Truist Financial Corp (TFC) 2013 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation, second-quarter 2013 earnings conference call on July 18, 2013.

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, with Investor Relations for BB&T Corporation.

Thank you, you may begin, sir.

Thank you and good morning, everyone.

Thanks to all of our listeners for joining us today.

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 second quarter, as well as provide a look ahead.

We also have other members of our executive management team who are with us today 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 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.

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 intent, beliefs or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

Please refer to the forward-looking statement warnings in our presentation in our 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, and good morning, everybody, and thanks very much for joining our call.

I'd say overall it was a very solid quarter, especially given the kind of sluggish economy we have.

Basically, frankly, everything looks good except expenses.

Some noise there which we will explain to you.

Fundamentally, the high level was driven by some non-run rate issues and we will give you some color on that.

We did have record net income of $547 million, which was up $37 million or 7.3% versus second quarter of last year.

Diluted EPS at $0.77, up 6.9%.

Revenue was $2.5 billion, up 1.3% versus second quarter of '12 and 6.2% annualized versus first quarter this year.

That was driven by record insurance, investment banking and brokerage, and trust and investment advisory revenues.

The income ratio increased to a very strong 44.6% versus 42.4%.

So, we feel really good about the continued positive progress in that.

In the lending area, excuse me, average loans held for investment increased 3.8%, versus first quarter.

That was on the high-end of our guidance range so we felt good about that.

That was including certain areas.

Sales finance was up about 35% versus first quarter.

C&I was up strong for the market at 4.7%.

Other lending subsidiaries grew 16.8%.

Obviously as we mentioned, some seasonal, positive influence with regard to that.

Direct retail lending is coming back.

It was up 4.6% and some of that was offset by lower mortgage and ADC runoff.

In the deposit area, deposits did increase 1.4% which is kind of by plan as we continue to manage our margin and reduce certain CD categories.

Non-interest-bearing deposits increased a very strong 13.2%, which continues to be a really good, robust performance in that area.

Continued to improve our deposit mix, as we run down the CDs and so our total costs declined to 32 basis points, consistent with the general guidance we've given you.

Our credit improvement is a really big story for us this quarter.

Charge-offs declined to 0.75%, frankly more than we had expected so we were very pleased about that.

The lowest level in five years.

The NPA decreased another $137 million or 9.7%, lowest level in five years.

Allowance coverage ratio improved to 1.55, NPLs from 1.43 at the first quarter.

In the expense area, we were up materially on an annualized run rate versus the first quarter.

Much of this was $27 million of merger and restructuring charges that we took following our community bank reorganization.

We did have other expense areas related to higher production related personnel cost, our volumes were up, so we get some clear correlated increase in cost there.

And we had a meaningful amount of expenses related to systems and process related enhancements.

These expenses included $35 million in systems and process related cost, composed of temporary consulting and similar costs which are not a part of our long-term run rate.

We are doing exactly what we have said to you over the last 1.5 years, and that is we are in the process of reconceptualizing and looking at every part of our business.

I know it may seem like that inconsistent with increase in expenses, but again, we want you to understand these are non-run rate expenses.

To give you perspective on that, in our Community Bank, Ricky Brown did a really good job of reorganizing our regions which we believe make us more efficient and at the same time more effective.

The numbers on that gives you a good perspective on the kinds of things we are doing.

The one-time charges related to that community bank reorganization was $16 million, and the run rate savings on that is $26 million.

So, a substantial run rate payback versus the one-time charge.

So, we will continue to report to you from time to time, those types of changes, as we put them into effect.

As I've said before, I'm not going to announce some big robust plan, like is often done, but we will continue to report to you what's happening along the way, as it's materializing.

If you will turn to Slide 4, much better loan growth than last quarter we were very pleased about.

I said C&I was up 4.7%, retail 4.6%.

Sales finance is very strong.

Some seasonality there but really moving market share there, 34.9%.

Other lending subsidiaries were up 16.8%.

If you minus out the negative impact of covered loans that gets us to the positive 3.8% growth.

In the other lending subsidiary areas, very strong results in our Sheffield small ticket finance area was up 41%.

AFCO CAFO, which is our insurance premium finance business, always has a big seasonal kick here.

It was up 22.7%.

We were pleased that in the period loan sales from investment were approximately $1.5 billion, higher than the second quarter average, it was our highest production quarter ever.

Now remember, there's a lot of production mortgage and we sell most of our mortgage, but still it produces revenue, so it's really, really good.

So, we expect for the third quarter loans to grow in the 2% to 4% range.

It's still, frankly, difficult to project lending volumes in this kind of market.

But we do have some visibility on that and we expect all the demand to remain strong growing double-digit in the third.

Other lending subsidiaries will also be double-digit in the third.

We relay commercial loans and retails will be kind of similar to what we saw in the second quarter.

On the other hand, mortgage will be likely down and that will have some impact with regard to our loan growth for next quarter.

If you turn to Slide 5, another great quarter for deposits.

As we improved our deposit mix and cost.l As I said, DDA was up 13.2%.

We allowed CDs to run down.

These are non-client relationship sensitive CDs, they are more price sensitive CDs so we're not concerned about that for the long term franchise point of view.

We did grow net new retail accounts in the second quarter, which is always something we look at.

Deposit cost, as I indicated, came down to 32 basis points so we are heading towards what we said, which is should see slightly below 30 basis points by the end of the year.

So, we expect to have strong growth in non-interest bearing deposits in the third quarter.

And with probably similar activity with regards to the CD area.

If you look with me on Slide 6, I just want to give you a little update on some of our revenue initiatives.

Recall that we said in the beginning of the year we thought this would be a sluggish growth economy.

That's proving to be true.

We thought that there were going to be upward pressure in certain cost areas including technological and regulatory which is proving to be true.

So, we decided we needed to focus very seriously on revenue initiatives and we've been doing that.

So just a quick update, continuing to have excellent results in expanding our corporate banking national market.

I want to be very clear to everybody we do have a national corporate banking strategy now.

So, while our Community Bank is basically a mid-Atlantic Southeast swinging around to Texas strategy, we are very national in many other categories, certainly including corporate banking.

We did add corporate banking teams in some of the larger markets in the country including Dallas, Chicago, Cincinnati, San Francisco.

To give you a perspective, common quarter loan growth in the corporate banking area is up 31%, so it's working.

Continue to invest in the wealth-management area, making targeted investments in certain key markets.

We opened Dallas wealth-management office.

We've added multiple investment in our advisors in Texas, Florida, North Carolina, added other offices in some of our key states like North Carolina, South Carolina and Virginia.

We did open a new broker dealer office in Maryland and Florida.

So, nice investment there.

Wealth income is up 19%.

Outstanding loans were up 20% versus common quarters.

So that's working well.

We continue to execute on our front life-insurance opportunities.

Real pleased with the way the institutional sales effort is going.

For example, Crump added a major account, MetLife, in the second quarter, which is the largest new client in Crump's history.

And obviously that's a major account and we are very appreciative of that partnership.

It just gives you an example of the opportunity there.

Quarterly revenue growth in the Crump life area is up 11% versus common quarter.

So, that's working.

In the mortgage area, we are continuing to expand our corresponding lending network.

Obviously, organic mortgage volumes are under pressure because of refis.

Purchases are doing really well.

So, we are looking for other ways to continue to mitigate that.

Year to date production was up 14% over the last year.

We do expect production to fall some this next couple of quarters because of the rates, mostly because of refis.

Margins will be under some slight pressure there.

So, by focusing on our correspondent delivery strategy and particularly our mandatory delivery expansion, that will offset meaningfully some of those negative impacts.

In the retail mortgage lending area, we continue to expand to some of our newer markets like Texas, Florida, Alabama.

So our mortgage area, while under pressure because of rates is doing relatively very well.

Feel really good about what's going on in Texas.

Ricky and his team are doing a great job down there.

Recall that we said we would execute on 30 new commercial branches this year.

We've already opened 25 of those.

The other five will open very soon.

We are seeing nice increase, for example, checking deposits in Texas are up 45%.

Loans are up 45% compared to second quarter of last year.

Revenue is up 38%.

And on a very current perspective, business credit pipeline is up 132% versus January.

So, obviously, we are starting from a small base but Texas is a really big opportunity for us.

We love Texas and it's got a huge amount of opportunity for us.

We also continued to execute on our revenue opportunities in the legacy colonial markets, just to give you a perspective.

Common quarter loan growth in Texas, Alabama, and Florida, which is primarily where we picked up colonial presence, is up 27%.

Revenues are up 9%, compared to common quarter.

We continue to expand our wholesale sales finance area.

Permitted lines are up 61% on a late quarter basis, to approximately $850 million.

Outstandings are up 75%.

So, you can see that all of these 2013 initiatives are working.

We will be somewhat uneven as we go forward, but the general trajectory of all those initiatives is very positive and offsetting to the downward pressure from a sluggish economy and margin pressure.

So, let me turn now to Daryl to give you some more color with regard to a number of these areas.

Daryl?

Thank you, Kelly and good morning, everyone.

I'm going to talk about credit quality, then interest margin, fee income, non interest expense, capital and segment reporting.

Continuing on Slide 7, our improvement in credit metrics really accelerated versus last quarter.

These are our best credit numbers in five years.

Charge-offs declined to 75 basis points during the second quarter.

That's down from 98 basis points last quarter.

The improvement was driven by a significant drop in commercial inflows.

This equates to a 22% drop in loan losses during the quarter.

We have reached the top end of our normal charge-off range of 55 basis points to 75 basis points, and we are ahead of our projections from last quarter.

The primary drivers for the improved charge-offs were old vintage loans which mostly had run their course, improvement in recoveries and improvement in real estate values.

Going forward, we expect modest, steady improvement in net charge-offs.

Nonperforming assets declined 10% during the second quarter and are down 33% since last year.

Commercial nonperforming loans decreased 14% versus last quarter.

We expect modest improvement in both nonperforming loans and nonperforming assets during the third quarter.

Turning to Slide 8, you can see a 28% drop in commercial nonperforming asset inflows that led to the overall credit improvement this quarter.

While delinquencies can fluctuate due to seasonality, the 30 to 89 and 90 days past due both improved this quarter.

The allowance for nonperforming loans increased from 1.43 times to 1.55 times, reflecting a continued strong coverage.

We had $36 million in reserve release this quarter.

Excluding the impact of covered charge-offs and the recovery in the covered provision, this reserve release is similar to most recent periods.

Continuing on Slide 9, net interest margin came in at 3.70%, down 6 basis points from last quarter, and somewhat better than our initial guidance.

Core margins fell 3 basis points to 3.40%.

The decrease was the result of several factors -- the runoff of our covered assets; lower yields on earning assets; and tighter credit spreads and retail production.

These were offset by a decrease in interest-bearing deposit costs and mix changes.

I'd like to point out that the steeper yield curve is positive for us.

Obviously, this will reduce pressure on our core margin, over time.

Looking at the second quarter, we expect to be down 5 basis points to 10 basis points.

We anticipate third-quarter core margins to decline modestly due to tighter credit spreads, resulting from competition.

As you can see, in the lower graph, we are asset sensitive, and are positioned for rising rates.

Turning to Slide 10, our fee income ratio in the second quarter increased to 44.6% compared to 42.9% in the first quarter, and up from 42.4% from second quarter last year.

This is one of our highest fee income ratios in recent history.

We had record results in insurance, investment banking and brokerage, and trust and investment advisory services.

Insurance produced record revenue, up 67% from first-quarter, driven by firming market conditions and a $13 million premium refund.

Mortgage banking produced record originations in the second quarter.

Mortgage banking income declined due to lower gain on sale margins, driven by lower spreads in the retail channel.

Investment banking and brokerage income increased due to strong commission income in BB&T securities, and improved investment services income.

FDIC loss share was up, mostly due to a $29 million swing in the provision for covered loans.

Looking at Slide 11, total non interest expense was up $82 million [linked] quarter.

This was driven by two things.

First, $27 million in restructuring and merger-related costs.

Second, there was also $35 million in systems and special project costs.

As these expenses subside over the next several quarters, so will total non interest expense.

Personnel expense increase versus first quarter due mainly to higher production related incentives and commissions, partially offset by lower social security and unemployment cost.

As you know, we recently announced the restructuring of our community bank where we trimmed back from 37 regions to 23.

We will also be closing about 40 branches.

With this decrease in personnel cost, we expect to see lower expenses for the next couple of quarters.

FTEs were down slightly compared with last quarter.

Loan related expense increased $5 million compared to first-quarter, due to higher pre-foreclosure expenses, and mortgage repurchase expense.

Foreclosure costs continued to decline down $6 million.

Professional services increased $11 million, driven by systems and special project costs.

We expect these costs to decline over the next few quarters.

Merger-related and restructuring charges increased $22 million, primarily due to community bank reorganization I mentioned earlier.

The good news is we expect to offset that with a similar amount of annual cost savings going forward.

Other expenses increased $24 million, due to higher project related expenses and operating charge-offs.

Despite the increase in this expense this quarter, we continue to focus on positive operating leverage, which will, over time, drive the efficiency ratio down.

Finally, the effective tax rate for the quarter was 27.7%, we expect a similar rate for the third quarter.

Turning to Slide 12, capital levels were up from last quarter with tier one common at 9.4%.

Under the final rules, our estimated Basel III tier one common is about 9%.

We successfully issued preferred stock in the second quarter, and we also synced up our preferred stock dividend schedule.

This resulted in a sub dividend payment in the second quarter.

We expect the board to authorize next week a full preferred dividend payment for next quarter of approximately $37 million.

We completed our CCAR resubmission on June 11.

As Kelly mentioned earlier this quarter we have taken a very conservative approach to our resubmission in terms of capital deployment for the rest of 2013.

As a reminder, we increased our dividend 15% in the first quarter, and when we resubmitted the final capital rules had not been announced.

And at that time, the industry expected higher capital requirements.

Now, here are a few highlights from our segment.

Turning to Slide 13, Community Bank net income totaled $209 million, showing strong growth versus common quarter, and down from a very good first quarter.

Average dealer floorplan loans grew $133 million or 116% compared to the first-quarter.

Turning to Slide 14, residential mortgage net income was down $25 million linked quarter and up modestly compared to second quarter last year.

Increased interest rates and changes in channel mix pressured gain on sale margins.

They came in at 1.31%, down 34 basis points from last quarter.

We had record loan production of $9.3 billion, up 7% versus last quarter.

Purchased mortgages made up 44% of production versus 32% last quarter.

Looking at dealer financial services on Slide 15.

You will see net income totaled $59 million.

That's up $19 million off a strong first quarter, and down slightly compared to a common quarter.

We continue to see strong demand and had record loan production in both recreational and retail auto lending.

On Slide 16, you will see specialized lending experienced a solid quarter, with net income of $68 million.

Average loans grew 9% versus second quarter last year, with the strongest performance in Sheffield, commercial finance, and premium finance businesses.

Moving on to Slide 17, insurance services generated $66 million in net income, up significantly compared to linked quarter, and flat compared to common quarter.

Wholesale revenues increased 11%, and retail increased 5%.

We continue to focus on business opportunities presented by our acquisition of Crump Insurance, through institutional sales and cross-selling with our wealth teams.

Turning to Slide 18, financial services generated $71 million in net income, mostly driven by corporate and wealth.

These businesses had loan growth of 31% and 20% respectively.

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

Thank you, Daryl.

So as you can see, it was a very solid quarter relative to the economy.

We are seeing most all parts of the business did really well.

Credit was a really big story.

Expenses were noisy but the real trends are very positive.

So, we are very optimistic about our relative performance going forward and we look forward to entertaining your questions.

Alan?

Thank you, Kelly.

We will now ask the operator to come back on the line and explain how the Q&A session operates.

Please follow our normal practice of asking one primary question and one follow-up, so that we can maximize the participation in the call.

Thank you.

(Operator Instructions)

Paul Miller, FBR.

On the insurance line item, which you guys -- was very strong this quarter is there seasonality in that?

How should we model that going forward?

Paul, this is Chris Henson.

There clearly is going from first to second, in fact it's our largest seasonality hit of the year.

Second quarter is typically our strongest and third quarter is typically our weakest.

So, I think we estimated last time we'd be up in the 15% range.

We actually beat that.

Third quarter, you could see it drop off to 17%, 18% or so.

Then, real quick on a follow-up.

On your allowance to loan losses you released some provisions which, of course, that's understandable, given the improvement in credit.

But how far down do you think you can take your allowance to loan losses to total loans or the targeted number?

Hi Paul, this is Clarke Starnes.

Certainly, we think as we are reaching normalized level of credit costs on the charge-off side, and the NPAs are normalizing, we would expect the allowance releases to start subsiding.

So, while it's not clear exactly what a 4 might be, certainly have to look at our models and make sure we feel good about the incurred loss in the portfolio.

I wouldn't expect continued sustained releases as we move forward, and look more toward flattening out as we reach the normalized levels on the credit cost.

Okay.

Thank you very much, gentlemen.

Erika Penala, Bank of America Merrill Lynch.

My first question is on the margin.

Daryl, you mentioned that a steeper yield curve will be beneficial to BB&T, eventually.

And I noticed that your Agency MBS book, the yields were up 5 basis points quarter-over-quarter.

And at 197, it seems to be below some of the reinvestment rates that we've heard from other banks.

I guess as we think through your margin guidance of 5 basis points to 10 basis points, could you give us a sense of how you are thinking about your reinvestment strategy and your bond book within that guidance?

Erika, if you look at the securities that we've been purchasing for the last couple of years, if you take that same mix of securities, we are up about 60 basis points.

I'd say the average purchases used to be around 160.

That same mix of securities is around 220 now, as we do our new investments.

So, we definitely are benefiting from the higher yield curve.

The other thing to note, you noticed that, that increase in yields on the agencies, a lot of that is driven by -- as rates go up, prepayments slow down, prepayments slowdown, the amortization of your premiums also slow, which kind of boosts the yields of those portfolios.

So, if you have bonds at premiums, the slower prepayments you have actually an uptick in some of the yields.

Okay.

Got it.

My follow-up question is on the expense line.

I appreciate the color on total expenses, but if we think about -- I think I heard you mention $62 million in non-run rate expenses in this quarter which gets me to about $1.4 billion in core expenses.

How quickly can that $62 million run off over the next few quarters, and what should expect for the core run rate?

Erika, this is Kelly.

I think the non-run rate expenses will be over the next two, three quarters.

Some of that is new systems that we are initiating.

For example, we are putting up a new GL system.

We are in the very early stages of putting up a new commercial loan front-end system.

So, as you know, you incur a lot of upfront expenses with regard to that.

And so, I expect that will -- that will begin to subside over the next few quarters.

We will continue to do the reconceptualization focuses, mitigating other increases in expenses that are more permanent in nature like we're also in some permanent increases in expenses and technology -- technological and regulatory area.

So, we are going to continue to push toward focusing on the efficiency ratio.

Which I think is the best way to kind of think about it.

Obviously, there's upward pressure on it now.

We still think over the long-term, we can and up eating in the low 50s, and in the next year or two, you know, probably hovering in the mid-50s is probably going to be where it's at.

So, it's a challenge for us all long-term right now.

But the encouraging thing to me is the reconceptualization approaches are really working.

Got it.

Thank you.

Matt O'Connor, Deutsche Bank.

Just looking out beyond the third quarter on the net interest margin.

Any thoughts on where it goes from there?

Maybe I missed it, but the purchase accounting accretion schedule, any meaningful changes to that, as we think out next year and beyond?

Matt, so, I think as you forecast out from the covered assets, if you recall, our commercial covered asset portfolio, for the most part, will be pretty much off the books by third quarter of '14.

So, it won't all be gone by then, because you still have the mortgage portfolio that last for several years after that.

But, I think we are pretty much tracking to what we projected.

I'd say your interest income is falling around $10 million give or take, every quarter.

As that kind of progresses over the next several quarters.

Your fee income line, which is the offset is also falling about the same amount.

This quarter, we did have a pickup in reversal on the provisions.

That's really just a one timer when that happens.

We really don't forecast that.

But overall, margins -- the core margin and the GAAP margin should be close to in sync as we get towards the end of '14.

I guess on the asset level, down 5 to 10 basis points going from to Q2 to third quarter, and then just the NIM beyond that just trending down or when does it stabilize?

Core margin should stabilize.

This [equal] yield curve, if you really look at it, a little over half of the loans and assets on the books are fixed-rate.

So, as we are repricing not just securities, but as we're repricing auto loans, home equity loans, some of our fixed commercial real estate loans, though they are repricing off the higher part of the curve now.

That takes time as that new volume comes in under the balance sheet.

But over the next couple of quarters, core margin should start to stabilize.

I'd say in the 330s is kind of where I would put core margin.

And then, you are truly just a covered portfolio running off.

Okay.

That's helpful.

Thank you.

Ken Usdin, Jefferies.

Kelly, just on the expense side again, just trying to look further out as well.

This year you had talked about having GAAP expenses down a few percent.

That looks a little bit harder given the step up we saw this quarter, even though a lot of the costs are of course related to these initiatives.

But, I was just wondering if you could take us a step a level higher and say, are you still committed to having total expenses down this year?

And then any thoughts you might have about how that progression leads to next year?

Just on total expense base would be helpful.

I think as the rest of the year goes through, we will end up down.

You've got these mitigating factors, but you have other factors that are coming down.

Remember, our credit expenses are continuing to come down and we're starting to get some of the run rate savings of what we just already just put into effect.

Because that happens fairly immediately.

So, I think that -- that projection still holds for the total of this year.

As we head into next year, I really think a lot of it depends on what happens to the economy and to volumes.

Obviously, we have a certain level of fixed overhead expenses and to the extent that we can get some faster loan growth and revenue growth, that will help push down relative expenses, as we lever up the fixed expenses.

I'm fairly optimistic about expense control as we head into next year.

It's a little early to make any kind of projections, but I can tell you that our intensity, in terms of focus will be the same next year as it is this year.

This reconceptualization focuses will continue throughout the year.

So, while, again, there are certain expenses in the technological and regulatory area that are very difficult to control, there are many areas of the bank that still have lever opportunity, in terms of expense focus and we are absolutely focusing on all of those.

Okay.

Got it.

And m second question, Daryl could you just update us on the purchased accounting delta that you expect for the next couple of years?

You've been giving us the update as far as the '13 to '14 and then the '14 to '15.

If you have those handy on the revenue side and then the FDIC expectations?

For the rest of the year, I would say that on the margin side, expect about a $10 million drop, $10 million per quarter drop of interest income.

As you get into '14, that would probably continue to maybe a $15 million to $20 million drop on a per quarter basis.

On the fee income, on the FDIC offset, similar amounts for '14, about $10 million per quarter.

That basically continues down about $10 million per quarter in '14.

So, by the end of '14, the net benefit of the purchase will be only a couple $0.01 and about $20 million benefit from where it is today.

Got it.

Thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Guys, just on the preferred dividend, I understand that the full quarterly amount is going to be $37 million going forward, but is there going to have to be any kind of true-up next quarter on top of that for this low pace of preferred dividend this quarter?

Kevin, really what we did, is we were really synching up a preferred dividend payment to equal what we have in the common.

We would synch up the common basically so that it would fit within the fee core process.

So we declare our dividends in the first month of the quarter and pay them in the third month of the quarter.

All we really did is we moved that preferred dividend.

We had a short sub-payment for the second quarter, which is all we really had to declare in the second quarter.

You don't accrue a preferred.

You only accrue it after you declare it.

So, what we declare this next week will be for the next full quarter, but rather than the preferred shareholders getting paid a month or two later in the quarter, now they are going to get paid earlier in the quarter.

So it was really just a timing difference.

Understood, thank you, quick question for Kelly.

I know on capital distribution, you guys made the point of taking a conservative approach over the balance of the year.

And I know there's been a lot of talk in the media about the regulators attitude toward large bank M&A.

Kelly, can you just give us what your latest outlook on that?

Do you feel as a lot of people suggest, that large bank M&A is basically shut down in terms of the attitude from the regulators?

Or do you think that is a viable option for you all in 2014, if you get opportunities?

Thanks.

Yes.

I think it's a viable option in 2014.

I think today large bank and medium-sized bank acquisitions basically shut down for two reasons.

One is, I suspect the regulators, if they were really honest, would probably say they would just assume not to see any acquisitions right now just because they want everybody kind of focused on settling down with all the new rules and regulations.

They haven't said that but I suspect that's kind of how they feel.

But I think more importantly from the acquirer's point of view, I don't think many acquirer's are interested in doing acquisitions today because there's so many uncertainties that need to be settled.

We just found out last week kind of what the preliminary indications are on capital.

We're still trying to settle out the focus on liquidity, how some of these new rules and regulations are going to work out, what are the risks in terms of embedded issues and the -- in the acquired company that might trip you up in terms of regulatory concerns in this very tight focused market.

So, I think the acquirer's are very conservative today.

Including ourselves.

In terms of being willing to do a deal.

So, I think whether you look at regulatory side or acquirer's side, it's probably the same answer.

As you head into '14, I think a lot of that kind of smoothes out, I think enough will have settled down so that regulators will feel more comfortable.

They're never going to be really, really easy in this environment, but I think they will be more comfortable.

And I certainly expect that we would be in a position to consider acquisitions as we head into '14.

Obviously, it depends on the economics of it.

That's always regarded as my point of view.

I would be surprised if you don't begin to see acquisitions as we head through '14.

Okay.

Thank you.

Todd Hagerman, Sterne, Agee.

Just a couple questions, just in terms of mortgage.

Kelly, again, the mortgage did pretty well this quarter, relatively speaking.

But, I'm just wondering, can you talk a little bit more about the production mix?

It was very good in the quarter, in terms of the balance on the purchase side versus the refi side.

Kind of the drivers there and how you think about that going forward?

The refi volume will continue to moderate, obviously.

It does ebb and flow, every time the 10-year pops up and down we get some volume immediate impact, but it will be steadily down.

But you are right.

The purchase percentage is very, very satisfying now.

The overall real estate market, frankly, is good and improving.

Purchase activity is robust in most of our markets.

We continue to move market share, in terms of our markets, frankly, because our mortgage business is extremely high quality.

We just haven't had any service quality issues.

For example, JD Powers just announced for the third year in a row we got number one in overall service quality, while others are having challenges in that area.

We've been fortunate not to have those challenges.

And then frankly, our correspondent business has been really good.

We continue to supplement our organic business with our correspondent business, which is very high quality.

So, we think that the kind of relationship you see this quarter will kind of continue as we go forward over the next couple of quarters.

That's terrific.

Just in terms of a follow-up, how -- with the change in terms of the channel originations as you mentioned, the correspondent, what are you seeing now?

Well, I should step back.

Gain on sale, you are seeing some pressure obviously.

Definitely a factor of the origination channels.

I'm just curious, as you mentioned, referred to the retail build out, kind of where you are seeing, directionally that momentum, as you kind of build out both the correspondent retail -- kind of how you see the deltas in the proportional gains?

Todd, from a spread perspective, the retail channel spread dropped a little bit this past quarter as rates rose.

We expect the retail channel to continue to drop into this next quarter.

The actual correspondent spreads actually hung in there really well this past quarter.

If you look at our total production, we had about 35% retail, 65% correspondent was the mix.

I would expect the spread for our business to decline a little bit from the 131 that we had this quarter, but not significantly.

Just mainly what we have a little bit of pressure on the retail channel side, but as Kelly said, these businesses are performing really well.

Strong markets, a lot of volume.

We focused on really, purchase activity several years ago.

44% of our volume was purchase activity.

That is a really huge percentage, and we will probably be north of 50% this quarter.

That's very helpful Daryl.

I really appreciate the color.

Betsy Graczyk, Morgan Stanley.

Couple of questions.

One on getting back to the M&A question.

It's wrapped up in the reality that BB&T is the largest bank, now that is able to not have to account for AOCI in your regulatory capital and you've got a little bit of flexibility there with that.

I'm just wondering how you think about balancing the potential opportunity for acquisition versus the fact that you are in a competitively strong position, given your size and what that has allowed you to do from a regulatory perspective.

When you sketch out, you've got about nine years of organic growth before you hit that $250 billion.

Kelly, I just want to understand how you are thinking about using that to your advantage competitively versus the potential for an acquisition?

To get you to that threshold.

That's a good one, Betsy.

So, we are obviously already thinking about that.

It would put practically more pressure on the metrics side of the acquisition.

Because, we are in the sweet spot, and it is a competitive advantage, and we are not going to throw that away by doing a relatively unprofitable acquisition that would trip us into less competitive advantage.

So, that's not to say we wouldn't look at one, but yes, we could do -- we could do a couple of 10's and 15's and still have runway.

But if we looked at anything that was really substantial, we would factor in that consideration, and we just have to look at the math of it.

The good news is, either way, it's a good deal for us.

Sure.

Okay.

That's helpful.

Then, Daryl, just a quickie.

In the PowerPoint, you indicated that the $22 million of restructuring charges should provide a similar annual cost savings beginning in 4Q '13.

I'm just wanting to understand, are you suggesting that therefore, as we get to the end of '14 that the full $22 million should be -- come out of expenses?

Yes, Betsy.

I think what we are saying there, and Kelly started off with, the community bank account and show what that impact is.

We will probably be down in personnel costs, not the incentive piece, but the personnel costs at least $20 million in the next quarter or two.

Most of the reductions in force occur mid-in the third quarter.

So we will get a partial benefit third quarter and a full benefit in the fourth quarter.

That's where the personnel cost side will come down there.

Okay.

So you are going to get that annualized impact sooner than a 12 month period.

It's going to be within the first quarter or two?

Yes, Betsy.

We will get the annualized impact of that as later than the end of this year, probably, maybe by the end of the third quarter.

Got it.

Okay.

Thank you.

Matt Burnell, Wells Fargo Securities.

Just wanted to get a little more detail on your deposit reduction.

Daryl, you all spoke about meaningful decline -- continuing meaningful decline in CDs.

But I also noticed declines in interest-bearing checking.

Is that basically the same concept?

Or are you actually starting to see some depositors on their own pull out deposits for their own investments?

Is there any of that going on in your footprint?

I think what I would say, we've had run off in our CD portfolio for the last couple of years.

At this low rate environment, it's just hard to get consumers to buy CDs when rates are just so low.

I think as rates start to climb, you are going to see that behavior start to switch back but it's too early for that to happen.

So, we definitely will continue to see a lower cost in CDs for the next several quarters.

That's where the bulk of that benefit is.

As far as the NOW and savings deposit categories, there really isn't a whole lot left there to reprice down for the most part.

We do see seasonal flows in those activities, as this past quarter, some of that was lumpy in some public deposits.

But the core still is really strong.

If you look at our DDA, DDA still continues to grow.

Our mix now of deposits is up to 26% DDA.

That's a huge movement for us, if you look over the last three years.

We've had tremendous growth in DDA.

That's really a reflection of how well we are executing on both our retail and commercial strategies, and wealth strategies that we have out there.

Okay and Clarke, I'm not going to let you get away totally scott free this morning.

Just a quick question on foreclosed property expense.

That's obviously come down dramatically over the past year.

Can you remind us where we should be thinking about a normalized level of foreclosed property expense might be?

Fair question, Matt.

I think it's pretty close to where it is.

You should know that included in that expense, while we've always focused heavily on the real estate component of that, and as our problem real estate credits have come down, that's where the big swing has been.

But we also include our auto repossession expenses in there.

And so I think you are pretty much at a normalized level where we are today.

Okay.

Thanks for taking my questions.

Brian Foran, Autonomous.

Kelly, I guess on -- you did an interview this morning and made some comments about where you thought lending standards were.

Kind of halfway back to where they were last cycle.

I guess I just wanted to maybe dig on that and it's still kind of the leveraged lending market which you been talking about for a while that's most concerning you?

Or, are there more market -- more pieces of the lending market where you think underwriting standards have gotten over their skis a little bit?

Well obviously lending is the most pronounced.

And then large hold positions is kind of second to that.

But in terms of just basic underwriting, it's kind of across the board disappointingly.

You are seeing substantial term extensions relative to credit structuring.

Your beginning to get back to the quote-unquote covenant light structuring deals, not as bad again, as I said about halfway back, and I hope we won't go all the way back.

But, we are seeing a lot of deals that are being underwritten out there in a fashion that we would absolutely not do it.

So, I think what's happening is that people are just really, really eager for revenue, which is understandable.

And as I indicated in the interview, members tend to be short.

So, I worry that the industry is beginning to underwrite some credits that are going to be problematic as we go forward.

Just as lending is important, and we believe it's more important to have good profitable long-term loan growth and not short term loan growth that might into very unprofitable loan growth down the road.

I'm not trying to be critical of anybody else, I'm just trying to honestly give an observation and what's going on in the industry.

That's helpful.

Then if I cut follow-up on capital.

I know you don't get to resubmit the resubmission so to say, but if you had known you were at 9% Basel III ratio, you've made some comments about the buyback expectations being low in the back half of the year because you didn't know that yet, but you also made some comments about M&A potentially accelerating in 2014.

So, I guess if we put them together, how -- ultimately what I'm asking is how should we think about the scope for buybacks if you had known you were at a 9% Basel III issue and ultimately into 2014 and beyond?

Well, that's a good question and obviously you only know what you know.

So, when we did do our submission, we didn't.

What we did know was the probability of capital problems were going up.

You know all the rhetoric has been out as to the expectation at that time was it could go up really substantially.

We didn't know what the final conditions of Basel would be.

At the earlier versions of that, we would've been substantially penalized 100 basis points almost based on what the original projections were.

So yes, now we know all that and now we are in a much stronger position than we were.

That's why I've been saying consistently for the last several months you should expect us to be very conservative with regard to capital deployment for us this year because of what we did know at the time we made the submission.

As we look forward to '14, we are in a strong capital position.

We will be accreting substantial capital, excuse me.

M&A, frankly, the kind of deals we would do would probably not be requiring capital.

The problem could be capital accretive because some institutions we would be acquiring.

As we go forward, I fully expect that we will have good flexibility, in terms of capital deployment.

I still like to think in terms of the priorities I've talked about, organic, dividends and acquisitions and buybacks.

But to the degree that we continue to get downward pressure from the regulators with regard to percentage of payouts, which continues to exist, and to the extent that acquisition opportunities that require capital are not out there, that certainly increases our appetite with regard to buyback.

Thank you.

John Pancari, Evercore Partners.

On the expense side, on comp expense, how much of the comp expense increase this quarter was production related?

I would say probably at least three quarters of the increase was probably on production related incentives, mainly in the mortgage insurance, capital markets area is where it came from.

Because our FTEs went down remember.

They were down 88.

Okay.

All right.

Good.

And then separately on loan demand, can you just give us a little more color there and where you are seeing good demand right now?

What types of areas and a little bit more color around your pipeline and trend in commitments?

This is Ricky Brown.

We are seeing good activity in real estate right now, particularly multifamily and some office activity.

Our focused areas have been good, there.

We put a lot of emphasis on that.

Our specialized force -- salesforce -- that is helping us in that area.

That's good.

Clearly, the auto space with the wholesale has been a really nice improving area for us.

Partnering with our folks in the field in the banking network, Community Bank is working with our folks in the sales finance area.

Got some great professionals helping us through that business, very, very well.

Saw some nice improvement in ADL late quarter which is good.

We also saw some nice, small commercial increase late quarter which is a very nice trend for us.

We feel good about that.

Then, good production in DRL in the quarter and small business that's done in the branches.

So, it was really kind of a across the board improved level of production from Q2 versus Q1.

We hope that, that will ultimately show continued good loan growth as people use those loans that we are making to them.

So, pretty broad based actually, across the board.

C&I as you saw was pretty good, it was pretty good in the Community Bank as well, up positively, close to 2% or so.

Lastly on the C&I side there, the line utilization for overall C&I, do you have that?

John, this is Clarke.

It's actually still flat for us, it's around 37%.

Again, a big future opportunity for us as our commitments have clearly grown but our utilization is still pretty flat.

Okay.

Thanks for taking my questions.

Michael Rose, Raymond James.

This question is for Kelly.

Just outside of M&A, you guys have done -- or made a lot of investments in other areas to franchise.

Where do you see the greatest opportunities for additional expansion or products?

Michael, right now, I think there is probably three that I would think about.

I really think continuing to deploy capital and its organic commercial growth strategy in Texas and frankly if that goes as well as I think it's going to go in all the markets like that, in other parts of the country, it's a very efficient way to expand our franchise.

I think expanding to Community Bank and that target of approach, the corporate banking space is going to continue to get substantial amount of our investment.

The marginal returns for us are fantastic and our execution ability is really, really good.

Then, in terms of marginal investments, we are going to continue to throw it at wealth management.

That machine is working really well for us now.

Chris Henson and his team have done a great good job of developing that.

We have virtually all of the infrastructure cost in place and the marginal returns on investment are very high.

So, those will be the two to three in terms of organic.

Other than any unique bank acquisition that might come along, we will continue to look at insurance acquisitions, over time.

To be honest, right now we finally have our plate full on insurance acquisitions and not to say we wouldn't do one.

We wouldn't want anybody listening to think we wouldn't.

But we've got some really good opportunity to continue to execute on the comp advantages.

So, expect to see most of our attention focused on those organic areas.

Okay.

Just as a follow-up, as you expanded those business lines, geographically as well, could we at some point down the road, whether it's five or ten years, see a kind of follow with more of a traditional branch network to maybe fund some of that growth over time?

Thanks.

So, a natural long-term organic path would be, in Texas for example, you expand with this commercial strategy.

You build around that.

Your [wealth] strategy because it is very closely tied to your commercial strategy.

You build your insurance around that, then commercial P&C because that's tied to that.

When you get to pure bread-and-butter retail, that's a long, long ground game.

So, in five to ten years I'd expect to say probably not doing much in terms of retail.

We will continue to focus on the organic commercial strategy.

Over 30 years, yes.

But I would rather expect most likely scenario is we will build out that retail network in places like Texas with appropriate retail acquisitions.

There are many good partners down there.

Folks we know very well that we are very close to.

We think that time will come for a good partnership somewhere along the way.

Thanks.

Gerard Cassidy, RBC.

Can you share with us what your view is now that you have your tier one common ratio at 9%, your required to be at 7%.

What are you going to be comfortable running at when we get to a more normalized state in banking, let's say sometime next year?

Gerard, that's a question that we are all kind of struggling with right now.

Fortunately, now we don't have to have a cushion for OCI variation.

So, that takes one off the table.

You know, you do want to always have some dry powder, in case of really good cash acquisitions and then, you also want to have some comfort around that 7% because recall if you below that 7% that's not a good day.

That triggers the dividend issues and the dividend compensation issues.

So, you want to have a nice cushion around that.

Then you've got the question of a domestic sensitivity charge that may come.

We don't know.

I still bet there's going to be a small one, but it might just be 25 basis.

So, we are not really ready to hang a number out there, Gerard.

But, it's something south of 9%, based on what you know today.

But, it's not 7.5%, so, it's a number that we will have to sell our way through.

Does the sensitivity charge come?

That changes it.

Then, we will probably keep some buffer in there, frankly, because even though we are not advanced approach bank today, we are not that far away from it.

So, we are not -- we're not going to be too aggressive in terms of trying to push that number closest to the 7%.

Plus to be honest with you, Gerard as you know, we are just really conservative on capital.

I'm not trying to make you all happy with relatively more capital, much harder work and much better execution than trying to jack-up returns based on [skinnying] down capital.

Okay.

Thank you.

Then, as a follow-up, you guys showed some very strong growth in certain loan areas, such as that average dealer floorplan loan in the Community Bank.

Is there anything you can share with us, other than the numbers down the road of course, but share with us to ensure that proper controls and procedures are in place so that very rapid loan growth doesn't lead to some credit issues in a couple of years?

Yes Gerard thank you.

As I've said, we've got a great partnership with our dealer services area in the bank.

We've hired some great professionals that really know the business, to help us to ensure that we are underwriting these credits appropriately.

We are also working to beef up our standards in terms of servicing, to ensure that we get out and see these dealers every month, inspect our inventories.

A lot of work there.

We are going to be very aggressive at monitoring and executing if things get out of trust.

We feel very good that we are handling this business well.

Remember, that with the great indirect business that we have, we had so many dealers that knew was very well, that wanted to do this business with us, and we were doing their capital, it's just a natural extension.

It gave us a great growth area.

I feel very good with our partnership with Clarke is going to allow us to handle this credit and do it in a way that the risk is managed very well.

Clarke you want to comment to that?

I might just add Gerard, remind you all that we've been in this business for many years.

We just chose to stay out of it for a while, because the captives had beaten the returns down so low.

So, it's not a new business for us.

But it is a new targeted initiative because the returns are better.

But risk management oversights in place, we have specialists on the sourcing side.

We have specialists on the enterprise risk side behind that.

So, we feel very comfortable with a good measured plan.

Thank you.

Christopher Marinac, FIG Partners.

Kelly and Daryl, I'm curious if you look out beyond the near-term and perhaps a FED change in policy late next year or even 2015, do you have a sense of how much of that you can retain, and also because it's partially a question of how much deposits and funding costs lag into that scenario?

How much retained in terms of capital?

Really in terms of margin, just kind of margin and the funding cost question.

So, you know, we have about 45% of our balance sheet that's variable-rate so, the slide that we show in our deck shows that we are slightly asset sensitive.

When the short end starts to move, we will definitely benefit even more stronger than what we are, just with the steeper yield curve and it will be more immediate impact on us.

The wild card is how quickly do you have to refresh your deposits, and how sticky are the deposits.

It really comes down to being competitive with the competition and other places in the marketplace.

We believe that we've had really good, strong core growth, good new clients come into the bank and believe that the deposits will stay with us.

That said, some of the dollars will leave the Company and go to other alternatives.

So, we are conscious of that.

We've put strategies in place to do other liquidity and funding, so that when that does start to happen, it won't have a material impact on our margins and all that.

So, we feel pretty good that if you look at our sensitivity, up 200 basis points, we are almost at 4% increase in net interest income over a 12 month time period.

So, we think we are positioned the right way, we really haven't changed that position for the last couple of years.

Eventually, rates will rise both on the short end as well as the long end continues to steepen.

Okay.

Very good.

Thanks, guys.

Appreciate it.

That's all the time we have for questions today.

At this time, I'll turn the call back over to the speakers for any additional or closing remarks.

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Thank you and have a good day.

That does conclude today's conference.

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