, we expect positive operating leverage and improved efficiency in the fourth. And so, we are now ready, I think, Alan, to turn to questions.

Okay. Thank you, Kelly. We'll now move to our Q&A session. [Operator Instructions] At this time, I'll ask Carrie to come back on the line and explain how you may participate in this Q&A process.

[Operator Instructions] And we'll take our first question from Erika Najarian from Bank of America Merrill Lynch.

My primary question has to do with your efficiency ratio. You were at 60 this quarter, and you mentioned that your goal is still to get to the mid-50s. And when I look back a year ago, you were at the mid-50s, and you actually took down your expense levels. But most of the increase in efficiency, as you pointed out, is in the revenue side. As we think about your goal, I guess, could you give us a sense of when BB&T can reach the mid-50s? And whether most of that is going to come through the expense line?

Erika, that's a really good question. And I think you characterized it right. The challenge today is on the revenue side. We're actually managing our expenses very well. We do have this temporary lift up in the expenses that I've talked about, but I'm really not concerned about that going forward. On the revenue side, you get these seasonal changes. Recall, it popped up in the -- then they'll pop back down in the fourth because they're insurance and so forth, primarily insurance. So over the next couple of years or so, we would expect to move back down towards that mid-50s. It will be largely out of revenue growth. Now we're not -- we have to diligently control expenses through that process. But frankly, as I said earlier, a lot of these expenses we're investing today will yield better and will optimum expense control and a lot of systems areas going forward, so that'll be a positive. We have a lot of investments like in wealth management and Corporate Banking, et cetera, that we're building an infrastructure that will yield benefits as we go forward. And so, we think as these strategies continue to develop, revenue will gain momentum and our efficiency ratio will come down.

And my follow-up to that is, I guess the message is, once the professional or the consulting expenses are out of the run rate on the expense side, and if you could quantify that, that would be great. I'm sorry if I missed it. Then, the goal for the expense side is just to keep it flat after you take out those consulting fees?

Yes, Erica, this is Daryl. If you look at the third quarter, we had approximately $40 million of extra one-time costs in our numbers this quarter. I would say, about half of that will probably come out of our expense base for the next quarter or 2. The other half is going to take some time over a couple of years as we get through the system conversions and then we probably get to leverage that, and actually get some benefit after we do full conversions and undo what we had in place before that. So I think we'll get a little relief. But as Kelly said, I think efficiency is really driven on the revenue side. Next year, we have, really, the last year of really the meaningful purchase accounting benefits from Colonial; so that will come out of the numbers for the next 3 to 4 quarters. And after that, it's really just growing the core company and the organic piece of the business.

Your next question comes from Matt O'Connor with Deutsche Bank.

Just some follow-up questions on the expense side. I mean I can appreciate the extra regulatory and systems cost. But I also recall, I think, it was a couple of quarters ago, you just talked about kind of rationalizing the branch network a little bit, streamlining some things and basically trying to lower costs even versus that 1Q expense level. I guess the question is even if you take out the $40 million versus the run rate you're at the right now, it still feels like the cost might be higher than you had thought a couple of quarters ago. And if revenue stays kind of sluggish for the industry and for you guys, is there more opportunity or more thoughts to cut a little bit deeper?

So Matt, I think the -- what we talked about before in terms of our optimization strategy has worked exactly as we expected across the entire enterprise. You're simply seeing it being disguised today because of these temporary costs and the reduction in revenue. But if you didn't have the temporary cost, if you didn't have the reduction in revenue this quarter, you would clearly see the Community Bank. In fact, I'll get Ricky to give you a sense of the success he's had in that project.

Yes, thanks, Kelly. Matt, we have achieved everything that we set out to do. If you recall, in the second quarter, we announced the regional restructuring from 37 to 23 regions. We got clear savings there; revamped our retail branch sales force management level, and that worked well. We've reduced some additional support in the home office for the Community Bank, we see no issues there. We got the 43 branches closed that we talked about, that's working. We're dealing with QM and preparing for that. And out of that, we think we've got some savings in addition that we'll begin to see some run rate in the third and ongoing into the fourth. So we have been very successful in doing what we set out to do in terms of reconceptualizing, reducing costs anywhere from $25 million to $35 million on a run rate basis. We still think there's ways to go in terms of branch optimization. We continue to look at underperformers. We feel like that there's a little room to go there. We're going to continue to be diligent. But if you go back over the last 4, 5 years, the Community Bank has really done a really fantastic job, we think, of reducing run rate costs, of operating our business, pretty significant numbers. And yet, it has not impacted our ability to serve our customers. In fact, our client service quality numbers at midyear is the highest in the history of BB&T. So we feel really good about being efficient and also delivering on our service quality and meeting the needs of our clients. So we feel really good about that.

Okay. And then just separately. Daryl, maybe you could give us the Colonial accretion? Or even just kind of the bottom line net revenue number as you think out the next few quarters here?

Yes. So if you look at both GAAP margin and core margin, core margin, as I said in my comments, is going to come down approximately 6 basis points due to the sale of one of our lending subsidiaries. The GAAP margin will probably be down closer to 10 basis points on a GAAP basis. From a core basis, thereafter, we're going to be relatively flat. We've been basically relatively flat on core margin for the last year. I think we'll stay probably relatively flat for the rest of next year. But you still have the run out of the purchase accounting. So if we're at 3.68% right now we'll probably end '14 around 3.40%. And at that point, there's very little spread difference between our GAAP margin and our core margin, no more than 10 basis points there. And then, going forward, then there's not a whole lot of purchase accounting left in the numbers.

We'll move now to Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: With respect to your loan portfolio, especially your C&I loans and your Residential Mortgage loans, which is the bulk of your portfolio. Can you talk a little bit about what type of pricing is coming in? On the Residential Mortgage side, what type of pricing on the 5 1s and the 30-year are you putting on, or are you just putting 5 1s on?

So on the mortgages, ARMs, we did see a big increase in mortgage loan activity this past quarter. I mean, you can see that the portfolio in mortgages was relatively flat, it didn't run off. We're mainly putting on, for the most part, shorter ARMs, more in that 3 and 5 1 ARMs. And if you look at the lifetime spreads of these, it's probably 1% to 1.5% versus our cost of funds. Paul J. Miller - FBR Capital Markets & Co., Research Division: And your C&I?

C&I, if you look at it, it's down about 20 basis points. We're about 2 10 from the previous quarter. We're seeing pressure in all segments, whether it's large, medium and small. Paul J. Miller - FBR Capital Markets & Co., Research Division: So you still -- okay. So you're seeing pressure on the pricing?

Yes. The credit spreads are down about 20 basis points.

Our next question comes from John Pancari with Evercore.

On the expense side, on the regulatory cost component, that $40 million that we saw this quarter, where -- can you remind us again where that could go to? How much of that -- of a decline could you see there? What would you view as a normalized run rate?

Yes, we had a one-time catch-up. There's a Dodd-Frank tax that we basically booked this quarter, it was basically 7 quarters worth of a catch-up. So it was about $6 million one-time increase. It should be back into the mid-30s next quarter.

Okay. And then that's a good run rate going forward?

I believe so. Maybe down a little bit as credit quality continues to improve. But it -- we've had a good run on that, so far. Lisa Sanders - S&P Capital IQ Inc., Research Division: Okay. And then on the credit front, looking at your charge-off outlook, the low end of your norm range, so implying that 50 basis point -- 55-base-point level, given that you had indicated before you're starting to see some good recoveries coming in. First off, I want to just verify that you're still seeing that on some of your -- particularly on some of you real estate-related credits. And then if you so, I mean, could that -- even that 55-bp range, could that even be a little bit conservative?

John, this is Clarke Starnes. We think it could be. We -- as we've said in the deck, there is some modest opportunity to outperform that number. We did see really strong recoveries in the third quarter. In fact, in the commercial ADC area, we were in a net recovery position for that whole sub-portfolio, so we are beginning to see some of that. We do have a big mix of consumer finance businesses though with higher normalized losses, so we're not going to see continued reduction there. So overall, we think we can certainly operate within the low end of the normalized range with some ability to outperform over the next several quarters if we continue to see those strong recovery rates.

We'll move now to Ryan Nash with Goldman Sachs.

First question for Kelly. Can you tell me a little bit about what's happening in commercial real estate? Obviously, we've seen an increase in industry growth over the past quarter or so, and I think you guys are still seeing declines. So could you just talk about maybe what some of the drivers are? Is it more geographical in your markets, you're not seeing a pick up? Is the competition from CMBS making it harder to grow? Can you just kind of flesh out what's driving your disconnect from the industry?

So I think the overall industry is, obviously, improved in CRE. Multifamily is strong across the board. Hotels are kind of back to the normal. Retail office is still really, really soft. But what's really happening is there is intense competition, everybody's going after loans wherever they can find them. We have an appetite to increase our CRE, but we do not have an appetite strong enough to take on too much risk at the extraordinarily low prices, and that's really what's going on in the marketplace today. We've -- I've talked to our people, nobody has ever seen it quite as intense as it is today in that space. It's just incredible. And so, it's the time to be patient. We think it will turn as we head into the next 12 to 15 months. But for right now, the differentiation between us and the marketplace is simply risk appetite. We're not going to jump out of the frying pan and into the fire. And we are concerned about some of the strategies that are in place in the marketplace, but we're going to stay the course.

Got it. And then just a follow-up to one of the earlier questions just asked. While the charge-offs could end up coming in on the low-end of your expectations, could you give us a sense of the trajectory of the provision from here? Should we expect provisions to match charge-offs, or do you think the reserve could continue to come down from here?

Ryan, this is Clarke. Certainly, we feel very good about the reserve levels we have now. And ultimately, the level of reserve is going to be contingent upon what that credit trajectory is. So I would say, from where I sit today in our outlook, we could see some additional improvement or reduction in the reserve levels if these trends continued. However, I would just say, as we look out beyond, I think reserve releases and the pace would have to moderate, just given what we see.

We'll move now to Craig Siegenthaler with Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: Just a follow-up on your last question on commercial real estate. Why do you think it's so competitive today? Do you blame sort of the yield curve which makes it easier for life insurers to underrate low yields with longer-terms? And also, if we are in the middle of an economic recovery, why do you actually think it will improve over the next 12 months? Because normally, I think competition actually keeps heating up through the recovery.

Well, I mean, you've got a lot of factors going on in terms of -- in the CRE market. And you still have it, still today. Because of low levels of interest rates, you have a lot of portfolio moving out into conduit markets, so that's still pretty strong at these all-time low rates. We've got the quality underwriting, as I mentioned before. But yes, as you expect the economy to recover, you'll certainly expect to see more CRE activity. For example, though you've seen nothing in office and you've seen nothing at retail, which is a big part of the market, as the economy gets better, consumer demand goes up, you'll see those markets recover and that'll be good for us and everybody else. Multifamily, I would guess, would begin to peak a little bit. But as that is peaking, that will be because the price points have changed. So a single-family is more attractive, so single-family ADC will pick up. And so when you look at all of that together, I think you're at the very low point with regard to CRE for us because of our risk appetite. For the industry, I think, overall CRE opportunity will improve, and I expect it will improve for us as we continue to aggressively pursue the market, not in terms of underwriting, but in terms of efforts. So I think, overall, it will improve for us and everybody else. Craig Siegenthaler - Crédit Suisse AG, Research Division: Thanks, Kelly. Very helpful. And just one follow-up. You referenced $39 million decline in personal expenses, mostly coming from lower production-related comp. As we move forward over the next 12 months, and you think about your own expectations for gain on sale margins and productions and what that does to revenue, how do you think variable expenses and fixed expenses could benefit, and how are you thinking about repositioning your business for that?

So Craig, you're talking about our mortgage business, correct? Craig Siegenthaler - Crédit Suisse AG, Research Division: Yes, just specifically mortgage.

Yes. So spreads did come down this quarter. There is some change with the variable comp, you said it's probably a 20% to 25% relationship versus the revenue in the mortgage business. I think as we get through QM that Ricky talked about, then we will rightsize our business in 2014 to whatever volume we see at that point. We're in the midst of basically moving a lot of production that was in our Direct Retail channel into the mortgage company, and that's going on as we speak right now. And once we finish that conversion and get through that, then we'll get into '14, we'll see what the activity is in the mortgage area, and then we'll rightsize accordingly.

Our next question comes from Betsy Graseck with Morgan Stanley.

I have a question that relates to your NIM and your loan outlook. You indicated that we should look for moderate loan growth, and I'm just wondering if I should read into that current rate of loan growth or for signaling a little bit of a slowdown in loan growth rate, especially given the conversation that we've had so far on the call? And then, I also wanted to understand, how much more competitive you're looking to be on lending and lending rates? I mean, clearly, one of the themes in the industry this quarter is more competitive pricing. So should we look for that 5 to 10 NIM compression to potentially be a little bit more so to try to get some more loan growth in the door, or we're looking to decelerate the loan growth here?

Betsy, I think, that's a question that I worry the most about. To be honest, it's a little indeterminate right now. Let me explain what I mean. So the economy is just not producing much loan activity today. When people talk about their loan growth, I think if you really drill down, most everybody would tell you 90-plus percent of what they're doing is moving around the existing business. There's just not much pure economic activity going on out there. In the very largest businesses, that have international activities, there are some growth there. But everywhere else, it's pretty tepid. And so, does the change in Washington last night sparked more confidence into people to start doing things. Who knows? But that would be a positive. Do rates take off and that causes the conduit market to slow down, and so the exit at the side of the back door slows down? That would be positive. But if things stay as they are today, I would expect that it's going to be very hard to get -- it should be very hard to get some kind of growth rate in our lines in the fourth that we have in the third. Now, that having been said, that doesn't mean I don't think we're going to do it. I don't think you could get 3% or 4%, frankly, in the market, I just don't think you can get it. The market is only growing 2%, so this notion that banks are going to grow loans faster than the GDP is kind of an interesting conclusion to reach. And so, I think, it's going to be tough in the marketplace. But don't forget, Betsy, we have these really positive unusual niches. I mean, we're going to put more emphasis, not on cutting price, not on taking more risk, we're going to put a lot more emphasis, because of how difficult it is in the marketplace, on our Specialized Lending strategies, on own our wealth strategy, on our Community Banking strategy in Texas, on our national Corporate Banking strategy. So when we say modest, we use that word to hedge a bit, to be honest. But if I'd bet today, I'd bet it would be in the 2% to 3% range. It won't be 5% or 6%. And I think it will be because of what we got in these areas are defined.

Okay. And then, Daryl, you mentioned the 5% to 10% basis point decline, and then when you talked through earlier how we got to the 10%, but you're also looking for some amelioration of that from lower funding cost and funding mix, et cetera, right?

Yes. I mean, if we didn't have the sale of that subsidiary, our core margin would be within 1 or 2 basis points. I mean, our core margin is holding in there pretty well. But the subsidiary we saw had higher-yielding loans and it also had higher provisions and other higher costs, so the net number is not a big give-up. But from a margin perspective, that's why it's going to cost us about 6 basis points in the core.

And was that an RWA decision to sell that asset?

Yes, Betsy. It wasn't specifically RWA. It was the inherent risk today, frankly, from a regulatory perspective in terms of that class of lending, we -- the Specialized Consumer Lending business. And we are just concerned about where that's going forward. And the cost increases that go with servicing that kind of portfolio in this new regulatory environment are enormous. And so when you get through forecasting all of that, the risk-adjusted return and risk being broadly defined, Betsy, is just not -- it was just not an acceptable investment opportunity for us.

Our next question comes from Gaston Ceron with Morningstar Equity Research.

Just wanted to follow up a little bit on the questions about loan growth. On the economy, it sounds like you're being a little conservative in outlook, which seems prudent. But can you talk about the process of longer-term growth? I mean, maybe at what point you kind of expect things to kind of pick up?

Yes, so my view about the long-term loan growth is dependent on one thing -- and I know I say this quarter-after-quarter, but it just happens to be the truth. And that is that when we get a return to certainty and more confidence, primarily based on changes in Washington, obviously, we got a positive change last night, hopefully we'll get a positive change over the next 60 days. Let's just assume for the moment we get some positive changes out of Washington, then I think, to be honest, you could see a number of years of above trend-line growth in the economy and above trend-line growth in loan opportunities. Because business people, when you talk to them and I -- before I get to travel around a lot and I talk to 500, 600 business CEOs every year, they really haven't invested on the margin for 5 years, and they definitely need and want to invest. And so, the minute they feel a sense of confidence returning, then I think you'll see a lot of planned expansions, equipment renewals, rolling stock replacements, that's going to really, really benefit particularly small and middle market, where we are really solidly entrenched. And so, again, if you make that proviso, in terms of change in D.C., then my optimism over the next 3 to 5 years is going to be really bullish.

Okay. And then just very quickly, a quick follow-up. On the net charge-offs situation, are you already thinking the normalized range, given how the housings have been going recently? Or do you think the normalized range still holds for the long-term?

It's a great question. Right now, we still think it holds. Again, I think, it's primarily based on our view of what our mix is. We still have, as Kelly said, a big opportunity in our Specialized Lending area and those have higher normalized loses, lower stress loss experience. And so, just given the mix that we're trying to originate to, we think the 55 to 75 is appropriate. However, as you come through recovery in a cycle, it's not abnormal to go under that range for a while. So we see some opportunity, but we still feel comfortable with our long-term range.

We'll move now to Keith Murray with ISI.

Could you just spend a minute on the insurance business? Can you just talk about -- are there synergies there, whether it relates to wealth management or the corporate lending side of the business, that maybe people are missing when you think about the long-term opportunities there?

Yes, it's a great question. This is Chris Henson. We, as Daryl said, we were down second to third. But if you really -- you have to really evaluate the insurance business on kind of a common quarter where we were up 6.3%. We think the market's moving in the kind of 4% to 5%, so I think we're probably taking a little bit of market share along the way as well as the pickup in firming. In terms of synergies, I think we got a number of fronts. Specifically to your question with the wealth business, we're actually adding, to Kelly's point about revenue initiatives, we're adding about 55 or 60 sales reps embedded within our wealth teams. But our current professionals throughout -- and we're in the middle of a rollout. We've actually rolled out 8 of our 23 regions at this point. And it's about a 2.5-, 3-year process, which we're about 9 months into. So we've got, we think, really kind of good upper end opportunity there over the next, call it, 2.5 years. And that, we believe, sort of driven by wealth, which is why we're embedding the salespeople there. And of course, we have referrals coming from our Community Bank, from all different commercial segments, directly to wealth, which ultimately leads directly to, we believe, additional life insurance sales. And it's not just estate planning, we have a lot of buy-sell opportunities and business-transition planning. So it's a different level of insurance kind of need, much more sophisticated, larger in case kind of need there. So we feel really positive about that. The second synergy we have that Crump brings us is through our institutional channel. And that really manifests itself a couple of different ways. One is, you have large financial institutions that have client relationships in the wealth business. If they want to offer more life insurance, too, they want to kind of get in the business, so they outsource it to a business like Crump. And we have also underwriters in the life business that have been core competencies underwriting, and they've had kind of grown a sales arm over the years. And with the tough economic times, they're paring that back, and they sort of outsource their revenue arms as well. So a lot of good upside. Plus just the firming in price, that Daryl commented on earlier, typically it comes back to us in wholesale first. And you can see that in the numbers, you see 10.8% improvement currently in wholesale, but we're getting about 2% to 3% in retail. So we still have the benefit of retail to come. And then, finally, I would just say, when you get 2 or 3 years out, you really have sort of the profit commissions that based on sort of historic look-back periods of 2 to 3 years that are sort of all profit that we stand to benefit from a couple of years out. So a lot of upside there.

And then just switching gears to credit. Obviously, the trends continue to get better, as you guys showed again this quarter, and we've seen it for many other banks. Just how do you balance that with the OCC is out there kind of making banks think about reserve releases and kind of sounding the alarm that maybe reserves are getting too low. How do you kind of balance that and how are the regulators dealing with that?

It's a very good question, Keith. We do think about that a lot. Certainly, our position on reserves is based upon the models we run and the judgment applied based on that process around the risk levels at the time of the reporting. So we really haven't changed our process at all, it was very disciplined and consistent there. But just thinking about it, I think the regulators are prudent in their fleshing about how fast some of the reserve releases are in the industry. And I think we do have to listen to them. And we do -- and just be cautious and prudent as we come through this recovery that we don't overshoot it and release too much. And so we think about that a lot in our process and feel very good about where we are.

Our next question comes from Kevin Fitzsimmons with Sandler O'Neill. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: Just 2 quick questions. First on fee revenues. I know you mentioned we're going to get a seasonal balance in insurance, mortgage revenues are likely going to continue to decline. On a net-net basis, do we think total fees can actually be stable to up, or are we looking at more of a slight decline there? And then, secondly, Kelly, if you can just give us an update on your latest thinking as you guys get, later in the year, approaching CCAR, how you feel about buybacks, how you feel about the M&A environment?

Okay, Kevin. I'll take the first part of that question. I think if you look at the seasonality in insurance versus what's happening in mortgage, we're going to net benefit in the fourth quarter. So we should definitely have higher fee income versus third quarter. We might also have a couple of other one-time gains associated in the first quarter. But even excluding those gains, I think our net fees will be better.

Kevin, on the whole CCAR capital M&A question. Now, we think the CCAR process is going to be relatively normalized this year. And so we don't expect any substantial events around that. There is still though this downward pressure in terms of banks, in terms of dividend payout rates as -- that is kind of out there, and so it's -- it will be challenging to raise dividends at a high level because, for us, as you you'd -- we already have a very high level in terms of payout and dividend yield, et cetera. So that really kind of puts us back to raising our priorities with regard to buybacks/M&A. Today, there's no M&A activity practically possible. The sellers' prices are too high, but most the buyers, they're just kind of waiting for more certainty around the regulatory environment. I personally think that kind of fades as we go through the next year or so. And I think there will be a number of M&A opportunities out there. And we certainly have a long list of partners that we would like to join up with. In the meantime, though -- as I mentioned at a recent conference, that's -- all of that put together, certainly raises the probability of BB&T with regard to buybacks given our relatively strong capital level as we go forward.

We'll move now to Matt Burnell with Wells Fargo Securities.

Daryl, I guess, a pretty specific question for you given how low your deposit costs have gotten and the fairly flattish trajectory of those costs probably -- in the future, you probably can't get those down too much quarter-over-quarter. Are you thinking -- given that long-term debt now comprises about 2/3 of your interest expense in the third quarter, are there any opportunities in that bucket to potentially reduce your funding cost going forward?

Yes, Matt. On the deposit cost side, we will break under 30 basis points next quarter, and they'll probably linger in the high- to mid-20s, probably, that's kind of the bottom for deposit costs. As we have maturities in our debt and we basically put on new debt, we definitely will reprice our debt cost down from where we are today. So I do think that is an opportunity, should be an opportunity throughout '14 as well.

Okay. And Clarke, maybe a question for you in terms of the Specialized Lending provision. That was down year-over-year, close to 30%, 29% by my calculation. You've had some pretty solid loan growth, assets are up in that unit about 12%. Can you provide some color as to your thinking about the future provision level, the provision ramp in that business and how that might affect the overall provision?

It's a great question, Matt. Now if you look at it kind of on a common quarter basis, our loss rates, even though there's movement within that group in the mix, overall loss rates are about the same as they were last year. And one of the things we really like about these businesses is that, while they certainly have higher risk elements, it's a more predictable normalized level of risk. So the -- and you're able to price for that, so we just don't have the volatility generally in those businesses that you might even expect. So for that reason, the provisioning is fairly steady in those businesses. So I think the biggest factor in what actual dollar level of provision will be the growth rates in those businesses. So we do expect those businesses to grow faster than the core bank. And accordingly, we would expect the provision expense to be higher on a dollar basis as the growth rate goes up. But on a relative basis, be pretty consistent.

We'll move to Gerard Cassidy with RBC Capital Markets.

Share with us, on your rate sensitivity, if rates were to move up, say, a parallel shift of 100 basis points, what that would do to net interest income? Or do you do it for a 200-basis-point shift? But what type of impact would you have on net interest income?

Yes, if you look at our chart that we have in our deck, you could see up 100 basis points -- our net interest income, over a 12-month period, will be up a little less than 2%, and up 200 basis points to a little less than 3%. And that -- you have to really know what's behind there, because there's a lot of key assumptions in there. Our 2 key drivers for rate sensitivity is really how quickly we will reprice our deposits and how sticky are our deposits, because we've had really good growth in our deposits there. We feel that our assumptions that we have in both categories are very conservative, and this reflects pretty good performance for a given rate change and could potentially have some upside if we don't move as quickly as what we have modeled in our rate-sensitivity models.

Very good. And then as a second question, when you go to the -- your Specialty Lending area on, I think, it's Slide 15, the Regional Acceptance had some very nice growth as to the whole area. Two questions in this area. Your expansion into California and Minnesota with Regional Acceptance, how are you going to do that? How are you going to win new business in markets that I'm assuming your name is not as well-known yet? And second, in the rapid growth that you guys are seeing in this Dealer Finance area, how can you give us some assurances that there aren't going to be credit issues 2 years down the road?

Gerard, this is Clarke, those are great questions. I'll take them separately. The Regional Acceptance business is a non-prime, national-based, auto-financed business. And their business model is around -- they really target large MSAs with large auto sales, and so it's very calculated, data-driven analysis on where we go to market. And then what we do, once we've determined it's a good market play, we do hire experienced people that have dealer relationships in those markets. So on the sourcing side, we have very good certainty about the relationships they have. We're not sending our people into strange territories and then we have very disciplined strict analytics around the risk management and the underwriting. So it's a very predictable model that we've used for years and years. We've actually been in California before, so this is not a new entry there, just new offices. As far as our Dealer Finance growth, in general, that's really on the prime auto side. And so, I would just say this, we've been more aggressive on the pricing side as far as the growth opportunity there. We're more conservative on our terms, so our advanced rates and our weighted average term and that sort of thing is going to be very conservative relative to industry, so we've chosen to compete a little more on spread and definitely not on risk.

We have several more questions in queue. However, we are out of time. So I'd like to turn the call back over to Mr. Alan Greer for any additional or closing remarks.

Okay. Thank you, operator. And I apologize to those folks we didn't get to, we will call you shortly. Thank you for your interest and participating today. This concludes our call.

Once again, that does concludes today's conference. Thank you for your participation.