Truist Financial Corp (TFC) 2012 Q3 法說會逐字稿

Greetings, ladies and gentlemen.

Welcome to the BB&T Third Quarter 2012 Earnings Conference Call on October 18, 2012.

At this time, all participants are in a listen-only mode.

A brief question and answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Alan Greer, Investor Relations for BB&T.

Mr. Greer, you may begin.

Thank you, Katie, and good morning everyone.

Thanks to our listeners for joining us today.

This call is being broadcast on the internet from our website at bbt.com.

We have with us today 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 a look ahead.

We also have other members of our Executive Management team, who are with us to participate in the question-and-answer session -- Chris Henson, our Chief Operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer.

The team will be available, along with Kelly and Daryl, during the Q&A.

We will be referencing 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 the BB&T website.

After Kelly and Daryl have made their remarks, we will pause to have the operator come back on the line and explain how you may participate in the Q&A session.

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 the 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.

Additional information concerning factors that could cause actual results to be materially different are contained on Slide 2 of our presentation and in the Company's SEC filings.

Our presentation also includes certain non-GAAP disclosures.

Please refer to Page 2 in the appendix of our presentation for the appropriate reconciliations to GAAP.

Now, I will turn it over to Kelly.

Thank you, Alan.

Good morning, everybody, and thanks for taking time to join our call.

Overall, I feel like we had very strong results this quarter, especially given the kind of softening economy.

We had pretty strong performance all across our operating segments.

I would ask you to remember that insurance is seasonally lower for us in the third quarter, and we do expect it to be stronger in the fourth.

If you look at net income, we totaled $469 million, which was up 28.1% versus third quarter.

Diluted EPS was $0.66, up 26.9% versus third quarter.

That was reduced by $0.04 merger-related charges.

Overall, all of the segments, as I indicated, were pretty strong in terms of performance.

Daryl's going to give you some detail color with regard to these segments, but I just wanted to mention a few general points in my summary, general comments.

First of all our community bank did a really good job continuing this quarter in growing deposits, had very strong performance in C&I and direct retail lending.

Residential mortgage, as you could see, had another really strong quarter -- produced $8.2 billion in originations, so their very strong performance in production and earnings.

Dealer Financial Services segment had steady production, strong quality.

I will point out that pricing competition is pretty tough out there in that segment, but we're doing relatively well.

Specialized lending had a good quarter with strong loan growth.

Insurance, as I indicated, was seasonally slower, but we are expecting a strong fourth quarter.

Overall insurance premiums are continuing to firm up, particularly the wholesale side.

We're very fortunate that we participate on wholesale and retail, so we feel good about that.

In the financial services area, our corporate banking area continues to exhibit strong performance, and we really are pleased with our wealth team results.

They're executing on our strategies there very well, so overall performance in the segments was very good.

Year-to-date total revenues were up $7.3 billion, up 12.5% versus last year.

I would point out that revenues, again I think, are strong given the seasonality.

There is some impact in terms of revenue numbers I'm covering in terms of a partial quarter of BankAtlantic.

Total FTE revenues were up $2.5 billion, or 4.4% annualized, so we felt good about that.

Net interest income totaled $1.5 billion, which was up 5.3% annualized versus second quarter of 2012.

A good performance on the revenue side.

In the loan area, which is an interesting challenge for all of us in the industry now, our average loan growth was 12.6% annualized versus second quarter.

Second quarter was helped somewhat by BankAtlantic.

With strong performance in other lending subsidiaries, mortgage, C&I, direct retail, and revolving credit, if you do exclude BankAtlantic average loans increased 8.4% annualized.

Another strong performance in deposit area.

Average total deposits increased $3.3 billion, or 10.6% annualized versus the second.

Had nice improvement in deposit mix and cost.

For example, if you exclude BankAtlantic, non-interest bearing deposits increased 25% on an annualized link quarter basis, so really good deposit performance again.

Another strong quarter in credit quality improvement.

NPAs decreased $179 million, or 7.4%, versus the second quarter.

That's ex covered assets.

Foreclosed real estate balances decreased another strong $82 million, or 37%.

Foreclosed property expense continued to come down, decreased $18 million from second quarter, over 25%, so nice improvement into credit area; and we're doing a really good job in expense management.

It excludes BankAtlantic and other selected items.

Our non-ex expenses increased less than 1%, so we feel good about controlling expenses.

If you look on Slide 4, we did have a couple of unusual items in the merger related and restructuring charges area -- that's mostly BankAtlantic.

That was $43 million pre-tax, so it was about $0.04 diluted earnings per share.

In loan processing expenses, we did have elevated re-purchase expenses that were related to better identification of unrecoverable costs associated with some investor-owned loans, so we do expect that next quarter to return to a more normalized level.

If you look on Slide 5, we're very pleased with our overall loan growth.

If you count them, it's a little bit noisy this time, but if you look at our total growth including BankAtlantic, it's a very strong 12.6% -- particularly strong at 15.7% if you exclude the run-off portfolios of ADC area and covered loans.

Now if you exclude BankAtlantic, it's still a very strong 8.4%, and which was above our guidance of 5% to 7%.

Again, if you exclude those run-off portfolios, it's 11.2%.

Even without BankAtlantic, it was a very strong quarter.

In terms of the categories, we feel really good about C&I.

It was a very strong 12.4%.

I will point out that the C&I market out there is very competitive.

We are holding to our discipline and not doing leveraged financing and other forms of high hold positions in syndicated lending, so we still are being conservative relative to the market; but so we feel particularly good, relatively, about that.

In other CRE, as you can see excluding BankAtlantic it was basically flat, down slightly.

I will point out that that's an emerging opportunity for us, because as you know, that's been running off really from the last several years, and we certainly think it's opportunistic now for us to get back more aggressively involved in that market.

While we'll be careful under credit, that's going to be a nice opportunity for us as the run-off discontinues and the growth opportunities replace that.

Sales finance had a strong performance of 5.1%.

Residential mortgage ex-BankAtlantic was 15.7%.

I will point out that it will decline as we go forward.

Recall in the second quarter that we were determined to not hold most of our 10- and 15-year paper.

As we go on through the fourth and the first, you'll see a gradual decline in that portfolio.

In other lending subsidiaries, we had a very strong 26.7%.

Recall that we do have seasonality in that business, particularly in our AFCO CAFO unit, so that will be a little seasonally softer in the fourth quarter.

Some ups and downs but overall good performance.

If you look at next year, I'll be honest with you guys it's really challenging to think about what next year is going to be.

The economy is slowing.

There's an awful lot of hesitation out there in the market place.

You've heard me talk about this before.

As I talk to business people, they're all basically sitting on their hands.

They're scared to death about increasing taxes, increasing regulatory costs, increasing health care costs.

The ones I talked to are just basically waiting for the election hoping for some more positive leadership and hoping for some certainty with regard to how to run their businesses.

With all of that said, I'll just point out that it's hard to project what's going to happen in this environment.

We'll have a better feel for that, I think, after the elections.

Even during that, our guidance to you in that context for next year would be continuing at 5% to 7%.

I would point out that that is nominal growth, so that would include impact of BankAtlantic.

We feel like that's strong growth, especially given that other lending subsidiaries, as I pointed out, will have some slowness and seasonality.

Mortgage will be slowing some because of the 10-15 year decision, so those are negatives.

On the other hand, we expect solid C&I growth, very challenging, very competitive, but our team is doing a really good job on that.

I would point out that at the end of the period, loans are up $3.1 billion, or 11%, so we do have a good start as we head into the fourth quarter.

Turning to Slide 6, take a minute to look at deposits.

Feel really good about deposits, given what we're trying to do, which is to manage our cost and improve our mix.

As you can see, total deposits, excluding BankAtlantic, was up 3.3%, 10.6% including BankAtlantic, and I will remind you that I mentioned BankAtlantic to give you a sense of organic, but a lot of hard work went into bringing BankAtlantic in, so it is real growth, and it is real earning assets and good deposits.

If you take out the effective CDs, which we continue to manage that portfolio very carefully, they were down 8.4%, so above the line of CDs we're up 6%, even adjusted for BankAtlantic.

Most importantly, I think our non-interest bearing deposits, even adjusted for BankAtlantic, are up a very strong 25%.

That's what we're trying to do is control our cost and grow our basic transaction DDA accounts, and that's working very well.

If you think about our deposit strategy right now, you've got kind of a slowing economy.

You've got some questions about loan growth.

It makes sense to focus on DDA growth and controlling the cost, which is what we're doing.

We are very pleased that year-to-date we had a growth in net new retail deposit accounts of 49,000, so it's working very well.

Also pleased that into last year we reduced our cost of interest-bearing deposits from $0.65 to $0.42, and so that's really helping our margins.

CD maturity is 12 months, so we're not out there long.

Looking forward, we do expect more modest deposit growth in the fourth quarter as we continue to focus on mix and lower deposit costs.

On a positive note, I would mention in case you didn't see it, that we were just identified in terms of market share position as the ninth-largest US bank in total deposits as of June 30, so we feel really good about that.

On Page 7 just a little bit of comment for you about revenues.

Recall that our long-term strategy is focused on diversification, and so what we're trying to do and what we are doing is designing a business to produce steady and growing EPS, dependable and growing dividends.

To get that, we focus on diversification of markets, diversification of products, which will of course give us diversification of revenues.

If you look at the pattern up there, you will see really nice diversification between the core bank, for the community bank and the non-core businesses, and you can see that community bank is 48%, insurance is 14%.

I will point out that insurance has volatility and based on seasonality so that percentage will move from time to time, but generally we're pretty pleased with these percentages of our business mix.

Frankly, looking forward, with challenges in the market place and core banking, I feel really good about having our revenue divided about half between the core bank and about half in non-core businesses.

It gives us a lot of flexibility, depending on what parts of the market are moving.

Now given the fact that the economy is flowing, and we do expect it to be challenging going forward, we are taking action to grow in spite of that, and so we've got a number of strategies I would just mention to you for the fourth quarter and going forward into next year.

One is that we are going to be pretty aggressively expanding our commercial branching network in new markets.

This is a really proven way for us to expand in new markets on a very profitable basis and a relatively short-term perspective.

Can't really do that in retail, but you can do it in commercial, and Rick has developed a really good strategy to be able to do that.

We'll be working on that.

Chris is still leading the charge in terms of executing our own expanding corporate banking initiative in key national markets.

We will be adding some new markets this year.

We are adding a new vertical lending team, so that will add marginally to our growth.

We continue to have outstanding execution in our wealth acceleration strategy.

Recall we really just kind of got that up and going in the last few years.

It's really coming into its own now, so we feel really good about that going forward.

We are adding more capacity in terms of producers in small business area and wealth, and in our broker dealers.

Then we have a particular opportunity in executing on the Krump acquisition, but really there are two ways that we get really big lift in that.

One is on our own wealth strategy for our own clients.

Krump has tremendous capacity in terms of helping our relationship managers provide more insurance products to our clients.

Then on the institutional or wholesale side, we are developing a really good reputation.

Krump, frankly, already had a good one, and it's getting even better, where we provide wholesale services for large companies, like them providing for BB&T for example.

Also, they're developing really strong relationships with other big companies like banks and insurance companies, to be able to provide wholesale services to allow them to provide insurance products to their wealth clients.

We're really excited about that opportunity as well.

With that, let me turn it to Daryl, and we'll give you some more color in terms of a number areas of detail.

Daryl?

Thank you, Kelly and good morning, everyone.

I'm going to take the next few minutes to discuss credit quality, net interest margin, securities portfolio, fee income, non-interest expense, capital and segment reporting.

Continuing on Slide 8, we really had a great quarter with respect to credit.

You can see that total NPAs were down 9.4% on a linked quarter basis.

NPAs have declined approximately $1.3 billion or 42.1% over the last 12 months to the lowest level in four years.

As a percentage of total assets, NPAs declined to 0.97%.

This linked quarter decline in NPAs was driven by lower commercial MPLs, which declined 8.8% and by foreclosed real estate, which declined $82 million or 37.1%, the lowest level in five years.

We continue to focus on improving asset quality and are guiding to a modest reduction in NPAs in the fourth quarter, assuming the economy does not deteriorate significantly.

This guidance also excludes the potential increase in NPAs that may result from the implementation of the regulatory guidance surrounding loans not reaffirmed by borrowers following bankruptcy.

We are working with regulators and expect to implement the guidance once all the factors regarding the behaviors of these loans are taken into account.

The goal is to get this done in the fourth quarter.

The implementation of this guidance could increase TDRs, non-accruals, and charge-offs; however, we believe we have fully provided for this issue in our allowance, and will not have a material income statement impact.

Looking on Slide 9, we continue to make significant progress in reducing foreclosed real estate balances, as you can see.

This quarter, we saw a decrease of $82 million, or 37.1%, to $139 million.

Since the third quarter of last year, foreclosed real estate is down $811 million, or 85.4%, with total OREO balance down to $139 million.

We should see some leveling off in OREO balances in the coming quarters; however, we forecast continued decline related expenses, but not at the same pace that we have seen in the recent past.

You will also note that our charge-off ratio, excluding covered loans for the quarter was 1.08%, down 1.22% from last quarter, very good improvement in charge-offs Third quarter losses are at the lowest level in four years.

We expect total charge-offs, excluding covered assets, to be similar in the range in the fourth quarter, and trend lower thereafter.

As NPAs continue to fall, obviously this will exclude any impact from losses arising from the loans affected by the regulatory guidance.

Turn with me to Slide 10.

Net interest margin came in strong at 3.94% for the quarter, driven by the run-off of covered assets which lowered margins seven basis points, primarily offset by an increase of six basis points in our core margin.

The improvement in core margin was mostly due to the full impact of the TRUPS call, delayed reinvestment of this quarter's investment cash flows, and a more favorable funding mix change.

These were partially offset by lower yields on loans and other earning assets.

We expect GAAP margin to decline to the mid [$370 millions] next quarter.

This trend is driven by several factors -- lower rates on new loan volume and investment purchases; run-off of higher yielding covered assets; and finally, higher long-term debt costs due to the TRUPS benefit going away.

Partially offsetting this will be lower deposit costs.

We've broken out our core margin on Slide 10, which excludes the covered assets.

This margin has held up well over the last two years.

The bottom of the slide, we included our current estimate of the declining benefit from the covered assets accretable yield, and its impact on our revenues.

The way to read this is the top line is the anticipated positive impact on margin through 2015.

The bottom line is the negative impact on fee income or the offset, which is becoming less negative.

As the positive impact declines over time, so you will see a negative impact.

In other words, the impact on net revenues will be less than the impact on net interest margin.

Remember, cash flows are recalculated every quarter and may change significantly, so please use this only as a guide.

While the accounting benefit for this transaction is running off, this has been a tremendous acquisition for us.

We now have number five market share position in Florida, number four in Alabama, and have a strong foothold for growth in Texas.

Since the acquisition, we've generated billions of new loans, with $1.5 billion in the last 12 months.

We continue to gain tremendous market share, and will continue to see positive benefits in the future.

As you can see on the graph on Slide 11, we remain asset-sensitive and positioned for rising rates.

BankAtlantic and deposit mix changes made us slightly more asset-sensitive.

In response to the impact of the rate environment on net interest income, we decided late in the quarter to purchase $2 billion in agencies, with $1.5 billion settling in October.

The current portfolio is 2.1 years in duration, and the net premium is 1.2%, both very low-risk numbers.

Our portfolio is 98% government-backed.

On Slide 12, our fee income ratio in the third quarter held steady at 42.4% compared to the second quarter.

Insurance income was down from a seasonally stronger second quarter, but grew 38% over the third quarter last year, mostly due to acquisitions.

We also saw continued evidence of some firming in market pricing, with year-to-date same-store sales up 3.9% over 2011.

We do expect a seasonally stronger fourth quarter from insurance.

Mortgage banking income was up $29 million compared to second quarter as a result of the increased mortgage production and improved margins.

We expect mortgage banking income to remain at a similar strong level in the fourth quarter.

The change in the FDIC lost-year income was mostly due to the offset to the provision of covered loans.

Other income increased $28 million, based on $17 million in other income related to our post-employment benefits, and $8 million increase in our income related to private equity and similar investments.

Looking on Slide 13, our efficiency ratio increased to 55.2%, compared to 53.9% last quarter, due to higher expenses.

Personnel expense increased $22 million, including $10 million related to BankAtlantic and $17 million related to post-employment benefit expense.

Foreclosed property expense continues to improve.

Narrowing losses and foreclosed property write-downs drove an $18-million reduction compared to last quarter.

We expect foreclosed property expense to continue to decline next quarter.

Processing expenses increased $23 million.

This was mostly due to the impact of additional mortgage repurchase activity and related reserves.

With $28 million related to better identification of unrecoverable costs associated with investor-owned loans, we expect this expense category to return to a more normalized level going forward.

Merger-related and restructuring expenses increased to $43 million, as expected, primarily related to the BankAtlantic acquisition.

We do not expect any more material merger charges related to BankAtlantic.

The primary driver of the increase in other expense is approximately $11 million in other operating charge-offs and similar expenses, largely related to the settlement with Visa.

Without BankAtlantic and the incremental loan processing expense, non-interest expense would have been up less than 1%.

FTEs increased by 110, excluding BankAtlantic, due to adding insurance lines.

Finally the effective (inaudible) will be about the same in the fourth quarter.

Moving to Slide 14, our capital ratios remain very strong and include the impact of Krump and BankAtlantic acquisitions and the redemption of our outstanding trusts.

Tier 1 common under Basel I fell as expected to 9.5%.

We estimate our Tier 1 common under the recently issued Basel III NPR to be approximately 8% under the proposed US capital rules.

In addition, Tier 1 common under the proposed Basel III international capital rules is 9.2%, which is important because this measure will potentially be used for 2013 CCAR.

Neither ratio includes mitigating actions which we will take to improve our capital ratios.

We are very comfortable with our Basel III capital levels, and feel we have the flexibility to take advantage of opportunities.

With that, let me point out a few highlights from our segment disclosures.

Turning to Slide 15, community bank net income totaled $250 million, up $73 million versus linked quarter.

The main drivers include loan growth, lower foreclosed property expense, and lower regulatory costs.

Our direct retail lending continues to be strong, with 3.6% linked quarter growth and 10.2% third quarter 2011.

Turning to Slide 16, residential mortgage was up $14 million on a linked quarter basis, up sharply compared to third quarter last year.

The main drivers include continued strong originations, increased gains on sale, and wider margins compared to last year.

The loan loss provision is lower compared to last year due to improved credit trend and updates to loss factors.

Year-over-year portfolio increased substantially, with loan service for others growing 9%.

With the refi boom resulting from low-level rates, only 59% of our production is from refinance.

Importantly, our purchase mortgages are up nearly 25% compared to last year.

Turning to Slide 17, dealer financial services reported net income of $53 million.

Regional acceptance continued to drive higher net interest income from the portfolio growth and improved margins.

Net charge-offs are up because of seasonality at regional acceptance.

We continue to open new offices in strong growth markets and are expanding our floor plan financing strategy.

On Slide 18, you can see specialized lending experienced good quarter growth.

Loans increased 16% versus third quarter last year.

High net interest income was driven by exceptional growth in small-ticket consumer finance and mortgage warehouse lending.

Net income for this segment was lower as the result of additional provisioning in light of the significant loan growth in this segment.

Moving on to Slide 19, insurance services generated $16 million in net income.

Income was down compared to second quarter, as expected, because of seasonality.

Turning to Slide 20, financial services generated $71 million in net income, primarily driven by higher corporate banking and wealth related income.

These businesses had loan growth of 50% and 33%, respectively.

With that, let me turn it back to Kelly for closing remarks and Q&A.

Thank you, Daryl.

In summary, I would say that we had a very strong quarter.

As we've indicated, we do have some concerns about where the economy is going.

I would point out in fairness, though, that if we get the right kind of positive leadership changes in Washington, there's a real potential for a positive economic boost as we head into next year, so I don't think we need to be overly pessimistic about where the economy is going.

Nonetheless, the economy's going to be what the economy's going to be.

In that context, I've never felt better about our fundamental performance.

Every part of our business is doing great.

We have the biggest value proposition in the market place, based on the outside evidence in terms of our service delivery quality.

We have great opportunities in our core bank, great opportunities in our non-core businesses.

The economy will be what the economy will be, but BB&T is going to out-perform the economy, and we feel very confident and enthusiastic about that.

Alan, let me turn it back to you.

Great, thank you Kelly.

In a moment, we'll ask the operator to come on and explain how the Q&A session works.

As normal, as is our normal practice, please observe the practice of asking one primary question and one follow-up so that we can maximize the number of participants.

If you have additional questions, please re-enter the queue.

Katie, if you would come back on the line now and provide instructions for Q&A?

(Operator Instructions) Jefferson Harralson, KBW.

All right, thanks guys.

Daryl, can you talk about the sources of the margin pressure that you're seeing?

What asset yield is it mainly affecting?

Is it the MBS side, is it the mortgage side?

Can you get a little more specific about what's driving the lower guidance there?

Yes, sure, Jefferson.

When you look at third quarter versus fourth quarter, we have margin coming down in four main areas.

First on the asset side, loan yields are coming down.

We're seeing tighter spreads in commercial real estate.

Our actual consumer loan spreads are actually holding in there well, but overall we're seeing lower spreads on the commercial side.

If you look at the TRUPS comes off, so that benefit goes away, so our long-term debt costs will bounce back up a little bit in the fourth quarter.

That's another thing.

Our covered assets continue to run down.

When we re-ran our cash flows in the third quarter, we lost another $17 million for this quarter, and a like amount for the fourth quarter as the cash flows continue to pay off and perform.

Those are probably the main areas of the drivers for the lower margin.

It doesn't seem like when you look at your guidance for accretable yield that a change in that does not seem to be a big driver.

Is that true, or is there a less accretable yield coming in than you thought?

There is a little bit less accretable yield.

If you want to -- if you look at it, we're going down 17 basis points, if you go from 394 to call it 375.

Eight basis points would be on asset yields re-pricing down, four basis points on covered, four basis points we're going to re-invest investment securities at lower yields, probably in the mid-1% range.

The TRUPS run-off is worth seven, and offsetting you have deposits that will continue to re-price down, so that nets to about 17 basis points.

Right.

Thanks guys, I'll pass it to someone else.

Remember Jefferson, that when we liked investment securities while it is having a negative impact on margin, it is having a positive impact on EPS.

Yes.

Got it, thanks guys.

Erika Penala, Bank of America.

This is another margin question.

I apologize, but I just wanted to make sure I was thinking about it the right way.

If we assume some nominal earning asset growth next quarter, and take sort of the mid-point of your guidance or just $375 million, then I get net interest income of $5.8 billion.

If I take the $600 million -- sorry if I take the $300 million that's coming off from just the accretable yield rate -- and I assume some sort of growth in earning assets, so say a 5% growth -- then I get to a margin that's sort of below $3.5 billion that you've indicated as core.

I'm getting more of a $3.4 billion margin.

You just mentioned to Jefferson that on the asset yield side, you're getting let's call it eight basis points a quarter, in terms of just pressure on the loan side.

I guess I'm wondering if I did that right, and what's the offset?

I apologize for the long-windedness of that question.

Sure, Erika.

There's a couple things there.

The fourth-quarter impact, what I was explaining, was the $394 million to $375 million.

As you get into next year, we don't expect to have as much pressure on the assets as what you're saying, so we really aren't going to give you 2013 margin guidance yet, as we don't have our operating plan completed yet, and need to pull that together.

Margin will continue to probably drift down modestly, but we continue to have some room to lower deposit rates.

Our investment yields are already relatively low, so as a re-invest, that benefit maybe won't be as much.

There's some offsetting things so that the dramatic drop between third and fourth, while it will trend down next year, it won't be as dramatic throughout that whole year.

Okay, I'll let someone else ask a question, thank you.

Todd Hagerman, Sterne, Agee.

Just a couple questions just in terms of the loan growth.

C&I obviously very strong, but as you mentioned you're getting a little bit more pressure on spreads.

Just curious in terms of A -- where the growth is coming from, and the decision on the mortgage side with that kind of slowing down relative to kind of what you're doing on the securities portfolio going forward.

Just kind of wondering how you're thinking about that in terms of the mix in the loan growth, or in the loan category, as well as the aggressiveness on the C&I side and the pressure there?

Todd what we're seeing out there is a lot of competition in general in the C&I space.

Although frankly, we are able to get market share movement holding on standards in terms of quality and price.

It's just you just have work much harder at it than you may some in other times.

You are seeing a lot of demand out there in CRE, particularly in the multi-family space.

Obviously, there's a huge surge because as people have become less interested in primary home space, they're moving into rentals, and so really strong growth there.

While competitive, it's certainly acceptable pricing.

What we're basically doing in terms of the aggregate asset mix is just trying to look at the things that make sense for us in terms of our risk appetite in the short run and in the long term.

We'll keep growing C&I kind of at a steady pace, taking what's available to us that meets our parameters.

Something like mortgage, last year and first part of this year we grew because frankly there was less overall demand in the market place and prices were relatively good and we had the asset sensitivity availability to handle it.

As we looked at the mid-part of this year, we became concerned about too much risk interest rate exposure, so we dialed back the mortgage -- not because of the quality of the mortgage, but because of the interest rate exposure.

You'll see us dialing those categories up and down in the short run, but the long term for us in terms of C&I, focusing on CRE, direct retail, other specialized lending businesses -- all of those will continue unabated as we go forward.

Okay, so just as a follow-up quickly, in terms of the C&I specifically, what kind of spreads are you seeing in terms of what you're putting the stuff on right now, and kind of how do you see that the next couple quarters?

Todd this is Clarke Starnes.

We see some incremental pressure.

I mean for the quarter we still had pretty healthy spreads -- 230 off on our C&I, and as Kelly said, our CRE is 80 to 100 basis points higher.

Our CRE production, by the way Kelly, was up 12% for the quarter, so that's offsetting some of that.

Again, we're still well north of 200 basis points on average, but there is pressure downward, particularly on investment or near-investment-grade credit, so that's why I think others are reaching on the risk curve to get yield, and we aren't going to do that.

We expect some pressure, but I still think we can get our share.

Great that's helpful, thank you.

Betsy Graseck, Morgan Stanley.

(inaudible) to make sure I understand impact that (inaudible) line has had on the movement in the quarter.

Are there any derivative positions that are coming off that are impacting the change?

Not really, Betsy.

Our derivative income is really not significant to our margin.

It's only a couple basis points, and that really had no impact on the quarter or on the forecast.

Okay, and then as we look forward, I realize you're not giving guidance, but given where RMBS yields are, and you indicated you did the forward, would you be taking receivership of those forwards, or would you be just rolling forward RMBS investments -- you get a little bit of a pick up on the roll-forward as to receiving RMBS?

Yes, we made a decision back in June to basically stop portfolioing our 10- and 15-year mortgages, so we're basically selling everything that we would normally sell now through to the GSEs.

The only mortgages that we're portfolioing right now are jumbo and arms, and some CRA-type loans.

Right, and on the security side, though--

Securities, we're basically buying all government agencies.

The yields right now in the current market place is at a mid-1% range.

It's probably what is a good average yield of what we're buying right now.

Okay, thanks.

Ken Usdin, Jefferies.

I wanted to ask a big picture question, just in terms of looking ahead to the next couple of years.

We know we've got this purchase accounting headwind, the preferred dividend's got a run rate next year, and then on the offsets we've got probably a better provision outlook in lower foreclosed real estate costs.

I just wanted to ask a broader question of like can we see earnings growth next year out of BB&T, given the points Kelly, that you've been making earlier about the environment and then some of these just natural pressures?

How do we think about the ability to grow earnings from where we are today?

Well, Ken, I think obviously we have to hedge now because we just don't know where the economy is going to be.

As I say, I think today, you have to be fairly pessimistic, just based on talking to businesses and seeing what they're actually doing.

On the other hand, I personally believe that as we think about post-election, I think there's a real opportunity for a positive surge, because keep in mind business people have not been investing now at the level they ought to be for a couple of years, and so you face a real opportunity there.

In any event, it's uncertain.

We feel positive, Ken, as we look forward.

Obviously we'll do better if the economy is better, but based on our most likely scenario, we feel positive about 2013 versus 2012, because even though we have the spread pressures, et cetera, on the core bank, we don't get the same kind of spread pressures in terms of our mortgage business.

We don't get the same kind of spread pressures in terms of our specialize lender business.

Our insurance business margins are likely heading up.

Recall from that pie chart that about half of our revenue comes in from the core bank and the other half comes in from these other sources, so it will be plenty challenging, but yes, I would feel positive about 2013 versus 2012.

Okay, got it.

My second question just relates to then, you mentioned earlier investing in some of the commercial office footprint, but I'm also just wondering how much more can you do -- how much do you have to invest in terms of incremental expenses versus in adjusting to this potential more challenging environment?

How much can you actually just work on the expense base?

I know you guys have this program underneath the surface, but how do we understand what the tangible benefits could be from you guys taking a closer or tighter look at expenses underneath the surface?

The degree of expense opportunity is a direct function of what we see in terms of the economy and revenue opportunities, so if the economy remains relatively positive and/or positive, then you'll see us investing in revenue producers, et cetera, and growing into that positive tail wind.

If, on the other hand, we hit a really negative environment for next year and things really start to continue to slow down, you'll see us really ratchet down expenses further.

We have a number of areas we can ratchet expenses that we sure don't want to, but we certainly can.

We've not gone through this whole cycle.

We've not done a lot of draconian things in terms of our expense structure, including a tougher look at some of our fringe benefits, et cetera.

We could get really much tougher on expenses if we had to.

I don't expect that, do not project that, but it'll all be a function of where we go.

I think you will see us continue to have a clearly competitive advantage on our efficiency ratio.

All of us are facing increasing (inaudible- audio difficulty) from the regulatory side.

We're being killed from all the additional regulatory burdens coming out of Washington from Dodd-Frank, and so that's a negative, but we are becoming more productive every day.

All of our strategies are being executed in an efficient manner.

We're becoming more productive, so I'd have to cautiously say that we have expense opportunity if the revenues don't come, but I hope what we do is get the revenues, and you'll see expenses stay kind of like they've been for the last couple of years.

Okay, thanks for that color, Kelly.

Yes.

Nancy Bush, NAB Research, LLC.

Kelly, just a question on -- I think probably I was not the only person who had a mini heart attack when you said that you wanted to start doing more in CRE.

Could you just clarify that, and sort of tell us the areas that you're going to stay out of, or put any parameters around what you want to do?

Nancy, as you well described to us in the past, our CRE -- when I say aggressive, that would be in our natural boring manner.

We'll continue to be as conservative in terms of underwriting as we've always been.

No, not going out and doing the crazy stuff that's got everybody in trouble, big land loans and equity projects and all of that kind of stuff, not at all -- let me emphasize not at all.

On the other hand, when there are really fully cash-flowing good projects with good solid cash equities in more of the family space, we would be interested that.

In office -- if they come back, now right now Nancy there's no supply in the office area -- but if office comes back in a positive scenario with regard to the economy, we would do some office buildings that had good pre-leases and good coverages.

What we're not doing Nancy is we're not reducing our coverage ratio requirements.

We're not reducing our tough standard with regard to having long-term, projected real interest rate carry in terms of cash flows.

What happens a lot of times when interest is low, people underwrite carry based on current rates.

We project in long-term normalized rates.

We don't get a lot of deals because of that, but don't have a heart attack.

You'll see us do nothing that you would feel uncomfortable with.

My follow-up question is for Daryl.

The $0.02 loan processing expense, could you just clarify that and why that was regarded as quote an unusual expense for the quarter?

Nancy, it was an account that we had in our mortgage area where we had some aged items, and we found these aged items and realized it should have been written off in prior periods, so that's why we are calling it a one-time item.

Okay, thank you.

You're welcome.

Matthew O'Connor, Deutsche Bank.

Just another follow-up question on the NIM.

I think somebody had asked earlier is there any derivative drag going forward.

Maybe I misinterpreted the answer or the release here, but there's a $26 million benefit that you pointed to as a reduction in funding cost this quarter?

That's correct.

I thought that went away next quarter, which is one of the drivers of the NIM decline?

Yes, that's really the four-basis-point impact on the higher long-term debt costs that we'll have next quarter.

If you look at overall from there on out, our derivative net income is just a few basis points.

It's not significant either way.

Okay, so once we get past this, the 4Q step-down, then that's relatively stable?

That's correct.

Okay, got you.

Separately, obviously as we think about the purchase accounting accretion, there's a partial offset in the fee component.

I did notice the FDIC loss share was a bigger loss, which I thought it would normally go in the other direction as purchase accounting accretion came down.

What's going on there, and then how do we think about that $90-million drag going forward?

When we closed on the Colonial acquisition in the third quarter of 2009 we set up an amortization schedule for the receivable.

That was basically a defined time period and it basically follows the schedule.

On the other side, we have the cash flows that impact the interest income.

We run those cash flows every quarter, and those durations move around, which causes that to move up sometimes a little faster and sometimes slower.

That duration is moving back and forth, but what we call the FDIC offset piece is more of a defined straight or amortized period on a defined period.

It doesn't change.

Yes, I guess I'm still a little confused.

The purchase accounting accretion will be coming down from this level going forward, as it has been.

Is that $90 million -- I know there's some puts and takes, but I assume that should be coming down?

Matthew, let me see if I can, its always been confusing to me.

Basically, I think about it this way.

The revenue is coming down, but the negative FDIC hit is coming down also.

In other words, you've got a negative end to revenues coming down, but you've got a positive end that the negative FDIC charges is reducing.

The FDIC charge is not going up.

It's going down.

That's the positive benefit.

If you look at the benefit for 2012, if you net the two it was $600 million in net revenue.

If you go to 2013 and you net the two it's $400 million; and 2014 it's $150 million.

You have to really net the blue line against the red line.

Okay, those numbers are helpful, thank you.

You're welcome.

Gerard Cassidy, RBC.

Kelly, can you outline for us -- you've done a good job about telling us what some of the customers are thinking should the fiscal cliff hit, and maybe higher taxes.

Potentially it'd slow down the economy.

If we put that off to the side for a moment, what do you see is the biggest risk for BB&T next year -- again, not an economic recession coming because of what's going on in Washington, besides that, what do you guys worried about the most?

That's a good question, Gerard.

I think that's a really big if, but if you set us all of that, first of all, as I said in my closing comments, I've never felt better about our overall fundamentals.

I mean every part of the business, that's what's kind of frustrating today, because the overall economic picture kind of clouds how strong the underlying performances of our business, which by the way you guys, when you're looking at us, you really ought to look at pre-tax, pre-provision.

You ought to look at the underlying strength of the core business at BB&T, which is still very strong.

There's only been one thing I've ever really worried about about our business is because we are a service business and because our strategy is based off having the best value proposition, which is a function of having the best quality, it really comes down to people.

While it's not a problem for us, that's what I worry about at night, because the entire strategy is based on having better people, better trained, better motivated, better executing than our competitors.

That's the only thing that I wake up at night worrying about.

Having said that, because of the intense focus we place in terms of recruiting, in terms of our university training and certification efforts, in terms of feedback we get from our clients through our engagement -- our associates based on engagement surveys -- I've never felt better about where we are with regard to our associates, but that's just what I worry about, because that's the only thing that could trip us up.

Thank you.

As a follow-up, if we're talking here a year from now, as we're heading into 2014 and if we assume now fiscal cliff does not hit, Washington's turned for the better, and this housing market continues to grow better than expected like we saw yesterday, and there's now talk in October of 2013 of the Fed raising short-term interest rates much sooner than they currently are expected to do, which is the middle of 2015.

If that proves to be true, how does that affect you guys a year from now in terms of the portfolio durations, margins, and things like that?

That's the opposite side of my middle of my night, Gerard.

In the middle of the night, sometimes I worry about if we don't have the right people.

The other time I wake up just laughing and clapping my hands because of that environment.

That would be a huge win for us.

We'll positively get, we're extremely positioned in the market place in general.

We got really high deposit market shares, but low (inaudible - audio difficulty) shares of loans and new markets like Florida and Alabama and Texas.

That's a boom for us.

It would be a really fun time.

Thank you.

Greg Ketron, UBS.

Kind of a short-term question and long-term question.

Daryl, on the margin -- sorry to go back to it -- but if you look at the potential revenue or earnings pressure that the drop to the mid-70s could create, it looks like if you just take the drop that could be $0.07 per share.

Then if you factor in the earning asset growth for the quarter, which actually ended the quarter on a strong note, so earning asset growth looks like it should be pretty good in the fourth quarter, that's kind of like a $0.02 or $0.03 offset, so it looks like about $0.04 in EPS pressure on a revenue or pre-tax basis, kind of a $50 million.

As we kind of walk through and look at the fourth quarter earnings and into 2013, are there offsets to that such as maybe a rebound in insurance, the lower FDI expense that you're looking at, that you think could offset the impact from the lower margin from a revenue and earnings standpoint?

Greg, I'll touch on it, but I think my peers here will probably chip in a little bit.

As you look out into 2013 -- and I did follow your logic on the fourth quarter -- but as you follow, look into 2013, definitely credit costs will continue to come down.

We tried to give some guidance, but we'll have more guidance in January regarding that, but we feel very good that credit quality is coming down and maybe some others want to touch on some of their businesses?

Yes Greg, this is Chris.

Insurance, I think you've touched on, is pretty clearly firming it from a price perspective.

Year to date we're up 4%.

If you just look at the core brokerage business, pulling out the little underwriting, it's actually like 4.6%.

We're just -- what you typically see is an abrupt change when you go from soft to hard market, up 15% to 20% or so.

We're only up four, so we're probably -- we've got another two years of this, I think, left.

There are kind of three legs to it.

One is you get the pricing improvement.

Then as the economy improves, you get a volume improvement exposures.

Thirdly, sort of in the out years in the second and third year, you get a pick-up in profit-sharing commissions that are based on performance with your underwriters.

I think we're just really well-positioned to take advantage of that as we move forward.

Greg, this is Ricky.

Just a little comment about -- around our commercial strategy that Kelly mentioned earlier.

We think there's some real opportunity in some of these new markets for us, and maybe even some contiguous markets that we're beginning to reach into that we can do some commercially oriented branch growth that can get us some loan growth, can establish some presence in concert with Chris' efforts in capital markets, and some of these things really work well together.

We think that's a nice offset in terms of additional loan growth that we can have against this margin pressure, so kind of volume growth.

We feel very good about it.

We've had a few practice runs in Texas already, and we've seen that work very nicely, so we're very encouraged by that strategy.

We're finalizing it.

Hopefully, you'll see some more information about that soon.

Lastly, Greg, what I would add is our deposit costs will continue to come down.

Last quarter we said they were going to go down from 42 basis points to 30.

That was pre-QE3, so we'll probably do better than that next year.

I think we'll have that to help offset some of these assets and side pressures.

Okay, great color, appreciate that.

Kelly, as we get closer to the election, seeing housing data -- particularly the Southeast improvement, prices improve -- you noted that people are taking a pretty cautious view.

Do you sense that there is a lot of pent-up demand kind of pending the election in November, and if we get the results that are more favorable to a business climate that you could see a pretty quick recovery and investment of the excess liquidity that's on the sidelines right now?

Greg, I really do.

I'll give you just a couple of little anecdotes.

I talked not too long ago with the owner of a retail furniture store.

He had like 50 stores so he has his own trucks to deliver all of his furniture.

He said, you know, I have not replaced a truck in over eight years.

He said I need to replace my entire fleet, but I'm not going to do a thing until after this.

I believe the day after you get a change, he will go out and replace his entire fleet.

We've seen people holding back in terms of technological investments -- I need to update all of my software and all of my hardware, but I'm holding back.

It could work today.

There's just a lot of that out there that's holding back.

I may be wrong, but I personally feel pretty strongly.

This is based on talking to 400 to 500 business people in the last year.

I think it's a pretty good economic sample.

I think under the scenario you described, we would definitely got a positive hit.

By the way, I know everybody is concerned about rates.

My own scenario -- I mentioned this up at the Barclays conference -- my own scenario is that next year we're going to see higher rates, either one or two reasons.

Either the crew stays in that is not as favorable to business, and we have relatively low growth, but if we keep spending like crazy, which will drive up inflation fears, which will drive up rates; or we get a more positive business climate, which cause business investment surges, loan demand grows, and that drives up rates.

Now, I know Bernanke can hold down the short-term and he can hold down the 10-year, but he can't hold down all rates.

I think any way you turn it, as we get toward next year, you're going to be seeing upward pressure on rates.

Okay, great, thank you.

Appreciate the color.

Kevin Fitzsimmons, Sandler O'Neill.

Real quickly, most of the questions have been dealt with, but the initiative you talked about in terms of expanding the commercial branches, just wanted to get a feel.

I think Ricky you had mentioned before that new market.

Is that really Texas we're talking about, or are you talking about actual states that you're not in at this time, and what would some of those be if that is the case?

Secondly, can you just give us a sense on that seasonality of insurance?

I would assume it's going up, but not up to the pace of last quarter, maybe something in between.

If you could give us a sense if that's a good assumption?

Thanks.

Yes, thank you very much, Kevin for that, but our focus is going to be in the three opportunity markets that we have in front of us -- Texas, Alabama, Florida, there's some places that we have opportunity.

That's where we're looking, and that's where we'll make the final assessment about what we do.

Longer-term, we'll see how that plays out.

If we're successful, it could have some applicability other places.

We'll ask Chris if there's comment on the insurance question.

Yes Kevin, the insurance you've got several things that kind of underline the business.

You've got the pricing pressure we talked about, or the pricing improvement.

Then you've got Krump kind of coming on line, which is kind of a nice pick-up as well.

I think the fourth quarter is going to look a good bit better than what you're seeing currently, probably in the kind of the up -- could be 5% or so, 5% to 10%, sort of where we are at the moment.

Okay, thank you very much.

Michael Rose, Raymond James.

Just one more question on the margin.

Does the implied drop this quarter change your kind of longer-term outlook of 3.6% to 3.7%?

It does not, Michael.

I think in January we'll give you clear guidance for 2013 after we get our operating plan pulled together.

I would just say from where we are in the fourth quarter, we have modest pressures next year.

I think we'll give you more color next quarter.

Back on the expenses, with some of these new initiatives for commercial branches and some of the other things you mentioned, how does that -- what's kind of the expense associated with some of those efforts?

Thanks.

Michael, in general on the expenses, as I indicated earlier, if things don't go well in terms of revenues, and we'll be really tough on expenses, every expense will be put under intense scrutiny.

Frankly, in that environment we would not make investments and expenses initiatives that do not generate positive income for the year.

We would hold back.

On the other hand, if we see more positive, then we'll be investing more in revenue opportunities.

In some cases, they're are a little short-term dilutive, and maybe positives for next year, but you're always having to make investments looking forward to grow the business.

We'll just have to measure that as we go along.

The truth is right now I can't tell you how that'll go.

I can tell you at the end of the day our profit will be to focus and so if the economy is tough, we'll be focusing tougher on expenses to get the profit.

If the economy is better we'll be getting more revenue because of some expense-side investments that create more revenue and we'll just have to play it by ear as we go along.

Thanks for the color.

Sure.

Ed Najerian, ISI Group.

Daryl, let me apologize up front for the tenth net interest margin question here, but I just thought I'd ask in a way that might clarify things a little bit for sort of the outlook for next year.

If we assume we're around $375 million for the fourth quarter, and then we look at that sort of blue line versus red line chart on Page 10 of the slide deck where you talk about the net revenue from covered loans next year at about $400 million, what would you say would be the net revenue from covered loans in the fourth quarter of this year?

Let me see.

I would probably say in the third quarter you can see in our press release we were about $130 million in net revenue, if you look on Page 6 there.

It would probably come down in the neighborhood around $20 million.

So something in the neighborhood of $110 million?

$100 million to $110 million, in that neighborhood.

Okay, so you're annualizing in the fourth quarter to about $440 million, so what you're telling us is the drop-off in revenue in 2013 from where you think you'll be in the fourth quarter in that mid-$370s million NIM level is not very much, in terms of the drop off in covered loan accretion.

This is a caveat.

We run cash flows every quarter and it's been volatile, but if you look at it over a longer time period, it's a modest gradual decline over the next couple years, but every time we re-run cash flows it gets a little lumpy, but you've got the trajectory right.

Ed, I want to make a just comment for you and others, and I'm sure you all understand this but I want to emphasize the point.

I don't want anybody to take out of context that graph on Page 10, as it shows a projected decline in net revenues from Colonial, because that is a very incomplete picture.

We're just trying to show you the impact on margin, but even that's incomplete because remember, this is basically a declining portfolio that we got three years ago.

At the same time we are growing, if you will, the new Colonial and it is growing by the day.

We've had huge -- billions of dollars in increases in loans and deposits and other fee income.

If you looked at that you could draw a conclusion that aggregate BB&T profitability is down by that much -- that would be very inaccurate, because the whole Colonial business is just really ramping up really rapidly.

We thought about could you do some kind of a comprehensive graph that looked at all of those aspects, but as you could imagine it would be too convoluted.

It would be very inappropriate to look at that and draw some whopping conclusions about negative impact on BB&T for next year.

That would be totally to not focus on the rest of the positive benefits on the merger.

Okay, that was my question.

Thanks a lot.

Matt Burnell, Wells Fargo.

Thanks very much for taking my question, and I'm sorry to beat what is pretty clearly nearly a dead horse at this point.

Kelly, I wanted to follow-up on your comment in terms of the on Slide 10, in terms of the reduced accretable yield.

I appreciate that there's far more benefit than the NIM impact from the decline in the accretable yield, but if I take the current net interest income from the third quarter, annualize that, and then reduce it by the $600 million of accretable yield that you're estimating at this point for 2013, I estimate a net interest margin in the 3.5% range versus what you're reporting now.

I guess I'm just curious as you see that $300 million decline year-over-year in the reported net interest income, is there any offset that you might be able to generate in the spread revenue specifically, to help us get a better sense of what the direction for net interest income is?

Let me make one general comment and Daryl will give you the detail, but keep in mind when you look at that reduction from $900 million to $600 million, that $300 million, look at the bottom line you've got -- it's only $200 million.

It's only $200, first of all.

Then you have the positives that I alluded to earlier with regard to more loan volume, which improves revenue -- not necessarily margin, but revenue.

Then we do have to your point fee opportunities, insurance opportunities, wealth management opportunities, all of which won't be in NIM, they'll be in non-interest income that will be very positive as well.

Let me ask Daryl to pick up any additional detail.

Matt if you look on Slide 10 and you look at the top part under that first bullet point, we list three offsets there.

You have the subs and specialty businesses.

Those basically yield around 10% and they're going to grow faster than the loan yields, so that will be an offset.

We don't see that offset in the fourth quarter because of seasonal decline there, but it's still growing faster year-over-year versus total loans.

You have CRE, which is not running off any more and will start to grow.

That yields higher than the C&I and other portfolios; and we talked about deposit costs.

Those are your offsets.

Okay.

Let me switch to my second question.

I guess I was curious as to the relatively low percentage of refi mortgages that you had in the quarter versus purchase mortgages.

I guess I'm curious if that's something that BB&T is specifically targeting, or is that something that your customers are coming to you and requesting higher, more purchase mortgages, rather than refis?

Yes Matt, this is Clarke.

Number one, we are very targeted consciously in our origination strategy on more purchase, because we know at some point refis wane, so we feel very good about our sales efforts there with the building community and with clients to own more purchase.

Frankly, we do have very good brand around our mortgage business and our markets, so clients that are purchasing homes are coming to us.

Final point, we are seeing more housing activity in many of our markets, so we are seeing improvement in housing, and so we're seeing more buys in a lot of our markets and we're getting, we believe, our fair share of that.

Okay, thank you very much.

We'll take our next question from Christopher Marinac with FIG Partners.

Thanks.

I just want to go back to the branch initiatives that you mentioned earlier.

Is there any comparison that's different today between buying versus building on branches?

Are there acquisitions that may make more sense and easier, or is it just simpler to go on your own?

Chris, what we try to do is look at, we try to look at, we do look at the internal rate of return analysis on build versus acquisition.

Obviously, as you would know, it depends on the more on the cost of acquisition than it does on the cost of build, because the cost of build is not a variable.

In this case, the cost to build houses is going to be lower, because we're looking at acquiring vacant, primarily vacant, existing or previous bank buildings, where we get them at a real deep discount based on current market values and we don't spend that much money on them because it will be a commercial strategy, and the exact nature of the branch doesn't vary.

It's not as important as it is in retail.

Number one the cost of these will be lower.

On the acquisition side it's just a function of two things.

One is what is the acquisition price and the other is what is the availability.

We obviously, as you know, we look at deals all the time.

I would say in general the sellers' desired returns today are generally higher than we're willing to invest in.

That's why we're looking, to some degree, why we're looking at this de novo strategy, because we're not going to go out and do acquisitions that violate the fundamental principles we've laid forth.

We'll be glad to do them, but we look at organic growth and merger growth as interchangeable.

We'd like to have a nice, healthy combination, but if acquisitions are too expensive, we've got plenty capacity from an organic point of view.

At this time, you can surmise that we're not expecting much acquisition activity, and so therefore, we expect some more in organic growth.

Very good Kelly, thank you.

You bet.

At this time, Katie, if I could just say that we have given as much time as we can.

We do have a few more names in the queue, but due to the time, we need to go ahead and end the call.

Kelly, do you have any closing remark?

No, just as I said for everybody, thanks for joining us.

We really appreciate your ongoing support of our Company.

A lot of good questions.

A lot of challenging issues out there, but I'll re-state again I've never felt better about the fundamental performance of our Company and the fundamental opportunity we have going forward.

Everybody have a great day.

Thank you.

This concludes our call.

Have a good day.

That concludes today's conference.

We appreciate your participation.