Truist Financial Corp (TFC) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the BB&T Corporation third-quarter 2013 earnings conference call.

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, Alan Greer.

Please go ahead.

Thank you, Carrie, and good morning everyone, and thanks to all of our listeners for joining us today.

We have with us Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review results for the third quarter as well as provide some thoughts about the fourth quarter.

We also have with us other members of our executive management team, who are is to participate in the Q&A session.

Chris Henson, our Chief Operating Officer, Ricky Brown, the President of Community Banking, and Clarke Starnes, our Chief Risk Officer.

We will be reviewing a slide presentation during our remarks today, a copy of the presentation as well as our earnings release and supplemental financial information are available on our website.

Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts.

However, there may be statements made during the course of this call that express management's intentions, beliefs, or expectations.

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

I refer you to the forward-looking statements warnings in our presentation, and 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.

And now, I'll turn it over to Kelly.

Thank you Alan, good morning everybody, and thanks for your continued interest in BB&T.

I would describe our quarter overall as solid performance, in a very challenging environment.

Looking through the highlights, starting on page 3 of the slide deck, net income was $268 million or $0.37, but recall that we had a substantial tax adjustment in there following our adverse opinion on STARS, so if you exclude the $235 million on tax adjustments, net income was $503 million, which was up a pretty strong 7.2% versus the third quarter of 2012.

Excluding the tax adjustments, diluted EPS was $0.70, which was an increase of 6.1% versus third quarter of 2012, so we feel good about that.

Total revenue was $2.4 billion, it was down from second quarter because seasonality on insurance and mortgage.

We had stable net interest margins, though, which we felt good about, so that was good.

We did have some growth in some key areas, normal blocking and tackling, areas like service charges, banker fees, trust and investment advisory income, and we do expect revenues to grow in the next quarter, because insurance will be stronger from a seasonal point of view, and even though mortgage will probably still be declining, we think the insurance rebound will cover that.

So the fee income ratio was 41.6%, which is still a strong industry number.

In terms of loans, they increased 3% versus the second quarter.

We did have seasonally strong growth in our other lending subsidiaries, they grew 23.3%.

Sales in finance was up a strong 22%, adjusted C&I was 2.1%, and that's adjusting for the mortgage warehouse, which is down, I think, for us and everybody.

Direct retail lending is beginning to grow pretty reasonably now, 4.4%, revolving credit was up a strong 7%.

I will point out that we did sell $500 million in loans through the sale of a consumer lending subsidiary.

We'll give you a little bit more detail on that in a little bit.

If you want to look at -- follow along, continue on that slide 3, average deposits decreased $2 billion.

That is managed because of some non-client deposits and our focus on margin.

Very importantly, DDA as a percentage of total deposits increased 7.8%.

Deposit mix improved, our total cost defined.

I think it's important to recognize that just in the last year, our DDA as a percentage of total deposits increased from 23.7% to 27%, which is one of our most important long-term diversification strategies.

Big story for the quarter was credit quality.

Charge offs declined to 0.49% of average loans and leases, the lowest since 2007, and below our long-term normalized range of 55% to 75%.

Several factors there, substantial recoveries, which is encouraging at this point in the cycle, and we're really winding down our advantaged asset workout strategy, which is a big part of that.

NPAs were down 8.9%, NPLs were down 10.4%, ALO coverage ratio was 1.66, up from 1.55.

And expenses, they decreased on an annualized basis, 6.6% so we have good management on basic expenses.

That was primarily because of decreased reduction in personnel expense.

We had less FTEs and lower restructuring costs.

I would point out, though, that we mentioned during the quarter that we are having some elevated costs related to systems and processing changes in the Company, we're using a substantial number of consultants on a temporary basis to do some of these projects.

These expenses are temporary.

They are not to be considered in our long-term run rate, as they will go away.

We think about these expenses as we are doing these systems and some of these projects.

The project-type expenses will go away pretty quickly.

The systems costs are staged in, some of these projects take two or three years, and so the expenses early on will go up, because you are running duplicate systems.

And then what happens is, as the new system is ready, the duplicate system drops off, that cost fades away, and then you get additional cost benefits as you get the efficiencies of the characteristics of the new system.

So it's a really good long-term story, but it does give you a little bit of noise in the short-term, but I promise you we are really diligently focused on expenses today, as we have been in the past.

If you look at slide 4, we did have substantial unusual item and then a smaller one, I just want to comment to you about.

Recall, we did have a $235 million adverse tax adjustment, which was primarily related to our adverse STARS opinion.

We are now fully reserved, and there's no remaining exposure to that transaction.

I would just mention two developments since our opinion.

Another bank had a positive ruling after they filed a motion to reconsider a portion of their previously-decided case so that was a positive step relative to our analysis, and a second institution received a partial summary judgment in their favor on a STARS transaction, so different courts are looking at these things different ways, and while there has been some positive developments, we think the appropriate position for us to be in, given our case, is to be very conservative, and therefore we are fully reserved in this area.

I know there are probably a couple of questions, for example what is in the $235 million versus the STARS, it was just another smaller issue that we had received a draft notice on from the IRS for a small issue, that we decided we would fully reserve for that as well, to be conservative.

I know some of you will ask a question what about the previously disclosed worst-case on $328 million versus the $235 million?

Well, that was our worst-case, we all decided to be conservative, and the fact is, the numbers just came in better.

But the main point is, we are now fully reserved, no additional exposure with regard to STARS, which is a good thing.

Another small thing which was just $0.01 on EPS, but we did have some land banked for potential new branch expansions, and we decided to reevaluate and mark those down, in terms of their valuation.

So that was a small item, but I did want to point that out.

If you will turn to slide five, I thought our average loan growth was strong, given the economy, and frankly our conservative risk appetite.

We did have C&I, as I mentioned, adjusted on 2.1%.

I would point out that our total loan growth was 4.4%.

We did have substantial continued run-off in covered loans, so that adjusts down to the 3% that we're reporting, but the 4.4% is more meaningful in terms of ongoing run rate.

We had strong retail at 4.4%, Sales Finance 22%, revolving credit 7%, our other lending subsidiaries really performing well for us, part of our diversification strategy.

For example, Sheffield was up 46%, AFCO CAFO was up 40%, so while seasonal, they give us very strong results in the seasons when they are very strong.

We will get some back down on that as we head into the fourth.

We do expect modest loan growth for the fourth, auto demand expected to be strong, double-digit growth expected there.

Growth in other lending will be lower, as I mentioned.

Commercial loans and direct retail is light, we are going into the third quarter.

We did have the $500 million disposition as a part of the sale of a subsidiary.

Just to give you a little color on that.

This was a subsidiary that we chose to divest of, because frankly, looking forward, the risk-adjusted return in this business was not what we expected in terms of our cost of capital.

And so we expect to redeploy that capital into other businesses, such as regional acceptance, for example which does, looking forward, have a really good expected risk-adjusted return, as it has in the past.

And so if you look at that together it is basically a continued part of our diversification strategy, while I hate to lose $500 million today, it definitely is a much better allocation of capital in terms of running the business going forward.

We think that this is an overall tough loan market, to be honest.

The economy is just not growing that fast, not likely to grow that fast in the near-term, particularly given all that is going on in Washington.

Fortunately though, we have some really good niche businesses, and I think this is a market where you get what you can get from the market, but then you go above the market, based on your niche strategies.

For example, our national corporate banking strategies really got several years of legs under it in terms of growth.

We put a new team in Chicago, and they are already off to a really good start.

Specialized lending, as I mentioned, is just doing fantastic.

Our wealth strategy is going extremely well.

We have huge untapped potential in places like Florida, Alabama, and Texas, and so while we are pretty conservative frankly, in terms of our thinking with regard to the economy, we feel relatively better in terms of our own situation because of the new strategy opportunities that we have.

If you look at slide 6, had another strong DDA performance, continued our mix improvement, continued reducing our costs, so DDA as I said, was up 7.8%.

We think that's very strong in the marketplace.

Our CDs are running down, but that is a managed process, for our non-client CDs, we just will not pay out for those, when we don't need the funding.

We did reduce costs by another basis point.

We still say we'll get that to slightly below 30 basis points in the fourth quarter, and we would expect the DDA to grow on a similar basis, as we go forward.

So that's a quick look at some of the highlights.

Let me now turn it to Daryl for some more color.

Thank you Kelly, and good morning everyone.

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

Continuing on slide 7 we continue to see significant improvement in our credit metrics.

Third-quarter net charge offs, excluding cover, were $142 million, down 34% compared to the second quarter.

A significant drop in inflows resulted in lower net charge offs as a percentage of average loans and leases.

Net charge offs dropped from 75 basis points last quarter to 49 basis points this quarter.

This represents our lowest charge off rate in nearly six years.

We also dipped below our normalized charge off guidance of 55 to 75 basis points.

The primary drivers for continued improvement in net charge offs were older vintage loans that were largely through the process, improved recoveries, which increased 25% from second quarter, and continuing improvement in real estate values.

The fourth quarter, we believe net charge offs will fall into the lower end of the range of 55 to 75 basis points, with a modest seasonal impact on our consumer loan portfolio.

Nonperforming assets, excluding cover, declined 8.9% during the third quarter, and represent our lowest nonperforming assets as a percentage of total assets in nearly six years.

We continue to expect nonperforming assets to improve at a modest pace in the fourth quarter, assuming no significant economic deterioration.

Turning to slide 8, as you can see, the 23% drop in commercial NPA inflows led to the loan loss improvement and the lower provision.

Even though delinquencies can fluctuate due to seasonality, both 30 to 89, and 90 days past due improved during the quarter.

Also, our allowance to nonperforming loans increased from 1.55 times to 1.66 times, reflecting continued strong coverage.

We had a reserve release of $52 million during the quarter, compared to last quarter's $36 million.

Turning to slide 9, as you recall, we provided net interest margin guidance for the third quarter to be down 5 to 10 basis points; however, margin was better than we expected.

As reported, net interest margin came in at 3.68% and core margin came in at 3.39%.

The primary reason for the difference between guidance and what we reported is better-than-expected credit spreads in several large loan categories, and positive duration adjustment in the investment portfolio.

In addition, the margin impact from the covered assets was better than anticipated.

Looking at margin outlook for the fourth quarter, we expect a decline of approximately 5 to 10 basis points.

The decline in margin guidance is driven by lower rates on earning assets, runoff of covered assets, tighter spreads in retail loans, and the sale of the subsidiary of loans of approximately $500 million, which will lower core margin run rate by 6 basis points.

Offsets to the decline in margin include lower funding costs and favorable funding and asset mix changes.

As you can see in the rate sensitivities graph, we became slightly less asset-sensitive, due to an increase in fixed assets and variable rate liabilities.

Turning to slide 10, our fee income ratio for the third quarter decreased to 41.6%.

This was driven primarily by seasonality of our insurance line of business, and a decrease in mortgage production, due to the interest rate environment.

Insurance income was $71 million lower than the second quarter, which reflects normal seasonality in the insurance business.

It also reflects the impact of a $13 million experience-based refund of reinsurance premium recognized in the prior quarter.

Mortgage banking income declined $51 million, primarily due to a decrease in margins and lower production, due to the rise in interest rates.

Mortgage origination slipped to 59% purchase versus 44% purchase last quarter.

Investment banking and brokerage income decreased $10 million, primarily due to seasonality compared to the second quarter.

The decline in other income primarily reflects lower income related to assets for certain post-employment benefits, which is offset in personnel expense.

Finally, FDIC lost share income was $11 million better than second quarter, primarily due to the offset in provision for covered loans.

Looking at slide 11, noninterest expense decreased $25 million to 7% annualized, compared to the second quarter.

Personnel expense decreased primarily due to lower production-related incentives and commissions, a decrease in post-employment benefit expense, which was offset in other income, decrease in pension expense, and the seasonal decrease in Social Security expense.

Additionally, FTEs were down 192 compared to last quarter.

Merger-related and restructuring charges were $23 million lower than the prior quarter.

This was the result of the optimization activities related to the community bank that were initiated in the second quarter.

Professional services and other expenses increased $13 million and $3 million respectively.

These increases were driven by increased legal expenses, costs associated with system and process enhancements, and fair value adjustments to land previously held for future branch expansion.

We would expect these expenses to decline in coming quarters, driving total noninterest expense lower.

Also, while the efficiency ratio increased this quarter, that was largely due to lower revenue, given the seasonal decline in insurance and the slowdown in mortgage banking income.

We expect to produce positive operating leverage, and see an improvement in our efficiency ratio in the fourth quarter.

We continue to target an efficiency ratio in the mid-50% range.

Finally our effective tax rate, excluding the adjustment, was 28.3% for the quarter.

We expect a similar rate in the fourth quarter.

Turning to slide 12, capital levels remain strong and are up from the second quarter, with Tier 1 common at 9.4%, and Tier 1 of 11.3%.

Under final rules, our estimated Basel III Tier 1 common is 9%.

Here are a few highlights from our segment disclosures.

Starting on slide 13, Community Bank net income totaled $268 million, showing strong growth on a link and common quarter basis.

Dealer floorplan loans increased $273 million or 77% common, and 24% linked quarter.

In addition, direct retail loans increased 6% and 4% respectively for common and linked quarters.

Turning to slide 14, residential mortgage net income was $77 million in the third quarter, flat compared to the prior quarter.

Noninterest income declined $56 million, driven by lower gains on our residential mortgage production and sales.

Higher interest rates during the quarter reduced refinancing volume.

Pricing also tightened due to increased competition.

Total loans serviced exceeded $110 billion at the end of the quarter.

Finally, the provision for loan and leases decreased $57 million, driven by improved credit trends in the residential mortgage portfolio.

Looking at dealer financial services on slide 15, we continue to generate strong production with year-to-date loan originations up 31% compared to prior year, and 52% on a like quarter basis.

Regional acceptance, our non-prime subsidiary, generated solid loan growth despite tense market competition in this spectrum.

This is one of our national businesses.

We entered two new markets in the third quarter, California and Minnesota, and going forward, we plan to expand in other new markets.

On slide 16, our specialized lending segment experienced another solid quarter with net income of $83 million.

Average year-to-date loans grew 8% compared to 2012, with strong performance in our Sheffield, premium finance, commercial finance, and equipment finance businesses.

Loan loss provision decreased $26 million, primarily driven by improved credit trends in the commercial finance portfolio, and recoveries recognized in the quarter.

Moving to slide 17, BB&T Insurance Services generated $22 million in net income, down lined quarter, primarily due to seasonality but up on a common quarter basis.

This is primarily driven by organic growth in wholesale and retail property and casualty, due to improved market conditions and continued firming of pricing.

Additionally, we are placing strong strategic emphasis in preparation for healthcare reform.

There is a good opportunity for our employee benefits business.

Turning to slide 18, our financial services segment generated $77 million in net income, primarily driven by corporate banking and wealth management, with loan growth of 22% and 23% respectively.

Total assets invested increased to $106 billion, or 12% growth compared to third quarter 2012.

Finally, financial services segment finished the quarter with a couple of major accomplishments.

First, BB&T Wealth again ranked among Barron's annual listing of the top 40 wealth management firms.

Also, we announced the hiring of an experienced corporate banking team, based in Chicago.

That team will serve as a base for our national effort to serve the needs of companies in food, agribusiness and beverage industries.

Both of these accomplishments emphasize our continued effort to grow both our corporate banking and wealth businesses, and with that let me turn it back over to Kelly for closing remarks and Q&A.

Thanks, Daryl.

Appreciate that.

So overall, it was a strong quarter, as I said, given the challenges.

Excellent asset quality improvement, diversification strategies continue to work, and more importantly, looking forward, we expect positive operating leverage and improved efficiency in the fourth, and so we are now ready, I think Alan, in terms of questions.

Thank you, Kelly.

We will now move to our Q&A session.

Please follow our normal practice of limiting your questions to one primary question and one follow-up, so that we may maximize the number of participants in the session.

If you then have further questions, please reenter the queue.

At this time, I will ask Carrie to come back on the line, and explain how you may participate in the Q&A process.

(Operator Instructions)

Erika Najarian from Bank of America Merrill Lynch.

My primary question has to do with your efficiency ratio.

You were at 60 this quarter, and you mentioned that your goal is still to get to the mid-50s.

When I look back a year ago, you were at the mid 50s, and you actually took down your expense levels, but most of the increase in efficiency, as you pointed out, is in the revenue side.

As we think about your goal, could you give us a sense of when BB&T can reach the mid-50s?

And whether most of that is going to come through the expense line?

Erika, that's a really good question.

I think you characterized it right, the talent today is on the revenue side.

We are actually managing our expenses very well.

We do have this temporary flip up in expenses that I talked about, but I am really not concerned about that going forward.

On the revenue side, you get these seasonal changes, recall, it popped up in the third, and it will pop back down in the fourth, in insurance and so forth, primarily insurance.

Over the next couple of years or so, we would expect to move back down towards that mid-50s.

It will be largely out of revenue growth.

We have to diligently control expenses during that process, but frankly, as I said earlier, a lot of these expenses we're investing today will yield better a better and more optimum expense control in a lot of systems area going forward, so that will be a positive.

We have a lot of investments, like in wealth management and corporate banking, structurally, that we're building an infrastructure that will yield benefits as we go forward.

And so, we think as these strategies continue to develop, revenue will gain momentum and our efficiency ratio will come down.

My follow-up to that is, I guess the message is once the professional or the consulting expenses are out of the run rate on the expense side, if you could quantify that, that would be great.

I am sorry if I missed it.

Then the goal for the expense side is just to keep it flat after you take out those consulting fees.

Erika, this is Daryl.

If you look at the third quarter, we had approximately $40 million of extra one-time costs in our numbers this quarter.

I would say about half of that will probably come out of our expense base in the next quarter or two.

The other half is going to take some time, over a couple of years, as we get through the system conversions, and we probably get to leverage that and actually get some benefit after we do full conversions and undo what we had in place before that.

So I think we will get a little relief.

But as Kelly said, I think efficiency is really driven on the revenue side.

Next year, we have really the last year of really the meaningful and purchase accounting benefit from Colonial, so that will come out of the numbers for the next three to four quarters.

And after that it is really just growing the core Company and the organic piece of the business.

Got it, thank you.

Matt O'Connor with Deutsche Bank.

Just some follow-up questions on the expense side.

I mean, I can appreciate the extra regulatory and systems cost.

But I also recall a couple quarters ago, you talked about rationalizing the branch network little bit, streamlining some things, and basically trying to lower costs even versus that Q1 expense level.

So it's a question, even if you take out the $40 million versus the run rate you're at right now, it still feels like the cost might be higher than you thought a couple quarters ago, and if revenue stays sluggish for the industry and for you, is there more opportunity or more thought to cut a little bit deeper?

Matt, I think what we talked about before in terms of our optimization strategy has worked exactly as we expected across the entire enterprise.

You simply see it being disguised today, because of these temporary cost, and the reduction in revenue.

But if you didn't have the temporary cost, if you didn't have the reduction in revenues this quarter, you would clearly see the community bank.

I will get Ricky to give you a sense of the success he has had on that project.

Thanks, Kelly.

Matt, we have achieved everything that we set out to do.

If you will recall in the second quarter, we announced the regional restructuring from 37 to 23 regions, we got clear savings there, revamped our retail branch sales force management level, and that worked well.

We reduced some additional support in the home office for the community bank.

We see no issues there.

We've got the 43 branches closed that we talked about, that is working.

We are dealing with QM and preparing for that, and out of that, we think we've got some savings, in addition that we will begin to see some run rate in the third and ongoing into the fourth.

So we have been very successful in doing what we set out to do, in terms of reducing costs anywhere from $25 million to $35 million on a run rate basis.

We still think there is a ways to go in terms of branch optimization.

We continue to look at underperformers.

We feel like that there is a little room to go there.

We're going to continue to be diligent, but if you go back over the last four or five years, the community bank has really done a really fantastic job, we think, of reducing run rate costs, of operating our business, pretty significant numbers, and yet it has not impacted our ability to serve our customers.

In fact, our client service quality numbers at midyear is the highest in the history of BB&T.

We feel really good about being efficient, and also delivering on our service quality, and meeting the needs of our clients.

We feel real good about that.

Okay.

And separately, Daryl maybe you could give us the Colonial accretion or even just the bottom line net revenue number, as you think out the next few quarters here.

If you look at both GAAP margin and core margin, core margin, as I said in my comments, is going to come down approximately 6 basis points due to the sale of one of our lending subsidiaries.

The GAAP margin will probably be down closer to 10 basis points on a GAAP basis.

From a core basis thereafter, we are going to be relatively flat.

We have been basically relatively flat on core margin for the last year.

I think we have stayed relatively flat for the rest of next year.

But you still have the run-out of the purchase accounting.

So if we're at 368 right now, we'll probably end 2014 around 340 and at that point, there is very little spread difference between our GAAP margin and our core margin.

No more than 10 basis points there.

And then going forward, then there's not a whole lot of purchase accounting left in the numbers.

All right, that is very helpful, thank you.

You are welcome.

Paul Miller with FBR.

With respect to your loan portfolio, especially your C&I loans and your residential mortgage loans, which is the bulk of your portfolio, can you talk about what type of pricing is coming in?

On the residential mortgage side, what type of pricing on the 5/1s and the 30-year are you putting on?

Are you just putting 5/1s on?

On the mortgages, ARMs, we did see a big increase in mortgage loan activity this past quarter.

You can see that the portfolio on mortgages was relatively flat.

It didn't run off.

We're mainly putting on, for the most part shorter ARMs, more in the 3 and 5/1 ARMs.

And if you look at the lifetime spreads of these, it is probably 1% to 1.5% versus our cost of funds.

And your C&I?

C&I, if you look at it, is down about 20 basis points, and we are 2.10% from the previous quarter.

We're seeing pressure in all segments, whether it is large, medium, and small.

So -- okay.

You're seeing pressure on the pricing?

Yes, the credit spreads are down about 20 basis points.

Thank you very much.

John Pancari with Evercore.

On the expense side, on the regulatory cost component, that $40 million that we saw this quarter, can you remind us where that could go to, and how much is that, of the decline could you see there?

What would you view it as a normalized run rate?

We had a one-time catch-up.

There is a Dodd-Frank tax that we basically booked this quarter, basically seven quarters worth of a catch-up.

It was about a $6 million one-time increase.

It should be back into the mid-$30 million next quarter.

Okay, and then that's a good run rate going forward?

I believe so, maybe down a little bit as credit quality continues to improve, but we have had a good run on that so far.

Okay.

And then on the credit front, looking at your charge off outlook, the low end of your normal range so implying that 50 basis point, 55 basis point level.

You've given that you had indicated before, you are starting to see some good recoveries coming in.

First off, I want to just verify that you are still seeing that on some of your -- particularly on some of your real estate related credit.

And if so, even at 55 BP range, could that be a little bit conservative?

This is Clarke Starnes.

We think it could be.

As we said in the deck, there is some modest opportunity to outperform that number.

We did see really strong recoveries in the third quarter.

In fact, in the commercial ADC area, we were in the net recovery position for that whole sub portfolio, so we are beginning to see some of that.

We do have a big mix of consumer finance businesses, though, with higher normalized losses, so we're not going to see continued reduction there.

Overall, we think we can certainly operate within the low end of the normalized range, with some ability to outperform over the next several quarters, if we continue to see those strong recovery rates.

Okay, thank you.

Ryan Nash with Goldman Sachs.

First question for Kelly, can you tell me a little bit about what's happening in commercial real estate?

Obviously, we have seen an increase in industry growth over the past quarter or so, and I think you are still seeing declines.

Can you talk about maybe what some of the drivers are?

Is a more geographical in your markets, you're not seeing a pickup?

Is it competition from CMBS making it harder?

Can you flesh out what is driving your disconnect from the industry?

I think the overall industry is obviously improved in CRE.

Multi-family is strong across the board, hotels are back to normal, retail office is still really soft.

But what is really happening is there is intense competition.

Everybody's going after loans wherever they can find them.

We have an appetite to increase our CRE, but we do not have an appetite strong enough to take on too much risk at extraordinarily low prices, and that's what's going on in the market place today.

We have talked about it, people -- nobody has ever seen it quite as intense as it is today.

It is just incredible.

And so it's a time to be patient.

We think it will turn, to head into the next 12 to 15 months, but for right now, the differentiation between us and the marketplace is simply risk appetite.

We are not going to jump out of the frying pan into the fire, and we are concerned about some of the strategies that are being in place in the marketplace.

We are going to stay the course.

Got it.

And then a follow-up to one of the earlier questions just asked.

While the charge offs could end up coming in on the low-end of your expectations, can you give us a sense of the trajectory of the provision from here?

Should we expect provisions to match charge offs, or do you think the reserve could continue to come down from here?

Ryan, this is Clarke.

Certainly, we feel very good about the reserve levels we have now, and ultimately, the level of reserve is going to be contingent upon what that credit trajectory is.

So, I would say from where I sit today and our outlook, we could see some additional improvements or reduction the reserve levels if these trends continued.

However, I would just say as we look out beyond, I think, reserve releases and the pace would have to moderate.

Just given what we see.

Thanks.

Craig Siegenthaler with Credit Suisse.

Just a follow-up on your last question on commercial real estate.

Why do you think it is so competitive today?

Do you blame the yield curve which makes it easier for life insurers to underrate low yields with longer terms?

And also if we are in the middle of an economic recovery, why do you think it will improve over the next 12 months?

Normally, I think competition keeps heating up through the recovery.

You've got a lot of factors going on in terms of the CRE market.

You still have -- and see it today, because of low levels of interest rates, you have a lot of portfolios moving out into the different markets, but that is still pretty strong at these all-time low rates.

We've got the quality underwriting, as I mentioned before.

But yes, as you would expect the economy to recover, you will certainly expect to see more CRE activity.

For example, today you see nothing in office, and you see nothing in retail, which is a big part of the market.

As the economy gets better, consumer demand goes up, you will see those markets recovering, that will be good for us and everybody else.

Multi-family, I would guess, was getting to peak a little bit, but as it was peaking, that would be because the price points have changed, so that single-family is more attractive, so single-family ADC will pick up.

So when you look at all that together, I think you are at the very low point with regard to CRE for us, because of our risk appetite.

For the industry, I think overall CRE opportunity will improve, and I expect it will improve for us as we continue to aggressively pursue the market, not in terms of underwriting, but in terms of effort.

I think overall it will improve for us and everybody else.

Thanks Kelly, very helpful, and one follow-up.

You referenced $39 million decline in personal expenses, mostly coming from lower production related comp.

As we move forward over the next 12 months, and you think about your own expectations for gain on sale margin and productions and what that does to revenue, how do you think variable expenses and fixed expenses could benefit, and how are you thinking about repositioning your business for that?

Craig, you're talking about our mortgage business, correct?

Specifically mortgage.

Spread did come down this quarter.

There is some change with variable comp, you said 20% to 25% relationship, which is the revenue in the mortgage business.

I think as we get through QM, that Ricky talked about, then we will right size our business in 2014 to whatever volume we see at that point.

We are in the midst of basically moving a lot of production that was in our direct retail channel into the mortgage Company, and that is going on as we speak right now.

And once we finish that conversion and get through that, then we will get into 2014 and we'll see what the activity is in the mortgage area, and then we will right size accordingly.

Great, thanks, Daryl.

Very helpful.

Betsy Graseck with Morgan Stanley.

I have a question that relates to your NIM and your loan outlook.

You indicated that we should look for moderate loan growth, and I just wanted to know if I should read into that current rate of low growth, or if we're signaling a little bit of a slowdown in loan growth rate?

Especially given the conversation that we have had so far on the call.

And then I also wanted to understand how much more competitive you are looking to be on lending and lending rates.

One of the themes in the industry this quarter is more competitive pricing.

So should we look for that 5 to 10 NIM compression that would potentially be a little bit more so, to try to get some more loan growth in the door, or are we looking to decelerate the loan growth here?

Betsy, I think that's what I worry the most about.

To be honest, it's a little indeterminate right now.

Let me explain what I mean.

The economy is not yet producing much loan activity today.

When people talk about their loan growth, I think if you really drill down, most everybody will tell you 90%-plus of what they're doing is moving around existing businesses.

There's just not much pure economic activity going on right there.

And the very largest businesses that have international activity have some growth there, but everywhere else, it is pretty tepid.

And so does the change in Washington last night spark more confidence into people start doing things?

Who knows, but that would be a positive.

Do rates take off and that causes the conduit market to slow down, and the exit outside the back door slows down?

That would be a positive.

But if things stay as they are today, I would expect it would be very hard to get the same kind of growth rate lined up in the fourth that we had in the third.

Now, that being said, that doesn't mean I don't that we are going to do it.

I don't think you could get 3% or 4%, frankly in the market.

I just don't think you can get it.

The market is not growing 2%, so this notion that banks are going to grow faster than GDP is kind of an interesting conclusion to reach.

And so, I think its going to be tough for the marketplace.

But don't forget Betsy, we have these really positive unusual niches.

We are going to put more emphasis not on cutting price, not on taking more risk.

We are going to put a lot more emphasis, because of how disparate it is in the marketplace on our specialized lending strategies, on our wealth strategy, on our community banking strategy in Texas, on our national corporate banking strategy.

When we say modest, we are using that word to hedge a bit, to be honest.

But if I had to bet today, I'd bet it would it be in the 2% to 3% range.

It will not be 5% or 6%, and I think it will be because of what we get in these areas I defined.

Okay, and Daryl, you mentioned the 5 to 10 basis point decline.

When you talked earlier how you get to the 10.

But you are also looking for some amelioration of that from lower costs and funding mix, et cetera.

Right?

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

What is that an RWA decision to sell that asset?

Yes, Betsy.

It wasn't specifically RWA, it was the inherent risk today, frankly from a regulatory perspective, in terms of that class of lending.

We specialized in the consumer lending business, and we are just concerned about where that is going, forward.

And the cost increases that go with servicing that kind of a portfolio in this new regulatory environment are enormous.

And so we get through forecasting all of that, the risk adjusted return, and risk being broadly defined, Betsy, it was just not an acceptable investment opportunity for us.

Okay, thanks.

Gaston Ceron with Morningstar Equity Research.

Just wanted to follow-up little bit on the questions about loan growth.

On the economy, it sounds like you are being a little conservative in outlook, which seems prudent.

But can you talk about the process of longer-term loan growth, and at what point you expect things to pick up?

My view about the long-term loan growth is dependent on one thing, and I know I say this quarter after quarter, but it just happens to be the truth.

And that is, that when we get a return to certainty, and more confidence, primarily based on changes in Washington, obviously we got a positive change last night, hopefully a positive change over the next 60 days.

Let's just assume for the moment we get some positive changes out of Washington, then I think, to be honest, you could see a number of years of the above trend line growth in the economy, and above trend line growth in loan opportunities.

So those people when you talk to them, and I get to travel around a lot and I talked to 500 or 600 business CEOs every year, they really have not invested on the margin for five years.

And they desperately need and want to invest, and so the minute they feel a sense of confidence returning, then I think you'll see a lot of plant expansions, equipment renewals, rolling stock replacements.

That is going to really benefit particularly small and middle market, where we are really solidly entrenched.

If you made the proviso in terms of the change in DC, my optimism over the next three to five years, because I'm really bullish.

Thank you very much, and very quickly a quick follow-up.

On the net charge off situation, are you at all rethinking the normalized range, given how things have been going recently, or do you think the normalized range still holds for the long-term?

Great question.

Right now we still think it holds again, I think, it's primarily based on our view of what our mix is.

We still have, as Kelly said, a big opportunity in our specialized lending area, and those have higher normalized losses, lower stress loss experience.

and so just given the mix that we are trying to originate to, we think the 55 to 75 is appropriate.

However, as you come through a recovery in a cycle, it is not abnormal to go under that range for a while.

We see some opportunity, but we still feel comfortable with our long-term range.

Great, thank you for the color.

Keith Murray with ISI.

If I could just spend a minute on the insurance business.

Can you talk about other synergies there, whether relates to wealth management or the corporate lending side of the business, that maybe people are missing, when you think about the long-term opportunities there?

It's a great question.

This is Chris Henson.

As Daryl said, we were down second to third, but if you really -- you have to revaluate evaluate the insurance business on a common quarter.

We were up 6.3%.

We think the market is moving in a 4% to 5%, so I think we're taking a little bit of market share along the way, as well is the pickup in firming.

In terms of synergies, I think we have a number of fronts.

Specifically to your question with the wealth business, we are actually adding, to Kelly's point about revenue initiatives, we are adding about 55 or 60 sales reps embedded within our wealth teams, but are current professionals throughout -- we are in the middle of a rollout.

We have actually rolled out 8 of our 23 regions at this point, and it's about a 2.5, 3-year process, which we are about nine months into.

We've got we think really good upper-end opportunity there, over the next call it 2.5 years.

And that we believe, driven by wealth, which is why we are embedding the sales people there, and of course we have referrals coming from our community bank from all different commercial segments directly to wealth, which ultimately leads directly to we believe additional life insurance sales.

And it's not just estate planning.

We have a lot of buy-sell opportunities and business transition planning, so it's a different level of insurance company, much more sophisticated, larger and case need there.

We feel really positive about that.

The second synergy we have that Crump brings us is through our institutional channel.

And that really manifests itself a couple different ways.

One is, you have large financial institutions that have client relationships in the wealth business.

If they want to offer more life insurance, and they want to get in the business, so they outsource it to a business like Crump.

We have also underwriters in the life businesses, that have been either core competency is underwriting and they have grown a sales arm over the years with tough economic times repairing that back in they offshore -- outsource their revenue arms as well.

A lot of good upside.

Plus just the farming and price that Daryl commented on earlier.

It typically comes back to us in wholesale first, and you can see that in the numbers.

You see 10.8% improvement currently in wholesale, but we are getting about 2% to 3% in retail.

So we still have the benefit of retail to come.

Then, finally I would just say, when you get two or three years out you really have the profit commissions that are based on historic look back period of two to three years, that are all profit that we stand to benefit from a couple years out.

A lot of upside there.

Thank you.

Switching gears to credit, obviously the trends continue to get better as you showed again this quarter and we've seen for many other banks.

How do you balance that with the OCC out there, making banks think about reserve releases, and sounding the alarm that maybe reserves are getting too low?

How do you balance that and how are the regulators dealing with that?

Very good question Keith.

We do think about that a lot.

Certainly our position on reserves is based upon models we run and the judgment applied based around process around the risk levels at the time of the reporting.

We really haven't changed our process at all, it's very disciplined and consistent there.

But just thinking about it, I think the regulators are prudent in their question about how fast some of the reserve releases are in the industry, and I think we do have to listen to them, and we do.

And just be cautious and prudent as we come through this recovery, that we don't overshoot it and release too much.

We think about that a lot in our process and feel very good about where we are.

Okay, thank you.

Kevin Fitzsimmons with Sandler O'Neill.

Two quick lessons.

First, on fee revenues, I know you mentioned we are going to get a seasonal bounce in insurance, mortgage revenues are likely going to continue to decline.

On a net-net basis do we think total fees can actually be stable to up, or are we looking at more of a slight decline there?

And secondly Kelly, if you can just give us an update on your latest thinking, as you get later in the year, approaching CCAR, how you feel about buybacks, how you feel about the M&A environment?

Thanks.

Kevin, I will take the first part of that question.

I think if you look at the seasonality in insurance versus what is happening in the mortgage, we are going to net benefit in the fourth quarter.

We should definitely have higher fee income versus third quarter.

We might also have a couple other one-time gains associated in the first quarter, but even excluding those gains, I think our net fees will be better.

Great, thanks.

Kevin, on the whole CCAR capital M&A question, we think the CCAR process will be relatively normalized this year.

And so we don't expect any substantial events around that.

There is still this downward pressure in terms of banks, in terms of dividend pay-out rates.

That is out there.

It is going to be challenging to raise dividends at a heightened level, because for us, as we already have a very high-level in terms of payout and dividend yield et cetera.

They're really puts us back to raising our priorities with regard to buybacks/M&A.

And M&A, today, there is no M&A activity practically possible.

The seller prices are too high, but most of the buyers are just waiting for more certainty around the regulatory environment.

I personally think that fades as we go through the next year or so, and I think there will be a number of M&A opportunities out there.

And we certainly have a long list of partners that we would like to join up with.

In the meantime, though, as I mentioned at a recent conference, all of that put together certainly raises the probability of BB&T with regard to buybacks, given our relatively strong capital level as we go forward.

Okay, thank you very much.

Matt Burnell with Wells Fargo Securities.

Daryl, a pretty specific question for you, given how low your deposit costs have gotten, and the fairly flattish trajectory of those costs in the future, probably can't get those down too much quarter over quarter.

Are you thinking -- given that long-term debt now comprises about two-thirds of your interest expense in the third quarter, are there any opportunities in that bucket to potentially reduce your funding costs going forward?

Yes, Matt, on the deposit cost side, we will break under 30 basis points next quarter, and probably linger in the high to mid 20s probably.

That is the bottom for deposit cost.

As we have maturities in our debt, and we put on new debt, we definitely will reprice our debt cost down from where we are today so I do think that is an opportunity.

Should be an opportunity throughout 2014 as well.

Okay, and Clarke, maybe a question for you in terms of the specialized lending provision.

That was down year-over-year close to 30%, 29% by my calculations.

You have had some pretty solid loan growth assets that are up in that unit, about 12%.

Can you provide some color as to your thinking about the future provision level or the provision ramp in that business, and how that might affect the overall provision?

It's a great question Matt.

And if you look at it on a common quarter basis, our loss rate, even though there is movement within that group in the mix, overall loss rates are about the same as they were last year.

And one of the things we really like about these businesses is that while they certainly have higher risk elements, it is a more predictable, normalized level of risk, so you are able to price for that.

So we just don't have the volatility generally in those businesses that you might even expect.

So for that reason, the provisioning is fairly steady in those businesses, and I think the biggest factor in the actual dollar level of provision would be the growth rates in those businesses.

We do expect those businesses to grow faster than the core bank, and accordingly, we would expect the provision expense to be higher on a dollar basis, as the growth rate goes up, but on a relative basis, be pretty consistent.

Okay, thank you.

Gerard Cassidy with RBC Capital Markets.

Could you share with us, on your rate sensitivity, if rates were to move up a parallel shift of 100 basis points, what that would do to net interest income or do you do it for a 200 basis point shift?

What type of impact would you have on net interest income?

If you look at our charts that we have in our deck, you would see up 100 basis points, our net interest income over a 12 month period would be up a little less than 2%.

And up 200 basis points, a little less than 3%.

You have to really know what is behind there, because there's a lot of key assumptions in there.

Our two key drivers for rate sensitivity is really how quickly we reprice our deposits, and how sticky are our deposits, because we have had really good growth in our deposits there.

We feel that our assumptions that we have in both categories are very conservative, and this reflects pretty good performance for a given rate change, and could potentially have some upside, if we don't move as quickly as what we have modeled in our rate sensitivity models.

Very good.

And then as a second question, and when you go to your specialty lending area, on I think it is slide 15, the regional acceptance had some very nice growth, as did the whole area.

Two questions in this area.

Your expansion into California and Minnesota with regional acceptance, how are you going to do that?

How are you going to win new business in markets that I'm assuming your name is not as well known, yet?

And second, the rapid growth that you are seeing in this dealer finance area, how can you give us assurances that there aren't going to be credit issues two years down the road?

Gerard this is Clarke.

Those are great questions.

I will take them separately.

The regional acceptance business is a non-prime national based auto finance business, and their business model is around -- they really target large MSAs with large auto sales, and so it is very calculated data-driven analysis on where we go to market.

And then what we do once we have determined it is a good market play, we do hire experienced people that have dealer relationships in those markets.

From the sourcing side, we have very good certainty about the relationships they have.

We are not sending our people into strange territories and then we have very disciplined strict analytics around the risk management and the underwriting.

It is a very predictable model that we have used for years and years.

We have actually been in California before, so this is not a new entry there.

Just new offices.

As far as our dealer finance growth in general, that is really on the prime auto side.

I would just say this.

We have been more aggressive on the pricing side, as far as the growth opportunity there.

We are more conservative on our terms, so our advance rate and our weighted average term and that sort of thing is going to be very conservative, relative to the industry.

So we have chosen to compete a little more on spread and definitely not on risk.

Thank you.

We have several more questions in queue, however, we are out of time.

I would like to turn the call back over to Mr. Alan Greer for any additional or closing remarks.

Thank you operator, and I apologize to those folks we didn't get to.

We will call you shortly.

Thank you for your interest and participating today.

This concludes our call.

Once again, that does conclude today's conference.

Thank you for your participation.