Truist Financial Corporation
Q4 2013 Earnings Call Transcript

Published: 16 Jan 2014

[Operator:]

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alan Greer, Executive Vice President and Director of Investor Relations for BB&T Corporation. Thank you. Sir, you may begin.

[Alan W. Greer:]

Thank you, Lisa. And good morning, everyone, and thanks to all of our listeners for joining us today. We have with us today Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the fourth quarter, as well as provide some thoughts for 2014. We also have other members of our executive management team with us to participate in the Q&A session

[Kelly S. King:]

Thank you, Alan. Good morning, everybody, and thanks for joining our call. So overall, we had a strong fourth quarter. Our revenues were up. Expenses were down. Credit was great. And I think, importantly, we believe the economy has hit kind of a positive pivotal point, and I'll talk some about that in a little bit. So net income totaled $537 million, up 6.1% compared to the fourth quarter of '12. Diluted EPS was $0.75 on a GAAP basis, an increase of 5.6% versus the fourth quarter of '12. For the year, we earned $1.6 billion or $2.19 a share. But remember, those results include $519 million in tax adjustments for prior quarters, which we've talked to you about. So if you exclude those adjustments, we would have had made $2.19 billion, which were record operating earnings. In the revenue area, our total revenue on an FTE basis was $2.4 billion. It was up 3.9% annualized compared to our Q3. That was largely based on a seasonally strong quarter for insurance, record performances in trust, investment banking groups, lower deposit cost. It was substantially offset, though, by decline in mortgage banking income. Our fee income ratio did increase to 43.5%. Regarding loans, average balances were down 1.2% on a GAAP basis. But remember, this includes the sale of a subsidiary we discussed in the last quarter. If you x that sale, loans were up slightly, consistent with the guidance that we gave at our mid-quarter conference. Importantly, income-producing CRE has turned, that's a big story for us, and grew 5.2% annualized. Combined with the residential CRE, total CRE grew 3%, and this is the first quarter this has turned and grown in 6 years, going back to postcrisis. So that would really help us in 2014. If you exclude the sale of the subsidiary and related transfer, other lending subsidiaries grew 3.5% versus the third quarter, even though this is a normally soft quarter for those subsidiaries, primarily in insurance premium finance. Residential mortgage increased 9.8% on a GAAP basis compared to third quarter. Now we did have the transfer in as part of the subsidiary sale, but still, that was up 6% excluding those loans. Deposits had another good quarter. They did decrease $2 billion or 6.3% overall. But importantly, noninterest-bearing deposits increased $1.1 billion or 12.8% annualized. And our deposit mix improved, and our cost declined 3 basis points to 28, which is what we had indicated earlier in the year. Credit performance was a really big story for the quarter. Net charge-offs remained unchanged from third quarter at 0.49% of our average loans and leases. That is below our long-term estimated normalized charge-off rate. We are, by the way, reducing that from 55 to 75 down to 50 to 70 basis point range. That's due to strong performance and mostly because of the change in our loan mix. NPLs decreased 9.2%. NPA has decreased 9.4%. ALLL coverage improved to 1.73 relative to NPLs, up from 1.66. Expenses was a good story for us. Noninterest expenses decreased 4% annualized versus the third quarter, mostly driven by lower professional services, regulatory and other expenses. In the professional services area, they decreased $14 million due to systems- and project-related reductions. Efficiency ratio improved, and we produced positive operating leverage for the fourth quarter. As we discussed in mid-quarter, we believe expenses peaked in 2013 and will decline consistently during all of 2014. We do expect continued improvement on efficiency ratios throughout the entire year. If you look at Slide 4 with me, there are just a couple of unusual items this quarter. The subsidiary sale, again, which we mentioned on the third quarter, did occur. We had a $31 million pretax gain, $19 million after tax, so that was about a $0.03 positive impact on EPS. We did have a relatively small but a meaningful number of merger-related restructuring charges, some related to the subsidiary sale. It's about $10 million pretax, and that was about $0.01 negative to our EPS. So if you look at Slide 5, a few more comments in regards to loans. Loans were down, as I said, 1.2% on GAAP, but that includes the mortgage warehouse being down, seasonality and the sub sale. So if you x the sub sale, they were flat. It's really up 0.3%, with some real positive improving trends, which I'll talk about. If you x the sub sale and the decline in mortgage warehouse, loans were up, actually, 1.5%, which is kind of a look at kind of an operating or a normalized kind of look at loan growth. C&I was flat, excluding mortgage warehouse, even though in a GAAP basis it's down 3.6% from the third. CRE, as I indicated, was strong. Other -- CRE other experienced solid growth of 5.2%. We had some good performance in some key retail areas

[Daryl N. Bible:]

Thank you, Kelly, and good morning, everyone. I'm going to talk about credit quality, net interest margin, fee income, noninterest expense, capital and our segment reporting. Continuing on Slide 7. We continue to see significant improvement in credit, driving lower costs. Fourth quarter net charge-offs, excluding covered, were $141 million or 49 basis points. This is essentially flat compared to the third quarter, but down 52% compared to the fourth quarter 2012. We are updating and reducing our previous charge-off guidance to 50 to 70 basis points based on the change in the loan mix. For the foreseeable future, we believe charge-offs will remain below 50 basis points, assuming no significant deterioration in the economy. Net performing assets, excluding covered, declined 9.4% during the fourth quarter and represent our lowest NPAs as a percentage of total assets in 6 years. We continue to expect NPAs to improve at a modest pace in the first quarter. Turning to Slide 8. As you can see, commercial NPA inflows dropped 33%, which led to the lower provision. As expected, delinquent loans increased modestly due to seasonal factors. However, total commercial watch list was down 9%. Also, our allowance to nonperforming loans increased from 1.66x to 1.73x, reflecting strong coverage. We had a reserve release of $70 million during the quarter compared to last quarter's $52 million due to continued credit improvement. Continuing on Slide 9. Margin came in at 3.56%, down 12 basis points from the third quarter. Core margin came in at 3.34%. The drivers for margin declines are the sale of a consumer lending subsidiary, lower rates on new earning assets and a decline in covered asset yields. These declines were offset by lower funding costs and favorable funding and asset mix changes. Looking at margin for the first quarter. We expect a decline of approximately 5 basis points. The decline in margin guidance results from a larger investment portfolio, driven by the new liquidity rules and lower yields on earning assets. The factors will be partially offset by continued improved funding costs. We grew the investment portfolio to $40 billion at year-end, and it should remain at this level throughout 2014. In light of that, we expect core margin to be relatively stable after the first quarter. Lastly, we became less asset-sensitive due to the increase in the investment portfolio. However, we continue to remain well positioned for rising rates. Turning to Slide 10. Our fee income ratio for the fourth quarter increased to 43.5%, which is driven mostly by insurance, investment banking and brokerage and other income, offset by the decline in mortgage banking. Insurance income was $16 million more than the third quarter, mostly due to normal seasonal factors. Investment banking and brokerage had a record quarter of $101 million, an increase of $12 million. Other income reflects 2 items

[Kelly S. King:]

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

[Alan W. Greer:]

Thank you, Kelly. Now we will move to the Q&A session. In a moment, I will ask Lisa to come back on the line and explain how you may participate in that process. [Operator Instructions] With that, Lisa, I'd ask you to come back on and explain how people can participate in the Q&A process.

[Operator:]

[Operator Instructions] And we will take our first question from Michael Rose from Raymond James.

[Michael Rose:]

I just wanted to get some clarification on the fee income growth this year. Does that include or exclude the gain from the sale of the subsidiary?

[Daryl N. Bible:]

So you're talking about the fourth quarter, Michael?

[Michael Rose:]

Yes. You mentioned year-over-year fee income would be higher. Does that include the sale of the subsidiary or not?

[Daryl N. Bible:]

When we look at that, we're actually carving out the onetime items, like the sale of the subsidiary and also the lost share impact, as well as any gains on securities. So if you take the gains on securities, in '13, we had about $50 million. We have $31 million in this gain on subsidiary. So kind of washes each other out.

[Michael Rose:]

Okay, that's helpful. And then just switching over to loan growth. Maybe this one could be for Kelly. Can you give us some context by market? And maybe, what Texas will contribute as we move into 2014?

[Kelly S. King:]

Yes. Michael, I think we have, fortunately, a number of areas that we're very bullish about. Certainly, we're continuing to build out and get a reasonable penetration in Florida and Alabama and Atlanta area. But Texas is, specifically, kind of a unique opportunity for us. We opened 30 commercial de novo operations there this year. We just added 21 from the Citi acquisition. So we have a total of 80 locations there now, and the momentum is absolutely fantastic. Our value proposition is playing extremely well in Texas. Texas is growing rapidly, as you know. So I'm not hanging everything on Texas, but it's a really big opportunity for us. But we have a large range of other loan initiatives that will supercede all of these. So overall, it looks very positive.

[Operator:]

And we will take our next question from Betsy Graseck from Morgan Stanley.

[Betsy Graseck:]

I just wanted to hone in a little bit on the expense ratio because I know that's a big part of the lift, as we're thinking about earnings into next year. And I know, Daryl, you talked about a couple of the initiatives that you have underway. But maybe you could describe how we should be expecting the expense ratio is going to migrate throughout 2014. And if you could talk a little bit about what you did this quarter to kind of drive that forward expense reduction that is coming.

[Daryl N. Bible:]

Yes. I think as you look at 2014, Betsy, we should have continued improvement each quarter in the efficiency ratio. The line items that I would say would have the most impact from a point-to-point basis in 2014 would be in personnel costs, professional costs, regulatory costs. All those will be down throughout 2014. As far as what you saw in the fourth quarter, I would tell you that some of our projects that we initiated back in the second quarter of '13 have come to completion, and they're starting to wind down. So some of those costs are coming out of our numbers in the fourth quarter. We still have some costs that are going on that will stay with our company through '14. But some of those costs will start to fall off as well. There's many projects, but I think we're starting to see positive traction of these costs as projects get completed.

[Betsy Graseck:]

And what's your sense just on regulatory expenses year-on-year? I mean, clearly, you had some uptick in expenses in '13 due to CCAR, et cetera. Do you feel like that's going to be a meaningful contributor to expense reduction in '14?

[Daryl N. Bible:]

I would say it would definitely add several pennies to our number for '14 versus '13. We had a lot of third-party help with CCAR, specifically. We have some third party helping us with some of our system convergence around some of our projects that we have today. So those are 8-digit numbers, and as those get completed, those should start to fade away.

[Operator:]

And we will take our next question from John Pancari from Evercore Partners.

[John G. Pancari:]

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

[Daryl N. Bible:]

So if you look at -- we still have a headwind in net interest income due to the covered portfolio. I mean, if you back out net interest income for the purchase accounting impact, actually, net interest income would be up year-over-year a couple of percent. But if you just look at it on a GAAP basis, that's down. And if you take that and match that against our fee income, essentially, revenues will be flattish for '14 versus '13. We have expense projections that should be down probably a couple of percent, 3-plus percent or so on a year-over-year basis.

[John G. Pancari:]

Okay. All right, that's helpful. And then my second question is just around the pace of loan growth. I know you gave pretty good color around the expectation for 2% to 3% growth in the first quarter. Can you talk about the pace of growth as you go through 2014, just given your color that you provided around loan demand there, Kelly? It certainly sounds like it should strengthen. So can you give us an idea how we should think about that pace of growth as we go through '14?

[Kelly S. King:]

Yes. So I think, John, it will continue to build. Part of that, like in the second, would be because of the seasonality and -- factors. But also, if our projection is right, which we could be wrong, if our production is right that the economy improves, then that will have a number of positive impacts. For example, companies start investing, they'll start drawing down on their lines, utilizing them more. We'll have new opportunities. We'll continue to execute on our wealth strategy, our corporate banking strategies, et cetera. And so I think you could see a meaningful increase in our loan growth as we head through the year. We certainly are not talking about 8% or 10% kind of loan growth, but I wouldn't be a bit surprised if we ended up at year-end in the 5% kind of range. So I'm not trying to signal that I think the market is getting ready to boom and take off. I don't think that's realistic. But it is getting better, and our strategies are really coming into execution phase and it's going to make a meaningful difference for us.

[Operator:]

And we will take our next question from Keith Murray from ISI.

[Keith Murray:]

I just wanted to check on any line utilization update, meaning the expectation and growth that you're seeing in loans. Do you expect to see corporations pulling lines down? Or do you feel like you need to see them use some of their own cash first that they built on their balance sheet before you sort of get a real pickup in loan growth?

[Clarke R. Starnes:]

Keith, this is Clarke Starnes. That's a great question. So far, our growth outlook and experience has been more around new production. Utilization is still flat, so we haven't hit the point yet where companies are starting to draw down. They're still using their cash first. So our utilization rates are still in the mid- to high-30s. They have not really moved yet.

[Keith Murray:]

Okay. And then, if you could just give an update. You did the Citi branch deal in Texas. Given what regulators are -- the headaches they're making the banks go through on M&A deals, are you seeing other opportunities just on branch deals in the footprint that you find attractive?

[Kelly S. King:]

Keith, I think that you will likely see a number of more opportunities like that as some of the larger companies, domestic and internationally, kind of tweak or substantially modify their strategies around capital requirements and liquidity requirements and other regulatory issues. So I personally expect you will see a fair amount of that nationally as we go forward. We're certainly going to look at any that makes sense. The Citi type of acquisition is kind of ideal in this environment because you get assets, liabilities and really good employees in really good markets. So yes, I would expect more of that as we go forward.

[Operator:]

And we'll take our next question from Steve Scinicariello from UBS.

[Stephen Scinicariello:]

Just want to follow-up on the strong performance on the insurance/brokerage side. I know there's some seasonality in the fourth quarter, but just kind of curious on of some of the trends because I think in the slides, you mentioned improving market conditions as well. So I just wanted to kind of get a little more color on what we might be able to see in terms of continued growth in that segment as you look ahead in 2014.

[Clarke R. Starnes:]

Right. Great question. In the fourth quarter, we had good solid performance from our Madria [ph], which is our sort of upper-end segment retailer, as well as our MGU or managing general underwriter, as they've been allocated a little bit more capacity by the underwriting companies. When I think about '14, I think what you -- we run -- our current run rate for the year was about 4.7% same-store sales. And I think the market is probably going to edge down a bit in -- just a shade in price probably in the 3% to 4%. We've been 4% to 5% in '13, probably more like 3% to 4%. We think -- given our momentum and kind of where we are today, we think for us it's probably a 5% to 6% kind of growth opportunity. Retail is probably in the 3% to 4% range. Wholesale is probably in the 6% to 9% range. So overall, we think 5% to 6% is kind of what we look for with good outsized performance from wholesale, specifically in the MGU.

[Stephen Scinicariello:]

Perfect, perfect. And then second question I had is just in terms of kind of the effects from kind of resizing or readjusting the investment portfolio due to the upcoming liquidity requirements. Just kind of looking ahead, I mean, so now that you've kind of hit that $40 billion kind of level, should we expect kind of a little less, I don't know, margin headwind as we go forward since you're kind of where you need to be?

[Daryl N. Bible:]

Yes. I think that's exactly right, Steve. If you look at our slides, we're going to go down in margin in the first quarter mainly due to the increased size of the investment portfolio because it's going to be on the books for the whole quarter from an average basis. But if you really look at core margin, we didn't have the sale of our consumer lending subsidiary, our -- we're basically, our core margin is relatively flat now. So I would expect core margin, after we adjust for the size of the investment portfolio, to be flat for the rest of '14. The steeper yield curve, our credit spreads that we're achieving now and our loans that we're putting on the books are definitely kicking in such that it's not having as much pressure on us, and we still have maybe just a little bit more funding costs to come down. So I think core margins, overall, can stay where they are after we adjust in the first quarter.

[Operator:]

And we'll take our next question from Ken Usdin from Jefferies.

[Kenneth M. Usdin:]

I wonder if you can talk to us a bit a little bit about just credit quality and the outlook. Obviously, the metrics all look very good, and you continue to have a decent release, probably a bigger-than-expected one. So was there any specific release related to the loan sale? And what do you think the pace of reserve release can continue to look like?

[Clarke R. Starnes:]

Ken, this is Clarke. That's a good question. Specifically, there were 20 -- there was $27 million of reserves that transferred with the acquired loans. So that was -- net of that and the covered position, the release was $70 million versus $52 million in the third. So $70 million is kind of more comparable to what happened in the third quarter. What drove that release was continued improvement in the credit quality, big improvement in the commercial portfolio and rundown of some of the older high-risk manages. And so we continue to see improvement as we look forward, and certainly, that would impact probably the reserves at least in the near term. So hopefully, we'll continue to get a benefit from that in the provision.

[Kenneth M. Usdin:]

Okay, great. And my second one is just regarding CCAR and the continued improvements you guys have made on the process and with Basel III up to 9.6%, can you just talk to us a little bit about just your general framework about balancing capital return this year against that potential you mentioned earlier, Kelly, about opportunities potentially coming up on the M&A side.

[Kelly S. King:]

Yes. So Ken, I think things are settling down with regard to -- certainly, with regard to us in the whole CCAR area. Obviously, '13 was a year of regrouping and reinvesting. So I view that as kind of stabilizing as we go forward. Certainly, we are being conservative with regard to our capital position. As we see the rules settle down, as we see the CCAR process stabilize, it certainly does put us in a position of strength that allows for, looking forward, being able to take advantage of some of these opportunities that do come along. We've always said we want to have capital for organic growth first and dividends and -- but also, then, take advantage of opportunities like the Citi deal that kind of came along or the Crump Insurance deal last year. And so we want to remain relatively conservative and keep some powder dry so that we'll be in a position to take advantage of those.

[Operator:]

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

[Sameer Gokhale:]

Just a couple. The first one I had was just in thinking about the auto business, and loan originations, I would say, across the industry have been quite strong loan growth. But at what point do you feel that you need to dial back on growth there? And I understand that auto sales have been strong, and that's been part of the reason that growth has been strong for loans. But everyone is talking about the pricing pressure, and it seems like this is a perfect sort of environment in terms of credit. Used-car values are up. So at what point do you say, "Let's dial back on auto originations"? Just because the used-car values have fallen and maybe that's a leading indicator that things might slow down there? So some perspective there would be helpful.

[Clarke R. Starnes:]

From a credit quality perspective, we are being very disciplined. While auto sales have driven big originations, we've avoided the temptation to extend term or lower advance rates or allow increased backing of a lot of those structural elements which we do see in the marketplace. We have not changed our underwriting so that will naturally impact our volume if others chose -- or choose to go that route. And then -- so the bigger consideration for us is if -- whether we can get an appropriate margin. And right now, we still feel that the pricing we're doing, that is still attractive for us, but we're going to stay very disciplined about that risk-and-return decision.

[Ricky K. Brown:]

This is Ricky Brown. Too, on the wholesale side of the business, remember, it was very small for us relative to the size of our overall retail piece. And so while we're expanding that, it's still very, very high-quality dealers with growth rates fast, but we were not very large in it. So it's just sort of getting to a size that makes some sense for us. So we're not outsized in that part of the business at all. So it makes me feel really good about sort of the direction of your question about how we're positioned.

[Sameer Gokhale:]

Okay, that's helpful. And then just the other question was for your residential mortgage banking business. I mean, gain-on-sale margins are only 55 basis points. Is that -- how does that factor into your thinking about selling loans versus retaining more of them on balance sheet? How do you think of the trade-off there, given the low gain-on-sale margins?

[Daryl N. Bible:]

Sameer, that's a great question. We did make the decision last -- late last quarter to start portfolio in the 10- and 15-year. I think as we look out and look at the margins that we're getting on gain on sale, we're looking for other opportunities to put on the balance sheet. There is huge emphasis in jumbo, both fixed and ARMs, and we're having a lot of success in the wealth area attracting those products. So I think as you see margins on gain on sale continue to shrink, I think we will put more and more on our balance sheet.

[Operator:]

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

[Erika Najarian:]

I just had 1 follow-up question. You've been extremely clear on your outlook for 2014. You're very positive on loan growth, and clearly, the core margin is stabilizing. I guess I wonder, as I look out farther into 2015, will 2014 mark an inflection point in your GAAP NII, in that some of the positive momentum that's happening with growth is going to show through in 2015? I guess, the straight question is, can NII grow in 2015?

[Daryl N. Bible:]

Yes. I believe it can, Erika. If you actually look at the covered assets, we got positive net interest income of about $120 million this quarter. This time next year, so fourth quarter of '14, it's down to about $60 million. So the headwinds are significantly less as we enter into '15. So I think depending on how strong the economy is and what type of growth, but if we're able to grow loans in the 5% to 6% range in '15, I think we will definitely have positive net interest income growth for '15.

[Kelly S. King:]

And Erika, I would just add, if you kind of look at '13 and '14 for our company, they really are 2 of the toughest years that we've had because of the decline in the Colonial income, because of buildup in expenses during '13 with regard to some of the process and project improvements, et cetera. But really, as we move through '14 and the Colonial drag dissipates as the loan growth strategies become better executed as the economy gets better. I don't want to predict -- '15 is too far out. But I'll be honest, yes, I feel pretty doggone good about it.

[Operator:]

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

[Kevin Fitzsimmons:]

Kelly, I just wanted to follow up on Ken's question from earlier on CCAR. Specifically, I think what we've heard you say in past quarters is that the dividend has probably not got too much room for increasing, given where the payout is, it's already on the high end. And buybacks are typically at the low end of your priority spectrum but probably gets a little more elevated given the state of large bank M&A, that it's -- it appears, at least from our vantage point, is still pretty much closed. But the stocks have increased. So where are buybacks right now in your frame of mind? Are they -- is it -- because I haven't heard it mentioned, and I've heard you mention about keeping your powder dry. So are buybacks something that you would characterize as less of a priority versus several months ago?

[Kelly S. King:]

So Kevin, you're right. All of these factors kind of move around, and you have to kind of adjust your thinking as you go. But as I sit here today, you're right, the dividend posture has to be relatively conservative in terms of increases, but we're already aggressive overall and have been throughout the whole crisis. Our long-term view is the buybacks are kind of our last priority in terms of utilization of capital, as we've described consistently. When you do not have M&A activity and other factors change, it can cause that to rise. And what I've said previously is that, given the current environment, that would cause buybacks to tend to rise somewhat. On the other hand, if we think specifically about '14, as I've said, I do think it's wise, right now, to keep some powder dry in terms of potential opportunities. Whether it's whole bank deals or partial bank deals, we think there will be opportunities there. And then, frankly, coming off of '13 CCAR, we want to be very conservative this year with regard to all of that. And so as I've said, I think you can expect us to have a very conservative ask [ph] as we think about CCAR for '14. Now the likely result of that would be material buildup in capital based on good solid earnings, which positions us as we go through the year and especially as we look to '15 to have more powder dry for acquisition opportunities and/or a more aggressive strategy with regard to buybacks.

[Operator:]

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

[Kevin Barker:]

Could you talk about the competitive pressures you're seeing in mortgage banking, given you've reported a significant decline in gain-on-sale margins while some of the largest banks reported a significant increase in margins? Was a lot of that due to channel mix? Or could you just give us some color around why the margins were down significantly in this quarter?

[Daryl N. Bible:]

Yes. So Kevin, if you look at mix of mortgage originations, when we shifted more towards the correspondent piece this quarter, there was about 3 quarters of production. So with that higher mix here, that kind of drove the spreads down. We did see some deterioration, however though, in retail. We -- our retail spreads are about 180 overall. But I would say the majority of it was driven by the mix change.

[Kevin Barker:]

Okay. And then a follow-up regarding some of the loans you're keeping on balance sheet. Are you expecting to keep 30-year fixed potentially conforming loans on balance sheet given the competitive pressures in mortgage banking? And would you be making non-QM loans?

[Daryl N. Bible:]

So I'll answer the balance sheet question first, and then Clark can kick in on the non-QM. As far as -- we always, traditionally, have kept ARMs on our balance sheet. We've done that historically. We made a decision late last quarter to keep the 10- and 15-year. Historically, we've also always kept our jumbo 30-year. Those tend to prepay a little bit faster. They are convex but it's not a significant portion of the mix overall. So I think 30-year conventional, we continue to sell those out into the marketplace. But the majority of what we're balance sheet-ing are 10- and 15-year and ARMs with a little bit of 30-year jumbo.

[Clarke R. Starnes:]

Kevin, as far as the non-QM, right now, our forecast is that our non-QM production is fairly modest, probably about 5%. We're primarily a QM lender. But we do see some potentially attractive opportunities to do some non-QM loans in a very safe manner, primarily in our wealth segment.

[Kelly S. King:]

But Kevin, just to echo that, as you've heard some others say, we are not going to be QM-constrained in terms of meeting the needs of our clients. And we're, arguably, as Clark said, primarily QM, but that -- the QM really, frankly, allows you to meet most of the needs of your clients. And so there will be some unusual needs from some wealth clients and small business clients and people like that, and we'll be very supportive in terms of making non-QMs and holding them on the balance sheet. So it's really -- as it turns out, we don't think it's going to get in the way of production and meeting our clients' needs. And I will tell you that the books are still to be written with regard to the ultimate cost of servicing loans, from a QM point of view, for us and everybody else. But the production side seems to be pretty benign in terms of any negative impact.

[Operator:]

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

[Brian Foran:]

I was wondering if you could come back to the comment about the asset sensitivity related to the LCR, and I definitely don't want to lose sight of the fact that, regardless of what happens, rising rates is a positive. But as you think about the kind of prospective in a normal rising rate environment, you'd kind of expect to see loan growth in excess of deposit growth for the industry that would seem to pressure people's LCR ratios. The LCR ratios, as currently written, seem pretty harsh, so maybe that moderates a little bit. But how do you think about that interplay? Is there risk that deposit betas and funding cost betas are higher this cycle because of that LCR dynamic? And is that something that would be a rounding error for your asset sensitivity and the industry's? Or is it something that's maybe a little bit bigger deal?

[Daryl N. Bible:]

Yes. That's a great question, Brian. On the LCR piece, you are correct, that is not final yet. We are moving in a direction to be in compliance -- well in compliance by the end of next year. In order to accomplish that, we have to continue to change the mix of our portfolio to 0 risk-weighted assets and really focus on growing our client deposits, which we will accomplish successfully in '14. But when you look at rate sensitivity, the 2 biggest drivers to our rate sensitivity are how quickly they reprice, so the beta that you talked about, and then how sticky are the deposits. From a beta perspective, we have been very conservative. We have priced in a faster beta than what's been historically standard. If you look historically, if the Fed moves 100 basis points on average, the non-maturity buckets move about 50%, give or take 5% or 10%. We're closer to the 70% to 80% beta there, so I think we're conservative there. If we don't have to move quite as fast, then we could actually show a little bit more asset sensitivity than what's in our disclosures today. The other piece, though, is how sticky are the deposits. We've had tremendous growth in our core deposits throughout the last 4 or 5 years. It is very difficult to model how sticky those deposits are. We actually put in our disclosures the sensitivity analysis, if we lose some of that core funding, how that impacts our asset sensitivity. And if you lose approximately $5 billion, I'm not saying we're going to lose, but if you lose $5 billion of core funding, it cuts our sensitivity about in half. So if you put it all together and look at the betas plus how sticky the deposits are, we are asset-sensitive. The degree of how asset-sensitive we are is really hard to really peg right now because of the factors I just mentioned. But it could be positive or it could be slight; it really depends on how sticky it is and how quickly we reprice.

[Kelly S. King:]

Brian, I would just add 1 point with regard to the stickiness. Really during '12 and '13, working through our Colonial and BankAtlantic acquisitions, we've really exited a lot of the less sticky deposits, frankly focusing on cost control. And many of them were not very -- totally client committed deposits anyway. And so while it's hard to know exactly what the betas will be and the stickiness, I would say that we jettisoned on an awful lot of the non-sticky deposits already.

[Brian Foran:]

That's really helpful. And 1 follow-up -- or I guess a 2-part follow-up on expenses, both more mechanical. For those of us who kind of primarily drive things off of GAAP efficiency ratio quarter-by-quarter, can you just remind us -- you gave a very detailed breakdown, which is always helpful, on Page 26. What's the normal difference between GAAP and the reported? Because some of -- intangible amortization is always there, but some of the merger charges and OREO presumably comes down over time. So is it, 150 bps a good guess between the difference between those 2? And then also, when you talk about the efficiency ratio kind of coming down over the course of the year, are we at the point where it's clear it will come down kind of sequentially each quarter, first quarter will be lower than fourth, et cetera? Or should we still build in some risk of lumpiness from project expense and things like that?

[Daryl N. Bible:]

Okay. Brian, if you look at our tables that we published, in the back section, on the Page 22, on the tables, we do a reconciliation of GAAP to our reported efficiency ratio. So you can kind of see the difference there. This past quarter, it's about 1.2% difference between our reported efficiency versus GAAP. The main drivers of it, you mentioned a couple of them, is, last year, impact of OREO, our adjustments on real estate and intangible amortization. Those are the ones that get adjusted for it, but you can kind of see a quarterly trend if you look on Page 22 from that perspective. As far as the trend of the efficiency ratio goes, it's hard to peg if it's going to be perfect line down. We definitely think the trajectory is going to be point-to-point down. How quickly each quarter is really depends on the revenue growth that we have, coupled with our expenses that are finishing up and coming off. It's a downward trajectory. It's just hard to actually say it's going to be a smooth line. It will come down, but it's not going to be very linear. It would probably be bouncing around a little bit, but the trajectory is down.

[Operator:]

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

[Gaston F. Ceron:]

Just very quickly, I wanted to go back to the Texas expansion issue that you discussed earlier on your process with the state. After the branch acquisition deal, obviously, your market share in the state is moving up. I'm curious what you -- how you see the pathway to getting that into kind of a top 5 area.

[Clarke R. Starnes:]

Yes. Thank you, Gaston. We feel very good about what's been going on in Texas. As Kelly said, very good deposit growth. Loan growth has been very good. The 30-branch activity has been very good from a deposit perspective. It's caused a big ripple in activity for commercial lending, real estate lending as well, and we feel really good about the momentum that we've got in Texas. As we think about going forward, we expect that momentum to continue. We see real estate opportunities. The auto business has been very good to us. So we think that Texas can continue to be good, and the marketplace continues to be good. In terms of the 21 Citi branches, we will integrate those. They fit very nicely. They look very much like the demographics of our 30-branch expansion, so that's really good from a -- fitting into our commercial focus in Texas, that's positive. It's going to give us a lot more exposure. We're getting some good bankers that are coming along with it. That's a good thing. And then in terms of just the future, obviously, we've gone from 53rd in market share when we started to now in the top 20. We'd like to be in the top 5. There's a long way from the top 20 to the top 5 in Texas, so we're gonna have to look for opportunities. We're going to keep our eye open. But we've said we're going to be focused on strategic importance and making sure we buy something that's not too risky and also something that makes sense from an accretion perspective. So we're going to be disciplined, but we know we're going to have to do things. And those things will open up as we go forward. So Texas is still going to be a very bullish story for BB&T going forward, and I'm excited about it.

[Gaston F. Ceron:]

And lastly, just any particular markets within the state that look particularly appealing? Or...

[Clarke R. Starnes:]

I would say, if you think about where we are in Texas today, we're in the big cities

[Operator:]

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

[Nancy A. Bush:]

Kelly, certainly, you're more optimistic about the economy than you've been in a long time, but the outlook for the Southeast still seems to be kind of spotty. Can you just tell us what you see going on there and whether the construction -- the lessening of construction activity, which has been sort of a damper there, is kind of easing up at this point? Could you just talk, sort of an industry basis, about what you're seeing?

[Kelly S. King:]

Yes. So Nancy, again, I am more optimistic, and I've described earlier kind of the macro views as to why I am. Specific on the Southeast, construction has been, as you pointed out several years ago, a real drag. Obviously, it was a big factor for all of the Southeast banks. That is definitely turning. The fact is, the data is just basically, no single-family lots available and houses hadn't been built for several years. So that is turning. There's -- still, babies are being born and people want to move up in housing, so there's a growing demand for single-family element construction. Manufacturing is going to be a pretty big factor in the Southeast over the next several years. With the sea-change and energy cost of this country, with the relative dollar change and relative low cost of operation and the union situation in the Southeast, manufacturing is going to be really strong. And so if you put together a combination of construction across the board, retail and multifamily and manufacturing, I think you'll see the Southeast, over the next 2 to 3 years, substantially stronger than a lot of people think.

[Nancy A. Bush:]

You had mentioned competitive conditions in lending. Could you just elaborate on that a little bit? Is it price? Is it structure? Is it both? And sort of what percentage or what amount is coming from the Community Banking segment?

[Kelly S. King:]

So the competitive structure, Nancy, is as tight as I've ever seen it and not surprisingly. I suppose we're all coming off of a difficult period, and everybody is looking for net interest income. So it's tough. It's probably a mix between -- equally between price and structure. I've been somewhat surprised and disappointed, though, how much slippage there has been on structure. The pricing I kind of understand. The structure is hard to understand, but it's been pretty broad-based on pricing and structure. And so the volumes that we're growing -- we're getting a lot of growth in our Specialized Lending businesses and in our corporate strategy, which, as you know, is a national strategy. The Community Bank, over the last 18 months, 24 months, has been relatively soft for us as the construction, lending and all that has really domiciled in our Community Bank. But that is really getting ready to change. Rick has got some aggressive strategies in terms of asset-based lending strategies, equipment financing strategies. As I said, residential and multifamily is still -- or multifamily is still strong. Residential is coming on. When you put all that together, I think you're going to see the Community Bank's contribution increase, but the corporate will remain strong. And so the percentage of Community will come up, but the absolute levels of both will be increasing.

[Operator:]

And ladies and gentlemen, due to time constraints, we will take our final question from Mike Mayo from CLSA. Tom Hennessy - Credit Agricole Securities (USA) Inc., Research Division This is actually Tom Hennessy in for Mike. I had 1 follow-up question. If you could just go back to your expectations for loan growth. You had mentioned the line utilization still being flat. In the outer quarters especially, does your expectation for loan growth come from any uptick in utilization? Or is it still just predominantly coming from new production?

[Daryl N. Bible:]

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

[Operator:]

And ladies and gentlemen, this does conclude today's question-and-answer session. Mr. Greer, at this time, I would like to turn the conference back over to you for any additional comments.

[Alan W. Greer:]

Thank you, Lisa, and thanks to everyone for joining us this morning. We hope you have a good day. This concludes our call.

[Operator:]

And this does conclude today's conference, and we thank you for your participation.