Truist Financial Corp (TFC) 2013 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation fourth quarter 2013 earnings conference call.

At this time, our participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alan Greer, Executive Vice President and Director of Investor Relations for BB&T Corporation.

Thank you, sir, you may begin.

Thank you, Lisa 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 some thoughts for 2014.

We also have other members of our Executive Management Team with us to participate in the Q&A session: Chris Henson, Chief Operating Officer; Ricky Brown, President of Community Banking; and Clarke Starnes, 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 intentions, beliefs, or expectations.

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

I refer you to the forward-looking statement warnings in our presentation and our SEC filings.

Our presentation includes certain non-GAAP disclosures.

Please refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP.

Now I'll turn it over to our CEO, Kelly King.

Thank you, Alan.

Good morning, everybody.

Thanks for joining our call.

Overall, we had a strong fourth quarter.

Revenues were up, expenses were down, credit was great, and I think importantly, we believe the economy fit kind of a positive pivotal point -- and I'll talk some about that in a little bit.

Net income totaled $537 million, up 6.1% compared to the fourth quarter of 2012.

Diluted EPS was $0.75 on a GAAP basis, increase of 5.6% versus fourth quarter of 2012.

For the year, we earned $1.6 billion, or $2.19 a share.

But remember, those results include $519 million in tax adjustments from prior quarters, which we've talked to you about.

If you exclude those adjustments, we would have had -- made $2.19 billion, which would have been record operating earnings.

In the revenue area, our total revenue on an FTE basis was $2.4 billion -- was up 3.9% annualized compared to Q3.

That was largely based on a seasonal strong quarter for insurance, record performances in trust, investment banking, groups, lower deposit costs.

It was substantially offset though, by a decline in mortgage banking income.

Our income ratio did increase to 43.5%.

With regard to loans, average balances were down 1.2% on a GAAP basis.

But remember, this includes the sale of a subsidiary we discussed in the last quarter.

If you X that sale, loans were up slightly, consistent with the guidance that we gave at our mid-quarter conference.

Importantly, income-producing CRE has turned.

That's a big story for us, and grew 5.2% annualized.

Combined with the residential CRE, total CRE grew 3%.

This is the first quarter this has turned and grown in six years, going back to post-crisis.

That'll really help us in 2014.

If you exclude the sale of subsidiary and related transfer, other lending subsidiaries grew 3.5% versus third quarter, even though this is a normally soft quarter for those subsidiaries, primarily in insurance premium finance.

Residential mortgage increased 9.8% on a GAAP basis compared to third quarter.

Now we did have that transfer in as part of the subsidiary sale, but still, it was up 6%, excluding those loans.

Deposits had another good quarter.

They did decrease $2 billion, or 6.3% overall, but importantly, non-interest-bearing deposits increased $1.1 billion, or 12.8% annualized.

Our deposit mix improved, and our costs declined three basis points to 28, which is what we had indicated earlier in the year.

Credit performance was a really big story for the quarter.

Net charge-offs remained unchanged from third quarter at 0.49% of average loans and leases.

That is below our long-term estimated normalized charge-off rate.

We are, by the way, reducing that from 55 to 75 down to 50 to 70 basis point range.

That's due to strong performance, and mostly because of the change in our loan mix.

NPLs decreased 9.2%.

NPAs decreased 9.4%.

ALL coverage improved to 1.73 relative to NPLs, up from 1.66.

Expenses was a good story for us.

(inaudible) expenses decreased 4% annualized versus the third quarter, mostly driven by lower professional services, regulatory, and other expenses.

In the professional services area they decreased $14 million, due to systems and project-related reductions.

Efficiency ratio improved, and we produced positive operating leverage for the fourth quarter.

As we discussed in mid-quarter, we believe expenses peaked in 2013, and will decline consistently during all of 2014.

We do expect continued improvement in efficiency ratio throughout the entire year.

If you'll look at slide 4 with me, we had just a couple of unusual items this quarter.

The subsidiary sale -- again, which we mentioned on the third quarter -- did occur at a $31 million pretax gain, $19 million after-tax.

That was about a $0.03 positive impact to EPS.

We did have a relatively small, but a meaningful number, of merger-related restructuring charges, some related to the subsidiary sale, about $10 million pre-tax.

That was about a penny negative to our EPS.

If you look at slide 5, a few more comments with regard to loans.

Loans were down, as I said, 1.2% on GAAP.

But that includes the Mortgage Warehouse being down, seasonality, and the sub sell.

If you X the sub sell, they were flattish, really up 0.3%.

But some real positive improving trends which I'll talk about.

If you X the sub sale and the decline in Mortgage Warehouse, loans were up actually 1.5%, which is kind of a look at kind of an operating or normalized kind of look at loan growth.

C&I was flat excluding Mortgage Warehouse, even though in GAAP basis was down 3.6% fourth to third.

CRE, as I indicated was strong.

CRE other expense, solid growth of 5.2%, had some good performance in some key retail areas: 11.9% growth in sales finance; 8.4% in revolving credit; 9.8% in residential mortgage -- again 6%, if you exclude the loan transfer.

Excluding the sale of the subsidiary and the related transfer of loans and other lending subsidiaries they increased 3.5%.

That was led by Sheffield, up 11.8%, equipment finance up 17.5%, Grandbridge up 7.4%, and Regional Acceptance, up 5.4%.

A little more commentary for you with regard to the loan area.

As I said, we are seeing some real positive points.

Just a macro perspective to begin with.

We really believe we are at a pivotal point in the economy.

Admittedly that's substantially intuitive, but I am meaningfully more positive about where we are and where we're going today than say 90 -- certainly 120 days ago.

What are the reasons for that?

Well first of all, we had better job growth over the last several months.

I know December was down, but we think that was a fluke.

The budget deal in Congress we think was a really big deal, and then psychology matters in situations like this.

People have been feeling bad for six years.

There's a natural psychological reaction when you go through a period like that where you just want to feel better.

It doesn't take too much positive news to make you feel better, and that's what we're beginning to see.

People need to invest.

A lot of small and medium size companies, particularly, have not invested in rolling stock equipment, automation equipment for five, six years.

They need to invest.

The global environment is more stable, and we're seeing some positive signs in terms of growth, in terms of the Euro zone and other areas.

The stock market is much better.

Just a long list of positives that I think are pretty meaningful in terms of how you ought to think about where we are.

Just in the last couple days, I just picked up some things.

Like for example, the World Bank says that global economy is at a turning point.

Wall Street Journal just yesterday, or maybe it was Tuesday, had an article that said why business investment could break out.

Kiplinger just yesterday said calmer waters lie ahead for the economy.

There's some pretty positive indicators out there.

I'm not trying to say it's perfect, and I'm not trying to say we've had a 180-degree turn.

I just simply think we've made a turn, and that's a big deal.

I think it portends more positive productivity and production as we go forward.

Nonetheless, whatever happens in macroeconomic conditions is what it's going to be.

What we're really focus on is what we can do to execute on our strategy to grow faster than the market.

So just a number of those to give you some comfort in terms of our optimism.

In the second half of the fourth quarter, we definitely saw a meaningful positive change in loan activity.

We ended 2013, particularly the second half of the fourth quarter, with the best momentum I've seen in just a number of quarters.

Growth in CRE, as I've described, is led by stronger performance in office properties: hotel, motel, retail.

We also continue to have good growth in multi-family, so we expect CRE to have meaningful positive growth in 2014.

Run-off in key portfolios improved.

That's a big thing mathematically in terms of loan growth.

Community bank run-off in December was the lowest in some time.

Single family run-off, which is a smaller portfolio now, but it's beginning to stabilize.

Mortgage Warehouse lending stabilized in December.

Mathematically, if these portfolios stabilize and the run-offs subside, that makes a positive kick in terms of growth.

CRE specialist strategy produced five consecutive months of growth, and continued to gain momentum across our footprint.

To give you perspective on that, fourth quarter end-of-period annualized growth was 12%.

We have unfunded construction loans at about $1 billion.

ADL asset-based financing has been restructured, added additional resources.

That's a big potential for us as we go into 2014.

Key new markets: Texas, Florida, Alabama, are gaining traction, really positive momentum there.

Dealer floor plan doubled commitments during 2014.

We have an $800-million pipeline.

Large corporate initiatives, including new offices in California, Chicago, Ohio, and New York.

We've added a food and ag specialty group, all improved focused during latter part of last year and heading into this year.

We're gaining a lot of momentum in all of those areas, and we are selectively increasing our whole positions in some large corporate opportunities, which is positive as well.

Equipment finance is a big opportunity for us, as it's experiencing strong growth.

We're really focusing on that into the large corporate space.

We've re-instituted our fixed-rate, owner- occupied program, which is very well received by our people in the community bank.

We have more focus on pricing and government finance, which produced very positive results in Q4.

Looking forward for the first quarter, we expect average loans to grow between 2% and 3%, and to accelerate in the second quarter as our more seasonal loan categories, like insurance premium finance in Sheffield, really begin to kick into their seasonal growth.

Loan growth still going to be tough.

Lots of competition, but we are optimistic as we head into 2014.

Looking at slide 6, with regard to deposits.

We had a good quarter for deposits, and we continue to execute our mix (inaudible - background noise) strategy.

We had a non-interest-bearing DDA up 12.8%, (inaudible - background noise) up 3% fourth to third, money market savings up 5.1%.

Now CDs and other type was down substantially at 61%, $3.9 billion, but that was a conscience strategy.

A lot of that is large corporate CDs, not out of the community bank.

That was a part of our mix change and our cost control.

Speaking of cost control, made really good progress.

We had told you at the beginning of the year we thought we could break 0.30, and we did.

We got down to 0.28, 3 basis points better than 0.31 for the third, and 10 better than the fourth quarter of last year.

So nice improvement there.

I would point out that these costs are likely to kind of flatten at this kind of level.

We've got new liquidity requirements, and so we want to keep our mix of deposits really diversified.

Look for that to be kind of flattish -- might be down a little bit more, but kind of flattish.

We expect continued growth in all client deposit categories during 2014, as we continue to focus on penetrating the client market.

That's a little bit of color there.

Daryl's going to give you a lot more details now.

Let me turn it to him.

Daryl?

Thank you Kelly, and good morning, everyone.

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

Continuing on slide 7, we continue to see significant improvement in credit, driving lower costs.

Fourth quarter net charge-offs, excluding cover, were $141 million, or 49 basis points.

This is essentially flat compared to the third quarter, but down 52% compared to the fourth quarter 2012.

We are updating and reducing our previous charge-off guidance to 50 to 70 basis points based on the change in loan mix.

For the foreseeable future, we believe charge-offs will remain below 50 basis points, assuming no significant deterioration in the economy.

Net performing assets, excluding cover, declined 9.4% during the fourth quarter, and represent our lowest NPAs as a percentage of total assets in six years.

We continue to expect NPAs to improve at a modest pace in the first quarter.

Turning to slide 8, as you can see, commercial NPA in flows dropped 33%, which led to the lower provision.

As expected, delinquent loans increased modestly due to seasonal factors; however, total commercial watch list was down 9%.

Also, our allowance to non-performing loans increased from 1.66 times to 1.73 times, reflecting strong coverage.

We had a reserve release of $70 million during the quarter, compared to last quarter's $52 million, due to continued credit improvement.

Continuing on slide 9, margin came in at 3.56%, down 12 basis points from the third quarter, and core margin came in at 3.34%.

The drivers for margin declines are the sale of the consumer lending subsidiary, lower rates on new earning assets, and a decline in covered asset yields.

These declines were offset by lower funding costs and favorable funding and asset mix changes.

Looking at margin for the first quarter, we expect a decline of approximately 5 basis points.

The decline in margin guidance results from a larger investment portfolio driven by the new liquidity rules, and lower yields on earning assets.

The factors will be partially offset by continued improved funding costs.

We grew the investment portfolio to $40 billion at year end, and it should remain at this level throughout 2014.

In light of that, we expect core margin to be relatively stable after the first quarter.

Lastly, we became less asset sensitive due to the increase in the investment portfolio; however, we continue to remain well positioned for rising rates.

Turning to slide 10, our fee income ratio for the fourth quarter increased to 43.5%, which is driven mostly by insurance, investment banking and brokerage, and other income, offset by the decline in mortgage banking.

Insurance income was $16 million more than the third quarter, mostly due to normal seasonal factors.

Investment banking and brokerage had a record quarter of $101 million, an increase of $12 million.

Other income reflects two items, a $31-million net gain on the sale of a consumer lending subsidiary, and an increase of $18 million in income from assets related to certain post-employment benefits, which is offset in personnel costs.

Finally, mortgage banking income declined $17 million, primarily due to lower gains on sale, lower volumes, tighter pricing, and the retention of mortgage loans on the balance sheet.

Total gain on sales decreased from 89 basis points in the third quarter to 55 basis points in the fourth quarter.

Even with lower mortgage revenues, we expect to see positive net growth in fee income in 2014.

Looking at slide 11, we achieved positive operating leverage, which drove the efficiency ratio slightly lower this quarter.

Total non-interest expense decreased $15 million, or 4% annualized, compared to the third quarter.

Professional services declined $14 million, reflecting lower legal costs and a decrease in project expenses.

Other expense decreased $14 million, reflecting lower insurance-related expenses, and the impact of the lower cost or market adjustments on owned real estate recorded in the third quarter.

Personnel expense increased $22 million compared to the Third Quarter.

This increase is largely due to the increase in post-employment benefit expense, which is offset in other income, and higher production-related incentives and commissions.

FTEs were essentially flat compared to last quarter.

Merger-related and restructuring charges were $6 million higher than last quarter, partially due to restructuring expenses from the subsidiary sale.

Our expenses have been elevated due to a number of projects that ultimately make us a better Company.

Therefore, our non-interest expense peaked in 2013, and we expect the trend to be lower throughout 2014.

As Kelly said, we continue to forecast an efficiency ratio in the mid 50%s by the end of this year.

Finally, our effective tax rate for the quarter was 29.2%.

We expect a similar rate in the first quarter of 2014.

Turning to Slide 12, capital ratios remain strong and are up from the third quarter, with Tier 1 common at 9.9% and Tier 1 of 11.8%.

Also, our estimated Basel III common equity Tier 1 ratio is 9.6%.

Now here are a few highlights from our segment disclosures.

Beginning on Slide 13, community bank net income totaled $275 million, showing growth for both link and common quarters.

Loan momentum picked up late in the quarter, with link quarter commercial production up 61%.

CRE and other non-residential loans grew 6.4% compared to the third quarter.

Dealer floor plan loans increased more than 100% compared to last quarter.

Turning to slide 14, residential mortgage income was $27 million, down due to the decline in loan production, and tighter margins versus prior quarters.

The mix in refi and purchase activity was 32% and 68%, respectively.

Looking at dealer financial services, slide 15, net income was $49 million for the quarter.

We continue to generate strong production, with common quarter loan originations up 15%.

Regional Acceptance, our non-prime subsidiary, generated mid-single-digit loan growth, and maintained strong risk-adjusted yields.

Operating margin for this segment improved to 46.5% compared to last year.

On slide 16, our specialized lending segment experienced another solid quarter, with net income of $71 million.

Average common quarter loans grew modestly due to the subsidiary sale; however, the segment showed strong performances from Sheffield, premium finance, commercial finance, and equipment finance.

Moving to slide 17, BB&T Insurance Services generated $49 million in net income, up $27 million link quarter due to seasonality, mostly driven by organic growth in wholesale and lower expenses last quarter.

EBITDA margins increased to 24.5% this quarter.

Turning to slide 18, our financial services segment generated $87 million in net income, driven by corporate banking and wealth, with loan growth of 17% and 23%, respectively.

Total assets invested increased to $111 billion, or 16% compared to fourth quarter 2012.

As we enter 2014, based on what we see today, we are planning for additional credit improvement, expense leverage, positive loan momentum, and strong fee income production.

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

Thank you, Daryl.

I hope you can see why we feel like it was a strong fourth quarter, and feel positive as we go forward.

Revenue up, expenses down, credit was great, better economic forecast, excellent momentum in loan growth and expense reduction.

We are very optimistic as we head into 2014.

Now, Alan, I'll turn it over to you.

Thank you, Kelly.

Now we will move to the Q&A session.

In a moment I'll ask Lisa to come back on the line and explain how you may participate in that process.

We ask you to follow our normal convention of asking one primary question and one follow-up so that we may maximize the participation in the Q&A.

With that, Lisa I'd ask you to come back on and explain how people can participate in the Q&A process.

Certainly, sir, thank you.

(Operator Instructions)

We will take our first question from Michael Rose from Raymond James.

I just want to get some clarification on the fee income growth this year.

Does that include or exclude the gain from the sale of the subsidiary?

Are you talking about the fourth quarter, Michael?

Yes, you mentioned year-over-year fee income would be higher.

Does that include the sale of subsidiary or not?

When we look at that, we're actually carving out the one-time items like the sale of subsidiary and also the lost-share impact, as well as any gains on securities.

If you take the gains on securities, and in 2013 we had about $50 million, we had $31 million in this gain on subsidiary.

It kind of washes each other out.

Okay, that's helpful.

Switching over to loan growth, maybe this one could be for Kelly.

Can you give us some context by market, and maybe what Texas will contribute as we move into 2014?

Yes Michael, I think we have fortunately a number of areas that we're very bullish about.

Certainly we're continuing to build out at a reasonable penetration in Florida and Alabama, Atlanta area, but Texas is specifically a kind of a unique opportunity for us.

We opened 30 commercial de novo operations there this year.

We just added 21 from the Citi acquisition, so we have a total of 80 locations there now, and the momentum is absolutely fantastic.

Our value proposition is playing extremely well in Texas.

Texas is growing rapidly, as you know.

I'm not hanging everything on Texas, but it's a really big opportunity for us.

But we have a large range of other loan initiatives that will supersede all of these, so overall it looks very positive.

We will take our next question from Betsy Grasek from Morgan Stanley.

I just wanted to hone in a little bit on the expense ratio, because I know that's a big part of the list as we're thinking about earnings into next year.

I know Daryl you talked about a couple of initiatives you've got under way.

But maybe you could describe how we should be expecting the expense ratio's going to migrate throughout 2014?

If you could talk a little bit about what you did this quarter to drive that forward expense reduction that's coming?

Yes, I think as you look at 2014, Betsy, we should have continual improvement each quarter in the efficiency ratio.

The line items that I would say would have the most impact from a point to point basis in 2014 would be in personnel costs, professional costs, regulatory costs.

All those will be down throughout 2014.

As far as what you saw in the fourth quarter, I would tell you that some of our projects that we initiated back in the second quarter of 2013 have come to completion, and they're starting to wind down.

Some of those costs are coming out of our numbers in the fourth quarter.

We still have some costs that are going on that will stay with our Company through 2014, but some of those costs will start to fall off as well.

There's many projects, but I think we're starting to see positive traction as these costs and projects get completed.

What's your sense just on the regulatory expenses year on year?

Clearly, you had some up-tick in expenses in 2013 due to CCAR, et cetera.

Do you feel like that's going to be a meaningful contributor to expense reduction in 2014?

I would say it would definitely add several pennies to our number for 2014 versus 2013.

We had a lot of third-party help with CCAR specifically.

We have some third-party helping us with some of our system conversions around some of our projects that we have today.

Those are eight-digit numbers, and as those get completed, those should start to fade away.

We will take our next question from John Pancari from Evercore Partners.

On the expense side, how much of that improvement in the efficiency ratio, getting you to the mid 50s by the fourth quarter, how much of that would you say does come from the expense base overall, versus top-line relief?

If you look at -- we still have a head wind in net interest income due to the covered portfolio.

If you back out net interest income for the purchase accounting impact, actually net interest income would be up year over year a couple percent.

But if you just look at it on a GAAP basis that's down.

If you take that and match that against our fee income, essentially revenues will be flattish for 2014 versus 2013.

We have expense projections that should be down probably a couple percent, 3%-plus or so on a year-over-year basis.

Okay.

All right, that's helpful.

Then my second question is just around the pace of loan growth.

You gave pretty good color around the expectation for 2% to 3% growth in the first quarter.

Can you talk about the pace of growth as you go through 2014?

Just given your color that you provided around loan demand there, Kelly, it certainly sounds like it should strengthen.

Can you give us an idea of how we should think about that pace of growth as we go through 2014?

Yes, I think John, it will continue to build.

Part of that, like in the second, will be because of seasonality factors; but also if our projection is right -- we could be wrong, but if our projection is right and the economy improves, then that will have a number of positive impacts.

For example, companies start investing, they will start drawing down on their lines utilizing them more.

We'll have new opportunities, we'll continue to execute on our wealth strategy, our corporate banking strategies, et cetera.

I think you could see a meaningful increase in our loan growth as we head through the year.

We certainly are not talking about 8% to 10% kind of loan growth, but I wouldn't be a bit surprised if we ended out the year in the 5% kind of range.

I'm not trying to signal that I think the market is getting ready to boom and take off, I don't think that's realistic.

But it is getting better, and our strategies are really coming into execution phase, and it's going to make a meaningful difference for us.

We will take our next question from Keith Murray from ISI.

I just wanted to check on any line utilization update, meaning the expectation in growth that you're seeing in loans.

Do you expect to see corporations pulling lines down, or do you feel like you need to see them use some of their own cash first that they built on their balance sheet before you get the real pick up in loan growth?

Keith, this is Clarke Starnes.

It's a great question.

So far, our growth outlook and experience has been more around new production.

Utilization is still flat, so we haven't hit the point yet where companies are starting to draw down.

They're still using their cash first, so our utilization rates are still in the mid to high 30%s.

They have not really moved yet.

Okay.

Then if you can just give an update.

You did the Citi branch deal in Texas.

Given what regulators are -- headaches they're making banks go through on M&A deals, are you seeing other opportunities just on branch deals and footprints that you find attractive?

Keith, I think that you will likely see a number of more opportunities like that as some of the larger companies, domestic and internationally, kind of tweak or substantially modify their strategies around capital requirements and liquidity requirements and other regulatory issues.

I personally expect you will see a fair amount of that nationally.

As we go forward, we're certainly going to look at any that make sense.

The Citi type of acquisition is kind of odd deal in this environment, because you get assets and liabilities, and really good employees in really good markets, so yes, I would expect more of that as we go forward.

We'll take our next question from Steve Ciccarello from UBS.

Just wanted to follow-up on the strong performance on the insurance brokerage side.

I know there's some seasonality in the fourth quarter, but just kind of curious some of the trends, because I think in the slides you mentioned improving market conditions, as well.

Just wanted to kind of get a little more color on what we might be able to see in terms of continued growth in that segment as you look ahead in 2014.

Right, great question.

Fourth quarter we had good solid performance from our McGriff, which is our upper-end segment retailer, as well as our MGU, our managing general underwriter, as they've been allocated a good bit more capacity by the underwriting companies.

When I think about 2014, I think what you, we're -- our current run rate for the year was about 4.7% same-store sales.

I think the market is probably going to etch down a bit just a shade in price, probably in the 3% to 4%, we've been 4% to 5% in 2013, probably more like 3% to 4%.

We think given our momentum and kind of where we are today we think for us it's probably a 5% to 6% kind of growth opportunity.

Retail is probably in the 3% to 4% range, wholesale is probably in the 6% to 9% range.

Overall, we think 5% to 6% is kind of what we look for, with good out-sized performance from wholesale, specifically in the MGU.

Perfect.

Second question I had was just in terms of the effects from kind of re-sizing or re-adjusting the investment portfolio due to the upcoming liquidity requirements.

Just looking ahead, now that you hit that $40-billion level, should we expect a little less margin headwind as we go forward, since you are where you need to be?

Yes, I think that's exactly right, Steve.

If you look at our slides, we're going to go down in margin in the first quarter, mainly due to the increased size of the investment portfolio, so it's going to be on the books for the whole quarter from an average basis.

But if you really look at core margin, you didn't have the sale of our consumer lending subsidiary.

We're basically, our core margin's relatively flat now.

So I would expect core margin, after we adjust for the size of the investment portfolio, to be flat for the rest of 2014.

The steeper yield curve, our credit spreads that we're achieving now, and our loans that we're putting on the books are definitely kicking in such that it's not having as much pressure on us, and we still have maybe just a little bit more of funding costs to come down.

I think core margins overall can stay where they are after we adjust in the first quarter.

We'll take our next question from Ken Usdin from Jefferies.

I wonder if you can talk to us a little bit about just credit quality and the outlook.

Obviously the metrics all looked very good and you continued to have a decent release, probably a bigger than expected one.

Was there any specific release related to the loan sale, and what do you think the pace of reserve release can continue to look like?

Ken, this is Clarke.

It's a good question.

Specifically, there was $27 million of reserves that transferred with the acquired loans, so that was -- but net of that and the covered position, the release was $70 million versus $52 million in the third, so $70 million is kind of more comparable to what happened in the third quarter.

What drove that release was the continued improvement in the credit quality, big improvement in the commercial portfolio, and run-down of some of the older higher-risk manages.

We continue to see improvement as we look forward, and certainly that would impact probably the reserves, at least in the near term.

Hopefully, we'll continue to get a benefit from that in the provision.

Okay, great.

My second one is just regarding CCAR, and the continued improvements you guys have made on process.

With Basel III up to 9.6, can you just talk to us a little bit about just your general framework about balancing capital return this year against that potential you mentioned earlier, Kelly, about opportunities potentially coming up on the M&A side?

Yes.

Ken, I think things are settling down with regard to -- certainly with regard to us in the whole CCAR area.

Obviously 2013 was a year of regrouping and reinvesting, so I viewed that as kind of stabilizing as we go forward.

Certainly, we are being conservative with regard to our capital position.

As we see the rules settle down, as we see the CCAR process stabilize, it certainly does put us in a position of strength that allows for looking forward, being able to take advantage of some of these opportunities that do come along.

We've always said we want to have capital for organic growth first and dividends, but also then take advantage of opportunities like the Citi deal that kind of came along, or the Krump Insurance deal last year.

We want to remain relatively conservative and keep some powder dry so we'll be in a position to take advantage of those.

Okay, got it.

Thanks, Kelly.

We'll take our next question from Sameer Gokhale with Janney Capital.

Great.

Thank you for taking my questions.

Just a couple.

The first one I had was just in thinking about the auto business.

Loan originations across the industry have been quite strong loan growth.

But at what point do you feel that you need to dial back on growth there?

I understand that auto sales have been strong and that's been part of the reason that growth has been strong for loans.

But everyone is talking about the pricing pressure.

It seems like this is a perfect environment in terms of credit, used car values are up.

At what point do you say let's dial back on auto originations, just because used car values have fallen, and maybe that's a leading indicator that things might slow down there?

Some perspective there would be helpful, thank you.

From a credit quality perspective, we are being very disciplined while all the sales have driven big originations.

We've avoided the temptation to extend term or lower advance rates or allow increased back in a lot of the structural elements which we do see in the market place, we have not changed our underwriting, so that will naturally impact our volume if others choose to go that route.

The bigger consideration for us is if whether we can get an appropriate margin.

Right now, we still feel with the pricing we're doing that it's still attractive for us, but we're going to stay very disciplined about that risk and return decision.

This is Ricky Brown.

Too, on the wholesale side of the business, remember it was very small for us relative to the size of our overall retail piece.

While we're expanding that, it's still very high-quality dealers with growth rates fast, but we were not very large in it.

It's just sort of getting to a size that makes some sense for us.

We're not out-sizing that part of the business at all.

It makes me feel really good about toward the direction of your question about how we're positioned.

Okay, that's helpful.

Just the other question was for your residential mortgage banking business, gain on sale margins are only 55 basis points.

Does that -- how does that factor into your thinking about selling loans versus retaining more of them on balance sheet.

How do you think of the trade-off there, given the low gain on sale margins?

Sameer, that's a great question.

We did make the decision late last quarter to start portfolioing the 10- and 15-year.

I think as we look out and look at the margins that we're getting on gain on sale, we're looking for other opportunities to put on the balance sheet.

There's huge emphasis in jumbo, both fixed and ARMs.

We're having a lot of success in the wealth area, attracting those products.

I think as you see margins on gain on sale continue to shrink, I think we'll put more and more on our balance sheet.

We'll take our next question from Erika Najarian from BOA, Bank of America.

I just had one follow-up question.

You've been extremely clear on your outlook for 2014.

You're very positive on loan growth, and clearly, the core margin is stabilizing.

I guess I wonder as I look out farther into 2015, will 2014 mark an inflection point in your GAAP NII, in that some of the positive momentum that's happening with growth is going to show through in 2015?

I guess the best - the straight question is can NII grow in 2015?

Yes, I believe it can, Erica.

If you actually look at the covered assets, we got positive net interest income of about $120 million this quarter.

This time next year, so fourth quarter of 2014, it's down to about $60 million.

The headwinds are significantly less as we enter into 2015.

I think depending on how strong the economy is and what type of growth, but if we're able to grow loans in the 5% to 6% range in 2015, I think we will definitely have positive net interest income growth for 2015.

Erika, I would just add, if you kind of look at 2013 and 2014 for our Company, they really are two of the toughest years that we've had because of the decline in the Colonial income, because of the build-up in expenses during 2013, with regard to some of the process and project improvements, et cetera.

But really as we move through 2014 and the Colonial drag dissipates as the loan growth strategies become better executed, as the economy gets better, I don't want to predict 2015 too far out, but I'll be honest, if you ask me, I feel pretty doggone good about it.

Great.

Thank you for taking my question.

Thank you.

We'll take our next question from Kevin Fitzsimmons from Sandler O'Neill.

Guys, I just wanted to follow up on Ken's question from earlier on CCAR.

Specifically, I think what we've heard you say in past quarters is that the dividend has probably not got too much room for increasing given where the payout is -- it's already on the high end -- and buybacks are typically at the low end of your priority spectrum, but probably gets a little more elevated given the state of large bank M&A, that it appears at least from our vantage point is still pretty much closed, but the stocks have increased.

So where are buy-backs right now in your frame of mind?

Because I haven't heard it mentioned, and I've heard you mention about keeping your powder dry.

Are buy-backs something that you would characterize as less of a priority versus several months ago?

Thanks.

Kevin, you're right.

All of these factors kind of move around, and you have to adjust your thinking as you go.

As I sit here today, you're right, the dividend posture has to be relatively conservative in terms of increases, but we're already aggressive overall and have been throughout the whole crisis.

Our long-term view is the buy-backs are kind of our last priority in terms of utilization of capital, as we've described consistently.

When you do not have M&A activity and other factors change, it can cause that to rise.

What I said previously is that given the current environment, that would cause buy-backs to tend to rise somewhat.

On the other hand, if we think specifically about 2014, as I said I do think it's wise right now to keep some powder dry in terms of potential opportunities.

Whether it's whole bank deals or partial bank deals, we think there are going to be opportunities there.

Then frankly, coming off of 2013 CCAR, we want to be very conservative this year with regard to all of that.

As I've said, I think you can expect us to have a very conservative ask as we think about CCAR for 2014.

Now the likely result of that would be a material build up in capital, based on good solid earnings which positions us as we go through the year, and especially as we look to 2015, to have more powder dry for acquisition opportunities and/or a more aggressive strategy with regard to buy-backs.

Okay, thank you very much.

We'll take our next question from Kevin Barker from Compass Point.

Good morning.

Could you talk about the competitive pressures you're seeing in mortgage banking, given you reported a significant decline in gain on sale margins, while some of the largest banks are reporting significant increase in margins.

Was a lot of that due to channel mix, or could you just give us some color around why the margins were down significantly this quarter?

Yes.

Kevin, if you look at the mix of mortgage originations, we shifted more towards the correspondent piece this quarter.

It was about 75% of our production.

With that higher mix there, that kind of drove the spreads down.

We did see some deterioration, however though, in retail.

Our retail spreads are about 180 overall, but I would say the majority of it was driven by the mix change.

Okay, and then a follow-up regarding some of the loans you're keeping on balance sheet.

Are you expecting to keep 30-year fixed potentially conforming loans on balance sheet, given the competitive pressures in mortgage banking?

Would you be making non-QM loans?

I'll answer it as a balance sheet question first, and then Clarke can kick in on the non-QM.

As far as we always traditionally have kept arms on our balance sheet.

We've done that historically.

We made a decision late last quarter to keep the 10- and 15-year.

Historically, we've also always kept our jumbo 30-year.

Those tend to pre-pay a little bit faster.

They are convexed, but it's not as significant portion of the mix overall.

I think 30-year conventional we continue to sell those out into the market place, but the majority of what we're balance sheeting are 10- and 15-year and ARMs, with a little bit of 30-year jumbo.

Kevin as far as the non-QM, right now our forecast is that our non-QM production is fairly modest, probably about 5%.

We're primarily a QM lender, but we do see some potentially attractive opportunities to do some non-QM loans in a very safe manner, primarily in our wealth segment.

But Kevin, just to echo that, as you've heard some others say, we are not going to be QM- constrained in terms of meeting the needs of our clients.

We are going to be, as Clark said, primarily QM, but the QM rules frankly allows you to meet most of the needs of your clients.

There will be some unusual need from some wealth clients and small business clients and people like that, and we'll be very supportive in terms of making non-QMs and holding them on the balance sheet.

It's really, as it turns out, we don't think it's going to get in the way of production and meeting our clients' needs.

Now I will tell you that the book is still to be written with regard to the ultimate cost of servicing loans from a QM point of view for us and everybody else, but the production side seems to be pretty benign in terms of any negative impact.

Okay, thank you very much.

We'll take our next question from Brian Foran from Autonomous Research.

I was wondering if you could come back to the comment about the asset sensitivity related to the LCR.

I definitely don't want to lose sight of the fact that regardless of what happens, margin rates is positive.

But as you think about the kind of prospective in a normal, rising-rate environment, you'd kind of expect to see loan growth in excess of deposit growth for the industry.

That would see the pressure of people's LCR ratios, the LCR ratios as currently written seem pretty harsh, so maybe that moderates a little bit.

But how do you think about that interplay?

Is there a risk that deposit betas and funding cost betas are higher this cycle because of that LCR dynamic?

Is that something that would be a rounding error for your asset sensitivity and the industry's, or is it something that's maybe a little bit bigger deal?

That's a great question, Brian.

On the LCR piece, you are correct.

That is not final yet.

We are moving in a direction to be in compliance, well in compliance, by the end of next year.

In order to accomplish that, we have to continue to change the mix of our portfolio to zero-risk-weighted assets, and really focus on growing our client deposits, which we will accomplish successfully in 2014.

But when you look at rate sensitivity, the two biggest drivers to our rate sensitivity are how quickly they re-price -- so the beta that you talked about -- and then how sticky are the deposits.

From a beta perspective, we have been very conservative.

We have priced in a faster beta than what's been historically standard.

If you look historically, if the Fed moves 100 basis points on average, the non-maturity buckets move about 50%, give or take 5% or 10%.

We're closer to the 70% to 80% beta there, so I think we're conservative there.

If we don't have to move quite as fast, then we could actually show a little bit more asset sensitivity than what's in our disclosures today.

The other piece, though, is how sticky are the deposits.

We've had tremendous growth in our core deposits throughout the last four or five years.

It is very difficult to model how sticky those deposits are.

We actually put in our disclosures sensitivity analysis -- if we lose some of that core funding, how that impacts our asset sensitivity.

If you lose approximately $5 billion -- I'm not saying we're going to lose -- but if you lose $5 billion of core funding, it cuts our sensitivity about in half.

If you put it all together and look at the betas plus how sticky the deposits are, we are asset sensitive.

The degree of how asset sensitive we are is really hard to really peg right now because of the factors I just mentioned.

But it could be positive or it could be slightly -- it really depends on how sticky it is and how quickly we re-price.

Brian, I would just add one point with regard to the stickiness.

Really during 2012 and 2013, working through our Colonial and our Bank Atlantic acquisitions, we've really exited a lot of the less sticky deposits, frankly focusing on cost control.

Many of them were not very totally client-committed deposits anyway.

While it's hard to know exactly what the betas will be and the stickiness, I would say that we jettisoned an awful lot of the non-sticky deposits already.

That's really helpful, thank you.

One follow-up, or I guess a two-part follow-up on expenses, both more mechanical.

For those of us who primarily drive things off GAAP efficiency ratio quarter by quarter, can you just remind us, you gave a very detailed break down, which is always helpful, on page 26.

What's a normal difference between the GAAP and the reported?

Because some of intangible amortization is always there, but some of the merger charges and OREO presumably comes down over time.

Is it 150 bips a good guess between the difference between those two?

Also, when you talk about the efficiency ratio kind of coming down over the course of the year, are we at the point where it's clear it will come down kind of sequentially each quarter -- first quarter will be lower than fourth, et cetera, or should we still build in some risk of lumpiness of project expense and things like that?

Okay.

Brian, if you look at our tables that we've published, in the back section on page 22 in the tables, we do a reconciliation of GAAP to our reported efficiency ratio.

You can kind of see the difference there.

This past quarter it's about 1.2 difference between our reported efficiency versus GAAP.

The main drivers of it -- you mentioned a couple of them -- is the loss-share impact, OREO, our adjustments on real estate and intangible amortization -- those are the ones that get adjusted for it.

But you can kind of see a quarterly trend if you look on page 22 from that perspective.

As far as the trend of the efficiency ratio goes, it's hard to peg it that it's going to be a perfect line down.

We definitely think the trajectory is going to be point to point down.

How quickly each quarter it is, it really depends on the revenue growth that we have, coupled with our expenses that are finishing up and coming off.

It's a downward trajectory.

It's just hard to actually say it's going to be a smooth line.

It will come down, but it's not going to be very linear.

It will probably bounce around a little bit, but the trajectory is down.

Thank you very much guys.

We'll take our next question from Gaston Ceron from Morningstar Equity Research.

Thanks for taking my question.

Very quickly, I wanted to go back to the Texas expansion issue you discussed earlier and your prospects for the state.

After the branch acquisition deal, obviously your market share in the state is moving up.

I'm curious how you see the pathway to getting that into a top five area?

Yes, thank you, Gaston.

We feel very good about what's been going on in Texas.

As Kelly said, very good deposit growth.

Loan growth has been very good.

The 30 branch activity has been very good from a deposit perspective.

It's caused a big ripple in activity for commercial lending, real estate lending as well.

We feel really good about the momentum that we've got in Texas.

As we think about going forward, we expect that momentum to continue.

We see real estate opportunities, the auto business has been very good to us.

We think that Texas can continue to be good, and the market place continues to be good.

In terms of the 21 city branches, we will integrate those.

They fit very nicely, they look very much like the demographics of our 30-branch expansion.

That's really good from a fitting into our commercial focus in Texas.

That's positive.

It's going to give us a lot more exposure.

We're getting good bankers that will come along with it.

That's a good thing.

Then in terms of just the future, obviously we've gone from 53rd in market share when we started to now in the top 20.

We'd like to be in the top five.

There's a long way from the top 20 to the top 5 in Texas, so we're going to have to look for opportunities.

We're going to keep our eye open.

But we've said we're going to be focused on strategic importance and making sure we buy something that's not too risky, and also something that makes sense from an accretion perspective.

We're going to be disciplined.

But we know we're going to have to do things, and those things will open up as we go forward.

Texas is still going to be a very bullish story for BB&T going forward.

I'm excited about it.

Lastly, just any particular markets within the state that look particularly appealing?

I would say if you think about where we are in Texas today -- we're in the big cities, Dallas, Houston, San Antonio, Austin, and now we're picking up College Station/Bryan, a good market.

That's where about 20 million of the 26.5 million people in Texas live, so we're where you want to be.

Now we've just got to build out that framework.

We think that where we've targeted is the right place.

But as we look forward to potential acquisitions it actually might round us out, because we can find some more rural to go along with the urban, to really get a more balanced sense out over time.

I feel good where we're positioned, because we're where the business is today.

But we're going to be open to other avenues in Texas to get the growth we need.

We'll take our next question from Nancy Bush, NAB Research, LLC.

Kelly, certainly you're more optimistic about the economy than you've been in a long time, but the outlook for the Southeast still seems to be kind of spotty.

Can you just tell us what you see going on there, and whether the construction, the lessening of construction activity, which has been sort of a damper there, is kind of easing up at this point?

Could you just talk on an industry basis about what you're seeing?

Yes, so Nancy, again I am more optimistic, and I described earlier the macro views as why I am.

Specifically on the Southeast, construction has been, as you pointed out, several years ago a real drag.

Obviously it was a big factor of all of the Southeast banks.

That is definitely turning.

The fact is today there's just basically no single family lots available, and houses hadn't been built for several years, so that is turning.

Still, babies are being born, and people want to move up in housing.

There's a growing demand for single-family development construction.

Manufacturing is going to be a pretty big factor in the Southeast over the next several years.

With the C-change and energy costs in this country with a relative dollar change, and the relatively low cost of operation and the union situation in the Southeast, manufacturing's going to be really strong.

If you put together a combination of construction across the board, retail and multi-family and manufacturing, I think you'll see the Southeast over the next two or three years substantially stronger than a lot of people think.

To that, you had mentioned competitive conditions in lending.

Could you just elaborate on that a little bit?

Is it price, is it structure, is it both?

What percentage or what amount is coming from the community banking segment?

The competitive structure, Nancy, is as tight as I've ever seen it -- not surprisingly, I suppose.

We're all coming off of a difficult period, and everybody is looking for net interest income, so it's tough.

It's probably mixed equally between price and structure.

I've been somewhat surprised and disappointed though how much slippage there's been on structure.

The pricing I kind of understand.

The structure is hard to understand.

But it's been pretty broad-based on price and structure.

The volume that we're growing, we're getting a lot of growth in our specialized lending businesses and our corporate strategy, which as you know is a national strategy.

The community bank over the last 18 months, 24 months has been relatively soft for us, as the construction lending and all that's really domiciled in our community bank.

But that is really getting ready to change.

Ricky has got some aggressive strategies in terms of asset-based lending strategies, equipment financing strategies, as I said, residential and multi-family is still strong.

Residential is coming on.

When you put all that together, I think you're going to see the community banks' contribution increase, but the corporate will remain strong.

The percentage of community will come up, but the absolute levels of both will be increasing.

Ladies and gentlemen, due to time constraints, we will take our final question from Mike Mayo from CLSA.

Good morning, this is actually Tom Hennessey in for Mike.

I had one follow-up question, If you could just go back to your expectations for loan growth.

You had mentioned the line utilization still being flat.

In the outer cores especially, does your expectations for loan growth come from any up-tick in utilization, or is this still just predominantly coming from new production?

Our current forecast is primarily from new production, so if we did see a turn in the utilization that would actually be a big benefit for us.

Okay, great.

Thanks.

Ladies and gentlemen, this does conclude today's question-and-answer session.

Mr. Greer, at this time I'd like to turn the conference back over to you for any additional comments.

Thank you, Lisa, and thanks to everyone for joining us this morning.

We hope you have a good day.

This concludes our call.

This does conclude today's conference.

We thank you for your participation.