Truist Financial Corp (TFC) 2014 Q3 法說會逐字稿

Greetings, ladies and gentlemen.

Welcome to the BB&T Corporation Third-Quarter 2014 Earnings Conference.

Currently all participants are in a listen-only mode.

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

As a reminder, this event is being recorded.

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

Thank you Tiffany.

Good morning, everyone.

Thanks to all of our listeners for joining us today.

We have with us Kelly King, our Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter and provide some thoughts about next quarter.

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 referencing a slide presentation during our comments.

A copy of this 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'll refer you to the forward-looking statement warnings in our presentation in 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 Kelly.

Thank you, Alan.

Good morning, everybody.

Thanks for your interest in BB&T and thanks for joining our call.

I'd say our third quarter was overall a strong quarter -- solid loan and core deposit growth, positive operating leverage.

And we had some very important, I think, strategic initiatives.

If you look at the highlights on earnings, net income totaled $520 million versus $268 in the third quarter of 2013.

Diluted EPS was $0.71 compared to $0.37.

Now remember, the third quarter 2013 had the tax-related reserve adjustment.

We did have a $0.01 reduction in earnings due to merger and restructuring charges.

Overall, a really solid quarter.

ROA was 1.19%; return on tangible common equity was a strong 15.04%; net revenues were up 1.7% to $2.3 billion.

That was largely due to higher mortgage income, service charges, and other fee income.

And it did really overcome our seasonal decline in insurance, which is always a challenge for us.

Very strong fee income ratio at 44%, so we feel good about fundamental earnings.

Loans grew 4.9% versus second quarter, led by P&I, CRE, direct retail, sales finance, other lending subsidiaries.

It was really broad-based.

If you ex residential mortgages, loans grew 8.8% which is very good.

If you notice in the releases, we did sell about $550 million in loans, primarily TDRs -- recorded a $42-million gain, which was reflected as a reduction in the provision for credit losses.

That resulted in unusual net charge-offs of $15 million, but it will reduce regulatory and servicing costs going forward.

We also had a significant unusual item in that we extinguished $1.1 billion of FHLB advances, which were costing 4.15% on average.

And we took a $122-million pre-tax loss.

We were able to replace that with less expensive short-term funding, so that does improve earnings run rate immediately -- so another good positive for us.

In terms of our strategic announcements, we've had a really exciting quarter.

We announced our agreement to acquire another 41 branches and $2.3 billion in deposits in Texas from Citibank.

If you recall, that follows the 21 branches that we acquired in the second quarter, so now we're the 13th largest bank in Texas.

I think when we started in 2009 we were 53rd, so in five years we've gone 53rd to 13th.

We've got a long way to go, frankly, to get into the top five.

But we love Texas, and we're moving, and feel very excited about those acquisitions.

Really excited about the agreement to acquire the Bank of Kentucky, $1.9 billion in assets, 32 branches in the northern part of Kentucky, and really the Greater Cincinnati area.

We're excited about having the number two market share in Kentucky.

Strong market position in the greater Cincinnati market, which as you know is a large, fast-growing and, for us, a very diversified market.

So we're excited about that strategic initiative move, as well.

If you'll go to Slide 4, I just want to amplify on these unusual items so they'll be clear.

The gain on loan sale did increase charge-offs by $15 million.

It did produce $26 million after-tax gain, as well as a positive $0.04 impact on EPS.

The loss on the extinguishment of debt, which is shown as a separate line item in the non-interest expense category, was $76 million after tax.

So that's a negative $0.11.

We had an income tax adjustment on a negotiated issue with the IRS, which shows up in the tax provision of course.

That was $50 million after tax, so that's $0.07 positive.

Then we had the merger-related and restructuring charges, which was a negative $0.01.

You can see the first three items really wash out, and then you just have a $0.01 negative impact due to mergers.

A relatively clean quarter once you work through those.

Really, all the changes were positive; so we felt pretty good about that.

I would point out, however, that with all of the changes, it does create positive improvement in earnings looking forward from the loan sale and the debt extinguishment, which is really good.

If you look at Slide 5, I'll say overall I'm very pleased with loan growth, especially given it's a really tough competitive environment out there.

Fortunately, we did have some strong seasonal growth.

If you look at commercial loan growth, it was very robust in the quarter.

C&I was up $509 million, about 5.1% annualized.

That was led by large corporate lending, growth in mortgage warehouse.

C&I lending is currently mostly larger participations, very competitive, so very tight spreads.

We're holding our guns with regard to quality.

So we are getting growth, but it's challenging out there.

We're not expecting C&I to be as strong in the fourth quarter because we'll have continued slow-down in mortgage warehouse lending likely.

Although I'll point out, the last couple days yields have been dropping like crazy; so who knows, it might be up a lot.

We'll see how that goes.

If you look at CRE construction and development, growth of 16.1%.

That was led by fundings on the multi-family construction loans.

Really, the largest geographical areas there are North Carolina, D.C., Atlanta, south Florida, and the Gulf Coast of Florida.

We do expect that this will continue because we still have just north of $1 billion in un-funded multi-family commitments.

We think that will have legs as we go into the fourth.

CRE income-producing increased 8.2% annualized.

This was led by retail property financing for acquisitions, refinancings, and multi-family.

Saw growth in office and industrial properties for the first time in a while.

This was really one of the most balanced quarters we've had in IPP, and we feel good about that.

Average direct retail lending continues to have legs, and is increasing.

It increased about 12.7%.

It continues to accelerate due to HELOC, direct auto lending in the branches.

That's really big and a sea change for us in the last three or four months.

Wealth continues to make a nice contribution to direct retail lending, up substantially.

We expect direct retail to continue to accelerate in the fourth quarter.

Residential loans were down 5.2% annualized, including the sale of essentially all of our conforming loans, which was the change we made about 90 days ago, and the sale of TDRs.

Total originations were actually up $5 billion, about 24% over the last quarter.

We'll see how they go this quarter, again depending on refi's.

Other lending subsidiaries was a very strong part for us, very strong 25.6% annualized growth.

Seasonally strong performance from insurance premium finance, up 36%.

Sheffield prime consumer lending up 27%.

Equipment finance up almost 11%.

Regional Acceptance, our sub-prime auto lender, was up 15.4%.

We expect these businesses to slow down in the fourth quarter because it's just seasonal.

We said they would pop up in the third; they did.

They will go down in the fourth.

It's very predictable, very seasonal.

Looking forward, we expect average loans to decline on an annualized basis in the fourth quarter, about 1% to 2%.

Now, this is largely due to lower residential mortgage balances, due to our loan sale and pull-back on our part in prime auto lending due to tight loan spreads.

That business may change back, but it's just gotten so tight.

The yields just aren't good enough to be really aggressive out there.

We're still in the business, and we still love the business; but we are just trying to be careful about the particular traunches that we're buying because of some tight spreads.

If you exclude the decline in residential mortgage balances, we expect annualized loan growth to be a positive 1.2%.

We do expect growth in direct retail, commercial, revolving credit, and other lending subsidiaries.

If you go to Slide 6, just a comment briefly on deposits.

Overall, it was another really good deposit quarter, improved deposit mix.

Overall total cost -- as you see, DDA went up 15.9%, which has continued to be strong -- growth in business deposits and modest growth in retail.

Total deposits were up 3.1%.

That's of course down from the DDA because we continue to strategically run off some of our time deposits which are just too expensive.

We did keep interest-bearing costs at 26 basis points.

Total costs, though, because of the mix change, reduced from 19 to 18 basis points.

Average DDA -- virtually this was 29.2% to third quarter versus 26.8%.

You can see, this several-year strategy of diversification continues to work on the asset side and on the liability side.

One of the most important themes in our business today is diversification.

It's, by the way, one of the reasons we're having a relatively good quarter.

And I'm not as worried about all this volatility in the market as some might be just because of having really strong businesses, like insurance, which just do not track the volatility into stock market and capital markets businesses, et cetera.

So not that we're not concerned about it, but we're really glad to have that insurance under our revenue stream -- no pun intended.

We added $1.2 billion in deposits through the Texas branch acquisition, which I referred to earlier.

Nice continued execution on the deposit side.

We're proud of all of our people in the Community Bank and the other parts of our bank and capital markets and corporate banking that continuing to make that happen.

Let me turn it to Daryl now, and he can give you some more detail and some color.

Thank you, Kelly.

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 overall improvement in credit quality.

Third quarter net charge-offs, excluding covered, increased slightly to 48 basis points.

Excluding $15 million net charge-offs related to the sale of residential loans, mostly TDRs, net charge-offs were 43 basis points, basically flat from last quarter, down almost 11% from the same period last year.

Additionally, loans 30 to 89, and loans 90 days past due, decreased compared to last quarter, mostly due to the residential mortgage loan sale.

Looking forward, we continue to expect net charge-offs to remain between 45 and 50 basis points next quarter, assuming no material decline in the economy.

NPAs excluding covered declined 3.6%, with a 10.2% decrease in commercial NPLs.

NPAs as a percentage of total assets remain at the lowest level since 2007, at 48 basis points.

Going forward we expect NPAs to decline modestly in the fourth quarter.

Finally, performing TDRs decreased 32.5%, driven by the sale of $550 million in mortgage loans.

Turning to Slide 8, our allowance coverage remains very strong, increasing to 1.82 times from 1.78 times.

We had a reserve release of $17 million excluding covered activity, a change in reserve for unfunded commitments, and the impact of the loan sale.

This compares to $39 million released last quarter.

Going forward, we anticipate no further reserve releases.

Continuing on Slide 9, margin came in at 3.38%, down 5 basis points from last quarter, and in line with our previous expectations.

Core margin was 3.2%, down 2 basis points from last quarter.

The decline was mostly a result of the impact of the covered asset portfolio, partially offset by improved funding mix changes.

Core margin declined due to lower yields on new loan volume.

Looking out next quarter, we expect margin to decline 3 to 5 basis points, due to the covered asset run-off, and changes in our forecasted loan balances and yields.

Additionally, we expect core margin to be relatively flat.

Net interest income should be down slightly in the fourth quarter, which includes the impact of purchase accounting.

We became more asset sensitive from last quarter, mainly from the asset and funding mix changes.

This improvement is partially offset by the early termination of the Federal Home Loan Bank advances.

Turning to Slide 10, our fee income ratio remains steady at 44% in the third quarter.

Overall, non-interest income was up slightly compared to last quarter.

This was driven by improved mortgage banking, service charges on deposits, investment banking and brokerage fees and commissions, offset by seasonally lower insurance income.

Mortgage banking income increased $21 million, mostly due to higher production and gain on sale.

Service charges on deposits increased due to one additional day in the quarter and increased commercial account analysis fees.

Investment banking and brokerage fees and commissions increased due to volume.

Insurance income decreased due to seasonality in property casualty insurance commissions.

Overall, we expect modest growth in fee income in the fourth quarter, driven by insurance commissions and lower FDIC loss share.

Turning to Slide 11, the efficiency ratio for the quarter was 59.7%, as core expenses came in a bit higher than forecast.

Non-interest expense was $1.6 billion, relatively flat compared to last quarter.

On a core basis, non-interest expense was $1.4 billion.

This quarter included $122-million loss on the unwind of $1.1 billion of Federal Home Loan Bank advances.

Personnel costs decreased $14 million from the prior quarter due to fewer FTEs and lower equity-based compensation for retirement-eligible employees.

FTEs declined nearly 800 compared to last quarter.

This is the result of a completion of several strategic efforts to reduce expenses and lower personnel costs.

Other expense and loan-related expense decreased a combined $118 million, due to prior-quarter adjustments related to the FHA-insured loans originated by BB&T.

Going forward, we expect expenses to fall below $1.4 billion in the fourth quarter.

The main drivers will be lower personnel and legal costs, operating charge-offs, and loan-related expense.

We are working hard to reach the efficiency target we laid out a year ago.

The target became more difficult because of changes in purchase accounting and slower mortgage revenues versus our forecast; however, as Kelly said in our Investor Day, given the number of moving parts, we're more likely to be in the 57% area.

We had a favorable development in our tax position with the IRS and recorded a $50-million credit in our provision.

Excluding this, our effective tax rate on an adjusted basis was 26.5%.

We expect a similar tax rate for the fourth quarter.

We achieved positive operating leverage and expect the same for next quarter.

Turning to Slide 12, capital ratios remained strong, with Tier 1 common at 10.5%, Tier 1 at 12.4%, both up from last quarter.

Our estimated Basel III common equity Tier 1 ratio improved to 10.3% at the end of the third quarter, compared to 10% last quarter.

Looking at liquidity, under the final rules, our LCR is very strong at 132%, substantially above the minimum requirement of 90% by January 1, 2016.

Our liquid asset buffer at the end of the quarter was very healthy at 14.3%.

Turning to segment reporting on slide 13.

Loan demand increased significantly versus last quarter in the Community Bank, with C&I up 6%, CRE up 10%, and direct retail loans up 13%.

Net income totaled $231 million, up from the prior quarter.

Additionally, non-interest expense declined $18 million or 11%.

In the fourth quarter, we expect to achieve a full run rate from ongoing optimization efforts.

We announced two acquisitions in the third quarter.

Both are expected to close in the first half of 2015.

We agreed to purchase 41 Citi branches in the Dallas, Houston, Midland, and Odessa markets, with $87 million in loans, $2.3 billion in deposits.

This continues our expansion efforts in Texas.

We also announced the acquisition of the Bank of Kentucky, which creates an entry point into northern Kentucky and Greater Cincinnati.

That will mean 32 branches, with $1.3 billion in loans and $1.6 billion in deposits.

Turning to Slide 14, residential mortgage net income rose as gain on sale margins increased to 1.1% in the third quarter from 0.95% last quarter, mostly due to a stronger retail mix.

Production mix of refi-to-purchase was 29% to 71%, consistent with prior quarter.

Originations were up 6% to $5 billion versus last quarter and credit quality remained strong.

Looking at Dealer Financial Services on Slide 15.

Net income totaled $51 million for the quarter.

We had strong loan production in prime, with 13% average loan growth and 15% for non-prime.

Asset quality for our prime auto business continues to exhibit strong performance by historical standards.

Our non-prime auto business continues to perform well within management's expectation and risk appetite.

Regional Acceptance continues to expand, most recently in California, Oregon and Connecticut.

Turning to Slide 16, our Specialized Lending segment had an excellent quarter, earning net income of $71 million.

We had really strong loan growth in Grandbridge, due partly to a new portfolio of product introduced earlier this year.

Sheffield growth was strong, up 27% annualized versus last quarter despite increased competition.

Equipment finance and premium finance had excellent loan growth of 11% and 36%, respectively.

Moving to Slide 17, BB&T Insurance net income was $36 million in the third quarter, a decrease of $21 million compared to the prior quarter.

Non-interest income decreased $37 million, reflecting seasonally lower property and casualty and employee benefit commissions, partially offset by new business and solid customer-retention rates.

Non-interest expense decreased $10 million, mostly driven by lower personnel costs.

Turning to Slide 18, our Financial Services segment generated $71 million in net income, driven by annualized loan growth and corporate banking at 19%, and wealth at 37%.

Additionally, we saw transaction deposit growth of 23% and 9% annualized.

Wealth continues to grow, setting record loan production for the past two quarters.

For next quarter, we see additional modest credit improvement, with much higher provision expense due to no further reserve releases; negative annualized loan growth of 1% to 2%; relatively stable revenues; and a decline in non-interest expenses.

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

Thank you, Daryl.

As you can see, overall we had a strong quarter, solid loan deposit growth.

Our fee strategy's been really working.

Approximately flat expenses, with nice improvement opportunity in the fourth, based on strategies that are already in effect.

We did produce positive operating leverage.

We had several key strategic initiatives that will yield really good long-term benefits.

It's a tough environment from a long- term perspective.

All of our key strategies are working, though, so we feel really positive about our business as it is moving forward.

We remain very bullish on the BB&T performance from a long-term perspective.

Let me turn it to Alan now for questions.

Thank you, Kelly.

At this time, we'll enter a Q&A session.

Tiffany, I would invite you to come back on the line and explain how participants on the call can participate in the Q&A session.

Thank you.

(Operator Instructions)

We'll go to the first question from Betsy Graseck with Morgan Stanley.

A couple questions, Daryl.

I wanted to just see if we could dig into the actions that you took this quarter on the early extinguishment of debt.

Maybe you could give us a sense of what kind of benefit you're expecting that is going to drive?

Is it entirely in the 3Q run rate?

Then maybe you could talk to as well other impacts from recent rate moves, and how you're thinking about managing, with what the market's given us recently?

Sure, Betsy.

On the federal home loan bank unwind that we did, that was done at the very end of the third quarter -- basically had almost no impact on third-quarter results.

If you look out into the fourth quarter, if you look at our long-term-debt line item, that's probably a 13-basis-point decline in our costs there.

Overall, our interest-bearing liabilities line item should probably be down average about two basis points, because of that unwind.

As you look about the flattening of the curve that's occurred in the last couple of days, the long end of the curve has come down, easily 50 basis points since the beginning of the quarter if you look at the 10-year -- maybe a little bit more than that now.

If you look at our balance sheet, our balance sheet is pretty well balanced.

From an asset liability perspective we're slightly asset sensitive, but we have about half of our assets that are fixed and about half are floating rate.

With the flatter curve, that does put a little bit of pressure on net interest income.

I would say that net interest income would come down maybe in the 1% to 2% range if this persists next year, which would between $50 million and $100 million.

Then you also have the benefit that Kelly talked about in the beginning.

In these lower rates in just two days we've seen refi activity really spike back up.

We could have back to what we had three or four years ago going through the recession, where you had really strong mortgage activity.

I believe we could have potentially offset, maybe even benefit, with higher mortgage revenues.

Your diversification is good.

Our revenue for net interest income is only 55% fees, or 45% -- pretty good balance, which is really why you want to be diversified and balanced overall.

Two quick follow-ups on that.

One, on the benefit to long term debt and interest-bearing deposits, that's baked into your three- to five-bip decline in 4Q for NIM?

Yes, and that's helping keep our core margin stable.

That's correct.

Got it, okay.

The LCR final rule was relatively positive for you.

Is there any actions that you're planning on taking differently as a result of that?

Yes, I think you'll see the benefits bleed out over time.

That's basically, we got a nice windfall with the treatment of public deposits and operating deposits, account classifications.

I think the strategy is we basically need to have less higher-quality investment securities, HQ1 securities on, so we can maybe buy some more Fannie and Freddie versus Ginny and Treasuries.

That should give us some slightly higher yield benefits over time.

I wouldn't say we would restructure the balance sheet.

I think we just do it as the cash flows come in.

If you look at what we've been investing in investments over the last several years, we've been very diversified in our investments.

We've been buying short floaters, we've been buying intermediate cash flows, and some longer cash flows.

We really don't know which way rates will go.

It's a more diversified strategy.

I'm glad we stayed with this strategy if this longer curve persists, rather than trying to keep everything short.

I think we're very well balanced.

Okay, that's great.

Thanks.

We'll take our next question from John Pancari with Evercore.

Good morning.

Can you give us a little more color on the expenses in the third quarter, and maybe how the numbers change versus your expectation you gave at the Analyst Day?

I think you had indicated slightly below $1.4 billion in total expenses, and they came in just above -- and how that may be impacting your outlook for the fourth quarter?

Separately, if you could talk about 2015 expense run rate?

Thanks.

John, as I mentioned at Investor Day, we tried to be very transparent in January, because obviously our expenses had shot up in 2013.

As we said then, which we said repeatedly that we thought the expense ratio this year would end in the fourth quarter in the 56% range.

Three weeks or so ago at Investor Day to give a little more transparency, I said remember you have a numerator and denominator.

We have more control over the numerator than we do the denominator.

Whether it was high 56% or low 57% -- it's just not that precise.

That wasn't backing up on the context, because in the context I said 56% range.

But anyway, it is challenging to get expenses down today, I'll be very honest.

It's a really difficult environment, because we're having to invest a lot in technology and regulatory systems and process changes.

On the other hand, we've been really aggressive this whole year.

I know it hasn't shown up yet, but we've been aggressive this whole year in terms of making any kind of changes.

You heard Daryl say in the third quarter FTEs dropped 800.

That was just executed toward the end of the third quarter, which kicks into the fourth.

That's a big part of why we feel confident in still saying we'll be down -- maybe not to 56%, but probably 57% is the way it looks at this point.

But again, if revenue were to kick up, we still -- you just don't know.

It's just not that precise.

We just want to dislodge ourselves a little bit from being so exact.

We tried to say range in the beginning to make that clear, but I understand the context of your question.

The third quarter -- if you take out distinguishment, it was $35 million over the $1.4 billion four.

We're a pretty big business today.

You've got a $5.5-billion expense ring -- $35 million's not that much.

We feel confident we'll be under the $1.4 billion for the fourth.

As we go into the 2015, all these strategies we put in place will be continuous.

They're not something we did just for the one quarter.

They will be continuous.

Now there will be other factors that may expect expenses for 2015.

For example, if rates really drop you've got some impact on your pension expense and so forth.

It's too early to know exactly what's going to happen to expenses, but those are factors that are not in short-term controllable by Management.

What we can control are re-conceptualizing, restructuring our businesses, so that they run more efficiently in this very tight environment we're in today.

All of the things we said at the beginning of the year had been done.

They are now in execution.

It's just time for the run rate to flow through the fourth quarter.

I understand there's a lot of questions about that, but we're very confident of what we said at the beginning of the year is exactly what we've executed on, and we'll continue that diligence as we head through 2015.

Okay.

On that -- with that commentary, how you've re-conceptualized and everything -- and given the top-line environment given the difficult yield curve here, can you talk about 2015 in terms of proficiency ratio expectation?

Is it fair to assume we're looking at a 57% full-year efficiency ratio for the full year of 2015?

I think it's fair to say that if everything were constant then I'd say 57% for 2015.

But as you know John, we in the last two days, we have more volatility than we've had in two years, and prior to that had been really volatile.

For me to sit here and say a number with regard to efficiency at this point would be really maybe not being forthright.

Again, the revenue side I can't control.

If rates go really low we'll get NIM pressure, but we'll get fee income increase in terms of mortgages.

I don't expect any material changes in terms of the basic run rate expenses that we control, because we can control FTEs, and we can control an awful lot of our expense structure.

Given what I know today, I would say I'm pretty comfortable for the year a range of 57%, but there will be volatility within the course of that, given what happens on any one quarter with regard to revenues.

As I said, we do have one unusual fairly large item for us, and that's pension.

The way you probably know that works is based on the discount rate at the end of the year, if the 10-year goes back up, then those expenses will be very low for us.

If it goes really low they'll be spiking up.

To be honest, I don't worry as much about that as I do how many people do you have, and how many branches you have, and fundamental day-to-day operating expenses that you can manage.

It's more of a non-manageable expense.

But I will tell you that I feel very confident in terms of maintaining the efficient structure that we have today, and even beginning to see smaller than this year, but incremental improvements even as we go forward.

But the big kick for us and everybody else in this business is getting revenue lift.

If we can keep expenses next year in the 57% range with the kind of modest growth we are expecting, that would be a wonderful thing.

If the economy gets a lot better, everything gets better.

Understood.

All right, thank you, Kelly.

We'll go next to John McDonald with Sanford Bernstein.

Daryl, I was wondering about the mortgage banking revenues were strong this quarter, and you mentioned the better gain on sale margin with the retail mix improving.

Do you see that kind of gain on sale as sustainable?

Just on the origination front, do you expect things to be seasonally lower in the fourth quarter before any refi impact?

Yes, the gain on sale was really driven by the retail activity.

Of course we had a little bit of increase in our correspondence spreads.

I would say gain on sale spreads prior to the last couple of days we would have expected to be pretty much consistent in the fourth quarter.

But the last two days we've had spike-up in activity.

You have a lot more refi activity.

If that really comes through, rather than having softer volume seasonally in the fourth quarter you could actually have that as an offset, which could be a windfall for us and the industry for mortgage revenues.

It's too early to call, but we definitely saw spikes up in refi volume in the last two days.

I would say mortgage revenue's a wild card right now.

Maybe down a little bit, but could be actually better than what we saw this quarter, depending on what happens to refi's.

Okay.

Can you just remind us on the insurance seasonality, when you go from third to fourth do you typically get that $40 million to $50 million back?

John, this is Chris.

We won't get the whole thing back.

You're probably looking at something like a 2% to 3% bump-up in fourth.

The strongest quarter's first, followed by second, followed by fourth, and third is our lowest seasonal quarter.

Okay, and just on the credit -- thank you, Chris.

On the credit side, Daryl, how much of that 40-50 basis point charge-off guidance is the pick-up from the seasonality you mentioned?

John, this is Clarke Starnes.

We always have defined seasonality in the fourth -- really, the second half of the year, but particularly in the fourth quarter in our non-prime auto business.

Really, all of the fourth-quarter guidance around losses is around the non-prime seasonality.

Otherwise, we feel very good about the stability in the credit trends otherwise.

Okay.

Do you expect to start building reserves if loan growth continues, kind of in the mid-single-digit pace, Daryl or Clarke?

We certainly at this point, as we said, do not anticipate further reserves based upon where credit trends are.

We would assume stable reserves, unless we had substantial growth, and then we would have to pick up provisioning then.

Okay, you mean growth beyond what you've had recently?

That's right.

Okay, thanks guys.

We'll take our next question from Matt O'Connor with Deutsche Bank.

Just to follow-up on some of the expense commentary, I guess pension comments specifically, it would be helpful if you could let us know what the pension costs were running this year, and if you have any sensitivity if rates were to stay at these levels, how meaningful that might be for next futures calls?

Yes Matt, this is Daryl.

I would say our pension costs this year were basically pretty much zero expense, maybe a slight credit, due to what happened with rates a year ago.

If rates were to stay where they are today -- so that would be down basically about 100 basis points from last year -- you could probably see about $100 million increase in pension expense next year.

That could be offset somewhat, because one of the other factors in this is when rates really drop and the field expectations are down for the next year, we're able to put additional funding into our pension program.

We always keep it fully funded as much as the IRS allows, and that could offset that a bit.

Okay.

Yes, that was actually going to be my follow-up question, since you have excess capital and there's not a ton of balance sheet growth, it seems like you'd have some flexibility to add there.

Yes, absolutely.

We'll add to the max.

Okay.

Then just following up on the mortgage refi comment, I realize this is all very real time, but a couple days ago, Wells had said not really any signs of a pick-up in refi's.

Obviously since then rates have come down another 20 bips.

I'm just trying to compare the two.

I don't know if it's just too real-time to reconcile, or if another 20-basis-point decline in rates actually makes that much of a difference, or different mix or something like that?

It just got real time.

Daryl sent me over some numbers a couple days ago.

In like two days, our production's almost doubled.

It was up about 30% in the last two days.

Right.

It's incredibly hard to predict right now.

I think John Stump will tell you that it's a long time between Monday and Thursday.

Yes, I think most equity investors and bank stocks right now say the same thing (laughter).

Okay, thanks for the color.

We'll take our next question from Erika Najarian with Bank of America Merrill Lynch.

My first question, Kelly, just to follow-up on John's line of questioning, maybe I'll take the other side of the efficiency equation.

You clearly have been good at controlling things that you can control.

As we look out in 2015, what are the revenue-generating initiatives that you've invested in over the past year that you think could provide a benefit or lift to revenues, even absent help from the rate backdrop?

Well, I think you've got a couple things.

You've got just a continuing and building revenue lift coming from -- the community bank is just getting better day by day, because overall the markets are getting better -- and frankly, a lot of strategies that Ricky put in place are just get better.

That's kind of independent of a unique strategy.

It's a general strategy.

Our insurance business continues to get better every day.

The investment in Crump and all of those businesses are really clicking.

They get better every day.

The new markets that we're in, it really is an exponential thing.

When you go into a market like Texas, it takes you a while to get your feet on the ground.

Then you're building on -- improving on what you have.

Then you layer in a couple of new investments like the two Citi traunches.

That gets better.

We'll have the opportunity in the greater Cincinnati market.

There are a number of top-line initiatives that will positively impact that ratio as well.

I think the final one I would point out is that our wealth strategy is really working.

It's probably still got another two or three years of legs.

We were kind of behind, to be honest.

Chris has done a great job in working with our wealth team.

As they integrate with the community bank, it is just gaining momentum every day.

I'd isolate on those particular ones, but there's some others, but those would be the main ones.

Got it.

My second question is do you think that there could be an inflection point in the M&A environment in terms of seller willingness, if the curve continues to be this flat going into next year?

Said another way, do you expect lower for longer to drive the propensity for conversations for potential sellers?

I would say lower for longer leads to longing for improvement.

That causes people to really re-think everything, to be honest.

I think it's an insightful question, Erika.

Yes, I think that everybody's already feeling the pressure.

If you read commentary from community mid-size banks, they will tell you that they are fighting every day -- and we're all fighting -- but they're really struggling, because an awful lot of the regulatory and technological costs push straight down to them just like they do us.

They're seeing the really tough competitive conditions out there in terms of lending.

I think every time you add one more weight on the challenges -- and lower-longer is another weight -- it causes people to think more seriously about strategic opportunities.

I would expect if we stay lower longer that would create, if not an outright discernible inflection point, it will certainly create a higher propensity of M&A activity.

Are the regulators thinking as fluidly, in that obviously you were able to get some smaller deals done.

But do you think some of the log jam in some of the more sizeable deals can break, as well?

Your thoughts there, too, and I'll step off.

Yes, so I'll tell you what I think with regard to what the regulators think.

But obviously, no one knows for sure.

But I believe the regulators are becoming pretty realistic with regard to this.

I think they recognize that the industry needed to consolidate.

I think they recognize that there's a lot of scale issues around a lot of the investments that companies are having to make to meet the regulatory standards, in terms of risk improvement practices, liquidity improvement, capital stronger, et cetera.

Yes, I think the regulators are beginning to warm up to the idea of the need for consolidation.

I think the key thing is they are not backing down in terms of their absolute expectations with regard to almost a zero tolerance with regard to risk management and compliance initiatives.

If the acquirer has invested the right time and money, and has the right attitude with regard to investing in those processes and procedures, then I think the regulators would probably look pretty favorably on an acquisition.

If they've not, then I think they will kill it dead in its tracks.

Got it.

Thank you very much.

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

Daryl, with the couple of deals coming on, and you guys making some adjustments with the debt retirement piece, I just wanted to see if you can help us understand just the total size of the balance sheet and how it should progress?

You're bringing on a lot more deposits than loans, but I'm wondering if that leads to balance sheet growth, or are you going to continue to re-mix other parts of the balance sheet from here?

Yes, that's a good question, Ken.

I will tell you that from the Citi Texas branch is what we did with the first acquisition, and what we're going to do with this second acquisition, is you really won't see hardly any balance sheet growth.

We're just going to replace some non-client national market funding with these core deposits.

It basically just improves our overall client funding and improves our liquidity and everything.

All that comes in, and we still get a benefit because the Citi deposits were actually cheaper than our deposits, so we'll have a benefit there.

As Ricky gets that going, then you get more revenue over time from those new markets that we're in.

With the Bank of Kentucky, that is basically going to come in.

I would say our balance sheet will grow with that, probably a little less than $2 billion, $1.5 billion to $2 billion, because that's a full bank with deposits and loans.

They have a good loan portfolio.

That's going to come in.

The market value on the loan portfolio won't be significant enough, so it's pretty much going to come in as you see it, for the most part.

I would say about $2 billion higher after we close both of those transactions.

Okay.

On the securities portfolio side, you had mentioned that you'd be able to just kind of use the cash flows to re-mix in this LCR free-up.

But has the portfolio size also gotten to be around the same level, and from here it's more about the re-mixing?

Yes, I would say our portfolio is just a tad over $40 billion.

That should probably stay pretty much consistent right now through 2015.

We have very strong liquidity ratios.

I think we're fine from that perspective.

I think we'll continue to invest in a very diversified portfolio, some short, intermediate and some longer -- very good diversification, but I think the size stays pretty much the same.

Okay.

If I wrap it up, then it basically means that ex that $2 billion from the Bank of Kentucky deal, then your earning asset growth will probably be a little bit lower than your loan growth from here?

The earning assets will basically just be a function of what comes in with Bank of Kentucky.

That's $1.6 billion.

Right, I mean ex that, like if the portfolio is about the same and you're basically loan growth is going to drive -- loan growth will really drive your earning asset growth from here, then?

Yes.

Let's say if we grow loans, call it 4% next year, earning assets will be a little less than that, because securities are flat.

Right.

Okay, got it.

Thanks a lot, guys.

You're welcome.

We'll go next to Gaston Ceron with Morningstar Equity Research.

I wanted to stay on the M&A theme just for a moment.

I think you gentlemen discussed your new position in Texas after this branch deal.

I think you said you were now looking at being around the 13th spot there in Texas, and still not in the Top 5. I'm curious if you can look out a little further and comment on your further aspirations in Texas, and how you expect to break into that top five, and any kind of time frame that might take you?

Well, I think our strategy for Texas going forward will be multi-faceted.

It will primarily focused on organic growth.

We have a really good base now of 120 branches.

We can grow really fast off that base organically.

As we have been, we will continue to look for partners in Texas.

There are a number of institutions there that would make good partners for us, we believe.

Texas bankers have done a really good job.

It's a really good market.

Their price to earnings are really high.

Today, I would not be willing to pay the kind of prices that would be required to buy those institutions.

I think looking at us in terms of any whole bank acquisitions in Texas, odds of that is pretty low, unless things change materially, which I do not expect.

We'll look for opportunities like Citi.

There could be some more of those in Texas, we would be very aggressive in that.

But we'll focus at this point primarily organically in Texas.

Now keep in mind, we're not unilaterally focused on Texas.

We have other expansion opportunities.

Over time, we'll continue to look for opportunities through M&A to expand in Florida, and maybe in other core existing markets.

We certainly over time have indicated that we will continue to look at expansions that are natural extensions of our existing footprint.

You can see that out into the Midwest, maybe pushing a little north.

We're up there in the Baltimore area.

Some areas up around there begin to make some sense.

Like we've always done, it's kind of a strategic creep.

You're unlikely to see us do something really big and whopping way out away from where we are.

You're more likely to see us do what we've done, which is natural creeping.

You can say, yes, it wasn't a creep in Texas, that was a pretty big leap.

It was, but it came -- it was fortuitous because of the way it came along with the Colonial acquisition.

Once we had that beach head, we decided to take advantage of it.

But our natural extension program is growing incrementally in contiguous markets.

Great.

Thank you very much.

We'll go next to Gerard Cassidy with RBC.

Could you guys share with us -- you mentioned in your prepared remarks that there's increased competition for the participation loans that you've got on your book -- excuse me, that you put on your books.

Can you tell us how large that portfolio is, and where there may be concentrations, and where you are seeing the competition being the most intense?

Gerard, this is Clark.

Our shared credit portfolio, we have about $22 billion in commitments.

That's a little under $9 billion in outstandings, and it grew about 13.5% linked quarter.

Very nice book for us, good growth.

Nothing's changed around our focus on conservative hold sizes.

Our average exposures in that book is about $38 million, so it's really fairly modest relative to our size.

What we are seeing more in the non-levered space -- which you know we don't participate in the leveraged side.

We're seeing more structural concessions in that area really broad-based.

What's happened is the leverage side's had a lot more attention.

There has clearly been the pull-back on the bank side.

We're seeing more competition in the non-levered space that we participate in, so we're having to be very cautious and careful about that.

But it's really broad based.

It's not in any one particular sector as far as the competitive side.

As far as our distribution, we don't have any particular concentration.

For us, it's very broad-based and diversified, primarily around industry verticals that we cover out of our capital markets area.

Now are the agents primarily the New York banks, or who puts together the participation that you guys are most often joining?

It would be the larger banks, not just the large New York banks.

It includes large regionals, as well, so we share credits with our peer bank regional partners, as well.

It's really both.

Great.

A follow-up on -- the Investor Day you guys were talking about return of capital.

Obviously with the third-quarter results, these are the results that you'll put into your CCAR submission in 2015.

With a very strong Tier 1 common ratio of over 10%.

Two parts -- one, what do you guys see in terms of how much maybe you'll ask for?

Obviously last year it was around 30%, if I recall.

I would assume it would be something higher.

Second, what's your comfort level on your Tier 1 Basel III common ratio?

What do you think you could have that eventually get to?

Gerard, as you know, we've been cautious in terms of trying to establish absolutes because this is still a moving target; although I am very pleased that we're beginning to get some specificity.

We still don't have the top-line corporate unsecured debt requirement.

That's not out there.

We don't think that's going to be an issue for us, because we think we're already where everybody is going to have to be.

We don't expect any substantial capital charge for us because of the G50 charges.

If you assume that the Tier 1 common is around seven, I would say generally we're comfortable in the 8.5 kind of range; but we would keep a cushion above that for various reasons.

Today the cushion is because of waiting for things to settle on down a bit more.

The global economic environment is pretty volatile, but there's opportunity there.

Now do we use that opportunity in terms of stronger organic growth?

Maybe so, but not highly likely to be honest.

We'll have good growth, but then it's not going to be enough to absorb capital.

Will we be thinking in terms of dividend increase?

Yes, but not enough to really absorb the capital.

That gets you to M&A and buy-backs.

I would project -- or what I prefer would be able to absorb some of that through M&A activity.

If we can, for example, like you saw us do in Bank of Kentucky, if we can do a 80/20, 70/30 kind of acquisition, where we can absorb capital that way, and it be a strategic attractive opportunity, it's just a win-win.

We will consider buy-backs?

Yes.

Now I try to remind everybody you've got to remember when you're talking about buy-backs, you've got to look at absolute price and return rate or return on the investment.

We're not going to go out and buy back just to reduce capital.

We would rather hold on to a little excess capital and buy it on a deal.

But yes, I think there's some opportunity there.

I'm hesitant to nail it down exactly whether it's 8.5 or 9, 9.25.

We're not going to be that exact about it, because we're going to be flexible and always have opportunity to respond to the current conditions.

I think inherent, Gerard, in your basic question is, is there meaningful opportunity for us to increase distributions to our shareholders through some combination of practically M&A and buy-back, and the answer would be yes.

Thank you.

We'll take our next question from Paul Miller with FBR Capital Markets.

Yes, thank you very much.

On Slide 6, you showed a very good increase in your average non-interest-bearing deposits.

Can you just add some color there, because that's pretty substantial growth?

Then with the two acquisitions, the one in Texas and the one in Kentucky, how much more can this grow when those other banks come underneath your ownership?

You're right, it is very strong.

It's driven primarily by two general factors.

One is the community bank is doing a really good job in terms of growing non-interest deposits in its structure.

Remember that the community bank, independent of these recent acquisitions has a lot of new markets -- Florida, Atlanta -- all of these are still relatively new for us.

Every time we bring in new commercial accounts we are increasing DDA.

We've got that.

We've got the Texas situation as you described, the Kentucky situation.

The community bank is going to be continuing to have accelerated non-interest bearing deposit growth because of the older, if you will, new markets and then Texas and Kentucky.

The other factor that is driving that is a very well executed national corporate banking capital market strategy.

That strategy we put in place about four or five years ago.

It is just being executed to precision.

We've got a guy named Rufus Yates, he's on our executive team.

He's very experienced in that area, and he's doing a fantastic job, as are all of that members of the team.

Every time we go into Chicago or Cleveland or San Francisco or New York with our capital market structure -- and this is people on ground, now.

We're putting people on the ground pursuing those corporate relationships.

Because as Clarke continues to say, we're not just going to go out and buy participation.

We're not going to go out and initiate relationships how to market quote-unquote wherever we don't have people on the ground.

I now define the corporate banking strategy market as a national market.

But when we're out there picking up those relationships, that's adding on a very low base.

The combination of the community bank, excellent execution, and the corporate bank, excellent execution, is getting us really good non-interest-bearing deposit growth.

I think that will continue for quite a while.

Is there other services coming along, other fee services coming along with these products?

Yes, absolutely.

Because one of the things, Paul, that happens in these is, it's not always but almost always a credit requirement that go along with these, and those are relatively thinly priced.

But we are very diligent about our total return expectations, and we're fortunate we have really good product offerings.

We have, of course, all the treasury and all that everybody else has; but we're unique in having really good insurance offerings.

We do a really good job in terms of over a two- to three-year period of time, getting pretty good penetration with those large corporate clients.

We often-times start out with credit and insurance.

In a lot of cases, we find we already have credit, and now we already have insurance through McGriff, our large national insurance deliverer.

We add credit and other things to it.

It's not easy, I'll say that, but we've been very successful at it.

Thank you very much.

Sure.

We'll take our next question from Matt Burnell with Wells Fargo securities.

Good morning.

Thanks for taking my question.

I understand the drivers of the revised efficiency ratio, and some of the challenges you're having in terms of expenses in the current environment.

Just looking into 2015, Daryl, I know you've got some expenses related to some of the back-office improvement that you're doing with some of the systems.

Given some of the headlines recently about cyber security, is that an area where you could see some incremental increase in cost over the next year or two, or is that largely embedded into your thinking with the newer systems?

This is Kelly.

I'll answer that one for you.

We are investing, and will continue to incrementally increase our investment into overall cyber-security, information security space.

We've been -- I've been very active international level in terms of chairing the BITS organization and the Financial Services Roundtable; and have been really concerned and outspoken, frankly, about the need for all of us to invest more.

BB&T has been focused on this really for the last two or three years at a very intense level.

But even so, just in the last six or eight months, Chris Henson and I did a deep dive in terms of our security procedures.

While we felt really good about where we were, we decided to enhance at a substantially increased level.

While we won't be doubling for example, in a year or something like that, it will be one of the few expense categories just given a pretty green light in terms of making investments necessary.

Because we're not going to take -- there's risk in that, I don't care what you do -- but if there are known risks we find that we can mitigate, we're going to do it.

Okay, thank you Kelly.

That's helpful.

Daryl, a follow-up question for you.

In terms of the loss-sharing income, with the change in the -- or the expiration of the commercial loss-sharing agreement at the beginning of this month, should we see a ramp-down in terms of that contra fee revenue item going into 2015, or is that going to stay relatively elevated?

What I would say, Matt, is that the fourth-quarter numbers will start to come down, the negative loss-share amount.

As you get into 2015, I would have that continuing to come down every quarter thereafter.

It won't be zero by the end of 2015, but it will probably be half of what it is today.

That drag really starts to fade away as the pace of that falls off.

Okay, that's helpful.

Thanks for taking my questions.

You're welcome.

Thank you.

Due to time restraints, we will turn the call back over to Alan Greer at this time.

Okay.

Thank you, Tiffany, and thanks again to everyone who joined us today.

This concludes our earnings call.

Have a good day.

That concludes today's conference call.

Thank you for your participation.