Operator: Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Second Quarter 2013 Earnings Conference Call on July 18, 2013. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Alan Greer with Investor Relations for BB&T Corporation. Thank you. You may begin, sir..
Alan Greer - EVP, Investor Relations: Thank you, and good morning, everyone. Thanks to all of our listeners for joining us today.
We have with us today Kelly King, our Chairman and Chief Executive Officer; Daryl Bible, our Chief Financial Officer, who will review the results for the second quarter as well as provide a look ahead. We also have other members of our executive management team who are with us today to participate in Q&A session. Chris Henson, our Chief operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer.
We will be referencing a slide presentation during our remarks today. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website.
Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intent, beliefs, or expectations.
BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the forward-looking statement warnings in our presentation and our SEC filings. Our presentation also includes certain non-GAAP disclosures. Please refer to Page 2 in the appendix of our presentation for the appropriate reconciliations to GAAP.
Now, I'll turn it over to Kelly.
Kelly S. King - Chairman and CEO: Thank you, Alan, and good morning, everybody, and thanks very much for joining our call. So I'd say, overall, it was a very solid quarter, especially given the kind of sluggish economy we have. Basically, frankly, everything looks good except expenses. There's some noise there which will explain to you, but fundamentally, the high level was driven by some non-run rate issues, and we'll give you some color on that.
We did have record net income of $547 million, which was up $37 million or 7.3% versus second quarter of last year. Diluted EPS was $0.77, up 6.9%. Revenue was $2.5 billion, up 1.3% versus second quarter of '12 and 6.2% annualized versus the first quarter this year. That was driven by record insurance, investment banking and brokerage, and trust investment advisory revenues. Fee income ratio increased to a very strong 44.6% versus 42.4%, so we feel really, really good about the continued positive progress in that.
In the lending area, average loans helped our investment increase 3.8% versus first quarter. That was on the high end of our guidance range so we felt good about that. That was including certain areas. Sales finance was up about 35% versus first quarter. C&I was up a strong for the market 4.7%. Other lending subsidiaries grew 16.8%. Obviously, as we've mentioned, there's some seasonal positive influence with regard to that. Direct Retail Lending is coming back. It was up 4.6%. And some of that was offset by lower mortgage and ADC run-off.
In the deposit area, deposits did decrease 1.4%, which is kind about planned as we continue to manage our margin and reduce certain CD categories. Noninterest-bearing deposits increased a very strong 13.2%, which continues to be a really good robust performance in that area. We continued to improve our deposit mix as we run down the CDs and so our total costs declined to 32 basis points, consistent with the general guidance we'd given you.
Our credit improvement is really a big story for us this quarter. Charge-offs declined to 0.75%, frankly more than we had expected. So we're very pleased about that. The lowest level in five years. The NPAs decreased another $137 million or 9.7%, lowest level in five years. Allowance coverage ratio improved to 1.55 times NPLs from 1.43 times at the first quarter.
In the expense area, we were up materially on our annualized run rate versus the first quarter, but much of this was $27 million of merger and restructuring charges that we took following our Community Bank reorganization. We did have other expense areas related to higher production-related personnel cost. Our volumes were up, so we get some clear correlated increase in costs there; and we had a meaningful amount of expenses related to systems and process-related enhancements. These expenses included $35 million in systems and process-related cost, composed of temporary consulting and similar costs which are not a part of our long-term run rate. We're doing exactly what we have said to you over the last year and half, and that is, we are in the process of reconceptualizing and looking at every part of our business. I know it may seem like that isn't consistent with an increase in expenses, but again, we want you to understand these are non-run rate expenses.
To give you a perspective on that, in our Community Bank, Ricky Brown did a really good job of reorganizing our regions, which we believe make us more efficient, and at the same time, more effective. The numbers on that gives you a good perspective on the kinds of things we're doing. So the onetime charges related to the Community Bank reorganization was $16 million, and the run rate savings on that is $26 million. So a substantial run rate payback versus the onetime charge. So, we will continue to report to you from time to time those types of changes as we put them into effect. As I've said before, I'm not going to announce some big robust plan like it's often done but we will continue to report to you what's happening along the way as it's materializing.
If you turn to Slide 4, much better loan growth than last quarter which we're very pleased about. I said C&I was up 4.7%, retail 4.6%. Sales finance is very strong. Some seasonality there but really, really moving market share there, up 34.9%. Other lending subsidiaries were up 16.8%, so if you minus out the negative impact of covered loans, that gets us to the positive 3.8% growth.
In the other lending subsidiary areas, very strong results in our Sheffield small ticket finance area, which was up 41%. AFCO/CAFO which we call our insurance premium finance business always has a big seasonal kick here, and it was up 22.7%. We were pleased that end of period loans held for investment were approximately $1.5 billion, higher than the second quarter average and it was our highest production quarter ever. Now remember that a lot of the production is mortgage and we sell most of our mortgage, but still it produces revenue so it's really, really good.
So we expect for the third quarter loans to grow in the 2% to 4% range. It's still frankly difficult to project lending volumes in this kind of market, but what we do have some visibility on that, we expect order demand to remain strong, growing double-digit in the third. Other lending subsidiaries will also be double-digit in the third, we believe. Commercial loans and direct retails will be kind of similar to what we saw in the second quarter. On the other hand, mortgage will be likely down, and that'll have some impact with regard to our loan growth for next quarter.
If you turn to Slide 5, it's another great quarter for deposits as we improved our deposit mix and cost. As I've said, DDA was up 13.2%. We allowed CDs to run down. These are non-client relationship-sensitive CDs, they are more price-sensitive CDs, so we're not concerned about that from a long-term franchise point of view. We did grow net new retail accounts in the second quarter, which is always something we look at. Deposit cost, as I indicated, came down to 0.32%, so we're heading towards what we'd said, which is pushing slightly below 0.30% by the end of the year. So we expect to have strong growth in noninterest-bearing deposits in the third quarter, and with probably similar activity with regard to the CD area.
If you look with me on Slide 6, I just want to give you a little update on some of our revenue initiatives. Recall that we said in the beginning of the year, we felt this was going to be a sluggish growth economy. That's proving to be true. We thought that there were going to be upward pressure in certain cost areas, including technological and regulatory, which has proven to be true. And so we decided that we needed to focus very seriously on revenue initiatives, and we've been doing that.
So just a quick update. Continuing to have excellent results in expanding our Corporate Banking national market. I want to be very clear to everybody, we have – we do have a national Corporate Banking strategy now. So while our Community Bank is basically Mid-Atlantic Southeast swinging around the Texas strategy, we're very national in many other categories, certainly, including Corporate Banking.
We did add Corporate Banking teams in some of the larger markets in the country, including Dallas, Chicago, Cincinnati, San Francisco. To give you a perspective, common quarter loan growth in the Corporate Banking area is up 31%, so it's working.
Continue to invest in the wealth management area and making targeted investments in certain key markets. We opened Dallas wealth management office. We've added multiple investors and – advisors in Texas, Florida, North Carolina; added other offices in some of our key states like North Carolina, South Carolina and Virginia. We did open new broker dealer offices in Maryland and Florida. So, nice investment there; wealth income is up 19%, and outstanding loans are up 20% versus a common quarter. So that's working well.
Continue to execute on our Crump life insurance opportunities. Real pleased with the way the institutional sales effort is going. For example, Crump added a major account, MetLife, in the second quarter, which is the largest new client in Crump's history, and obviously, that's a major, major account. We're very appreciative of that partnership. But it just gives you an example of the opportunity there. Quarterly revenue growth in the Crump life area is up 11% versus a common quarter, so that's working.
In the mortgage area, we continue to expand our correspondent lending network. Obviously, organic mortgage volumes are under pressure because of refis. Net purchases are doing really well. So we're looking for other ways to continue to mitigate that. So, year-to-date production was up 14% over last year. We do expect production to fall some this – next couple of quarters because of rates, mostly because of refis. Margins will be under some slight pressure there. So, by focusing on our correspondent delivery strategy, in particular, our mandatory delivery expansion, that will offset meaningfully some of those negative impacts. In the retail mortgage lending area, we continue to expand in some of our newer markets like Texas, Florida, Alabama. So our mortgage area, while under pressure because of rates, is doing relatively very well.
I feel really good about what's going on in Texas. Rick and his team are doing a great job down there. Recall that we said we would execute on 30 new commercial branches this year. We've already opened 25 of those, the other five will open very soon. We are seeing nice increase, for example, checking deposits in Texas are up 45%. Loans are up 45% compared to second quarter of last year. Revenue is up 38%. And on a very current perspective, business credit pipeline is up 132% versus January. So, obviously, we're starting from a small base, but Texas is a really big opportunity for us. We love Texas and it's got a huge amount of opportunity for us.
We also continued to execute on our revenue opportunities into legacy Colonial markets. Just to give you a perspective, common quarter loan growth in Texas, Alabama and Florida, which is primarily where we picked up Colonial presence, is up 27% and revenues are up 9% compared to common quarter.
We continue to expand our wholesale sales finance area. Committed lines are up 61% on a linked-quarter basis to approximately $850 million, Outstandings were up 75%. So you could see that all of these 2013 initiatives are working and will be somewhat uneven as we go forward, but the general trajectory of all those initiatives is very, very positive and offsetting to the downward pressure from a sluggish economy and margin pressure.
So, let me turn now to Daryl to give you some more color with regard to a number of these areas. Daryl?
Daryl N. Bible - SEVP and CFO: Yeah. Thank you, Kelly, and good morning, everyone. I'm going to talk about credit quality, net interest margin, fee income, noninterest expense, capital, and segment reporting.
Continuing on Slide 7, our improvement in credit metrics really accelerated versus last quarter. These are our best credit numbers in five years. Charge-offs declined to 75 basis points during the second quarter. That's down from 98 basis points last quarter. The improvement was driven by a significant drop in commercial inflows. This equates to a 22% drop in loan losses during the quarter. We have reached the top end of our normal charge-off range of 55 to 75 basis points, and we are ahead of our projections from last quarter.
The primary drivers for the improved charge-offs were old vintage loans have mostly run their course, improvement in recoveries and improvement in real estate values. Going forward, we expect modest steady improvement in net charge-offs.
Nonperforming assets declined 10% during the second quarter and are down 33% since last year. Commercial nonperforming loans decreased 14% versus last quarter. We expect modest improvement in both nonperforming loans and nonperforming assets during the third quarter.
Turning to Slide 8. You can see a 28% drop in commercial nonperforming asset inflows that led to the overall credit improvement this quarter. While delinquencies can fluctuate due to seasonality, the 30 to 89 and 90 days past due both improved this quarter. The allowance to nonperforming loans increased from 1.43 times to 1.55 times, reflecting a continued strong coverage. We had $36 million in reserve release this quarter. Excluding the impact of covered charge-offs and the recovery in the covered provision, this reserve release is similar to most recent periods.
Continuing on Slide 9. Net interest margin came in at 3.70%, down 6 basis points from last quarter and somewhat better than our initial guidance. Core margin fell 3 basis points to 3.40%. The decrease was the result in several factors; the runoff of our covered assets, lower yields on earning assets and tighter credit spreads on retail production. These were offset by a decrease in interest-bearing deposit cost and mix changes. I'd like to point out that the steeper yield curve is positive for us. Obviously, this will reduce pressure on our core margin over time.
Looking at the second quarter, we expect to be down 5 basis points to 10 basis points. We anticipate third quarter core margin to decline modestly due to tighter credit spreads resulting from competition. As you can see in the lower graph, we are asset-sensitive and are positioned for rising rates.
Turning to Slide 10; our fee income ratio in the second quarter increased to 44.6% compared to 42.9% in the first quarter, and up from 42.4% from second quarter last year. This is one of our highest fee income ratios in recent history. We had record results in insurance, investment banking and brokerage, and trust and investment advisory services. Insurance produced record revenue, up 67% from first quarter, driven by firming market conditions, and a $13 million premium refund.
Mortgage banking produced record originations in the second quarter. Mortgage banking income declined due to lower gain on sale margins, driven by lower spreads in the retail channel. Investment banking and brokerage income increased due to strong commission income in BB&T Securities and improved Investment Services income. FDIC loss share was up mostly due to a $29 million swing in the provision for covered loans.
Looking at Slide 11; total noninterest expense was up $82 million linked-quarter. This was driven by two things; first, $27 million in restructuring and merger-related costs; second, there was also $35 million in systems and special project costs. As these expenses subside over the next several quarters, so will total noninterest expense.
Personnel expense increased versus first quarter, due mainly to higher production-related incentives and commissions, partially offset by lower Social Security and unemployment costs. As you know, we recently announced the restructuring of our Community Bank where we trimmed back from 37 regions to 23. We will also be closing about 40 branches. With this decrease in personnel costs, we expect to see lower expenses for the next couple of quarters.
FTEs were down slightly compared with last quarter. Loan-related expense increased $5 million compared to first quarter due to higher pre-foreclosure expenses and mortgage repurchase expense.
Foreclosure costs continue to decline, down $6 million. Professional services increased $11 million, driven by systems and special project costs. We expect these costs to decline over the next few quarters.
Merger-related and restructuring charges increased $22 million, primarily due to the Community Bank reorganization I mentioned earlier. The good news is we expect to offset that with a similar amount of annual cost savings going forward.
Other expenses increased $24 million due to higher project-related expenses and operating charge-offs. Despite the increase in this expense this quarter, we continue to focus on positive operating leverage, which will over time drive the efficiency ratio down.
Finally, the effective tax rate for the quarter was 27.7%. We expect a similar rate for the third quarter.
Turning to Slide 12, capital levels were up from last quarter with Tier 1 common at 9.4%. Under the final rules, our estimated Basel III Tier 1 common is about 9%. We successfully issued preferred stock in the second quarter, and we also synced up our preferred stock dividend schedule. This resulted in a sub-dividend payment in the second quarter. We expect the Board to authorize next week a full preferred dividend payment in the next quarter of approximately $37 million. We completed our CCAR resubmission on June 11. As Kelly mentioned earlier this quarter, we have taken a very conservative approach to our resubmission in terms of capital deployment for the rest of 2013. As a reminder, we increased our dividends 15% in the first quarter; and when we resubmitted, the final capital rules have not been announced, and at that time the industry expected higher capital requirements.
Now here are a few highlights from our segment.
Turning to Slide 13, Community Bank net income totaled $209 million, showing strong growth versus common quarter, and down from a very good first quarter. Average dealer floor plan loans grew $133 million or 116% compared with first quarter.
Turning to Slide 14, residential mortgage net income was down $25 million linked-quarter and up modestly compared to second quarter last year. Increased interest rates and changes in channel mix pressured gain-on-sale margins. They came in at 1.31%, down 34 basis points from last quarter. We had record loan production of $9.3 billion, up 7% versus last quarter. Purchase mortgages made up 44% of production versus 32% last quarter.
Looking at Dealer Financial Services on Slide 15, you'll see net income totaled $59 million. That’s up $19 million after strong first quarter, and down slightly compared to a common quarter. We continue to see strong demand and had record loan production in both recreational and retail auto lending.
On Slide 16, you will see specialized lending experienced a solid quarter, with net income of $68 million. Average loans grew 9% versus second quarter last year, with the strongest performance in Sheffield, Commercial Finance and Premium Finance businesses.
Moving on to Slide 17. Insurance services generated $66 million in net income, up significantly compared to linked quarter and flat compared to common quarter. Wholesale revenues increased 11% and retail increased 5%. We continue to focus on business opportunities presented by our acquisition of Crump Insurance through institutional sales and cross-selling with our wealth team.
Turning to Slide 18. Financial services generated $71 million in net income, mostly driven by corporate and wealth. These businesses had loan growth of 31% and 20%, respectively.
And with that, let me turn it back over to Kelly for closing remarks and Q&A.
Kelly S. King - Chairman and CEO: Thank you, Daryl. So as you can see, it was a very solid quarter relative to the economy. We think most all parts of the business did really well. Credit was a really big story. Expenses were noisy but the real trends are very positive, so we're very optimistic about our relative performance going forward and we look forward to entertaining your questions. Alan?
Alan Greer - EVP, Investor Relations: Thank you, Kelly. We will now ask the operator to come back on the line and explain how the Q&A session operates. Please follow our normal practice of asking one primary question and one follow-up, so that we can maximize the participation in the call. Thank you.
Operator: Paul Miller, FBR.
Paul Miller - FBR Capital Markets: On the insurance line item which you guys did very – it was very strong this quarter, is there a seasonality in that? How should we model that going forward?
Christopher L. Henson - COO: Yeah, Paul, this is Chris Henson. There clearly is going from first to second. In fact, it's our largest seasonality hit of the year. Second quarter is typically our strongest and third quarter is typically our weakest. So, I think we estimated last time, we'd be up in the 15% range. We actually beat that. Third quarter, you could see a drop off to 17%, 18% or so.
Paul Miller - FBR Capital Markets: Then, real quick on a follow-up. On your allowance for loan losses, you released some provisions, which – of course, that's understandable given the improvement in credit, but how far down do you think you can take your allowance for loan losses to total loans or do you hit targeted number?
Clarke R. Starnes III - SEVP and Chief Risk Officer: Paul, this is Clarke Starnes. Certainly, we think as we're reaching normalized level of credit cost on the charge-off side and the NPAs are normalizing, we would expect the allowance releases to start subsiding. So, while it's not clear exactly what a floor might be, certainly have to look at our models and make sure we feel good about the incurred loss in the portfolio. I would just – I wouldn't expect continued sustained releases as we move forward and look more toward flattening out as we reach the normalized levels on the credit cost.
Operator: Erika Penala, Bank of America Merrill Lynch.
Erika Penala - Bank of America Merrill Lynch: My first question is on the margin. Daryl, you mentioned that a steeper yield curve will be beneficial to BB&T eventually, and I noticed that your agency MBS book, the yields were up 5 basis points quarter-over-quarter and at (197), it seems to be below some of the reinvestments rates that we've heard from other banks. I guess as we think through your margin guidance of 5 to 10 basis points, could you give us a sense of how you're thinking about your reinvestment strategy in your bond book within that guidance?
Daryl N. Bible - SEVP and CFO: Erika, if you look at the securities that we’ve been purchasing for the last couple of years, if you take that same mix of securities, we’re up about 60 basis points. I’d say the average purchases used to be around 160. At the same mix of securities, is around 220 now as we do our new investment. So, we definitely are benefiting from the higher yield curve. The other thing that you noticed is that increase in yields on the agencies. A lot of that is driven by as rates go up, prepayment slowdown. As prepayments slow down, the amortization of your premium is also slow, which kind of boosts the yields of those portfolios. So if you have bonded premiums with slower prepayments you have actually an uptick in some of the yields.
Erika Penala - Bank of America Merrill Lynch: And my follow-up question is on the expense line. I appreciate the color on total expenses, but if we think about – I think I heard you mention $62 million in non-run rate expenses in this quarter which gets me to about $1.4 billion in core expenses. How quickly can that $62 million run off over the next few quarters and what should we expect for the core run rate?
Kelly S. King - Chairman and CEO: Erika, this is Kelly. I think the non-run rate expenses will be over the next two, three quarters. Some of that is from new systems that we are initiating; for example, we are putting up a new GL system, we're in the very early stages of putting up a new commercial loan front-end system. So, as you know, you incur a lot of upfront expenses with regard to that. So I expect that will begin to subside over the next few quarters. We'll continue to do the reconceptualization focuses that will be mitigating other increases in expenses that are more permanent in nature, like the – we are seeing some permanent increases in expenses in technology – technological and regulatory area. So we're going to continue to push toward focusing on the efficiency ratio, which I think is the best way to kind of think about it. Obviously, there's upward pressure on it now. We still think, over the long term, we can end up in the low 50s in the next year or two; probably hovering into mid-50s is going to probably be where it's at. So, it's a challenge for us all long-term right now, but the encouraging thing to me is these reconceptualization approaches are really working.
Operator: Matt O'Connor, Deutsche Bank.
Matthew O'Connor - Deutsche Bank: Just looking out beyond the third quarter on the net interest margin, any thoughts on where it goes from there? Maybe I missed it, but the purchase accounting accretion schedule, any meaningful changes to that as we think out next year and beyond?
Daryl N. Bible - SEVP and CFO: Yeah, Matt. So I think, as you forecast out from the covered assets, if you recall, our commercial covered asset portfolio, for the most part, will be pretty much off the books by third quarter of '14. So, it won't all be gone by then because you still have the mortgage portfolio that lasts for several years after that. But I think we're pretty much tracking to what we've projected. I'd say your interest income is falling around $10 million, give or take, every quarter has that kind of progresses over the next several quarters. Your fee income line which is the offset is also falling about the same amount. This quarter, we did have a pickup in reversal on the provision. That's really just a one-timer, when that happens, we really don't forecast that. But overall, margins, the core margin and the GAAP margin should be close to in sync as we get towards the end of '14.
Matthew O'Connor - Deutsche Bank: And I guess on the absolute level down 5 to 10 basis points going from 2Q to third quarter and then just the NIM beyond that trending down or when does it stabilize?
Daryl N. Bible - SEVP and CFO: Core margin should stabilize, I mean this steeper year curve, if you really look at it little over half of the loans and assets on the books are fixed rate, so as we are replacing not just securities but we are replacing auto loans, home equity loans, some of its commercial real estate loans, they are re-pricing up the higher part of the curve now. That takes time as that new volume comes in onto the balance sheet, but over the next couple of quarters core margins should start to stabilize. So, I'd say in the 3.30 is kind of where I put core margin. And then it's really just the covered portfolio running off.
Operator: Ken Usdin, Jefferies.
Ken Usdin - Jefferies: Kelly, just on the expense side again, just trying to look further out as well. This year, you had talked about having GAAP expenses down a few percent. That looks a little bit harder given the step up we saw this quarter, even though a lot of the costs are, of course, related to these initiatives. But I just wonder if you could take us a step a level higher and say, are you still committed to having total expenses down this year? And then any thoughts you might have about how that progression leads to next year, just on a total expense base would be helpful.
Kelly S. King - Chairman and CEO: Yes. So, I think as the rest of the year through, we'll end up down because you've got these mitigating factors, but you have other factors that are coming down. Remember, our credit expenses are continuing to come down. We're starting to get some of the run rate savings of what we just already just put into effect because that happens fairly immediately. So I think that projection still holds for the total of this year. As we head into next year, I really think it – a lot of it depends on what happens to the economy, and to volumes. Obviously, we have a certain level of fixed overhead expenses, and to the extent that we can get some faster loan growth and revenue growth, that will help push down relative expenses as we lever up the fixed expenses. So, I'm fairly optimistic about expense control as we head into next year. It's a little early to make any kind of projections, but I can tell you that our intensity in terms of focus will be the same next year as it is this year. This reconceptualization focuses will continue throughout the year. So, while again, there are certain expenses in the technological and the regulatory area that are very difficult to control, there are many areas of the Bank that still have a lever opportunity in terms of expense focus, and we're absolutely focusing on all of those.
Ken Usdin - Jefferies: My second question, Daryl, could you just update us on the purchase accounting deltas that you expect for the next couple of years? You've been giving us that update as far as the '13 to '14, and then the '14 to '15; if you have those handy on the revenue side; and then the FDIC expectations?
Daryl N. Bible - SEVP and CFO: Yeah. So, for the rest of the year, I would say on the margin side, expect about a $10 million drop – $10 million per quarter drop of interest income. As you get into '14, that would probably continue to maybe a $15 million to $20 million drop on a per quarter basis. On the fee income, on the FDIC offset, similar amounts for '14, about $10 million per quarter. Then, that basically continues down about $10 million per quarter in '14. So by the end of '14, the net benefit of the purchase will be only a couple of pennies, maybe about $20 million benefit from where it is today.
Operator: Kevin Fitzsimmons, Sandler O'Neill.
Kevin Fitzsimmons - Sandler O'Neill: Guys, just on the preferred dividend, is there – I understand that the full quarterly amount is going to be $37 million going forward, but is there going to – have to be any kind of true-up next quarter on top of that for this low pace of preferred dividend this quarter?
Daryl N. Bible - SEVP and CFO: No, Kevin, really, what we did is we were really syncing up the preferred dividend payments to equal what we have in the common where we synced up the common basically so that it would fit within a CCAR process. So we declare our dividends in the first month of the quarter, and pay them in the third month of the quarter. All we really did is we moved the preferred dividend. We had a short stub payment for the second quarter, which is all we really had to declare in the second quarter. You don't accrue a preferred, you only accrue it after you declare it. So what we declare this next week will be for the next full quarter, but rather than the preferred shareholders getting paid a month or two later in the quarter, now they're going to get paid earlier in the quarter. So it's really just a timing difference.
Kevin Fitzsimmons - Sandler O'Neill: A quick question for Kelly. I know on capital distribution, you guys made the point of taking a conservative approach over the balance of the year, and I know there's been a lot of talk in media about the regulator's attitude toward large bank M&A. Kelly, can you just give us what your latest outlook on that? Do you feel, as a lot of people suggest, that large bank M&A is basically shutdown in terms of the attitude up from the regulators, or do you think that is a viable option for you all in 2014 if you get opportunities?
Kelly S. King - Chairman and CEO: Yes, I think it's a viable option in 2014. I think today, large bank and the medium-sized bank acquisitions basically shut down for two reasons. One is, I suspect the regulators, if they were really honest, would probably say they just assume not to see any acquisitions right now just because they want everybody kind of focused on settling down with all the new rules and regulations. They haven't said that, but I suspect that's kind of how they feel. But I think more importantly, from the acquiror's point of view, I don't think many acquirors are interested in doing acquisitions today because there's so many uncertainties that need to be settled. We just found out last week kind of what the preliminary indications are on capital. We're still trying to settle out the focus on liquidity. How some of these new rules and regulations are going to work out, what are the risks in terms of embedded issues in the acquired company that might trip you up in terms of regulatory concerns in this very tight focused market. So, I think the acquirors are very conservative today, including ourselves, in terms of being willing to do a deal. And so, I think whether you look at the regulatory side or the acquiror side, it's probably the same answer. As you head into '14, I think a lot of that smooth's out. I think enough would have settled down so that regulators will feel more comfortable. They're never going to be like really, really easy in this environment, but I think they'll be more comfortable. And I certainly expect that we would be in a position to consider acquisitions as we head into '14, obviously, it depends on the economics of it. That's always going to drive it from my point of view, but I wouldn't be surprised if you don't begin to see acquisitions as we head through '14.
Operator: Todd Hagerman, Sterne Agee.
Todd Hagerman - Sterne Agee: Just a couple of questions just in terms of mortgage. Kelly, again, the mortgage did pretty well this quarter, relatively speaking. But I'm just wondering, can you talk a little bit more about the production mix? It was very good in the quarter in terms of the balance on the purchase side versus the refi side and kind of the drivers there and how you think about that going forward?
Kelly S. King - Chairman and CEO: So, the refi volume will continue to moderate, obviously. It does ebb and flow. Every time the tenure pops up and down, we get some volume immediate impact, but it will be steadily down. But you're right, the purchase percentage is very, very satisfying now. The overall roadside market frankly is good and improving. Purchase activity is robust in most of our markets. We continue to move market share in terms of our markets, frankly, because our mortgage business is extremely high. We just haven't had any service quality issues. For example, J.D. Power just announced, for the third year in a row, we got number one in overall service quality, while others are having challenges in that area. We've been fortunate not to have those challenges. Then frankly, our correspondent business is really good, and we continue to supplement our organic business with our correspondent business, which is very high quality. So we think that the kind of relationship you see this quarter will kind of continue as we go forward over the next couple of quarters.
Todd Hagerman - Sterne Agee: Then just in terms of a follow-up, with the change in terms of the channel originations, where – as you mentioned the correspondent, what are you seeing now – well, I should step back a moment, gain on sale, you're seeing some pressure obviously, definitely, a factor of the origination channels. But I'm just curious, as you mentioned referred to the retail build-out; kind of where you're seeing directionally that momentum as you kind of build out both the correspondent retail, kind of how you see the deltas and the proportional gains?
Daryl N. Bible - SEVP and CFO: Yeah, Todd. From a spread perspective, the retail channel spread dropped a little bit this past quarter as rates rose. We expect the retail channel to continue to drop into this next quarter. The actual correspondent spreads actually again did really well this past quarter. If you look at our total production, we had about 35% retail, 65% correspondent was the mix. I'd expect the spreads for our business to decline a little bit from the 1.31% that we had this quarter, but not significantly, just mainly what we have, a little bit pressure on the retail channel side. But as Kelly said, these businesses are performing really well; the strong markets, a lot of volume. We focused on really purchase activity several years ago. 44% of our volume was purchase activity. That is a really huge percentage and we'll probably be north of 50% this quarter.
Operator: Betsy Graseck, Morgan Stanley.
Betsy Graseck - Morgan Stanley: Couple of questions. One, on getting back to the M&A question, and it's wrapped up in the reality that BB&T is the largest bank now that is able to not have to account for AOCI in your regulatory capital, and you've got a little bit of flexibility there with that. So I'm just wondering how you think about balancing the potential opportunity for acquisition versus the fact that you're in a competitively strong position given your size, and what that has allowed to do from a regulatory perspective. I mean, when we sketch out, you've got about nine years of organic growth before you hit that $250 billion. So, Kelly, just want to understand how you're thinking about using that to your advantage competitively versus the potential for an acquisition that would get you to that threshold.
Kelly S. King - Chairman and CEO: Yes, that's a good one, Betsy. So, we're already thinking about that. It would put practically more pressure on the metrics of the acquisition because we are in a sweet spot and that is a competitive advantage, and we're not going to throw that away by doing a relatively unprofitable acquisition that would trip us into a less competitive advantage. So, that's not to say we wouldn't look at one, but yeah, we could do a couple of 10s or 15s and still have runway. But if we looked at anything that was really substantial, we would factor in that consideration and we'd just have to look at the math of it, but the good news is, either way, it's a good deal for us.
Betsy Graseck - Morgan Stanley: Then, Daryl, just a quickie. In the PowerPoint, you indicated that the $22 million of restructuring charges should provide a similar annual cost savings beginning in 4Q '13. I'm just wanting to understand, are you suggesting that, therefore, as we get to the end of '14, that full $22 million should be – come out of expenses?
Daryl N. Bible - SEVP and CFO: Yeah, Betsy. I think what we're saying there, and Kelly started off with the Community Bank, and trying to show what that impact is, we'll probably be down in personnel costs, not the incentive fees but the personnel cost, at least $20 million in the next quarter or two. Most of the reductions enforced occur mid in the third quarter, so we'll get a partial benefit third quarter and a full benefit in the fourth quarter, but that's where the personnel cost line will come down there.
Betsy Graseck - Morgan Stanley: So you're going to get that annualized impact sooner, than a 12-month period, that's going to be within the first quarter or two?
Kelly S. King - Chairman and CEO: Yeah, Betsy. We'll get the annualized impact of that no later than the end of this year, probably, maybe by the end of the third quarter.
Operator: Matt Burnell, Wells Fargo Securities.
Matthew Burnell - Wells Fargo Securities: Just wanted to get a little more detail on your deposit reduction. Daryl, you all spoke about a meaningful continuing meaningful declines in CDs, but I also noticed declines in interest-bearing checking. Is that basically the same concept or are you actually starting to see some depositors, on their own, pull out deposits for their own investments? Is there any of that going on in your footprint?
Daryl N. Bible - SEVP and CFO: I think what I would say; we've had runoff in our CD portfolio for the last couple of years at this low rate environment. It's just hard to get the consumers to buy CDs when rates are just so low. I think as rates start to climb, you're going to see that behavior start to switch back, but it's too early for that to happen. So, we definitely will continue to see a lower cost in CDs for the next several quarters. That's where the bulk of that benefit is. As far as the now and savings deposit categories, there really isn't a whole lot left there to re-price down for the most part. You do see seasonal flows in those activities this past quarter. Some of that was lumpy in some public deposits, but the core still is really strong. If you look at our DDA, DDA still continues to grow. Our mix now of deposits is up to 26% DDA. That's a huge movement for us if you look over the last three years. We've had tremendous growth in DDA, and that's really a reflection of how well we're executing on both our retail and commercial strategy, and wealth strategy that we have out there.
Matthew Burnell - Wells Fargo Securities: Clarke, I'm not going to let you get away totally scot-free this morning. Just a quick question on foreclosed property expense. That's obviously come down dramatically over the past year. Can you remind us where we should be thinking about a normalized level of foreclosed property expense might be?
Clarke R. Starnes III - SEVP and Chief Risk Officer: Fair question, Matt. I think it's pretty close to where it is. You should know that, included in that expense, while we've always focused heavily on the real estate component of that, and as our problem real estate credits have come down, that's where the big swing has been. But we also included our auto repossession expenses in there, and so I think you're pretty much at a normalized level where we are today.
Operator: Brian Foran, Autonomous.
Brian Foran - Autonomous Research: Kelly, you did an interview this morning and made some comments about where you thought lending standards were and kind of halfway back to where they were last cycle. I guess, I just want to maybe dig on that, and is it still kind of a leverage lending market which you've been talking about for a while that's most concerning you or are there more markets, more pieces of the lending market where you think underwriting standards have gotten over their skis a little bit?
Kelly S. King - Chairman and CEO: Well, obviously levered lending is the most pronounced and then, large hold positions is kind of second to that, but in terms of just basic underwriting, it's kind of across the board, disappointingly. I mean you're seeing substantial term extensions relative to credit restructuring. You're beginning to get back to the 'covenant light' structuring deals, not as bad, again, as I've said about halfway back, and hopefully, we won't go all the way back, but we are seeing a lot of deals that are being underwritten out there in a fashion that we would absolutely not do it, and so I think what's happening is that people are just really, really eager for revenue, which is understandable, and as I indicated in the interview, memories tend to be short, and so I worry that the industry is beginning to underwrite some credit, so it will be problematic as we go forward, so discipline is important, and we believe it's more important to have good profitable long-term loan growth and short-term loan growth might turn into very unprofitable growth down the road. And so no, we're not trying to be critical of anybody else, I'll just trying to honestly give an observation about what's going on in the industry.
Brian Foran - Autonomous Research: Then, if I could follow-up on capital. I know you don't get to resubmit the resubmissions, so to say, but if you had known you were at a 9% Basel III ratio, you've made some comments about the buyback expectations being low in the back half of the year because you didn't know that yet but you also made some comments about M&A potentially accelerating in 2014. So I guess if we put them together, ultimately, what I'm asking is how should we think about the scope for buybacks if you had known you were at a 9% Basel III ratio, and ultimately, into 2014 and beyond?
Kelly S. King - Chairman and CEO: Well, it's a good question, and obviously, you only know what you know. And so when we did do our submission, we didn't – what we did know was the probability of capital problems are going up. And all of the (letters) that's been out the expectation at that time was it could go up really substantially. And we didn't know what the final conditions of Basel would be. In the earlier versions of that, we would have been substantially penalized 100 basis points almost, based on what the original projections were. So yes, now we know all of that and now we are in a much stronger position than we were, but that's why I've been saying consistently for the last several months, you should expect us to be very conservative with regard to capital for us this year because of what we did know at the time we made a submission. Now as we look forward to '14, we're in a strong capital position. We'll be accreting substantial capital. M&A, frankly, the kind of deals we would do we probably not be requiring capital. It would probably it could be capital accretive because of some of the institutions that we've been acquiring. So, as we go forward, I fully expect that we will have good flexibility in terms of capital deployment. I still like to think in terms of the priorities I've talked about in terms of organic dividends and acquisitions and buybacks. But to the degree that we continue to get downward pressure from the regulators with regard to percentage of payouts, which continue to exist, and to the extent that acquisition opportunities that require capital are not out there, that certainly increases our appetite with regard to buyback.
Operator: John Pancari, Evercore Partners.
John Pancari - Evercore Partners: Back on the expense side, on comp expense, how much of the comp expense increase this quarter was production related?
Daryl N. Bible - SEVP and CFO: I would say probably at least three-quarters of the increase was probably on production related incentives, mainly in mortgage, insurance, capital markets areas is where it came from.
Kelly S. King - Chairman and CEO: Yeah, because our FTEs went down, remember?
Daryl N. Bible - SEVP and CFO: They were down 88, yes.
John Pancari - Evercore Partners: Then separately, on loan demand, can you just give us a little more color there on where you're seeing good demand right now, what types of areas? And a little bit more color around your pipeline and trending commitments?
Ricky K. Brown - SEVP and President, Community Banking: Yeah, this is Ricky Brown. We're seeing good activity in real estate right now, particularly multifamily. Some office activity, our focused areas have been good there. We've put a lot of emphasis on that, got our specialized force, sales force; that is helping us in that area. That's good. Clearly, the auto space with the wholesale has been a really nice improving area for us, partnering with our folks in the field, in the banking network, Community Bank, as well working with our folks in the sales finance area, got some great professionals helping us through that business very, very well. We saw some nice improvement in ABL linked-quarter, which is good. We also saw some nice small commercial increase linked-quarter, which is a very nice trend for us, we feel good about that. And then good production in DRL in the quarter and small business that's done in the branches, so it was a really kind of across-the-board improved level of production from Q2 versus Q1. And we hope that that will ultimately show continued good loan growth as people use those loans that we're making to them. So, pretty broad-based actually across the board. C&I, as you saw, was pretty good, and it was pretty good in the Community Bank as well, up positively, close to 2% or so.
John Pancari - Evercore Partners: And then lastly on the C&I side, there the line utilization for overall C&I, do you have that?
Clarke R. Starnes III - SEVP and Chief Risk Officer: John, this is Clarke. It's actually still flat for us. It's around 37%. So again, a big future opportunity for us as our commitments have clearly grown, but our utilization is still pretty flat.
Operator: Michael Rose, Raymond James.
Michael Rose - Raymond James: This question is for Kelly. Just outside of M&A, you guys have done or made a lot of investments in other areas of the franchise. Where do you see the greatest opportunities for additional expansion or products?
Kelly S. King - Chairman and CEO: So, Michael, right now, I think there are probably three that I would think about. I really think continuing to deploy capital and this organic commercial growth strategy in Texas, and frankly, if that goes as well, I think it's going to go in other markets like that in other parts of the country. It's a very efficient way to expand our franchise. So I think expanding the Community Bank in the targeted approach. The Corporate Banking space is going to continue to get a substantial amount of our investment. The margin of returns for us are fantastic, and our execution ability is really, really good. And then in terms of marginal investments, we're going to continue to throw it at wealth management. That machine is working really well for us now. Chris Henson and his team have done a great job developing that. We've got virtually all of the infrastructure cost in place and the marginal returns on investment are very high, so those would be the two to three in terms of organic. Other than any unique bank acquisition that might come along, we'll continue to look at insurance acquisitions over time, but to be honest, right now, we've kind of got our plate full on insurance acquisitions and not to say we wouldn't do one – I wouldn't want anybody listening to think we wouldn't, but we've got some really good opportunity to continue to execute on the Crump advantages. And so expect to see most of our attention focused on those organic areas.
Michael Rose - Raymond James: And just as a follow-up, as you've expanded those business lines geographically as well, could we at some point down the road, whether it's five or 10 years, see you kind of follow with more of a traditional branch network to maybe fund some of that growth over time?
Kelly S. King - Chairman and CEO: Yeah, so a natural long-term organic path would be – in Texas, for example, you expand with this commercial strategy, you build around that your wealth strategy because it is very closely tied to your commercial strategy. You build your insurance around that, and commercial P&C because that's tied to that. When you get to pure bread-and-butter retail, that's a long, long ground game. So in five years to 10 years, I'd expect to say, probably not doing much in terms of retail, will continue to focus on the organic commercial strategy. Over 30 years, yes, but I would rather expect the most likely scenario is we'll build out that retail network in places like Texas with appropriate retail acquisitions. There are many good partners down there, folks we know very well that we're very close to, and we think that a time will come for a good partnership somewhere along.
Operator: Gerard Cassidy, RBC.
Gerard Cassidy - RBC Capital Markets: Can you share with us what your view is on now that you have your Tier 1 common ratio at 9%, you're required to be at 7%. What – where are you going to be comfortable running at when we get to a more normalized state in banking, let's say, sometime next year?
Kelly S. King - Chairman and CEO: Gerard, that's a question that we're all kind of struggling with right now. Fortunately, now, we don't have to have a cushion for OCI variation. So that takes one off the table. You do want to always have some dry powder in the case of really good cash acquisitions. Then you want to have some comfort around that 7% because, recall, if you go below that 7%, that's not a good day. That triggers the dividend issues, and some compensation issues. So you want to have a nice cushion around that. So, then you've got the question of a domestic SIFI charge that may come, we don't know. I still bet this will be a small one, but it might be just 25 basis (points). So, we're not really ready to hang a number out there, Gerard. But it's something south of 9% based on what you know today, but it's not 7.5%, so I mean it's a number that we will have to fill our way through; does a SIFI charge come, that changes it. And then we will probably keep some buffer in there frankly because even though we're not an advanced approach bank today, we're not that far away from it, and so we're not going to be too aggressive in terms of trying to push that number closest to the 7%. Plus to be honest with you, Gerard, as you know, we're just really conservative on capital. I'd like to rather make you all happy with relatively more capital, with much harder work and much better execution than trying to jack up returns based on (indiscernible) down capital.
Gerard Cassidy - RBC Capital Markets: And then as a follow-up, you guys showed some very strong growth in certain loan areas, such as net average deal of floor plan loan in the Community Bank. Is there anything you can share with us other than the numbers down the road, of course, but share with us to ensure that proper controls and procedures are in place so that very rapid loan growth doesn't lead to some credit issues in a couple of years?
Christopher L. Henson - COO: Yeah, Gerard, as I said, we've got a great partnership with our dealer services area in the bank. We hired some great professionals that really know the business to help us to ensure that we're underwriting these credits appropriately. We're also working to beef up our standards in terms of servicing to ensure that we get out CD (singles) every month, inspect our inventories, a lot of work there. We're going to be very aggressive at monitoring and executing if things get out of trust, and so we feel very good that we are handling this business well. Remember, that with the great indirect business that we have, we had so many dealers that knew us very well that wanted to do this business with us and we were doing their capital although it’s just a natural extension. So it gave us a great growth area. I feel very good that our partnership with Clarke is going to allow us to handle this credit, and do it in a way that the risk is managed very well. Clarke, do you want to comment to that?
Clarke R. Starnes III - SEVP and Chief Risk Officer: Yeah, I might just add, Gerard, remind you all that we’ve been in this business for many years. We just chose to stay out of it for a while because the capitals had beaten the returns down so low. So it’s not a new business for us, but it is a new targeted initiative because the returns are better. But risk management oversight's in place. We have specialist on the sourcing side, we have specialist on the enterprise risk side behind that. So we feel very comfortable with a good measured plan.
Operator: Christopher Marinac, FIG Partners.
Christopher Marinac - FIG Partners: Kelly and Daryl, just curious if you look out beyond the near term, and perhaps a Fed change in policy late next year or even 2015, do you have a sense of how much of that you can retain? And also, it's partially a question of how much deposits and funding cost lag in that scenario?
Daryl N. Bible - SEVP and CFO: How much is retained in terms of capital?
Christopher Marinac - FIG Partners: Really in terms of margin, just kind of margin and the funding cost question?
Daryl N. Bible - SEVP and CFO: Yeah, so we have about 45% of our balance sheet that is variable rate. So, the slide that we show on our deck shows that we are slightly asset sensitive. When the short end starts to move, we will definitely benefit even more stronger than what we're just with a steeper yield curve, and it will be a more immediate impact on us. So the wild card is how quickly do you have to reprice your deposits and how sticky are your deposits. It really comes down to being competitive with the competition and other places in the marketplace. We believe that we've had really good strong core growth, good new clients come into the Bank and believe that the deposits will stay with us. That said, some of the dollars will leave the Company and go to other alternatives, so we are conscious of that. We've put strategies in place to do other liquidity and funding so that when that does or to happen, it won't have a material impact on our margins and all that. So, we feel pretty good that if you look at our sensitivity, up 200 basis points. We're almost at 4% increase in net interest income over our 12-month time period. So, we think we are positioned the right way. We really haven't changed that position for the last couple of years, and eventually, rates will rise both on the short-end, and as well as the long-end continues to steepen.
Operator: That's all the time we have for questions today. At this time, I'll turn the call back over to the speakers for any additional or closing remarks.
Alan Greer - EVP, Investor Relations: Thank you for joining us today. We do have a couple of folks still in the queue, so I apologize for that, but we've gone a couple of minutes over. So, thank you. If you have further questions, please don't hesitate to call Investor Relations. Thank you, and have a good day.
Operator: That does conclude today's conference. We appreciate your participation. You may now disconnect.