Truist Financial Corporation
Q3 2013 Earnings Call Transcript

Published: 17 Oct 2013

[Operator:]

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

[Alan W. Greer:]

Thank you, Carrie, and good morning, everyone. And thanks to all of our listeners for joining us today. We have with us Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter, as well as provide some thoughts about the fourth quarter. We also have with us other members of our executive management team who are with us to participate in the Q&A session

[Kelly S. King:]

Thank you, Alan. Good morning, everybody, and thanks for your continued interest in BB&T. I would describe our quarter overall as a solid performance in a very challenging environment. Looking at a few of the highlights starting on Page 3 on the slide deck, net income was $268 million or $0.37. You'll recall that we had a substantial tax adjustment in there following our adverse opinion on STARS. So if you exclude the $235 million on tax adjustment, net income is $503 million, which was up a pretty strong 7.2% versus the third quarter of '12. Excluding the tax adjustment, diluted EPS of $0.70, which is an increase of 6.1% versus third quarter of '12, so we felt good about that. Total revenue was $2.4 billion, it was down from second quarter because of seasonality on insurance and mortgage. We had stable net interest margins, though, which we felt good about, so that was good. We did have some growth in some key areas, kind of normal blocking and tackling areas like service charges, bank card fees, trust and investment advisory income. And we do expect revenues to grow in the next quarter because Insurance will be stronger from a seasonal point of view. And even though mortgage will probably still be declining, we think the insurance rebound will cover that. So the fee income ratio was 41.6%, which is still a strong industry number. In terms of loans, they increased 3% versus second quarter. We do have seasonally strong growth in our other lending subsidiaries; they grew 23.3%. Sales finance was up a strong 22%. Adjusted C&I was 2.1%. Now that's adjusting for the mortgage warehouse, which is down, I think, for us and everybody. Direct retail lending is beginning to grow pretty reasonably now, 4.4%. Revolving credit was up a strong 7%. I will point out that we did sell $500 million in loans through the sale of our consumer lending subsidiary. We'll give you a little bit more detail on that in a little bit. If you want to look at -- follow along, continue on that Slide 3. Average deposits decreased $2 billion. That's managed because of some non-client deposits and our focus on margin. Very importantly, DDA or noninterest-bearing deposits increased 7.8%. Deposit mix did improve, while total cost declined. I think it's important to recognize that in -- just in the last year, our DDA as a percentage of total deposits increased from 23.7% to 27%, which is one of our most important long-term diversification strategies. Big story for the quarter was our credit quality. Charge-offs declined to 0.49% of average loans and leases, lowest since 2007, and below our long-term normalized range of 55% to 75%. Several factors there

[Daryl N. Bible:]

Thank you, Kelly, and good morning, everyone. I'm going to talk about credit quality then interest margin, fee income, noninterest expense, capital and our segment reporting. Continuing on Slide 7, we continue to see significant improvement in our credit metrics. Third quarter net charge-offs, excluding covered, were $142 million, down 34% compared to the second quarter. A significant drop in inflows resulted in lower net charge-offs as a percentage of average loans and leases. Net charge-offs dropped from 75 basis points last quarter to 49 basis points this quarter. This represents our lowest charge-off rate in nearly 6 years. We also dipped below our normalized charge-off guidance of 55 to 75 basis points. The primary drivers for continued improvement in net charge-offs were older vintage loans that were largely through the process; improved recoveries, which increased 25% from second quarter; and continuing improvement in real estate values. The fourth quarter, we believe net charge-offs will fall into the lower end of the range of 55 to 75 basis points, with a modest seasonal impact on our consumer loan portfolio. Nonperforming assets, excluding covered, declined 8.9% during the third quarter, and represent our lowest nonperforming assets as a percentage of total assets in nearly 6 years. We continue to expect nonperforming assets to improve at a modest pace in the fourth quarter assuming no significant economic deterioration. Turning to Slide 8. As you can see, the 23% drop in commercial NPA inflows led to the loan loss improvement and the lower provision. Even though delinquencies can fluctuate due to seasonality, both 30 to 89 and 90 days past due improved during the quarter. Also, our allowance in nonperforming loans increased from 1.55x to 1.66x, reflecting continued strong coverage. We had a reserve release of $52 million during the quarter compared to last quarter's $36 million. Turning to Slide 9. As you recall, we provided net interest margin guidance for the third quarter to be down 5 to 10 basis points. However, margin was better than we expected. As reported, net interest margin came in at 3.68% and core margin came in at 3.39%. The primary reason for the difference between guidance and what we reported is

[Kelly S. King:]

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

[Alan W. Greer:]

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

[Operator:]

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

[Erika Najarian:]

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

[Kelly S. King:]

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

[Erika Najarian:]

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

[Daryl N. Bible:]

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

[Operator:]

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

[Matthew D. O'Connor:]

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

[Kelly S. King:]

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

[Ricky K. Brown:]

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

[Matthew D. O'Connor:]

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

[Daryl N. Bible:]

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

[Operator:]

We'll move now to Paul Miller with FBR.

[Paul J. Miller:]

With respect to your loan portfolio, especially your C&I loans and your Residential Mortgage loans, which is the bulk of your portfolio. Can you talk a little bit about what type of pricing is coming in? On the Residential Mortgage side, what type of pricing on the 5 1s and the 30-year are you putting on, or are you just putting 5 1s on?

[Daryl N. Bible:]

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

[Paul J. Miller:]

And your C&I?

[Daryl N. Bible:]

C&I, if you look at it, it's down about 20 basis points. We're about 2 10 from the previous quarter. We're seeing pressure in all segments, whether it's large, medium and small.

[Paul J. Miller:]

So you still -- okay. So you're seeing pressure on the pricing?

[Daryl N. Bible:]

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

[Operator:]

Our next question comes from John Pancari with Evercore.

[John G. Pancari:]

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

[Daryl N. Bible:]

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

[John G. Pancari:]

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

[Daryl N. Bible:]

I believe so. Maybe down a little bit as credit quality continues to improve. But it -- we've had a good run on that, so far.

[Lisa Sanders:]

Okay. And then on the credit front, looking at your charge-off outlook, the low end of your norm range, so implying that 50 basis point -- 55-base-point level, given that you had indicated before you're starting to see some good recoveries coming in. First off, I want to just verify that you're still seeing that on some of your -- particularly on some of you real estate-related credits. And then if you so, I mean, could that -- even that 55-bp range, could that even be a little bit conservative?

[Clarke R. Starnes:]

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

[Operator:]

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

[Ryan M. Nash:]

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

[Kelly S. King:]

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

[Ryan M. Nash:]

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

[Clarke R. Starnes:]

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

[Operator:]

We'll move now to Craig Siegenthaler with Crédit Suisse.

[Craig Siegenthaler:]

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

[Kelly S. King:]

Well, I mean, you've got a lot of factors going on in terms of -- in the CRE market. And you still have it, still today. Because of low levels of interest rates, you have a lot of portfolio moving out into conduit markets, so that's still pretty strong at these all-time low rates. We've got the quality underwriting, as I mentioned before. But yes, as you expect the economy to recover, you'll certainly expect to see more CRE activity. For example, though you've seen nothing in office and you've seen nothing at retail, which is a big part of the market, as the economy gets better, consumer demand goes up, you'll see those markets recover and that'll be good for us and everybody else. Multifamily, I would guess, would begin to peak a little bit. But as that is peaking, that will be because the price points have changed. So a single-family is more attractive, so single-family ADC will pick up. And so when you look at all of that together, I think you're at the very low point with regard to CRE for us because of our risk appetite. For the industry, I think, overall CRE opportunity will improve, and I expect it will improve for us as we continue to aggressively pursue the market, not in terms of underwriting, but in terms of efforts. So I think, overall, it will improve for us and everybody else.

[Craig Siegenthaler:]

Thanks, Kelly. Very helpful. And just one follow-up. You referenced $39 million decline in personal expenses, mostly coming from lower production-related comp. As we move forward over the next 12 months, and you think about your own expectations for gain on sale margins and productions and what that does to revenue, how do you think variable expenses and fixed expenses could benefit, and how are you thinking about repositioning your business for that?

[Daryl N. Bible:]

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

[Craig Siegenthaler:]

Yes, just specifically mortgage.

[Daryl N. Bible:]

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

[Operator:]

Our next question comes from Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

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

[Kelly S. King:]

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

[Betsy Graseck:]

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

[Daryl N. Bible:]

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

[Betsy Graseck:]

And was that an RWA decision to sell that asset?

[Kelly S. King:]

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

[Operator:]

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

[Gaston F. Ceron:]

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

[Kelly S. King:]

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

[Gaston F. Ceron:]

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

[Clarke R. Starnes:]

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

[Operator:]

We'll move now to Keith Murray with ISI.

[Keith Murray:]

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

[Christopher L. Henson:]

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

[Keith Murray:]

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

[Clarke R. Starnes:]

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

[Operator:]

Our next question comes from Kevin Fitzsimmons with Sandler O'Neill.

[Kevin Fitzsimmons:]

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

[Daryl N. Bible:]

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

[Kelly S. King:]

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

[Operator:]

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

[Matthew H. Burnell:]

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

[Daryl N. Bible:]

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

[Matthew H. Burnell:]

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

[Clarke R. Starnes:]

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

[Operator:]

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

[Gerard S. Cassidy:]

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

[Daryl N. Bible:]

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

[Gerard S. Cassidy:]

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

[Clarke R. Starnes:]

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

[Operator:]

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

[Alan W. Greer:]

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

[Operator:]

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