Truist Financial Corp (TFC) 2014 Q1 法說會逐字稿

Greetings, ladies and gentlemen.

Welcome to the BB&T Corporation first-quarter 2014 earnings conference.

(Operator Instructions)

As a reminder, this event is being recorded.

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

Thank you, Felicia, and good morning, everyone.

And thanks to all of our listeners for joining us today.

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

We also have other members of our executive management team who are with us to participate in the Q&A session: Chris Henson, our Chief Operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer.

We will be referring to a slide presentation during our comments today.

A copy of the presentation, as well as our earnings release and supplemental financial information, are available on our website.

Before we begin, let me remind you that there may be statements made during the course of the 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 also includes certain non-GAAP disclosures.

Please refer to page 2 and 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, and thanks also for joining our call and your interest in BB&T.

So, I would say overall, given our normal seasonality and the substantial reduction in mortgage volume, we had a really solid quarter.

It has been driven primarily by insurance, commercial loan growth, credit quality and excellent expense control.

If you look at earnings, net income totaled $501 million versus $210 million in the first-quarter 2013.

That was diluted EPS of $0.69.

Now, that was also after two one-time negative adjustments totaling $0.03 per share, which I will give you a little detail on in just a moment.

Of course, our first-quarter 2013 results were reduced by a tax-related adjustment of $281 million.

If you look at revenues, revenues were $2.3 billion.

Now, that was seasonally lower, as you would expect.

It was also driven by higher insurance revenues, higher trust and investment advisor revenues, offset somewhat by a lower net interest margin and a decline in mortgage banking income.

Our fee income ratio was very strong at 43.2%.

If you're following along on the slides, I'm on slide 3. Commercial loan growth was very good this quarter.

Average CRE income-producing properties' balances grew 10.6% annualized versus fourth-quarter 2013.

That was led by multi-family, but also we had some growth in office retail and industrial.

In the case of CRE income and construction, both of these had the best growth rates since the recession, and frankly, we expect them to continue to have good solid growth rates.

Average C&I growth was 3.6% annualized, which was driven primarily by corporate lending.

Sales [financials] with strong balances grew 7.3% annualized versus the fourth quarter, and that was primarily driven by prime auto.

Average mortgage loans -- were a little noise there, so let me explain it to you.

Mortgage loans were up $6.7 billion; retail loans went down by $6.6 billion.

Pardon me my allergies -- that was really just a change relative to our QM compliance adjustments, so we transferred $8.3 billion from retail to mortgage, and that's just offsetting effect of that.

In deposits, our non-interest-bearing deposits increased $2.9 billion or 8.8%, although the linked-quarter growth was only 0.5% due to seasonality.

Average deposits decreased $188 million or 0.6%, but our deposit mix improved [and our costs declined] 1 basis point to 0.27%, which was very pleasing.

Our credit improvement continues to be a great story.

Net charge-offs were 0.55% of average loans and leases.

Now, the core net charge-offs were 0.47%, which was down -- 0.49% in the fourth.

So, what happened there -- we had an additional $23 million in charge-off related to a change in process in our non-prime auto portfolio, and Daryl will give you more detail on that.

But basically, net core charge-offs went down again.

Loans passed due 30 to 89, and 90, declined.

NPLs declined; NPAs declined.

So, really, really good levels of credit quality, and continuing to improve.

We said in January that our expenses had peaked in 2013 and would decline in 2014, so we delivered.

Non-interest expense decreased 14.8% annualized versus the fourth quarter.

Expense decline was driven by lower personnel and professional expenses.

Our efficiency ratio improved, and we had positive operating leverage in the first quarter, which we were very pleased about.

We do expect continued improvement in our efficiency ratio throughout 2014.

I want you all to know we are laser focused on expense management, as we continue to reconceptualize our businesses.

A lot of the reconceptualization processes that we've developed over the last couple of years are really beginning to kick in now.

And frankly, because revenue is relatively slow, and is probably going to be somewhat slow as mortgage continues to be down, it's just really important to be tough on expenses, and we are.

So, if you will turn to slide 4, with regard to the selected items, we did have an adjustment to non-controlling partnership interest of $16 million after tax, which was $0.02 a share negative.

We did have merger-related and restructuring charges related to severance, which was $5 million after taxes, and it was $0.01 after tax impact on EPS.

If you look at slide 5, want to give you a little more color with regard to the lending area.

Overall, our loan demand for new business is improving.

A large percentage of loan demand in the market, I will say to you though, is refinance and shareholder-friendly purposes.

But our quarter was kind of interesting.

It started out kind of slow, I think, mostly because of the weather.

Volumes really accelerated late into the quarter.

And that did impact some of our seasonal business, like, for example, Sheffield starts really getting going and heading into the second quarter.

That was slowed a little bit because of the weather.

It's really beginning to pick up now, so we will see really good growth in that in the second quarter.

So, overall, really good, building momentum.

If you look at the absolute numbers, you will see that total loans were 0.9%, but taken under covered loan run-off, which you know about, the real normal loans were up 2.1% annualized.

So, within that are some really good numbers.

So, C&I was up 3.6%.

CRE income producing was up 10.6%.

CRE construction was up 3.5%.

So, total commercial was up 4.9%.

These portfolios have really turned recently, and beginning to grow for the first time in a long while, but seem to have really good legs as we go forward.

Again, when you look at these numbers, remember: Retail is down and mortgage is up.

That is just a wash, so don't pay any attention to that.

Sales finance was strong at 7.3%.

Other lending was down seasonally.

We do expect double-digit growth in those areas in the second quarter.

I will point out though that equipment finance was up 26.8%, and that will likely carry on in to the rest of the year.

So, we are seeing strong momentum in equipment finance.

So, we have a number of enhanced lending strategies that we are focusing on I just want to mention to you.

Our specialized strategy in CRE lending is really gaining traction; we have over $1 billion in unfunded construction loans, which kind of speaks to continued momentum.

We have a nice pipeline in our new national CRE permanent financing program; our closings will begin in April.

Large corporate lending has continued to produce double-digit growth and commitments to end outstandings.

Our real strategy over the last several months is paying off in wholesale lending, and dealer finance continues to gain momentum.

We're having double-digit growth there, and we expect that throughout the rest of the year.

Wealth lending is a real strong story for us.

It's growing fast, and really becoming a major driver in our retail business.

And we're gaining general traction in all of our markets, but particularly key markets like Texas and Florida.

So, looking forward, we expect average loans to grow about 3% to 5% in the second-quarter 2014.

It will be led by C&I, CRE income producing, and construction.

Sales finance will be strong.

Other lending subsidiaries are expected to rebound strongly -- or be led by insurance premium finance, small ticket consumer finance business and equipment finance.

So, I would say, overall, lending is improving.

We continue to see and believe that there has been a shift in business psychology.

I mentioned this in the middle of the fourth quarter.

Business people have really started focusing on: It's time to kind of make a psychological turn and invest.

And the need to invest out there is really strong.

I will just reference a comment from Kiplinger's letter last week, which kind of makes this point.

They were talking about the aging of buildings and equipment -- how it will drive investment this year up to 4.5% to 5% versus 1.5% in 2013.

But this is interesting: So, if you look at the average age of all fixed assets from buildings to rail equipment, machinery, has lengthened to 20.3 years in 2012 -- highest since 1949, and they've gotten even older.

Buildings average 22.2 years old, since the 1960s.

So, as we have talked about, there has not been a lot of investment in refurbishing and rebuilding and getting ready for expansion.

So, that argues very positively as we go forward, I think, with regard to momentum in terms of lending.

So, we remain very focused on disciplined lending.

I just want to point out that while our growth may not be as strong as some, even though we think it is still really good growth relative to the environment, we are being very disciplined.

We are not heavy players in leverage lending business.

I will just mention to you: You may have seen, an analyst did a write-up in the last few days, some was really calling out the issues that a lot of banks were really focused a lot on large leverage lending.

I'm not going to comment on which banks he talked about, but I will tell you that he had a sentence that says, quote, BB&T has been by far the most cautious, with a de minimis amount of leveraged loans.

That is affirmation of exactly what we have been telling you, and we remain committed to long-term profitable loan growth.

Now, that doesn't say we're not going to be aggressive; we're working really hard, and we're going to be really on the streets working hard to get all the good loans -- profitable loans that are out there.

But we're not going to push loan growth at the expense of quality.

And that has been a long-standing position of BB&T, and it remains so.

Still, having said that, we have a number of enhanced strategies, as I described.

And another point to keep in mind: We've had a lot of large real estate loans -- because that was a bigger part of our portfolio -- that are really being paying off recently.

One of the good things is, mathematically, most of those portfolios have turned, and so just mathematically with the same production, their growth will go up, and we expect in final production, so that's really good news.

We have a really good, strong call to action in the Bank in terms of moving market share.

[I will tell you that] in traveling around, talking to our folks in the community bank and our corporate lending area, enthusiasm for lending is at an all-time high.

We are really focused on being the most responsive in the marketplace, and we believe ultimately that will be the key differentiator.

So, we are very excited about lending, as we go forward particularly.

If you turn with me to slide 6 -- just a couple of comments with regard to deposits.

Deposits are continuing to behave exactly the way we've wanted to for the last several years, so we continue to improve our deposit mix and cost.

You will notice that while non-interest-bearing deposits were only 0.5% of first quarter versus fourth, because of seasonality, we did have strong organic DDA growth of 8.8% versus the first quarter.

And importantly, our DDA mix improved to 28.2% versus 24.9% in the first quarter of 2013.

So, that is a whopping big change in one year.

And we, again, pulled our interest-bearing deposit costs down by $0.01, [from about 1 point] to 27 basis points.

I will point out though that we do think that will be relatively flat as we go forward.

Not a lot more downside there, because frankly, we and others are having to focus on deposit [type of] (inaudible) and because of the liquidity and LCR purposes.

In fact, you will see us spending more time growing commercial and retail deposits as we run off some public funds, which is kind of unfortunate, but that is the requirement of the LCR requirements, at least at this point, unless they change it.

So, we feel good about our deposit strategy, and it's certainly very complementary toward our lending strategy.

Let me turn it now to Daryl for some additional color on the numbers.

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 results.

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

First-quarter net charge-offs, excluding covered, were $156 million or 55 basis points.

These numbers include $23 million in net charge-offs resulting from a process change that accelerated charge-offs and our non-prime auto business.

Excluding this change, core charge-offs were 47 basis points, down slightly compared to last quarter.

We are maintaining a long-term charge-off guidance of 50 to 70 basis points.

But for the next few quarters, we believe charge-offs will remain below 50 basis points, assuming the economy does not deteriorate significantly.

Non-performing assets, excluding cover, declined 6.4% during the first quarter.

NPAs as a percentage of total loans was 0.54%, our lowest ratio since 2007.

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

Turning to slide 8, delinquent loans decreased in most categories, as credit continues to perform very well.

Our allowance to non-performing loans decreased slightly from 1.73 times to 1.7, reflecting strong coverage.

We had reserve release of $80 million during the quarter, excluding covered activity, and a change for reserve for unfunded commitment.

This compares to $67 million released last quarter, excluding the same items.

We expect future releases, if any, to be lower as credit improvements stabilize.

Continuing on slide 9, margin came in at 3.52%, down 4 basis points from the fourth quarter.

Core margin was at 3.29%.

The margin declined due to higher investment balances purchased in response to the new liquidity rule.

For the second quarter, we expect margin to decline approximately 10 basis points.

This decline results from tighter credit spreads in new originations and continued runoff of covered assets.

These factors are partially offset by improved funding, mix, and lower cost.

Our duration of equity is a negative 55 basis points at the end of the quarter.

We remain slightly asset sensitive.

Turning to slide 10, our fee-income ratio for the first quarter remained fairly stable at 43.2%.

Overall, non-interest income decreased $74 million.

This was driven by a decline in mortgage banking income, lower investment banking and brokerage fees, and decline in other income.

These decreases were partially offset by a strong performance in insurance.

Insurance income was up $56 million over the fourth quarter, due to 9% growth in commissions, stronger performance-based incentives, and better information which allowed us to record $23 million in revenue that normally would have been recorded in the second, third and fourth quarters.

This is not a one-time benefit, just timing.

But even when you consider this, we had really strong results.

We expect second-quarter insurance revenues to be similar to the first quarter.

Mortgage banking income declined $26 million in the quarter, primarily due to lower residential volumes and lower production of commercial mortgages.

Residential gain-on-sale margins increased from 55 basis points in the fourth quarter to 69 basis points in the first quarter.

However, origination volumes were down 29% and loan sales were 51% lower compared to last quarter.

To address the lower mortgage revenues, we are taking aggressive action to align our production and origination businesses to coincide with lower volumes.

Investment banking and brokerage was down seasonally this quarter to $88 million compared to record performance last quarter.

FDIC loss year income offset was worse by $9 million compared to last quarter.

This quarter's assessment of cash flow significantly changed our outlook for accretable yield and our offset going forward.

We expect approximately $20 million improvement in interest income in 2014 versus our prior guidance, but approximately $80 million in greater fee income offset as we amortize the FDIC receivable.

So, our net benefit for 2014 is projected to be $120 million.

This is a decrease of $60 million compared to our last projections.

In total, this is a positive development in cash flows.

Our covered assets are performing better, and our losses are down.

So, we will earn additional interest income on these assets over their lives.

But in the short run, the change results in a reduction in the estimated recoverable cash flows from the FDIC, which will be amortized over the next couple of quarters.

Other income decreased, primarily due to two items.

A $30-million net gain on the sale of consumer lending subsidiary last quarter, and a decrease of $19 million in income from assets related to certain post-employment benefits, which is offset in personnel costs.

Turning to slide 11, we achieved positive operating leverage, which drove our efficiency ratio to 59.3% this quarter.

Total non-interest expense decreased $53 million or 15% annualized compared to the fourth quarter.

This decrease was led by lower personnel costs and lower professional service expense.

The personnel expense decrease was mainly due to lower incentives and lower pension expense.

Personnel expense included a seasonal increase of $25 million due to the annual reset of Social Security limits and other payroll taxes.

FTEs were essentially flat compared to last quarter.

Professional services declined $13 million, reflecting lower legal costs and a decrease in project expenses.

Merger-related and restructuring charges totaled $8 million in the quarter, due to severance and accruals.

We still plan to achieve an efficiency ratio in the 56% range in the fourth quarter of this year, and we expect positive operating leverage throughout each quarter.

Finally, our effective tax rate for the quarter was 27.3%.

We expect a similar rate next quarter.

As Kelly mentioned earlier, our non-controlling interest included a $16-million one-time catch-up adjustment, which is related to certain partnership profit rights.

Turning to slide 12, capital ratios remained strong, and are up from the fourth quarter, with Tier 1 common at 10.2% and Tier 1 at 12.1%.

We also estimate the Basel III common equity Tier 1 ratio of 10%.

We are looking at liquidity.

We made excellent progress in the LCR ratio, which is currently 87%.

If you recall, we have to be at 80% by the first of next year, as proposed.

Remember: These rules are not final yet.

Our liquid asset buffer is 16%, so our liquidity position is very strong.

We were pleased to receive a no objection for our capital plan.

We will recommend to the Board $0.01 increase in the quarterly dividend from $0.23 to $0.24.

This will happen later this month at our regularly scheduled Board meeting, and this will result in a dividend yield of approximately 2.5%.

Beginning on slide 13: Loan demand picked up significantly in the last four weeks in the community bank, with strong growth in retail and C&I.

Throughout the quarter, we had strong CRE growth, and we expect that to continue in the second quarter.

Community banking net income totaled $217 million, seasonally lower versus fourth quarter, but increase from last year.

Our dealer floor plan initiative has been very successful, as we have grown loans 92% compared to last year, and 47% compared to last quarter.

We also surpassed $1 billion in outstanding balances.

Also, we obtained regulatory approval and expect to close our 21-branch acquisition of Citibank later this quarter.

Turning to slide 14: Residential mortgage net income was $63 million.

The mix of refi to purchase was 34% and 66%, respectively.

Remember: We added costs late last year due to the organizational realignment to be compliant with QM.

Looking at dealer financial services on slide 15, net income was $35 million for the quarter.

This is down on a linked-quarter and like-quarter basis, as credit has normalized, resulting in an increase in loan-loss provision.

We continue to generate strong production in dealer finance, with linked-quarter loan originations at 27%.

Operating margin in the segment was down slightly versus first quarter last year at 78%.

On slide 16, our segment lending earned net income of $59 million.

Production was down due to seasonality, but we will achieve double-digit loan growth in this segment in the second quarter.

Moving on to slide 17: Insurance had a strong quarter, even without the benefit of a $23-million timing change we described earlier.

We had good production in both retail and wholesale businesses.

Net income was $75 million, up 88% versus like quarter, due to the factors I described earlier.

Same-store sales, excluding the process change, was strong at 9%, which includes profit commissions from our wholesale businesses.

The EBITDA margin improved to 27% versus 25% a year ago.

Recently, we closed two small but strategic important insurance acquisitions.

The combined revenue of these acquisitions is approximately $11 million.

Turning to slide 18, our financial services segment generated $68 million in net income, driven by corporate banking [and loans] (inaudible) growth of 18% and 20%, respectively, on a like-quarter basis.

Total invested assets increased to $114 billion or 12% annualized growth compared to last quarter.

We will continue to drive stronger revenues in the future.

In closing, we see additional modest credit improvement, continued expense leverage, stronger loan growth, and improved fee income production.

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

Thank you, Daryl.

So, I think you can see why we say it is a solid quarter.

We did have great credit quality.

I would point out to you that in the CCAR Fed's stress test of the -- all the commercial banks that were stressed, we had the lowest charge-offs and the best net income projected through that cycle.

So, that was very, very good, and affirms our high-quality credit portfolio.

We are building loan momentum with these enhanced strategies.

We have excellent expense control.

We have strong fee income, particularly in insurance, which is really material, and becoming a very, very positive story as we go forward.

We do believe the market is improving.

And while it is not overly robust, it is definitely getting better, and we saw really strong improvement as we headed through the end of the first quarter, and we think that will carry out through the rest of the year.

So, we are excited about the improvement in the market, and we are focused on excellent execution, and think we will have really good results as we go forward.

Now I'll turn it over to Alan.

Thank you, Kelly.

At this time, we will ask Felicia to come back on the line and explain the Q&A process.

(multiple speakers)

(Operator Instructions)

Betsy Graseck, Morgan Stanley.

Hi, good morning.

Good morning.

Good morning.

Nice to see the expenses -- really appreciate that.

My question is on CCAR, and, Kelly, you talked a little bit about that in your closing remarks, and it looks to me like you graded yourself very harshly.

I mean, in some cases you were even more conservative than the Fed, and with your strong capital ratios, the question is: Why so conservative on the ask with no buyback request?

I guess I'm wondering what you think you need to see in order to turn that buy request back on?

Well, Betsy, that's an obviously good question.

To be very honest, coming off of our negative experience last year, my strategy was to be absolutely very conservative and take no risk with regard to this process.

As you know, and from recent revelations, it is a somewhat challenging process.

And I just simply did not want to take any risk.

Although, I will admit that does set up a positive opportunity as we head into 2015.

And that's what we were trying to set up.

And do you think there's any possibility of going back in for a resubmit?

Or separately, do you take the excess capital that you are generating now and use it in asset allocation, maybe going after parts of the loan market that others can't because they're tighter on capital?

Yes, so, I think the latter basically will be more likely.

We always have the option of going for a special request if circumstances justify it.

And I will point out that we did say in our application that if we were to get a recovery on the STARS transaction, that that gives us opportunities with regard to buybacks or special dividends.

But more likely, you would find us being more aggressive with some of these strategies to lever up that additional capital.

I still think that is best payback for the shareholders, and that's what we would focus first on.

Okay, thanks so much.

You bet.

Gerard Cassidy, RBC.

Thank you.

Good morning, Kelly; good morning, Daryl.

Hello, Gerard.

When you guys look at your capital levels, obviously they're very healthy.

And as you just addressed with the CCAR, how does acquisitions, Kelly, play into this?

There has been apparently a lull in activity with the bigger banks.

What is your view on the next 12 to 18 months of the M&A market?

Gerard, I think we are all trying to figure out, again, kind of where that is going.

Obviously, there is nothing going on today except in the small end.

I don't think you're going to see much activity in the near term, Gerard.

But I -- a little bit different than some people, I don't think mergers are shut down forever either.

I think as the Fed gets comfortable with the CCAR process, banks with a strong capital like BB&T and banks that, frankly, don't requires any systemic risk will have the opportunity to look at combinations forward.

I think that is a good, healthy, long-term thing for BB&T because we're really good at it.

But I just want to always reinforce that when we talk about acquisitions, that we are not going to take substantially dilutive acquisitions.

We're just not going to do it.

It's not healthy for our shareholders.

But that does not mean we won't look at acquisitions.

We look at a lot, and we don't do much, as you know from my tenure as CEO.

So, we will be very cautious and careful.

We will keep looking.

It's not out of the question for the long term, but don't expect much in the short term.

You mentioned systemic risk.

How do you -- I think most people would agree our four largest banks are too big to fail.

Do you know -- where, in your eyes, is the cut-off line where you become a systemic risk bank?

Gerard, I think that everybody, including the Fed -- personal opinion -- is trying to figure this out.

But what I personally think right now is: Up to $500 billion is kind of a clear, non-systemic level.

I think $1 trillion and above is clearly systemic.

I think between $500 billion and $1 trillion -- nobody kind of knows.

But when you go over $500 billion, you are heading into territory -- you're heading into a question that is more likely to be more pressure on systemic questions.

So, that's the reason -- $180 billion is so -- you know, we could double and still be the size of US Bank.

And so, we have got lots of opportunity before we even get to the -- kind of the first floor, which I consider to be the $500-billion level.

Great.

And then just finally, coming back to the Tier 1 common ratio under Basel III.

Clearly, you guys are very strong at 10%.

Once -- let's say it's the end of 2015, all of the issues from the past for the industry are behind us.

Where do you think you would be comfortable in carrying that Basel III Tier 1 common ratio, if the requirement for regional banks like yours is 7%?

Obviously, you are not going to have it that low, but what is the comfort level?

Well, we, like everybody, are still trying to finalize how we feel about all of that.

Because your capital level has something to do with your liquidity level, and we don't have all the final numbers there.

So, we will be conservative, Gerard, as you know, in capital.

But it's something less than 10%.

It's in the 9%-ish area, we think, for the current period.

And whether it is 9.5% or whether it's 9%, just kind of depends on how we feel about these other factors.

Thank you.

Paul Miller, FBR.

Yes, can you clarify, on your NIM, when you're talking about a 10-basis-points decline in NIM, were you talking about the headline NIM, or the operating or core NIM?

Yes, Paul, this is Daryl.

I would tell you that we're talking about our GAAP NIM going down from 3.52% to 3.42%.

And what about any guidance on the core NIM -- the 3.29%?

I would say approximately half that amount.

So, we're a 3.29% on core, and we'll probably go down about 5 on core margin.

I think as you look at core margin going forward, it should start to stabilize.

But we are just seeing a little bit tighter credit spreads right now in some of our lending categories, specifically C&I and prime auto.

So, I mean, when you are talking about -- should we see continued pressure, given the current environment, throughout the year at this current rate?

When we are forecasting our margin right now, we are forecasting current spreads that we're seeing right now, not any further decline.

So, we have a nickel going down on core margin next quarter, and then it is starting to stabilize after that quarter.

And then, on the mortgage front, have you seen any pick up at all in your pipelines on the purchase of product?

It is kind of moving around, Paul, right now.

But I would say there has not been a substantial pick up in the activity, but certainly purchase is up dramatically versus refi.

So, if you look at purchase only, it's way up.

But if you look at the total, it's not been enough to drive the total.

So, our purchase is about 65% of our product today, which is really good because we think once you get into the Spring -- it has been a tough Winter -- people didn't even get out -- go out of their houses to look for houses.

As you get into Spring, people will be back out looking for houses.

The fact that our percentage is much higher on purchase bodes well for some momentum pick-up.

Yes, just to add to that, I would say that our revenue should pick up and be similar to what we saw in the fourth quarter, just due to what Kelly said about the purchase and seasonal activity in the second.

Okay, guys.

Thank you very much.

Erika Najarian, Bank of America.

Yes, good morning.

Good morning.

Just a question on the loan growth.

What were the rest of the year -- sorry, I have allergies, too.

Kelly, your color on both the business psychology and what your teams are doing in terms of their aggression -- they are both very upbeat.

As we look for loan growth for the balance of the year, is it fair to assume that we will continue to see the quarterly acceleration in loan growth like you are predicting for the second quarter of the year versus first quarter?

Yes, Erika, I think that will continue to build as we go through the year.

Again, because of this business confidence -- by the way, one thing I failed to mention earlier, and I think it is pretty indicative of business confidence.

I just read this yesterday.

So, they just did a survey, and employers expect to hire 8.6% more college graduates this year.

Last year when they asked them that question, it was 2.1%.

So, when you look at all these factors, there are clearly a lot of green shoots out there in terms of building momentum.

Got it.

And just a follow-up question on the efficiency ratio.

We appreciate the color on the 56% range for the fourth quarter this year.

As we look out to 2015 -- I know it's a little bit early, but assuming no major shift in the rate environment in the first half of 2015, are you expecting to essentially hold the line in the mid-50%s efficiency ratio regardless of the revenue environment?

I don't think it is prudent, to be honest, for anybody to say that they are going to be holding their expense expectations independent of revenue.

Because, obviously, the efficiency ratio is a function of expenses and revenue.

And so, if your revenue were to decline a lot, and you just said: Well, I'm going to absolutely hit a certain efficiency target, that would -- you could completely destroy your franchise.

So, we are not independent in terms of revenue.

However, having said that, as I think about 2015, I think about revenue having positive upward momentum.

I think businesses really stronger.

I think margins will be [buttressed] by more loan demand.

As more loan demand goes up, you have more opportunity to have a little firmness in pricing.

So, as you see all of that, that looks to me like some comfort in terms of positive revenue change.

And with our really tight focus on expenses, which will transcend into 2015, then I have a lot of comfort in the 56% range.

And I think, as you head into 2015, you could see a little bit of downward pressure below that.

Great.

Thank you for taking my questions.

Steve Scinicariello, UBS.

Morning, everyone.

Morning.

I just wanted to follow up with you just given the strength in the insurance income line, and that you've bolted on a couple other franchises lately.

Just curious: What the outlook might be from here, both from an organic side and the inorganic side, and maybe the interplay between what we should expect going forward there?

Yes, Steve, this is Chris Henson; I appreciate the question.

We are very excited about what is taking place in insurance.

We sort of saw this a couple years ago beginning to play out.

And so, what you have got, really, is price improvements were in the 3% to 3.5% range.

And you have got new business growth in the 1% to 2%.

And then we talked about some time ago, as those begin to matriculate as the economy improves, we also benefit from performance-based commissions from really all businesses: retail, wholesale, [NGU], et cetera.

And that could range anywhere in the 1%, 1.5% range.

So, looking forward, you could see a market this year in the 6% to maybe even 6%-plus kind of growth rate.

And that breaks down in retail and wholesale as follows.

Retail is running probably about 5% -- just run rate growth looking forward.

Wholesale is probably in the 9% kind of range, and those mixes roll out of there at 6% or 6%-plus kind of range.

So, it really continues to perform.

And we think with the underpinnings of the two revenue opportunities we have, which is cross-sell and life insurance, to wealth, our broker dealer and P&C clients, as well as the EB opportunity, and employee benefits from a company we bought a couple years ago, we are now rolling out a plan throughout the whole footprint as -- we feel very, very positive about the whole business.

It definitely sounds like a very exciting opportunity.

Think you might be able to bolt on some more of these franchises as well?

Are there more opportunities like those out there, too?

Well, I think there could be.

The good news is: I don't think we have to do anything significant.

Where we are focused today, we have all the major pieces today.

We are about half wholesale, half retail, which takes the volatility out of earnings.

So, it really gives you the good level -- we are trying to level out the earnings going forward.

We also have dominant market share in Crump Life, and we have -- the largest wholesaler in the country.

So, we don't need any big pieces.

But to your point, there are some fill-in we can do within the community bank footprint, which is what Woodbury was.

And then we particularly could have some competency areas like Caledonia with respect to aviation.

We did not have a competency there.

That gave us the ability.

So, you could see some small fill-ins, just looking forward.

Perfect.

And then just changing gears: I know the asset sensitivity dipped down a little bit, just because the funding side, you know, and the mix shift over there.

Are there any things you guys might look to do to kind of start to increase the asset sensitivity over the next couple of quarters?

Steve, what we are really focused on is growing our core deposits.

As we grow our core deposits, that will give us more flexibility in the balance sheet, because of the optionality and the betas that we project there.

So, I think as we continue to build out and add to that, that that should kind of offset what we're seeing on the loan side organically.

So, I think core deposits is really the key and the answer.

It also helps a lot with our liquidity, and just makes it more efficient to meet the liquidity ratios.

Makes sense.

Thank you so much.

John Pancari, Evercore.

Morning.

Morning.

In terms of the margin color you gave, how much of that core margin compression guidance factors in any incremental impact from investment and securities tied to LCR?

And then separately, just want to get an idea on your loan yield expectation, in terms of where you are putting on new loans currently by portfolio?

Thanks.

Okay.

So, for the net interest margin piece, I would tell you that we are basically forecasting out, from this point, flat investment balances.

So, there's really not any more margin pressure related from the investment portfolio.

It's really due to the -- just tighter credit spreads that we are seeing in our volumes that we're putting on in the loan side.

Just for an example, if you want to look at our C&I book, C&I we booked about $5.5 billion new and renewing assets, and the average rate on C&I was about a 2.31%.

When you look at our CRE, the average rate on the volume that we booked there -- a little over $1.2 billion or $1.3 billion -- was around 4%.

So, we are seeing a little bit tighter pressures in both of those areas.

But overall, still really good.

And from an asset-sensitivity position, those tend to be more floating rate [over] rate assets that will also help our asset/risk position.

Okay.

All right, that's helpful.

And then on the loan growth side -- on the C&I side, could you give us a little bit more color on the growth you're seeing there?

I know you mentioned corporate banking, Kelly.

Wanted to see what type of credits that is, particularly if you're avoiding the whole leverage lending side of the business.

And then separately, on the CRE side, I know you mentioned permanent financing initiatives -- wanted to get a little bit more color there.

Thanks.

Hello, John, this is Clarke.

I'll answer that call.

As far as our corporate strategy, it's really aligned around the middle market segment for the industry verticals we follow.

So, in that regard, we are clearly -- we are absolutely avoiding the high-yield leverage-sponsored transactions -- really do almost none of that.

So, most of our focus has been on these verticals.

For us, the growth coming out of areas like our energy group in Texas, [wheat] portfolios, agribusiness, public finance, and really strong in corporate leasing -- we call it equipment finance.

So, those are where we are seeing our best opportunities on the commercial middle market.

On the CRE aside, predominantly multi-family still, both on the construction and the permanent.

But we are starting to see some retail, mostly nice, high-quality single-tenant deals -- some office.

We're actually doing a little bit of hotel and some industrial.

And for the first time in a long time, we also saw some residential homebuilder construction -- very high quality there.

And then, finally, I'd say another big focal area for us that was mentioned is: Dealer floorplan has been very, very strong.

Okay, great, thank you.

Thanks.

Ken Usdin, Jefferies Investment Bank.

Thanks, good morning.

Daryl, I was wondering if you could talk a little bit more on the NII outlook.

Previously, you guys had talked about being able to hopefully grow core NII this year, even with the sales of the business and -- that you had made late last year.

Do you think that is still possible, given the incremental core margin compression?

Our rate forecast right now is for rates to move in mid-2015 upward, and we'll see how that plays out.

I would say that our core margin is currently 3.29%; we should end the year in the low 3.20%s.

So, I would say it stabilizes there, and probably does not move up until we really get some increases in rates.

But hopefully we can get it to stabilize in the low-3.20%s.

Okay.

And my second question is: Can you just run us through the components of the purchase accounting numbers?

You gave us the 2014.

If you have it on you, if you would be able to give us the pieces of how you're at least thinking of interest income and then the loss share back out for 2014 and 2015?

Yes.

So, if you look at the full-year 2014, the net impact will be $120 million of earnings.

If you break it into the pieces, interest income is $390 million and FDIC loss share is a negative $270 million.

That's how you get to the $120 million.

When you get into 2015, the benefit from the purchase accounting comes down dramatically.

The net benefit of, like, $30 million interest income was like $190 million, with a $160-million offset.

So, it is pretty much out of our run rate as you get into 2015.

Okay, perfect.

Thank you.

Keith Murray, ISI.

Thank you.

Could you spend a minute to talk about reserve release likely dwindling down here?

Is that more a function of loan growth that you are expecting?

Or are you seeing anything in the credit books that you think -- three, six months out, whether it's [delinquencies], et cetera.

You're kind of hitting a bottom here?

Hi, Keith, this is Clarke.

Very good question.

What you're seeing for us is consistent with others in that the older, higher-risk vintages have been burning down, and that's where the releases have come from, to date.

As our portfolio is just stabilizing and returning to a more normalized level, then we would expect the provisions start at some point matching charge-offs.

And as we grow our portfolio, we would have to increase reserves at that point out.

So, we would certainly not expect the level of releases we have seen over the last several quarters as we move forward.

But it is not reflective of any concern at all about asset quality.

In fact, I would say our -- to Kelly's point about the CCAR results, and our own view of risk, we think we have built a very sustainable, high-quality portfolio, and there is nothing in our assumptions about reserves that would indicate any concerns about increased risk at this point.

Thank you.

Kelly, maybe just a broader M&A question.

When you think about bank M&A today -- you have done a lot of retooling of branches and technology, et cetera.

Is there a concern in your mind that if you purchase a bank today, you're sort of going to have to reinvent the technology and the branches, et cetera, where the costs up front might be different than they were in the past?

Is that something that you think about?

Yes, Keith, we think a lot about that.

I will tell you: We are not as aggressive as some people are about the imminent demise of the branches, and everybody is going to technology and all that, although we do think those are real trends, things just don't change as fast as a lot of people would think.

So, we factor all of that into our acquisition model when we are acquiring companies.

So, depending on what the state of technology is -- if it needs to be revamped, we simply build that into the expected investment we have to make.

And, therefore, we would lower the price to generate our desired level of return.

So, just because they have a dilapidated branch system, or haven't invested in technology, would not preclude us from doing it.

It would just adjust the price.

Thank you.

And then just finally, do you have any update on where you stand on the STARS appeal process?

No, it is still in the normal kind of process.

Probably fourth quarter would be our guess.

We have been surprised; it could happen earlier, but we would guess fourth quarter.

Thank you very much.

Kevin St.

Pierre, Sanford Bernstein.

Good morning.

Kelly, you mentioned the somewhat negative experience in last year's CCAR.

But the results of the actual stress test last year were very good, just like this year.

So, now with two straight years of strong relative performance on the stress test, is it fair to say that if we're sitting here next year and you're at 11% Tier I common, that we would see more than a 30% total pay-out ratio?

And if yes, would you favor special dividends or share repurchase?

Maybe talk about priorities.

So, if those conditions exist, which we fully expect them to, certainly we would expect to apply for more than 30% total payout -- absolutely.

And so, again, us being very conservative this year does not give anything away.

It just keeps it in the pot, and makes it available for subsequent decisions.

So, as always, we would like to use excess capital to grow organically, like through acquisitions.

Do as many -- be as aggressive as reasonable in dividends, including the possibility of special dividends.

But if none of those seem to be the right decision, then buybacks moves up the list, in terms of our thinking.

But I will remind you that we think about the issue of buybacks more than just reducing our capital.

We're not going to go out and do a bunch of buybacks if the price is so high that it's a bad decision for the shareholders.

So, it's a pretty complex decision, as you know.

But the order of priority would be as I described, and I think you could reasonably expect us to be more aggressive in some form or fashion as we head into 2015.

Great, thank you.

And a quick one for Daryl and/or Clarke.

You mentioned in your comments, Daryl, that for the next few quarters -- your quote was next few quarters you expect charge-offs to be below 50- to 70-basis-point normal range.

Is that because you're hesitant to forecast beyond the next few quarters, or do you -- or is your expectation that net charge-offs will rise in 2015?

Kevin, this is Clarke.

Great question.

There's nothing to imply that we necessarily think there will be a big change.

But we said before: Our normalized range, based upon the way we're trying to grow the portfolio, and the part that we have chosen for our Company, that that 50 to 70 probably improves the cycle's long-term sustainable range.

Certainly, if the economy stays strong, and as we are rebuilding early coming out, the older stuff running off, then we could be below that range.

So, we're just, I think, being cautious and conservative.

Great, thank you very much.

Christopher Marinac, FIG Partners.

Thanks.

Daryl, you mentioned earlier about the need to grow core deposits.

I was curious if you expect any change, even if it's very modest, in the overall funding cost for the next few quarters?

Yes, Christopher, what I would tell you is that we're pretty much at the floor on deposit cost.

I would maybe forecast maybe a couple more basis points coming down, and that's really coming down for -- on the CD book.

I think if you look at how we're pricing our NOW accounts and our MMDA accounts, we are offering very attractive rates, and we are getting a lot of good traction in growing both retail and corporate balances in those areas.

And I think that has gained momentum in the community bank area and our market corporate area, and I think that's going to play out throughout the year.

Okay, great.

And then, Kelly, just a follow-up for you.

When you mentioned about loan growth and increased activity across the footprint -- is there a difference between your larger metro areas and the smaller, more mid-sized markets?

Yes, I would say there is -- in two regards.

One is: In some cases, some of the largest metro areas that got beaten down the most have a bigger ramp-up possibility because of how far they got beaten down.

And then, just the nature of large, urban markets is they have more large businesses.

And to be honest, the largest businesses in our market and I believe across the country are doing much better today than the small-and medium-sized businesses are, largely because they have international opportunities and they have bigger scale.

And so, just the very mathematical nature of that means there would be more lending opportunities in the larger markets.

That's not to say that the smaller markets are bad, it's just that they are not growing today as fast because they do not have that large, international component flowing through those large businesses.

On the other hand, I will remind you that that's one of the reasons we like large and small markets.

While those markets might not grow as fast in the rising times, they don't go down as fast.

And so, it's another really good part of our diversification strategy, and we like them both.

Great.

Thanks very much, guys.

Nancy Bush, NAB Research LLC.

Hello, Kelly, how are you?

Hello, Nancy.

Just a quick question -- sort of an add-on there.

Your optimism about business conditions, I think, is very well received, but I'm wondering about: Are you seeing a resurgence across the southeast?

Or is it very spotty?

Or if you could just comment on how the southeast seems to be proceeding, I would appreciate it.

Yes, Nancy, you have been the best around, in terms of really focusing on the markets, specifically the southeast.

I would say it is generally broad-based.

As I travel around to the -- Florida, Texas or South Carolina where I have been recently, there is a broad-based kind of generic change in mood.

And so, I think that it's not market specific.

I think, frankly -- you and I have talked about how the southeast is going through a long-term kind of secular change, and the nature of southeast vis-a-vis northeast.

I think the southeast in general is getting ready to have 10 to 20 years of relatively positive robust improvement, mainly because of something I think most people are not focused on, and that is the change in currency value of the retirees wanting to move from the northeast to the southeast.

So, for 25-plus years, they were facing -- until recently, they were facing currency devaluation as the southeast was growing fast and their markets were not growing at all.

So, every year they could sell their house and buy less house because their currency went down.

That is exactly flipped because we did a 50% discount in the southeast, and their values haven't gone down as much.

So, I think you are going to see some upward push, particularly in real estate and related service in places like Florida.

These markets -- Florida was [net attriting] for a while, and now it's gaining again.

Texas is growing 1,000 people a day.

And so, I think it is across the board and it's relatively positive.

Just as an add-on to that, could you speak to the residential picture -- residential construction picture in the southeast?

What are we going to see in this next cycle?

I think in the short run, Nancy, what you are going to see is kind of interesting is you are going to see some ramp-up in prices in existing homes because we are going to go through a little valley here of construction because there's no lots available.

We have been through five years where we did not develop any lots, and it takes, in many cases, 18 months or so to get the zoning and all to get the new lots going.

So, what you are seeing today is more of the large national builders that are moving in to buy up the lots that are already developed, so that they can -- they have the capital and they just have to get the lots.

So, you are going to see upward prices on existing lots -- upward prices on existing homes relative to that phenomenon.

But simultaneously, you will see A&D building because there's a dearth of lots out there.

So, I think, hopefully won't be as robust as it was in the last 10 years or so before the crisis.

But I think you are getting ready to see a solid development of momentum in A&D and verticals in the single family.

And multi-family is still strong.

I think it will stay strong for the next year or so, and then I think as the economics of single versus rental cross, you will see multi-family plateau.

And so, we are making, as of now, we are already focusing more on single-family A&D and construction to be ready for that impending change.

Thank you very much.

You bet.

Gaston Ceron, Morningstar Equity Research.

Hello, good morning.

Good morning.

Just a very quick question going back to the M&A topic.

It sounds like perhaps not a lot on the front burner in the near term.

But certainly still lots of interest on the long term.

I'm curious: As you kind of assess your experience with the Citi branch acquisition, I'm curious how that has kind of affected your appetite or interest in acquisition -- future branch acquisitions of this kind versus entire banks?

Has your experience been so positive that you continue to see this as a good way to [go over] franchising key states?

Yes, I think you are going to see likely more -- well, already, you are seeing more.

You will see a continuing trend of branch sell-off by some of the largest institutions that are having capital issues and/or trying to narrow their product lines and/or market focuses.

Just like our opportunity coming out of Citi's decision in Texas is a really good opportunity.

Now, it depends on the institution.

It depends on the nature of their branch distribution.

Have they run it in a way that is relationship-oriented, or are they just trying to push product?

Not so much the nature of the buildings and the technology, but the nature of the strategies in the marketplace.

Like, for example, the BankAtlantic acquisition for us was really good because, while they had some problems at the top of the house, they had a really good basic retail strategy that we were able to build on.

So, Texas right now for us, that looks very, very good.

And I think that will be very good as we go through.

If we see other situations like that, we'd be very aggressive in looking at it.

Certainly one of the advantage of branch acquisitions is it eliminates any whole-bank risk issues -- around BSA/AML, et cetera.

So, it's -- it would be high on our list, but not necessarily to the exclusion of whole banks.

Great.

Thanks for the color.

I will turn the conference back to Mr. Greer for any additional remarks.

Thank you, Felicia, and thanks to all of you for joining us.

This concludes our call.

Thank you, and have a good day.

That does conclude today's conference call.

Thank you for your participation.