Truist Financial Corp (TFC) 2012 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the BB&T Corporation fourth-quarter 2012 earnings conference call today on January 17, 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, Investor Relations.

Please go ahead, sir.

Thank you, Casey and good morning, everyone.

Thanks to all of our listeners for joining us today.

We have with us today Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the results for the fourth quarter as well as provide a look ahead.

We also have other members of our Executive Management team.

Chris Henson, our Chief Operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer, who are with us to participate in the Q&A session.

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 our website.

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

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

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

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

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

Our presentation includes certain non-GAAP disclosures.

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

And now I will turn it over to Kelly.

Thank you, Alan.

Good morning everybody.

Thanks for joining our call.

So I'm going to start with some overall performance highlights, and I would say in general that relative to the environment, 2012 was an outstanding year and fourth quarter was a very solid quarter financially.

In addition to the financial performance I would just point out to you that we did acquire and convert BankAtlantic and Crump.

I am very proud of the fact that we did over 1,100 community projects which we call our Lighthouse Projects, and we continue to get outstanding feedback in terms of our service quality which is ultimately most important in terms of our value proposition.

In terms of some of the numbers, we did have record annual net income of $1.9 billion, up 49% from the prior year.

Net income for the quarter was $506 million, up 29.4% versus last year's fourth.

Diluted EPS totaled $0.71, which was up 29%.

I would point out that we did have $0.01 of EPS reduction because of merger related charges.

Total revenues was very strong, $2.5 billion, up 8% versus third-quarter record 2012 revenues were really from mortgage banking insurance investment banking and brokerage.

We had a very strong fee income ratio of 44% which we feel very good about.

Solid overall loan growth was 3% versus third quarter annualized.

That growth was led by C&I direct retail lending and Residential Mortgage.

Solid linked quarter C&I and CRE loan production, I'll give you more color on that in a minute.

In terms of deposits, another great quarter.

Total deposits increased $3.1 billion, or 9.5% versus the third annualized, but more importantly non-interest-bearing deposits increased 24.7% versus third quarter annualized.

And we continue to improve our mix.

And decrease our interest-bearing costs.

Overall a really good performance in credit quality so NPAs and NPLs are both decreased over 10% on an annualized basis.

Our allowance coverage ratio improved to 1.37, up from 1.24, so really strong, consistent performance there.

Expenses were well controlled.

Noninterest expenses decreased 10.7% versus the third quarter annualized and very pleased that we had positive operating leverage.

If you are following along let's go to page 4 in the deck.

So I'm very pleased about overall loan growth, particularly given a tough economic set of conditions.

And I would point out and emphasize that we are continuing to stick to our credit quality discipline and unfortunately we do see some slippage in the marketplace but we're being very firm about that.

So you can see that our ex covered growth was 4.4%.

Of course we continue to have mix change.

C&I was 5.4% for the third annualized, CRE was 7.7%.

I would point out that we did have a reclass from C&I and some CRE to the C&I, so if you adjust for that our C&I would have been 6.7%.

Of course CRE would have been slightly less as well, but that's what we're really trying to focus on.

I would remind you that our CRE had another continued substantial runoff but we think we are kind of at the trough at the bottom on that.

We really see that as an opportunity going forward.

I'll talk about some of the categories in just a moment, but that's a real opportunity for us.

Direct retail had a strong quarter, 6.3%, revolving credit, 8.2%, Residential Mortgage was, 5.7%.

Keep in mind we told you last quarter that with regard to Residential Mortgage those rates are not as high as they were in previous periods because they're not holding our fixed rate conforming and our other lending subsidiaries was 2.1%, and again that's seasonal, so those are very much in line with what we would have expected.

So if you look at again in the context of a relatively slow market out there, we feel good about those growth rates.

Also feel encouraged in terms of momentum because in the period loans were $1 billion higher than the fourth-quarter average so that's encouraging.

And in terms of little guidance on the first quarter, we expect to see solid C&I, CRE, and Sales Finance growth.

Our corporate banking investments continued to expand our loan opportunities there.

Now CRE I don't want Nancy to have another heart attack here so we're focusing on retail, warehouse, office, multi-family, small stuff like we always do.

We're not doing 1,500 store office buildings, that kind of thing, so just what BB&T always kind of does but we're just going to do more of it relative to last two or three years.

And we're going to be focusing on wholesale lending and Sales Finance.

That's a really, really big opportunity for us as we go forward.

Also point out that we've got some really encouraging momentum developing out of the Community Bank, especially in our newer markets around Colonial impact.

So just to give you a perspective if you look at loan production for the Community Bank, it was up 26% over last year on fourth to third annualized was 32%.

All of that is not funded today, but we believe as we head into the spring, people start pulling down those lines and so that's -- that production number's something that's a pretty good indicator of future growth.

So we feel good about that and taking all of that into account we would guide you to loan growth for the first quarter into 2% to 4% range.

Contingent upon the economy.

The economy is soft today.

And businesses are still not started really ramping up their investments.

There's still a lot of uncertainty out there.

Who knows what's going to happen with regard to the debt ceiling discussion and expense reductions at the federal level.

If we get any kind of modest or reasonably positive leadership out of Washington or reach some side of kind of reasonable accord around that I think you may see a positive tick on this.

I would point out that people have been holding back for four years, particularly the last two years in terms of making any investment, so if we can get some kind of reasonable leadership out of Washington you might see more of a positive kick in loan growth than you might have expected.

I just want to emphasize also again that we are sticking to our disciplined strategy in terms of lending.

We are not doing leveraged lending which a lot of companies are doing.

We're keeping relatively small to hold positions, a lot of our competitors are taking much smaller hold positions.

We could double our loan growth in short order if we chose to.

But we're much more focused on long-term earnings.

And we're simply not going to go back out of the frying pan into the fire in terms of taking on a bunch of higher-risk profile types of credit.

So think in terms of our loan growth on a risk-adjusted basis as being very, very strong.

If you look at slide 5 in terms of deposits, overall great quarter particularly given the significantly lower costs.

Our total deposits were up 9.5% quarter to quarter annualized, more importantly, DDA non-interest bearing deposits was up 24.7% which is really, really strong.

We affectively reduced our borrowing costs on interest-bearing deposits by 18 basis points during 2012.

Our CD maturity is still reasonable at 12 months.

We opened about 34,000 net new retail deposit accounts so we've gone through the transition of getting through free checking and moved to positive growth again there on a solid basis.

So if we think about first quarter we would guide you to more modest deposit growth frankly, we're not trying to push it too fast.

We don't have the loan growth to support it.

So we're trying to keep the cost down and let the growth be kind of what it is.

And so you expect to see some continued improvement in deposit costs.

I would just make an editorial comment that the TAG program ended, was basically not a big deal, probably slightly positive to us because of our credit rating.

But more importantly I think this is a really important step in getting our industry disengaged from government support and government control.

And we pushed for the termination of that program and we're glad that it did in fact terminate.

If you look at slide 6, I'll just say to you overall the Department of Revenue in this dynamic global marketplace -- we believe diversification of assets markets and the resulting revenue is very, very critical.

We've invested for many years in diverse businesses and we're really beginning to the benefit in more stable revenue and earnings.

Which is what we've always told you folks that we're trying to do on behalf of our shareholders, produce long-term stable revenue and stable earnings, so we can have stable dividends and share price increase.

If you look at our [patch out] there I would just point out to you that it's a pretty good balance.

47% from the Community Bank; 14%, Insurance Services; 13%, Financial Services; 12%, Mortgage, and 8% in Specialized Lending; and 6% in Dealer Financial Services.

So I'll just point out that we are not as spread dependent as a lot of companies are and so even if we stay in a low interest rate environment for a long time we won't be relatively as hit as some others.

I will say with regard to interest environment and Daryl can give his comment on this, but I personally think notwithstanding what others are saying, by the end of this year we're going to see interest rates rising.

I just think there's so much monetary stimulus into this economy and we're going to see the impact of that in terms of rates notwithstanding what the Chairman is trying to do.

So I'm a little bit more bullish on the yield curve than some people are.

In terms of some key initiatives for '13 I just want you to know that even though it's a relatively slow environment, our attitude at BB&T is bullish.

We're not sitting back crying over spilt milk about how bad the economy is.

We are moving forward.

We've got a number of initiatives, just a few of them are this.

So we're expanding our corporate banking initiative in key national markets, continuing to expand our vertical lending teams, that's paying really, really big benefits for us.

We're expanding our advisor capacity in wealth management and brokerage dealers, we're adding substantial number of brokers there.

We have a huge opportunity with this Crump acquisition in a number of areas but I just want to highlight one to give you a perspective of how important that opportunity is for us.

So if you think about what a wholesale company does, is it's classical wholesale in terms of supporting the needs of the retailers, but what's really happened in the life insurance business over the last really couple of decades, is the traditional model has changed dramatically.

If you go back 20 plus years ago, two-thirds of life insurance product was sold by the dedicated insurance salesman of the underwriters.

That's changed to where that's only about one-third today.

So two-thirds of the premiums are being written by people that sell multiple products.

And at the same time, virtually all financial service providers, banks, brokers, insurance carriers, they're all trying to sell life insurance to their clients, and so they're having to adjust their models.

And so what we see is that many companies are looking at this and saying, having the capacity inside their shop is too complex, too expensive.

They simply don't have the expertise.

And so Crump is being sought out by large banks, other large insurance companies to provide a turnkey process for them in terms of meeting the needs of their clients.

And frankly, it's going extraordinarily well and it has huge opportunity for us.

So that's just one part of what Crump brings to us, but it's a huge opportunity, we're very excited about it.

We continue to expand our already very, very successful Mortgage operation in terms of our correspondent lending network.

We are expanding our Retail Mortgage lending in targeted geographies that we've not otherwise been located in.

You saw recently Ricky announce that we're going to be opening 30 commercial branches in Texas.

That's already well underway.

Most of them will be open by June.

We are extremely encouraged by the initial results of that.

We think that's going to be a big, big payback for us in Texas in a relatively short order.

And then I would just point out that we continue to have tremendous revenue opportunities in the legacy Colonial markets.

We always go through this process when you bring in a new company, it takes a good while to ramp up those revenue production capabilities of those markets.

And that's happening.

But I just want to show you what the opportunity is, so for example we produced something called a revenue multiplier, which is revenue relative to compensation expenses.

And so for our core markets today, that is a 8.28 multiple.

And in the Colonial markets it's 4.53.

So you can see there's this massive opportunity to ramp up the performance in the Colonial markets, which is happening but it happen much more over the next two or three years as they move closer to the core markets.

So huge opportunity for BB&T to grow our revenue and profits independent of what happens to the market.

Obviously if the market is better, we'll do better.

But we're going to do well relatively in any event, so we're very excited about overall revenue and look forward to reporting it to you later.

Let me turn now to Daryl to give you some additional information about our performance.

Thank you, Kelly and good morning, everyone.

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

On slide 7 our credit metrics show continued improvement in NPAs and charge-offs.

NPAs declined 10.6% during the fourth quarter and are down 37% since last year.

Charge off's declined at a modest pace during the quarter and are now at the lowest level in four years.

We expect modest improvement in NPAs during the first quarter and anticipate net charge-offs will be around 1% of average loans and should trend lower thereafter.

Our allowance coverage ratios consistently improved during the year.

During the fourth quarter our allowance to nonperforming loans increased to 1.24 times from 1.37 times, reflecting continued improvement in underlying credit trends.

Turning to slide 8, let me provide some color around the 21% increase in performing TDRs.

As you know the OCC, which is not our regulator, issued third-quarter guidance on loans discharged in bankruptcy that were not reaffirmed by the borrower.

This guidance requires these loans to be classified as TDRs and possibly as nonperforming assets regardless of payment history or expected performance.

During the fourth quarter we applied the TDR guidance to all of our portfolios resulting in $226 million increase in performing TDRs.

Based on experience we believe it is appropriate to classify these loans as performing.

About 77% of the loans have been current for two years and over 90% are current now.

Also in our experience FICO scores for these borrowers increased about 50 points after the debt discharge.

Neither our primary regulator nor the SEC have formalized their thoughts on this issue.

But as we said last quarter, we provided for these loans in our allowance and this change in classification will not have a material adverse impact on earnings.

Continuing on slide 9, net interest margin came in strong at 3.84%, down 10 basis points from last quarter and above our guidance.

The decrease was a result of several factors.

A $26 million benefit in hedge amortization related to our TruPS redemption in the third-quarter, runoff of covered assets and lower yields on new earning assets.

These were partially offset by the decrease in interest-bearing deposit costs.

Looking to the first quarter we expect margins to be in the mid-3.70%s.

There are two primary drivers.

First, continued pressure on asset yields from the continued low rate environment, and second, continued runoff of covered assets.

Offsetting these drivers, our benefits will continue to decline in funding cost and favorable funding mix.

Looking out into this year, we expect a modest decline in margin after the first quarter.

As you can see in the bottom graph we remain slightly asset sensitive and are positioned for rising rates.

Turning to slide 10, our fee income ratio for the fourth quarter increased to 44.1% compared to 42.4% in the third quarter.

Insurance income was up $29 million, mostly due to seasonally stronger fourth quarter.

In the first quarter we will see the opposite seasonal impact.

However, firming market conditions will lead to an increase over last year's first quarter excluding Crump.

Mortgage Banking income was up $20 million compared to a very strong third quarter due to increased production volume.

We expect Mortgage Banking income to be modestly down in the first quarter due to tighter margins and similar volume levels.

Investment banking and brokerage generated healthy growth in the fourth quarter mostly in fixed income markets.

Looking on slide 11, you will see the efficiency ratio remained flat wIth the fourth quarter coming in at 55.3%.

Total noninterest expense was down $41 million link quarter or 10.7% annualized.

Personnel expense increased $26 million, mostly due to production-based incentives offset by slight decrease in FTEs.

Foreclosed property expense was down $6 million and is at its lowest level since third quarter 2007.

We also saw a decline in loan related expenses from lower mortgage repurchase expense.

If you recall last quarter we had higher expenses related to unrecoverable costs associated with investor-owned loans.

Merger related and restructuring expenses were down considerably due to the completion of BankAtlantic acquisition in the third quarter.

Other expenses showed strong improvement with the Visa settlement in the third quarter and lower insurance related costs this quarter.

For the first quarter we expect lower noninterest expense to be driven by decreases in both production-based incentives and professional services.

Looking into 2013 we believe our discretionary expenses will be flat.

FTEs will be flat excluding revenue initiatives and credit costs will trend lower.

We expect positive operating leverage in 2013 compared to last year.

Finally, the effective tax rate for the quarter was 27.4% and we expect a similar amount in the first quarter.

Turning to slide 12, capital levels were up from the third quarter.

Basel III Tier 1 common under proposed US rules is 8% and 9.3% under international rules.

These estimates do not include mitigating actions we will take to lower our risk-weighted assets and improve our capital ratios.

Our recently submitted CCAR plan and capital deployment priorities are first to support organic growth, second to increase dividends, and finally to pursue strategic opportunities and consider share buybacks.

Now here are a few highlights from our segment disclosures.

Starting on slide 13, Community Bank net income totaled $220 million, showing very strong growth versus common quarter and modestly down linked quarter.

Common quarter increase was due to higher foreclosure property costs in the earlier quarter as we ramped up efforts to reduce OREO and took some significant write-downs.

Link quarter growth decline was due to higher provisions, mostly the result of loan growth and reserve rate adjustments and elevated noninterest expenses related to the BankAtlantic system conversion.

Kelly mentioned we are pleased with the Commercial loan pipeline remains strong.

Turning to slide 14 Residential Mortgage was up $3 million on a link quarter basis from a very strong third quarter and up sharply compared to fourth quarter last year.

This is a record quarter in originations and our servicing portfolio now exceeds $1 billion.

Looking at dealer Financial Services on slide 15, you will see net income totaled $38 million, down compared to both link and common quarters.

The decrease in segment net income is mostly due to higher loan loss provisions, coupled with strong annual loan growth, and fourth-quarter reserve rate adjustments at regional acceptance.

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

On slide 16 you will see Specialized Lending experienced a strong quarter with net income of $72 million.

Common quarter net income was up $8 million, mostly the result of net interest income growth related to Sheffield Financial, mortgage warehouse lending, and premium finance.

This was offset by higher noninterest expense due to higher personnel costs, depreciation on operating lease equipment, and higher servicing costs from the portfolio at Grandbridge.

Specialized Lending continues to show strong loan production compared to both link and common quarters.

We also added $4 billion in servicing with the acquisition of Dwyer-Curlett.

Moving onto slide 17, Insurance Services generated $39 million in net income, up significantly compared to both common and link quarters.

Increased revenue was broad-based across most insurance businesses while maintaining excellent expense control.

Insurance benefited from both acquisitions organic growth.

Crump insurance added $83 million in noninterest income.

And growth in same-store sales suggests firming in pricing.

As we integrate Crump Insurance into our processes, we see outstanding potential to leverage its product offerings and cross-sell opportunities.

As noted earlier we expect future organic revenue growth and we'll have a seasonally lower revenue in the first quarter.

Turning to slide 18, Financial Services generated $90 million in net income, mostly driven by corporate banking and wealth management.

These businesses had loan growth of 39.9% and 26.5% respectively.

Investment banking and brokerage had a strong quarter led by capital markets and fixed income transactions as we continue to see opportunities in middle market and corporate lending.

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

Thank you, Daryl.

So overall as you can see it was a great year.

A really solid quarter, we really made excellent progress in our several year diversification strategy plan.

Nice progress in moving back to normalized profitability.

But we think '13 will be challenging but our business is really performing well and so given the economy we believe will have another high-performance year in 2013 and looking forward to sharing that with you.

So now I'll turn it back to Alan for Q&A.

Thank you, Kelly.

In a moment I'll ask the operator to come on the line and explain how you may participate in the Q&A session.

Please observe our normal practice of asking one primary question and one follow-up question so that we can maximize participation in the Q&A session.

If you have further questions please reenter the queue.

With that I'll ask Casey to come on and explain the instructions.

(Operator Instructions)

Jefferson Harralson, Keefe, Bruyette & Woods.

For my first question I wanted to ask about the 2% to 4% loan growth expectation for 2013.

Can you talk about the mix of that a little bit.

How does the mortgage portfolio -- I know that this year you were maybe substituting in some mortgages and replacing securities portfolio this year.

Is the reverse going to happen next year, and within that 2% to 4% where do you think C&I comes out?

Well, so last year, for much of the year, a meaningful part of our growth was in holding mortgages because frankly, early part of the year made sense because of rates; as rates declined later in the year it didn't make sense, so we stopped doing that.

And so you've seen a little bit of downward pressure on total loan growth because of that.

You'll see positive growth in this year in terms of C&I in terms of Sales Finance, Specialized Lending's will be strong.

CRE is going to be a comer in terms of this year.

So it's going to be pretty broad-based and diversified.

And I think it will overall be very positive in terms of profitability because due to that kind of growth in this kind of market given our discipline in terms of structure and price is really good growth.

All right.

And for my follow-up I just want to ask a mortgage question.

How should I think about the huge mortgage origination volumes?

And how much extra profitability that's giving you now that's at risk to come out later in the year?

I see the Mortgage segment profitability sitting there that seems to also include the loans on the balance sheet.

But with record gain on sales and record originations how should we think about how that plays out and the potential impact for you guys as the mortgage plays out next year?

I'll give you part of this and then Daryl will give you color in terms of spread.

So basically our overall production is really strong.

We had $8.5 billion in fourth quarter, up from a very strong third quarter.

Best ever.

We think the -- based on our pipeline and our marketing efforts that kind of continues at least in the first part of the year.

You might see a little pressure on margins.

So let me let Daryl explain that to you.

Jefferson, if you look at our overall margin spreads in fourth quarter they were 229.

That's actually down from 240 in the third quarter.

Our mix of business was 35% retail, 65% correspondent in the fourth quarter.

I think as you look out into next year, if you assume a similar mix, we expect volumes to be relatively strong compared to this past year, but probably a little bit tighter margins on retail.

Our margins at retail now were over 400 points.

Probably that gets in the 300-point range and correspondence were in the low hundreds and that probably goes over 100.

Perfect.

Thanks, guys.

Craig Siegenthaler, Credit Suisse.

First question, just on the branch openings in Texas I'm wondering how has your overall view of M&A changed over the last six months?

And also are there other states maybe like Tennessee where you considered organic expansion opportunities?

So our strategy with regard to M&A has not changed in terms of what we would like to do.

It's just that there are not really willing sellers out there at a price that we're willing to pay.

And so our strategy in Texas is simply to say that we believe we can build out our Texas operations on a commercial basis de novo.

Now, you really cannot do that privately on retail, it would take 100 years.

So we would still very much be interested in acquisitions that particularly cover retail space and in Texas.

So our Texas 30-branch strategy does not say we're not interested in acquisitions in Texas.

It simply says we're not going to sit back and run our business waiting for what other people do.

We can't control what other people do.

They have their own strategies.

We respect that.

We're going to run our business.

So we know we can build out Texas on a commercial basis very, very effectively.

And we believe that we can do that in other markets as well.

Ricky, you may want to comment on that.

Kelly I 100% agree.

We do think the momentum that we've had in Texas since we've been there three years ago that we can take these commercial strategies that we're talking about and make it work for us.

We're very excited about the 30 locations that we've got.

We got them at a lesser cost than what we originally looked at.

We're having good success in hiring.

We've got a good pipeline of people that are ready to join BB&T.

They enjoy working for BB&T.

They see the brand as a differentiated brand.

We feel very good about our opening schedule.

We'll have a couple of these open the next couple of weeks.

We think all of them will be open by midyear.

And the expectation is that we'll hit the ground running and do very, very well.

So we're excited about this strategy.

And as Kelly said we're still looking for other opportunities but this means that we move forward and not sit still.

And then Kelly, just as my follow-up here.

You mentioned real briefly on some of the risk involved in leveraged loan growth that some of your competitors are putting on but you guys are avoiding.

Can you provide a little more commentary on the types of leverage loans you're referring to and maybe what type of banks are adding these loans?

I'm going to let Clarke handle that, Craig.

I think he can do a better job of that.

Craig, if you look at the production statistics, big part of the market growth right now in the C&I space is leveraged finance and a lot of it's around the low rate environment.

So what we see is primarily M&A driven dividend and recap type structures driving a lot of that growth.

We see both large banks and similar regional peers actively participating in that market and we just feel like that's outside our risk appetite.

So we have purposely avoided the majority of that and continue to stick to our long-term underwriting standards even in the middle market space.

So again, it's very prevalent right now, fourth quarter was a record origination quarter for the leverage finance market.

Great.

Thanks, guys.

Matthew O'Connor, Deutsche Bank.

This is actually Adam [Shaman] in for Matt O'Connor.

I've a question on loan growth and you attributed it to some of the softer growth in 4Q possibly to underwriting standards or at least first peers.

How much of an impact do you think came from tax and other uncertainties coming out of Washington?

And what are you hearing from clients in the new year with most of this behind them?

It sounds like much hasn't changed given the 1Q guidance.

Is this more debt ceiling talk?

What are you hearing from them in the new year?

Adam, what we're seeing is there's continued uncertainty out there.

This whole fiscal cliff debate, what was going on with taxes now the debt ceiling, the general economy -- the world geopolitical situation, the world economy, pending healthcare cost is coming in 2014.

All of that still is waiting on businesses and we're still seeing that as we talk to businesses.

I think they are still a bit cautious, they're being very careful.

And I think that manifest itself in just being very careful about what they borrow.

So we are seeing increased borrowings and that's good but they are not borrowing what they're signing the notes for.

We're not seeing significant increases in utilization and I think that bodes well.

All we can do right now is be sure we're meeting the needs of the clients that are -- that we are talking to.

And we're doing that and then as the economy improves and certainty builds back in we think that loan growth will be accelerating for us.

So we feel pretty good about how positioned as Kelly said production looks really good in the Community Bank year over year, and on a linked quarter basis; I think that builds momentum and commercial real estate does in fact create a tremendous opportunity nicely up over last year and a nice run rate in terms of third-quarter annualized growth.

So we feel good about both the C&I piece and the CRE piece despite the difficult conditions.

As Kelly said, at the end of the day, all we can do is get up in the morning and be enthusiastic about what we do, live our mission, go talk to clients and prospects, meet their needs, despite the conditions.

And if we do that we think we can be a big winner in this.

Adam, I would just point out too also just a clarification that the 2% to 4% guidance we give you is only for the first quarter.

To be honest depending on things how things happen in Washington, I personally think again as I said if we get just a reasonable agreement with regard to some of these fiscal issues, I think there's a very good chance that you're going to see some pickup in momentum in the economy, you're going to clearly see some pickup in momentum in borrowings.

I remind you again people have just not been borrowing for two or three years.

There's a lot of plans, a lot of equipment, lot of computers that need to be replaced.

We could all be pleasantly surprised with the level of loan growth we see as we head through the course of this year.

Okay.

Thanks.

Just one quick one on Colonial.

I'm sorry if you've touched on this already but the interest income came in a bit higher than expected in the quarter.

Only down a few million but the FDIC loss share came in higher as well.

How does this -- how does the FDIC loss share trend here and is there any significant impact from the net Colonial contribution versus what was provided in last quarter's presentation?

I don't think an update was given there.

Adam, this is Daryl.

What I would tell you is we didn't put it back in because there isn't a material difference for 2013 and 2014.

You are correct it did come in a little bit stronger in the fourth quarter.

My numbers when we ran them in the fourth quarter it's about a $10 million difference from what we had in the fourth quarter for all of 2013, so that's why we didn't provide it.

So I'd used the same numbers that we gave you last quarter as you look out into '13 and '14.

Okay.

And on the FDIC loss share specifically?

Should that come down to more normal levels in 1Q?

It will follow the same trend that we had in the last exhibit that we had in last quarter.

So it's pretty consistent with what we had projected.

So the FDIC loss share negative will become less of a negative throughout the next two years.

Okay.

Thank you.

Michael Rose, Raymond James.

Just wanted to follow-up on your comments, Kelly, about loan growth potentially being a tail wind and maybe we can ask it from a geographic perspective.

Are you starting to see a lift in some of the more troubled markets like Florida and Georgia, and what's the outlook there if the general economic environment improves and how would that translate over the next couple quarters for loan growth?

Michael, I think we are clearly seeing -- if you look at overall attitudes today versus a year ago I'd say across-the-board it's more positive just because frankly as time goes on people kind of get tired of feeling bad and they start turning a little positive just as the passage of time but also we're past the election.

Whether you're aware or not it's done, so that's uncertainty they were dealing with, so that's kind of turning positive.

The real estate market overall is clearly improving.

Some numbers that came out yesterday just in terms of overall real estate momentum across the country is improving.

Substantial improvement in Florida.

And in places like that.

Atlanta is still dragging its feet a little bit but it's improving and really the only hangover is lots, and that's getting ready to improve in my opinion because there's a huge increase in demand for houses and there's not any houses built in a long time.

So I think you're going to see places like Florida and places like Atlanta have a relatively faster ramp up over the next year or so.

To be honest with you, all of that general improvement in real estate is really big news for BB&T in two regards.

One, it improves our overall credit quality metrics pretty substantially because that means our NPAs will go down faster.

It means our opportunity to grow CRE ramps up faster.

The general economic conditions improve faster so it's overall really good news for us, particularly because in those markets like Florida, et cetera, we've got pretty large shares of deposits like fifth market share but we have tiny shares in terms of loans and fees, and so as those markets jump back it's a real boomerang opportunity for us.

Just as a follow-up to that, your ADC portfolio has you clearly come down.

You avoided that category and run it down but now you're starting to see some of your competitors go a little bit more aggressively into that.

What's your appetite particularly in some of those more stressed markets?

Our appetite for ADC is very positive.

We've always been a really big ADC lender.

We never intended to convey that we're getting out of ADC.

We just had a truckload that we needed to unload.

And we needed for the market to stabilize.

We're really, really good at that.

And so we've charged our people to be back in the market looking for ADC.

To be honest with you were we're looking for the better players.

We're not going to go -- a lot of people got -- we got a little bit of this -- with what we call the pickup truck operator as far as just building two or three houses and that kind of thing.

That's the riskiest part of that market.

So we will be back in it.

We'll be back into the better market.

We'll be back into it with better borrowers.

And we have improved our lending process, to be honest even though we were very good, we now have dedicated CRE lenders who will be the only ones dealing with those markets so our appetite obviously is strong and our capacity and capabilities are even stronger.

Thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Just with the environment the way it is and I know you've referenced expecting to have positive operating leverage, if you could just give a little more color, give a little more detail on your plans on expenses.

I know in prior quarters you've talked about initiatives where you're looking for things -- are there any kind of initiatives going on in the expense side right now to get leaner?

And if you can give a little color there?

Thanks.

So, Kevin, as we developed our '13 budget we basically took the position that we should be conservative with regard to revenue projections because we don't know what's going to happen in DC.

As you heard me say I think there's a decent chance that it could turn more positive but we are budgeting from a conservative point of view in terms of revenues.

Therefore to produce kind of bottom-line numbers we want we're being really tough on expenses, in all categories.

We did a clean sheet of paper type of look with regard to year over year category expenses.

And then that's laid on top of our expense reconceptualization process that we put into place starting about early summer.

That's all unfolding just as we planned.

So while there are upward pressures, Kevin on expenses in terms of regulatory costs, technological costs, we -- even though we have a relatively efficient company, because we've grown relatively rapidly, we'd still have a good opportunity in terms of being really tight with regard to the expenses.

And so as you heard Daryl describe we would expect expenses to be kind of flattish as we go into this year.

We're holding FTEs kind of flattish.

Actually down I guess with when you consider foreclosure expense and that kind of thing.

If you look at the basic core expenses looking at FTEs kind of flattish we may make some FTE expenses but the way we look at that just to give you perspective on how hard we've been, we're basically saying we're only willing to invest in revenue producers this year that are immediately accretive.

And so it's been a tight budgeting process.

It's going to stay tight.

When the market is where it is, I think the -- you have to control the things you can control and expense is one of those and we're going to be extremely diligent and tough with regard to expense control.

So it's more continue to grind it out and focus on the expenses rather than expecting some big expense program to come around?

Yes, Kevin.

Truth is, there are no big deals.

Everybody talks about all these big projects and all these big names and all this stuff.

Unless some company is just really extraordinarily managed, nobody can just go in and say we're going to wipe out 10% of our costs without completely destroying their franchise.

So yes, it's grinding it out, it's a ground game, it's day to day, spending less on publications, less on conventions, little less on entertainment, it's just grinding it out.

Category by category.

It's thousands here and $20,000 there and it adds up to lots and lots of money but it's a ground game.

Fair point.

And just real quickly, if you can just comment on buybacks I know you mentioned them as a priority.

Third priority in something you would consider, but given your comments about acquisitions not being likely in the near term has that as a priority actually risen up the ranks in recent months?

Thanks.

I would say as a practical matter, yes.

Because we're trying to be, Kevin, I talked a lot about this over the years, we're trying to be very practical about mergers.

While I still believe there ought to be a major consolidation in the industry -- I still believe long-term there will be; in the short-term for a variety of reasons it's just not happening, so we're not expecting it to happen.

We're not spending any time worrying about big deals, we don't think big deals will happen; we'll be looking at a few little deals but they are not going to be dramatic.

And so that does raise the probability of buybacks.

And we will execute on those according to capacity and according to price.

Buybacks is a function not just of how much capacity you have but also what is the given return on your investment, so as we look at the price relative to our book value and the earnings projections off of the return capital, we'll make the right decision and -- in some I would say your conclusion is right.

We expect those this year to be relatively more aggressive than in past years.

Okay.

Thank you.

Betsy Graseck, Morgan Stanley.

I just had a question slightly separate one which was on the NPLs and the credit guidance.

So you're nonperforming assets came down pretty sharply in the quarter down about 11%.

Q-on-Q your NPAs came down 11% Q on Q. But then the guidance for net charge-offs going forward is only down 2 basis points for the first quarter.

So I just wanted to make sure I understood why there wasn't a little bit more aggressive decline in NCOs going forward.

And maybe you could help us understand if you think the NPN/NPL reduction is close to being done?

Betsy, this is Clarke.

That's a fair question.

We're very pleased at the accelerated results in the fourth quarter.

Frankly a little bit better than we thought.

We're still trying very hard to clean out the residual particularly housing related exposures in the commercial book, our all-day mortgages, and our DRL land loans, and so that has higher loss content.

So that's one reason the loss rates continue to be up some and not down as quickly as we would like to see.

Although we feel very optimistic that we can start seeing lower loss rates as we move forward into the year.

One of the things that gives us a lot of confidence about that is our nonaccrual inflows are continuing to come down.

That's the biggest driver.

We have more flexibility as those inflows come down to be less aggressive about liquidations and the marks we take there.

So we believe that nonaccrual inflow number coming down gives us ability to see lower loss content as we move forward.

Okay.

And then to your point, as you get through the higher loss content, asset reduction, how long do you think that last?

Is that another one, two quarters?

Or is that for the full year?

Well, we certainly -- as we look and think about normalized loss rates we've talked about before, longer-term we see a 55 to 75 basis point expectation given the mix that we are building and consciously underwriting too, obviously we're 100 basis points today, so there's still a lot of room for us to have benefit there as we move toward normalized losses.

It will take beyond '13 for us to get there so the good news is we still have room to go that it will -- as we move forward over the next couple of years.

Got it.

Just wondering because in your slide deck you say related to the NCOs that we go to the roughly 1% NCO in 1Q '13 and then trend lower thereafter, so I'm just wondering what that ramp is that you're expecting.

And you explained it.

So thanks a lot.

Ken Usdin, Jefferies.

To follow-up on the operating leverage question, Daryl, I believe in the presentation in December you had talked about GAAP expenses being down 1% to 2% this year.

And I believe that ties to what you're saying about down environmental expenses and flat discretionary.

So I wanted to see if that's the right magnitude?

And then from the operating leverage perspective, can you give us some context in terms of how conservative you are being around your thoughts around total revenue growth this year?

Obviously you have the purchase accounting coming down and you have the tough mortgage comp to fend off as well.

Okay Ken, you are correct on the non-interest expenses.

We are going to see it down probably a little over 2% because of I'd say the foreclosure costs, professional services, and loan and lease expenses being the main drivers.

On the revenue side, based upon what we see as Kelly's remarks with the economy where it is sluggish growth, and we're saying flattish revenue, if we get any benefit of either a stronger economy or a steeper yield curve, we can have positive revenue.

As of right now our positive operating leverage is coming from negative expenses and flattish revenue.

Okay.

Great.

Thank you for that confirmation.

And then my second question is can you talk about the insurance business with a little bit more detail?

Obviously the year over year comp will be positive because of the Crump deal, but I know Kelly you mentioned about the strengthening underlying bid on the pricing side.

What's the organic growth opportunity in the insurance business and also what are you continuing to see on the acquisition side on that front as well?

Thanks, guys.

This is Chris.

Good question.

I would say high level insurance business we're sort of -- you typically see a rise in rates that will occur sharply over a couple years.

What we're in is a more slow lead up if you will.

We're probably one year into what could be a three to five-year kind of slower migration.

So this year, we saw same-store sales up 4.7% but if you noted the fourth quarter over fourth, was up 7% which indicates some positive edge on price firming.

So this really happens we think over the next three to five years in about four different ways.

First you get the firmness in pricing that will come to us and should come over like I say three to five years.

With any improvement in the economy like Kelly is talking about you really begin to drive more units.

And so you have more exposures to cover, which is a volume driver.

And then thirdly, we have these various synergies that we've talked about.

You just alluded to Crump.

With Crump we have on the PNC side cost take out as we put those two companies together.

On the revenue side we have really kind of several drivers.

We have one cross sell and more through a dedicated team that we built internally cross-selling insurance to our wealth clients, our broker-dealer clients, our PNC insurance clients.

We have the opportunity as Kelly alluded to earlier to drive the institutional side of the business.

We have the independent side, we think sort of hit a bottom if you will this past year with uncertain sort of tax laws.

We think that has potential to kind of come back closer to average.

And so you have a number of synergies in the business.

We didn't talk about healthcare reform.

That's a whole another approach that we have working.

And then fourthly, as you get two years into this three to five-year cycle, as you know the business works, we have profit commissions that will come back to us really -- there's no cost in profit commissions as you perform for your underwriters you get a sharing of the profit over time.

So we think we are well-positioned, in fact we don't know if of another platform that's positioned this well and we think it's really up from here in the next three to five years.

Feel very strong about it.

Greg Ketron, UBS.

Question on the loan growth or market opportunities.

And maybe this is for you, Kelly, as you look across the footprints, you look at what could be some of the loan growth drivers as 2013 progresses, you have had M&A in the marketplace through the RBC acquisition by PNC and then Wells Fargo's continued integration of Wachovia.

And then also the securitization markets being really not starting up at this point and some maturities coming out of the CMBS channels, and I was just wondering as you get beyond the first quarter in the loan growth of 2% to 4%, and we move through the rest of 2013 what kind of opportunities do you think exist in the loan growth side?

Well, that's what we're all trying to figure out.

It's a good question.

I think that you see it multifaceted.

The first thing you're going to see if the economy ramps up is you're going to begin to see some draw-down of existing credit lines.

Our utilization rates are still low.

And so without any new production you could see a substantial increase in our book just because of the increase in utilization rates.

Then you are going to see a substantial change I believe in our numbers in terms of our effective execution on high-quality CRE.

That's a substantial negative run-up.

When you switch that from big negative to slightly positive it's a huge ramp up in terms of increased outstandings.

You alluded to disruption in the marketplace as still accruing to our benefit.

We think the market will settle down.

Those companies will be really good competitors but it takes more time than everybody thinks to settle into some of these major acquisitions.

And so we're still benefiting from that and will during the course of this year and a little bit into next year.

The mitigations impact on loan growth is something I've been talking about for three or four years.

It's not been as pronounced at this point as I thought it would be but it is happening.

And I think it is going to accelerate.

And so there are a lot of maturities out there in the pipeline that are going to have to be placed and I think a lot of that is going to end up on bank balance sheets, and we have a good appetite for that.

So I think it will be a widespread array of loan opportunities.

And then when you add to that our initiatives in terms of increased corporate banking platforms, increased strategy, commercial strategies in Texas, and continuing to grow off a really good foundation in our Specialized Lending businesses, expanding our Mortgage business in terms of wholesale financing, (inaudible) financing on wholesale side.

We just have a long list to be honest of growth opportunities, and so I would say in terms of loan growth we're being -- constantly always try to be conservative but when you look at what were doing, it's hard to say that it's not more reason to be a little bit more optimistic.

Thanks.

And then on the pricing side, especially in areas like commercial real estate you talked about credit slippage, how are you seeing the pricing trends in your marketplace?

Greg, this is Clarke.

Pricing remains very competitive as you can imagine particularly as you go up the risk curve on the investment grade side.

But for us, positively, while we continue to see runoff of the older assets, our new loan spreads were relatively stable for the quarter to remind you all -- we talked about last time our C&I spread right now is 230 off.

It's a pretty good spread.

But the CRE opportunity it tends to run 80 basis points or more above our C&I rate so as we can gain more traction as Kelly said, that's really gives us a nice margin benefit.

Great.

Thanks for the color.

Paul Miller, FBR Capital Markets.

This is Thomas [Atrone] on behalf of Paul.

Two quick questions for you guys.

I believe in the Residential Mortgage Banking segment you guys have been about 40/60 retail to correspondent.

Can you talk a little bit about how you see that mix developing going forward?

Tom, this is Clarke.

Historically, we were primarily a retail originator, but over the years as there was a disruption in the corresponding side, we have dramatically benefited from that.

We have a very clean program we've run over the years.

We never got involved to any degree in the broker side, so there's a lot of Community Banks and high quality private correspondents over our network.

And so over the last couple of years you've seen a little more proportion in that segment than our retail segment.

And so while we certainly wouldn't want to be overweighted on the correspondent channel we expect that to be variable from year to year.

And so we would expect particularly as we look into '13 maybe a little higher level of correspondent to retail, but as rates go back up and over time you could see those numbers be a little more consistent to one another.

One other benefit we had is we did establish a mandatory delivery program this year.

We actually originated a $2 billion -- almost $3 billion in that channel this year so that's another nice growth opportunity for us.

So all in all we would see a higher percentage of correspondent in our platform than we have historically had but we think the risk profile is very, very good.

Okay.

Just a general point for you and others if you think about BB&T's lending strategy if you go back 5, 10 years ago, basically all of our lending strategies were in our existing footprint kind of the mid-Atlantic Southeast.

But we have very consciously expanded to a national lending strategy.

And what we consider to be very controlled focused areas.

So for example we have a national Specialized Lending strategy in certain businesses where we are really, really good at it.

Our corporate banking is now a national lending strategy and are mortgage is a national lending strategy, but we do that through this correspondent network where we can get high-quality paper on an efficient basis to lever up our manufacturing process, and so that's just one example of several of how we moved I think judiciously into a national lending platform on a very economical basis.

Okay.

Great.

And then one quick follow-up, in your C&I growth can you talk a little bit about where you're seeing the growth come from?

What sectors specifically if you can?

Thank you, Thomas.

What we're seeing as Kelly mentioned we've had five or six initiatives that we've been working on that we've seen some really good performance from '11 to '12 and indicators as we go into '13; example, asset-based lending, year over year production was up 40%.

We feel very good about that.

The dealer opportunity, we have over 6,000 dealers and this wholesale opportunity is tremendous for us.

We have a pipeline approaching $500 million.

We've got tremendous opportunity to grow that book off of a big retail paper business.

Something in the wholesale we never did much of.

Small commercial is another thing we put a lot of emphasis on improving our process.

We've seen small commercial pick up year over year 15% but linked quarter annualized up 55%.

So focusing on that core Community Bank lending seems to be going very, very well along with process change.

Income producing properties up 64% linked, annualized year over year up 60%.

Our regional corporate banking not the national platform that Kelly talked about up 33% year over year, 39% linked quarter annualized.

So we're also have a professional association strategy that we are working on, doctors, lawyers, et cetera that is a core function within the Community Bank.

So partnering with these large corporate initiatives, partnering with these Specialized Lending initiatives, we see a broad-based opportunity in lending and if we can continue to do our jobs, meeting the value proposition that we put forth to our customers and hopefully get a little help in terms of leadership toward the fiscal issues that our country faces, that could be a key that could really turn on some very nice loan growth for us.

But irrespective of that we're going to be really focused on these initiatives, we see it playing out broadly across our footprint.

Washington, DC is doing well, North Atlanta the more urban part of Atlanta's doing well, Florida, our Texas opportunity, we just see some broad-based opportunities across the board.

And we're going to keep pushing, do underwriting correctly be as judicious as we can to deliver value, hold up pricing as best we can, but also be mindful of competition.

And we feel very good about these broad-based opportunities.

And one final note on loans, just outside of the Community Bank, remember we've got these eight corporate verticals that we've been putting in to place over the last two or three years.

They are being excluded on.

We have frankly relatively small market shares in the national space in these verticals.

And so that will add supplemental growth in our corporate banking areas as well.

Okay.

Thanks very much, guys.

John Pancari, Evercore Partners.

Can you talk a little bit about the magnitude of the benefit of the stabilization in commercial real estate and then ultimately the growth you could see there?

I know you mentioned a couple times Kelly, I just wanted to get idea how much of a benefit can we actually see in 2013 as this stabilizes and you actually start to see some growth?

That's a good question.

And we haven't to this point tried to project an absolute mathematical target on that, but let me just give you a perspective that's been a very, very big part of our business for really 40 years.

And to be honest with you notwithstanding the last three or four years, we've made a lot of money in real estate over the long term.

We gave back some of it over the last two or three years, but overall the long-term return on that investment has been phenomenal so we are very good on that, done properly it's a very good business.

But it's been running down at a 30%-plus clip for the last couple of years.

And we now see a bottom.

We're looking for growth, so I think the mathematical impact on that total portfolio could be 1 point or 2 just when you turn back in terms of the marginal incremental benefit on that so I think it's very positive, John.

I think it's something we know how to do really well.

And we are frankly in a lot of good markets to where our value proposition is very, very strong.

And the opportunity for us to move relationships with some of these other companies that don't have quite the capacity we have today is very, very good.

Okay.

And you think that inflection is something that's likely over the next couple of quarters?

Yes.

Okay.

And then my second question on the M&A side I know Kelly you mentioned that you could see some smaller deals.

Can you remind us how you would characterize a smaller deal in terms of the asset size?

So I think in terms of smaller deals as being -- I don't want to hurt anybody's feelings but I think in terms of smaller deals for us is being $3 billion to $10 billion.

You could probably see a lot of deals done out there in the $1 billion level.

You're unlikely to see us doing something in the $1 billion level.

You never say never in this business if you have some -- really strategically significant thing in one little market you might do something, but I would think in terms of $3 billion to $10 billion, and there are a number of opportunities in the whole space that we think may become available in that area.

Really if you can do $3 billion, $4 billion, $5 billion deal in this environment, we're really good at it.

We have a very efficient merger and converging team.

And so we think it's what I call the ground game of merger strategy.

It's up and running well.

We're on the streets talking to people that considering making changes so I think that's where you'll see the predominant activity.

Other things could change but as I said before I do not expect them.

Okay.

Great.

Thanks for taking my questions.

Matt Burnell, Wells Fargo Securities.

Kelly, I'm sorry if you've already covered this but you sound perhaps a bit more optimistic in terms of the potential for commercial loan demand assuming things can get settled a bit in DC.

I guess I'm curious as to if you've seen any increased demand in the commercial commitments since the election?

Or are your borrowers continuing to more or less sit on their hands awaiting further information and further clarity out of Washington?

No.

It is actually been some ramp-up in terms of loan production.

I mentioned earlier you might not have been on the call, but I mentioned for example in the Community Bank our loan production year over year is up 26%, for the fourth quarter annualized it was up 32% compared to the third.

So clearly there is some increased demand out there in terms of what I call getting ready to play.

And so we're booking CRE commitments that are unfunded.

We're looking lines of credit for companies that are not yet funded.

So yes, there is some -- clearly there's a more positive attitude than a year ago.

And I think what they're doing basically is they're locking in their commitments.

They're getting plans ready to go.

And then they want to see things settle down.

They've seen what the deal is on taxes, not what they wanted but it's not draconian.

And now they've got to see that we're not going to run off the cliff in terms of economy because of the fiscal issues.

And when that resolves itself, which I think it will in a reasonable way, I think you're going to see people decide that we've just got to go ahead and run our business.

CEOs have a natural process when things really get worse, they hunker down completely.

When things begin to stabilize, they begin to look around a little bit.

They remain conservative.

And then at some point when things look a little bit bright, you just have to get back to say, we've just got to run our business.

And that's where we are today and I think you're going to see companies decide to make investments and I think we're going to be the beneficiary of that.

Okay.

And for my follow-up in terms of the mortgage sales that you made in the quarter, can you comment on the gain on sale margins on those?

And what your expectations are for those margins over the course of 2013?

Matt you may have not been on but we did cover that but I will give it to you again.

Fourth quarter our gain on margins were 229 basis points, about $160 million in dollar terms.

As we look out into '13 we expect some pretty good volume compared to 2012, although we'll probably have slightly tighter margins going forward.

Right now our retail margins are well north of 400.

Probably as you get into '13 that's going to trend down at least into the 300s.

And our margins over our correspondent network are over 100.

That's going to pierce through 100 some time throughout '13.

Okay.

Thanks very much.

Sorry for the repetitive question.

Erika Penala, Bank of America Merrill Lynch.

My questions have been asked and answered.

Thank you.

While we still have several questions in the queue we need to conclude the call given the time.

I would now like to turn the conference back to Kelly King for any additional or closing remarks.

Thanks, everybody for being with us today.

We really appreciate it.

I think what you've heard us say is that it was a really good quarter, a great year.

We have some reservation about the economy but relative to that, we feel very bullish about our business as we go forward.

Notwithstanding the fact that we just celebrated our 140 year anniversary.

We feel very strong our best days are ahead and we look forward to reporting that to you here forward.

Have a great day.

Thank you.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect.