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BB&T (NYSE:BBT)

Q4 2012 Earnings Call

January 17, 2013 7:30 am ET

Executives

Alan Greer - Executive Vice President of Investor Relations

Kelly S. King - Chairman, Chief Executive Officer, President, Member of Executive & Risk Management Committee, Chairman of Branch Banking & Trust Company and Chief Executive Officer of Branch Banking & Trust Company

Daryl N. Bible - Chief Financial Officer and Senior Executive Vice President

Ricky K. Brown

Clarke R. Starnes - Chief Risk Officer and Senior Executive Vice President

Christopher L. Henson - Chief Operating Officer, Senior Executive Vice President and Assistant Chief Financial Officer

Analysts

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Adam Chaim - Deutsche Bank AG, Research Division

Michael Rose - Raymond James & Associates, Inc., Research Division

Kevin Fitzsimmons

Betsy Graseck - Morgan Stanley, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Gregory W. Ketron - Citigroup Inc, Research Division

Thomas LeTrent - FBR Capital Markets & Co., Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Erika Penala - BofA Merrill Lynch, Research Division

Operator

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Fourth Quarter 2012 Earnings Conference Call today, on January 17, 2013. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Alan Greer, Investor Relations. Please go ahead, sir.

Alan Greer

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

We will be referencing a slide presentation during our remarks today. A copy of the presentation, as well as our earnings release and supplemental financial information are available on our website. After Kelly and Daryl have made their remarks, we will pause to have Cassie come back on the line and explain how you may participate in the Q&A session.

Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Additional information concerning factors that could cause actual results to be materially different is contained on Slide 2 of our presentation and in the company's SEC filings.

Our presentation includes certain non-GAAP disclosures. Please refer to Page 2 and the Appendix of our presentation for the appropriate reconciliations to GAAP.

And now, I'll turn it over to Kelly.

Kelly S. King

Thank you, Alan. Good morning, everybody. Thanks for joining our call.

So I'm going to start with some overall performance highlights. And I would say, in general, that relative to the environment, excuse me, 2012 was an outstanding year and our fourth quarter was a very solid quarter financially. And in addition to the financial performance, I would just point out to you that we did acquire and convert BankAtlantic and Crump. I'm very proud of the fact we did over 1,100 community projects, which we call our Lighthouse Projects, and we continue to get outstanding feedback in terms of our service quality, which is ultimately the most important in terms of our value proposition.

In terms of some of the numbers, we did have record annual net income of $1.9 billion, up 49% from the prior year. Net income for the quarter was $506 million, up 29.4% versus last year's fourth. Diluted EPS totaled $0.71, which was up 29%. I would point out that we did have a $0.01 of EPS reduction because of merger-related charges.

Total revenues, very strong, $2.5 billion, up 8% versus our third quarter. Record 2012 revenues were really from Mortgage Banking, Insurance, Investment Banking and Brokerage. We had a very strong fee income ratio of 44%, which we feel very good about.

Solid overall loan growth. It was 3% versus third quarter, annualized. That growth was led by C&I, Direct Retail, Lending and Residential Mortgage. It follows linked quarter C&I and CRE loan production. I'll give you a little more color on that in a minute.

In terms of deposits, another great quarter. And total deposits increased $3.1 billion, or 9.5% versus the third, annualized, but more importantly, noninterest-bearing deposits increased 24.7% versus third quarter, annualized. And we continue to improve our mix and decrease our interest-bearing costs.

Overall, a really good performance in credit quality. So NPAs and NPLs are both decreased over 10% on an annualized basis. Our allowance coverage ratio improved to 1.37, up from 1.24, so really strong consistent performance there.

Expenses were well controlled. Our noninterest expenses decreased 10.7% versus the third quarter, annualized, and very pleased that we had positive operating leverage.

If you're following along, let's go to Page 4 in the deck. So I'm very pleased about overall loan growth, particularly given a tough economic set of conditions. And I would point out and emphasize that we are continuing to stick to our credit quality discipline. And unfortunately, we do see some slippage in the marketplace, but we're being very firm about that. So you can see that our x covered growth was 4.4%. Of course, we continue to have mix change.

Our C&I was 5.4%, fourth to third annualized. CRE was 7.7%. I would point out that we did have a reclass from C&I -- I mean, from CRE to C&I, so if you adjust for that, our C&I would have been 6.7%. Of course, CRE would have been slightly less as well, but that's what we're really trying to focus on. I would remind you that our CRE had another continued substantial runoff, but we think we are kind of at the trough, kind of at the bottom on that. We really see that as an opportunity going forward. I'll talk about some of the categories in just a moment, but that's a real opportunity for us.

Direct Retail had a strong quarter, 6.3%; Revolving Credit, 8.2%; Residential Mortgage was 5.7%. Now keep in mind, we told you last quarter that with regard to Residential Mortgage, those rates are not as high as they were in previous periods because they're not holding our fixed rate conforming. And our other lending subsidiaries was 2.1%, and, again, that's seasonal, so those are very much in line with what we would have expected.

So if you look at the -- again, in the context of a relatively slow market out there, we feel good about those growth rates. Also feel encouraged in terms of momentum because the end of period loans were $1 billion higher than the fourth quarter average, so that's encouraging.

And in terms of a little guidance on the first quarter, we expect to see solid C&I, CRE and Sales Finance growth. Our Corporate Banking investments continue to expand our loan opportunities there. Now on this CRE, I don't want Nancy to have another heart attack here, so we're focusing on retail, warehouse, office, multi-families, small steps like we always do. We're not doing 50- or 100-story office buildings, that kind of thing. So just what BB&T always kind of does, but we're just going to do more of it relative to the last 2 or 3 years. And we're going to be focusing on wholesale lending and sales finance. That's a really, really big opportunity for us as we go forward.

Also point out that we've got some really encouraging momentum developing out of the Community Bank, especially in our newer markets around Colonial impact. So just to give you a perspective, if you look at loan production for the Community Bank, it was up 26% over last year. Our fourth to third annualized was 32%. Now, all that's not funded today, but we believe as we head into the spring, people will start fund -- pulling down those lines and so that production number is something that's a pretty good indicator of future growth. So we feel good about that.

And taken all that into account, we would guide you to a loan growth for the first quarter in the 2% to 4% range contingent on the economy. The economy is soft today, and businesses have still not started really ramping up their investments. There's still a lot of uncertainty out there. Who knows what's going to happen with regard to the debt ceiling discussion and expense reductions at the federal level. But if we get any kind of modest or reasonably positive leadership out of Washington and we reach some kind of reasonable accord around that, I think you may see a positive kick on this. I'd just point out that people have been holding back for 4 years, in particular the last 2 years in terms of making any investments and so if we can get some kind of reasonable leadership out of Washington, you might see more of a positive kick in loan growth than you might have expected.

I just want to emphasize also, again, that we are sticking to our disciplined strategy in terms of lending. We're not doing leverage leading, which a lot of companies are doing. We are keeping relatively small hold positions. A lot of our competitors take a much bigger hold positions. We could double our loan growth in short order if we chose to, but we're much more focused on long-term earnings and we're simply not going to go back out of the frying pan into the fire in terms of taking on a bunch of higher-risk profile types of credits. So I just think in terms of our loan growth, on a risk-adjusted basis as being very, very strong.

If you look at Slide 5 in terms of deposits, it's overall a great quarter, particularly given the significantly lower costs. Our total deposits were up 9.5% quarter-to-quarter annualized. More importantly, DDA, noninterest-bearing deposits, was up 24.7%, which was really, really strong. We effectively reduced our borrowing cost on interest-bearing deposits by 18 basis points during 2012. Our CD maturity is still reasonable at 12 months. We opened about 34,000 net new retail deposit accounts, so we're going through the transition of getting through free checking and move to positive growth again there on a solid basis.

So if we think about first quarter, we would guide you to more modest deposit growth. Frankly, we're not trying to push it too fast. We don't have the loan growth to support it. So we're trying to keep the costs down and let the growth be kind of what it is. And so you expect to see some contingent improvement in deposit cost.

I would just make an editorial comment that the TAG program ended, was basically not a big deal. It was probably slightly positive to us, probably, to our credit rating. But more important, I think, this is a really important step in getting our industry disengaged from government support and government control and we pushed for the termination of that program and we're glad that it did, in fact, terminate.

If you look at page, or Slide 6, I'll just say to you, overall, with regard to revenue in this dynamic global marketplace, we believe diversification in assets, markets and the resulting revenue is very, very critical. We've invested, for many years, in diverse businesses and we're really beginning to see the benefit in more stable revenue and earnings, which is what we've always told you folks that we're trying to do on behalf of our shareholders, produce long-term, stable revenue and stable earnings so we can have stable dividends and share price increase.

If you look at that pie chart there, I would just point out to you that it's a pretty good balance: 47% from the Community Bank; 14%, Insurance Services; 13%, Financial Services; 12%, Mortgage; and 8% in Specialized Lending; and 6% in Dealer Financial Services. So I'd just point out that we're not as spread-dependent as a lot of companies are. And so even if we stay in a low interest rate environment for a long time, we won't be relatively as hit as some others. I will say with regard to interest rate environment, and Daryl can give his comment on this, but I personally think, notwithstanding what others are saying, about end of this year, we're going to see interest rates rising. I just think there's so much monetary stimulus into this economy and we're going to see the impact of that in terms of rates, notwithstanding what the Chairman is trying to do. So I'm a little bit more bullish on the yield curve than some people are.

In terms of some key initiatives for '13, I just want you to know that even though it's a relatively slow environment, our attitude at BB&T is bullish. We're not sitting back crying over spilt milk about how bad the economy is. We're moving forward. We've got a number of initiatives. Just a few of them are these: So we're expanding our corporate banking initiative in key national markets, continuing to expand our vertical lending teams; that's paying really, really big benefits for us. We're expanding our adviser capacity in wealth management and brokerage-dealers. We're adding substantial number of brokers there.

We have a huge opportunity with this Crump acquisition in a number of areas, but I just want to highlight one to give you a perspective of how important that opportunity is for us. So if you think about what a wholesale company does is this classical wholesale in terms of supporting the needs of the retailers. But what's really happened in the life insurance business over the last, really, couple of decades is the traditional model has changed dramatically. If you go back 20-plus years ago, 2/3 of life insurance product was sold by the dedicated insurance salesmen of the underwriters. That's changed to where that's only about 1/3 today. So 2/3 of the premiums are being written by people that sell multiple, multiple products. And at the same time, virtually all financial service providers, banks, brokers, insurance carriers, they're all trying to sell life insurance to their clients and so they're having to adjust their models. And so what we see is that many companies are looking to this and saying having the capacity inside their shop is too complex, too expensive. They simply don't have the expertise. And so Crump is being sought out by large banks, other large insurance companies, to provide a turnkey process for them in terms of meeting the needs of their clients. And frankly, it's going extraordinary well and it has huge opportunity for us. So that's just one part of what Crump brings to us, but it's a huge opportunity. We're very excited about it.

We continue to expand our already very, very successful mortgage operation in terms of our correspondent lending network. We're expanding our retail mortgage lending in targeted geographies that we've not otherwise been located in. You saw recently, Ricky announced that we're going to be opening 30 commercial branches in Texas. That's already well under way. Most of them will be opened by June. We are extremely encouraged by the initial results of that. We think that's going to be a big, big payback for us in Texas in relatively short order.

And then I would just point out that we continue to have tremendous opportunities in the -- revenue opportunities in the legacy Colonial markets. We always go through this process: When you bring in a new company, it takes a good while to ramp-up those revenue production capabilities of those markets and that's happening, but I just want to show you what the opportunity is. So, for example, we produce something called a revenue multiplier, which is revenue relative to compensation expenses. And so for our core markets today, that is 8.28 multiple; and in the Colonial markets, it's 4.53. So you can see those as massive opportunity to ramp up the performance in the Colonial markets, which is happening, but it'll happen much more over the next 2, 3 years as they move closer to the core markets. So, huge opportunity for BB&T to grow our revenue and profits independent of what happens to the market. Obviously, if the market is better, we'll do better. But we're going to do well relatively in any event. So we're very excited about mortgage and overall revenue, and look forward to reporting it to you later.

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

Daryl N. Bible

Thank you, Kelly, and good morning, everyone. I'm going to take -- talk to you and talk about credit quality, net interest margin, fee income, noninterest expense, capital and our segment reporting.

On Slide 7, our credit metrics showed continued improvement in NPAs and charge-offs. NPAs declined 10.6% during the fourth quarter and are down 37% since last year. Charge-offs declined at a modest pace during the quarter and are now at the lowest level in 4 years. We expect modest improvement in NPAs during the first quarter and anticipate net charge-offs will be around 1% of average loans and should trend lower thereafter.

Our allowance coverage ratio has consistently improved during the year. During the fourth quarter, our allowance to nonperforming loans increased to 1.24x from 1.37x, reflecting continued improvement in underlying credit trends.

Turning to Slide 8, let me provide some color around the 21% increase in performing TDRs. As you know, the OCC, which is not our regulator, issued third quarter guidance on loans, discharges and bankruptcy that were not reaffirmed by the borrower. This guidance requires these loans to be classified as TDRs and possibly as nonperforming assets regardless of payment history or expected performance. During the fourth quarter, we applied the TDR guidance to all of our portfolios, resulting in a $226 million increase in performing TDRs. Based on experience, we believe it is appropriate to classify these loans as performing. About 77% of the loans have been current for 2 years and over 90% are current now. Also, in our experience, FICO scores for these borrowers increased about 50 basis -- 50 points after the debt discharge. Neither our primary regulator nor the SEC have formalized their thoughts on this issue. But as we said last quarter, we provided for these loans in our allowance and this change in classification will not have a material adverse impact on earnings.

Continuing on Slide 9. Net interest margin came in strong at 3.84%, down 10 basis points from last quarter and above our guidance. The decrease was a result of several factors: a $26 million benefit in hedge amortization related to our TruPs redemption in the third quarter; runoff of covered assets and lower yields on new earning assets. These were partially offset by the decrease in interest-bearing deposit costs.

Looking to the first quarter, we expect margin to be in the mid-370s. There are 2 primary drivers: first, continued pressure on asset yields from the continued low rate environment; and second, continued runoff of covered assets. Offsetting these drivers are benefits will continue to decline in funding costs and a favorable funding mix.

Looking out into this year, we expect a modest decline in margin after the first quarter. As you can see in the bottom graph, we remain slightly asset-sensitive at our position for rising rates.

Turning to Slide 10. Our fee income ratio for the fourth quarter increased to 44.1%, compared to 42.4% in the third quarter. Insurance income was up $29 million, mostly due to seasonally stronger fourth quarter. In the first quarter, we will see the opposite seasonal impact. However, firming market conditions will lead to an increase over last year's first quarter, excluding Crump.

Mortgage Banking income was up $20 million compared to a very strong third quarter, due to increased production volume. We expect Mortgage Banking income to be modestly down in the first quarter due to tighter margins and similar volume levels, investment banking and brokerage-generated healthy growth in the fourth quarter, mostly in fixed income markets.

Looking on Slide 11. You will see the efficiency ratio remained flat, with the fourth quarter coming in at 55.3%. Total noninterest expense was down $41 million linked quarter, or 10.7% annualized. Personnel expense increased $26 million, mostly due to production-based incentives offset by slight decrease in FTEs. Foreclosed property expense was down $6 million and is at its lowest level since third quarter 2007. We also saw a decline in loan-related expenses from lower mortgage repurchase expenses. If you recall last quarter, we had higher expenses related to unrecoverable costs associated with investor-owned loans. Merger-related and restructuring expenses were down considerably due to the completion of BankAtlantic acquisition in the third quarter.

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

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

Looking into 2013, we believe our discretionary expenses will be flat, FTEs will be flat excluding revenue initiatives and credit costs will trend lower. We expect positive operating leverage in 2013 compared to last year.

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

Turning to Slide 12. Capital levels were up from the 13th. Basel III Tier 1 common under proposed U.S. rules is 8%, and 9.3% under international rules. These estimates do not include mitigating actions we would take to lower our risk-weighted assets and improve our capital ratios.

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

Now here are a few highlights from our segment disclosures. Starting on Slide 13. Community Bank net income totaled $220 million, showing very strong growth versus common quarter and modestly down linked quarter. Common quarter increase was due to the higher foreclosure property costs in the earlier quarter as we ramped up efforts to reduce OREO and took some significant write-downs. Linked quarter growth decline was due to higher provisions, mostly the result of loan growth and reserve rate adjustments and elevated noninterest expenses related to the BankAtlantic system conversion. Kelly mentioned we are pleased with the commercial loan pipeline remained strong.

Turning to Slide 14. Residential Mortgage was up $3 million on a linked quarter basis from a very strong third quarter and up sharply compared to fourth quarter last year. This is a record quarter in originations, and our servicing portfolio now exceeds $1 billion.

Looking at Dealer Financial Services on Slide 15, you will see net income totaled $38 million, down compared to both linked and common quarters. The decrease in segment net income is mostly due to higher loan loss provisions, coupled with strong annual loan growth and fourth quarter reserve rate adjustments at Regional Acceptance. We continue to open new offices in strong growth markets and are expanding our wholesale financing.

On Slide 16, you will see Specialized Lending experienced a strong quarter, with net income of $72 million. Common quarter net income was up $8 million, mostly the result of net interest income growth related to Sheffield Financial, Mortgage Warehouse Lending and premium finance. This was offset by higher noninterest expense due to higher personnel costs, depreciation on operating leased equipment and higher servicing cost from the portfolio at Grandbridge.

Specialized Lending continues to show strong loan production compared to both linked and common quarters. We also added $4 billion in servicing with the acquisition of Dwyer-Curlett.

Moving on to Slide 17. Insurance Services generated $39 million in net income, up significantly compared to both common and linked quarters. Increased revenue was broad based across most insurance businesses, while maintaining excellent expense control. Insurance benefited from both acquisitions' organic growth. Crump Insurance added $83 million in insurance noninterest income. And growth in same-store sales suggests firming in pricing. As we integrate Crump Insurance into our processes, we see outstanding potential to leverage its product offerings and cross-sell opportunities. As noted earlier, we expect future organic revenue growth and we'll have a seasonally lower revenue in the first quarter.

Turning to Slide 18. Financial Services generated $90 million in net income, mostly driven by Corporate Banking and wealth management. These businesses had loan growth of 39.9% and 26.5%, respectively. Investment banking and brokerage had a strong quarter led by capital markets and service income transactions as we continue to see opportunities in middle market and corporate lending.

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

Kelly S. King

Thank you, Daryl. So overall, as you can see, it was a great year, a really solid quarter. We really made excellent progress in our several unit diversification strategy plan, nice progress in moving back to normalized profitability. But we think '13 will be challenging, but our businesses are really performing well. And so given the economy, we believe we'll have another high-performance year in 2013, and looking forward to sharing that with you.

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

Alan Greer

Thank you, Kelly. In a moment, I'll ask the operator to come on the line and explain how you may participate in the Q&A session. [Operator Instructions] With that, I'll ask Cassie to come on and explain the instructions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to Jefferson Harralson with Keefe, Bruyette, & Woods.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

For my first question, I wanted to ask about the 2% to 4% loan growth expectation for 2013. Can you talk about the mix of that a little bit? And how does mortgage portfolio -- I know this year, you were maybe substituting in some mortgages and replacing securities portfolio this year. Is the -- some of the reverse going to happen next year? And within that 2% to 4%, where do you think C&I comes out?

Kelly S. King

Well, so -- yes, last year, for much of the year, a meaningful part of our growth was in holding mortgages because, frankly, early part of the year it makes sense because of rates. As rates declined later in the year, it didn't make sense so we stopped doing that. And so that -- you're seeing a little bit of downward pressure on total loan growth because of that. You'll see positive growth as -- in this year in terms of C&I, in terms of Sales Finance. Specialized Lendings will be strong. CRE is going to be a comer in terms of this year. So it's going to be a pretty broad based and diversified. And I think, it'll overall be very positive in terms of profitability because that kind of growth in this kind of market, given our discipline in terms of structure and products, is really good growth.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Right. And for my follow-up, I just want to ask a mortgage question. How should I think about the huge mortgage origination volumes and how much extra profitability that's given you now that's at risk to come out later in the year? I see the mortgage segment profitability sitting there. That seems to also to include the loans on the balance sheet. But with kind of record gain on sales and record originations, how should we think about how that plays out and the potential impact for you guys as the kind of mortgage plays out next year?

Kelly S. King

I'll give you part of this and then Daryl will give you some color in terms of the spread. So basically, our overall production is really strong. I mean, we had $8.5 billion in the fourth quarter, up from a very strong third quarter, best ever. We think the -- based on our pipeline and our marketing efforts, that kind of continues, at least in the first part of the year. You might see a little pressure on margins, so let me let Daryl explain it to you.

Daryl N. Bible

Yes, Jefferson, if you look at our overall margin or spreads in the fourth quarter, they were 229. That's actually down from 240 in the third quarter. Our mix of business was 35% retail, 65% correspondent in the fourth quarter. I think as you look out into next year, if you assume a similar mix, we expect volumes to be relatively strong compared to this past year, but probably a little bit tighter margins on retail. I mean, our margins at retail now were over 400 points. Probably, that gets in the 300-point range and correspondents were in the low 100s and that probably goes under 100.

Operator

We'll take our next question from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

First question just on the branch openings in Texas. I'm wondering how has your overall kind of view of M&A changed maybe over the last 6 months? And also are there other states, maybe like Tennessee, where you'd consider doing organic expansion opportunities?

Kelly S. King

So our strategy with regard to M&A has not changed in terms of what we would like to do. It's just that there are not really willing sellers out there at a price that we're willing to pay. And so our strategy in Texas was simply to say that we believe we can build out our Texas operation on a commercial basis de novo. Now, you really cannot do that practically on retail. It'll take 100 years. And so we would still very much be interested in acquisitions that particularly cover retail space in Texas. So our Texas 30-branch strategy does not say we're not interested in acquisitions in Texas, it simply says we're not going to sit back and run our business waiting for what other people do. I mean, we can't control what other people do to have their own strategies, and we respect that. We're going to run our business. So we know we can build out Texas on a commercial basis very, very effectively. And we believe that we can do that in other markets as well. Ricky, you may want to comment on that further?

Ricky K. Brown

Yes, Kelly, I 100% agree. We do think the momentum that we've had in Texas since we've been there 3 years ago that we can take these commercial strategies that we're talking about and make it work for us. We're very excited about the 30 locations that we've got. We got them at a lesser costs than we originally looked at. We're having good success in hiring. We've got a good pipeline of people that are ready to join BB&T. They enjoy working for BB&T. They see the brand as a differentiated brand. We feel very good about our opening schedule. We'll have a couple of these now open in the next couple of weeks. We think all of them will be opened by midyear. And the expectation is that we'll hit the ground running and do very, very well. So we're excited about this strategy. And as Kelly said, we're still looking for other opportunities, but this means that we move forward and not sit still.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then, Kelly, just as my follow-up here. You mentioned real briefly on some of the risk involved in leveraged loan growth that some of your competitors are putting on but you guys are avoiding. Could you provide a little bit more commentary on the types of leveraged loans you're referring to and maybe what type of banks are adding these loans?

Kelly S. King

Yes, let me let Clarke handle that, Craig. I think he can do a better job on that.

Clarke R. Starnes

Craig, if you look at the production statistics, a big part of the market growth right now on the C&I space is leveraged finance and a lot of it's around the low-rate environment. So what we see is primarily M&A-driven dividend and recap-type structures driving a lot of that growth. We see both large banks and similar regional peers actively participating in that market and we just still feel like that's outside our risk appetite so we have purposely avoided the majority of that and continue to stick to our long-term underwriting standards, even in the middle market space. So again, it's very prevalent right now. Fourth quarter was a record origination quarter for the leveraged finance market.

Operator

We'll go to Matthew O'Connor with Deutsche Bank.

Adam Chaim - Deutsche Bank AG, Research Division

This is actually Adam Chaim in for Matt O'Connor. I just had a question on loan growth. I know you attributed some of the softer growth in 4Q possibly to underwriting standards or at least versus peers. How much of an impact do you think came from the tax and other uncertainties coming out of Washington? And what are you hearing from clients in the New Year, with most of this behind them? It sounds like much hasn't changed given the 1Q guidance. Is this more debt ceiling talk? What are you hearing from them in the new year?

Clarke R. Starnes

Adam, what we're seeing is there's contained uncertainty out there. This whole fiscal cliff debate, what was going on with taxes, now the debt ceiling, the general economy, the world geopolitical situation, the world economy. Pending health care cost is coming in 2014. All that still is weighing on businesses and we're still seeing that as we talk to businesses. I think they're still a bit cautious. They're being very careful. I think that manifests itself in just being very careful about what they borrow. But we are seeing increased borrowings and that's good, but they're not borrowing what their signing the notes for. We're not seeing significant increases in utilization, and I think that bodes well. All we can do right now is be sure we're meeting the needs of the clients that are -- that we are talking to and we're doing that and then as the economy improves and certainty builds back in, then we think that loan growth will be accelerating for us. So we feel pretty good about how we're positioned. As Kelly said, production looked really good in the Community Bank year-over-year and on a linked quarter basis. I think that builds momentum and commercial real estate does, in fact, create a tremendous opportunity, nicely up over last year and a nice run rate in terms of third quarter annualized growth. So we feel good about both the C&I piece and the CRE piece despite the difficult conditions. As Kelly said, end of the day, all we can do is get up in the morning, be enthusiastic about what we do, live our mission, go talk to clients and prospects, meet their needs despite the conditions, and if we do that, we think we can be a big winner in this.

Kelly S. King

Adam, I would just point out, too, also just a clarification that the 2% to 4% guidance that we've given you is only for the first quarter. To be honest, depending on how things happen in Washington, I personally think, again, as I said, if we get just a reasonable agreement with regard to some of these fiscal issues, I think there's a very good chance that you're going to see some pickup in momentum in the economy. You're going to clearly see some pickup in momentum in borrowing. I'll remind you again people have just not been and companies have not been borrowing for 2 to 3 years. There's a lot of plant, a lot of equipment, a lot of computers that need to be replaced. We could all be pleasantly surprised with the level of loan growth we see as we head through the course of this year.

Adam Chaim - Deutsche Bank AG, Research Division

Okay. Just one quick one on Colonial. I'm sorry if you've just touched on this already. But the interest income came in a bit higher than expected in the quarter, only down a few million, but the FDIC loss share came in higher as well. How does this -- how does the FDIC loss share trend from here? And is there any significant impact from the net Colonial contribution versus what was provided in last quarter's presentation? I don't think that an update was given there.

Daryl N. Bible

Yes, Adam, this is Daryl. What I would tell you is we didn't put it back in because there isn't a material difference for 2013 and 2014. You are correct, it did come in a little bit stronger in the fourth quarter. My numbers, when we ran them in the fourth quarter, it's about a $10 million difference from what we had in the fourth quarter for all of 2013. So that's why we didn't provide it. So, I'd used the same numbers that we gave you last quarter as you look out into '13 and '14.

Adam Chaim - Deutsche Bank AG, Research Division

Okay. And on the FDIC loss shares specifically, should that come down to more normal levels in 1Q?

Daryl N. Bible

It will follow the same trend that we had in the last exhibit that we had in the last quarter. So it's pretty consistent with what we had projected. So the FDIC loss share negative will become less of a negative throughout the next 2 years.

Operator

We'll go next to Michael Rose with Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

I just wanted to follow up on your comments, Kelly, about loan growth potentially being a tailwind. And maybe we can ask it from a geographic perspective. Are you starting to see a lift in some of the more troubled markets, like Florida and Georgia and kind of what's the outlook there if the general economic environment improves and how would that translate over the next couple of quarters for loan growth?

Kelly S. King

Yes. So Michael, I think, we are clearly seeing -- I mean, if you look at overall attitudes today versus a year ago, I'd say across the board is more positive just because, frankly, as time goes on people kind of get tired of feeling bad and they start little turning positive just to -- as passage of time, but also we're past the election. Whether you're aware or not, it's done. That's a certainty. You know what you're dealing with, so that's kind of turning positive. The real estate market overall is clearly improving. I mean, there was some news that came out yesterday just in terms of overall real estate momentum across the country is improving, substantial improvement in Florida and places like that. Atlanta is still dragging its feet a little bit, but it's improving. And really the only hangover is lodge and that's getting ready to improve, in my opinion, because there's a huge increase in demand for houses and there's not been any houses built in a long time. So I think you're going to see places like Florida and places like Atlanta have a relatively faster ramp-up over the next year or so. To be honest with you, all of that general improvement in real estate is really big news for BB&T in 2 regards: one, it improves our overall credit quality metrics pretty substantially because that means our NPAs will go down faster. It means our opportunity to grow CRE ramps up faster. The general economic conditions improve faster. So it's overall really good news for us, particularly because in those markets like Florida, et cetera, we've got pretty large shares of deposits, like fifth market share, but we have tiny shares in terms of loans and fees. And so as those markets come back, it's a real boomerang opportunity for us.

Michael Rose - Raymond James & Associates, Inc., Research Division

And just as a follow-up to that, your ADC portfolio has clearly come down. You've avoided that category and run it down, but now you're starting to see some of your competitors go a little bit more aggressively into that. What's your appetite particularly in some of those more stressed markets as they housing...

Kelly S. King

Our appetite for ADC is very positive. We've always been a really big ADC lender. We never intended to convey that we were getting out of ADC. We just had a truckload that we needed to unload and we needed for the market to stabilize, but we're really, really good at that and -- so we've charged our people to be back in the market looking for ADC. Now to be honest with you, we're looking for the better players. We're not -- we'll go -- a lot of people got and we got little bit of this of what we call the pickup truck operators were just building 2 or 3 houses and that kind of thing and that's the riskiest part of that market. So we will be back in it. We'll be back into the better markets. We'll be back into it with the better borrowers. And we have improved our lending process, to be honest, even though we were very good. We now have dedicated CRE lenders who will be the only ones dealing with those markets, so our appetite, I would say, is strong and our capacity and capabilities are even stronger.

Operator

We'll go next to Kevin Fitzsimmons with Sandler O'Neill.

Kevin Fitzsimmons

Just with the environment the way it is and I know you've referenced expecting to have positive operating leverage, if you can just give a little more color, give a little more detail on your plans on expenses. I know in prior quarters you've talked about initiatives where you're looking for things. Are there any kind of initiatives going on in the expense side right now to get leaner? And if you can give out a little color there.

Kelly S. King

So Kevin, as we develop our '13 budget, we basically took the position that we should be conservative with regard to revenue projections because we don't know what's going to happen in D.C. As you just heard me say, I think there's a decent chance that it could turn more positive, but we are budgeting from a conservative point of view in terms of revenue. Therefore, to produce kind of bottom line numbers, we're being really tough on expenses in all categories. We did a clean-sheet-of-paper-type of look with regard to year-over-year category expenses. And then that's laid on top of our expenses reconceptualization process that we put into place starting about early summer. That's all unfolding just as we planned. So while there are upward pressures, Kevin, on expenses in terms of regulatory cost, technological cost, we -- even though we have a relatively efficient company, because we've grown relatively rapidly, we still have a good opportunity in terms of being really tight with regard to expenses. And so, as you heard Daryl describe, we would expect expenses to be kind of flattish as we go into this year. We're holding FTEs kind of flattish. We'd like to be down, I guess, when you consider foreclosures expense and that kind of thing. If you look at the basic core expenses and looking at FTEs kind of flattish, we may have some FTE expenses. But the way we look to that, just to give you perspective on how hard we've been, we basically saying that we are only willing to invest in revenue producers this year that are immediately accretive. And so it's been a tight budgeting process. It's going to stay tight. When the market is where it is, I think you have to control the things that you can control and expenses are one of those and we're going to be extremely diligent and tough with regard to expense control.

Kevin Fitzsimmons

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

Kelly S. King

Yes, Kevin. Truth is there are no big deals. Everybody talks about all these big projects and all these big names and all this stuff, but unless some companies are just really extraordinary poorly managed, everybody can just go in and say we're going to wipe out 10% of our costs without completely destroying their franchise. So yes, its grinding it out. It's a ground game. It's day-to-day spending less on publications, less on conventions, less on -- a little less on entertainment. I mean, just grinding it out category-by-category. It's thousands here and twenty-thousands there and it adds up to lots and lots of money, but it's a ground game.

Kevin Fitzsimmons

Fair point. And just real quickly, if you can just comment on buybacks. I know you mentioned them as a priority -- a third priority and something you would consider. But given your comments about acquisitions not being likely in the near term, has that, as a priority, actually risen up the ranks in recent months?

Kelly S. King

I would say, as a practical matter, yes, because we're trying to be, Kevin -- I talked a lot about this over the years, we're trying to be very practical about mergers. While I still believe there ought to be a major consolidation in the industry and while I still believe long term it will be and the short term, for a variety of reasons, it's just not happening. And so we're not expecting it to happen. We're not spending any time worrying about big deals. We don't think big deals will happen. We'll be looking at a few little deals, but they're not going to be dramatic. And so that does raise the probability of buybacks and we will execute on those according to capacity and according to price. Buybacks is a function not just of how much capacity you have, but also whether it's a good internal return on your investment. So as we look at the price relative to our book value and the earnings projections off of the return in capital, we'll make the right decision and -- but in some, I would say your conclusion is right. You'd expect us this year to be relatively more aggressive than in past years.

Operator

We'll take our next question from Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley, Research Division

I just had a question on a slightly separate line, which was on the NPLs and the credit guidance. So your nonperforming assets came down pretty sharply in the quarter, down about 11% Q-on-Q. Your NPAs came down about to 11% Q-on-Q. But then the guidance for net charge-offs going forward is only down a couple of basis points for the first quarter. So I just wanted to make sure I understood why there was a little bit more aggressive decline in NPLs going forward? And maybe you could let -- help us understand if you think the NP and NPL reduction is close to being done?

Clarke R. Starnes

Betsy, this is Clarke. That's a fair question. We're pleased that the accelerated results in the fourth quarter are, frankly, a little bit better than we thought. We're still trying very hard to clean out the residual, particularly housing-related exposures in the commercial book. Our Alt-A mortgages and our DRL land loans and so that has higher loss content. So that's one reason the loss rates continue to be up some and not down as quickly as we would like to see, although we feel very optimistic that we can start seeing lower loss rates as we move forward into the year. One of the things that gives us a lot of confidence about that is our nonaccrual inflows are continuing to come down and that's the biggest driver. We have more flexibility as those inflows come down to be less aggressive about liquidations in our -- in the marks we take there. So we believe that nonaccrual inflow number coming down gives us ability to see lower loss content as we move forward.

Betsy Graseck - Morgan Stanley, Research Division

Okay. So -- and then to your point, as you get through the higher loss content asset reduction, how long do you think that lasts? Is it that another 1, 2 quarters or is that for the full year?

Clarke R. Starnes

Well, we certainly -- as we look and think about normalized loss rates we've talked about before, longer-term, we see a 55 to 75 basis point expectation given the mix that we are building and consciously underwriting to. Obviously, we're 100 basis points today. So there's still a lot of room for us to have benefit there as we move toward normalized losses. It will take beyond '13 for us to get there. So the good news is we still have room to go that will inure as we move forward over the next couple of years.

Betsy Graseck - Morgan Stanley, Research Division

Okay, got it. I was just wondering because in your slide deck you say "and related to the NCOs that we go to the roughly 1% NCO in 1Q '13 and then trend lower thereafter," so I'm just wondering what that ramp is that you're expecting and you explained it, so thanks a lot.

Operator

We'll go next to Kevin (sic) [Kenneth] Usdin with Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Just to follow up on the operating leverage question. Daryl, I believe in that presentation in December, you had talked about GAAP expenses being down about 1% to 2% this year and I believe that, that ties to what you're saying about down environmental expenses and kind of flat discretionary. So I wanted to just see if that's kind of the right magnitude. And then from the operating leverage perspective, just can you give us some context in terms of how conservative you are being around your thoughts around total revenue growth this year, because obviously you have the purchase accounting coming down and you have the tough mortgage comp to fend off as well?

Daryl N. Bible

Okay, Ken, so you are correct on the noninterest expenses. We are going to see it down probably a little over 2% because of, I'd say, the foreclosure costs, professional services and loan and lease expenses being the main drivers. On the revenue side, based upon what we see, as Kelly's remarks with the economy where it is at sluggish growth and we're saying flattish revenue, if we get any benefit of either a stronger economy or a steeper yield curve, we can have positive revenue. But right now, our positive operating leverage is coming from negative expenses and flattish revenue.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Got -- okay, great. And then my second question is could you talk about the insurance business with a little bit more detail? Obviously, the year-over-year comp this year will be positive because of the Crump deal. But I know you -- and, Kelly, you mentioned kind of the strengthening underlying did on the pricing side. What's the organic growth opportunity in the insurance business, and also what are you continuing to see on the acquisition side on that front as well?

Christopher L. Henson

Yes, this is Chris. Good question. I would say just sort of high level in the insurance business, we're sort of -- you typically see a rise in rates that will occur sharply over a couple of years. What we're in is a more slow bleed up, if you will. I mean, we're probably 1 year into what could be a 3- to 5-year kind of slower migration. So this year we saw same-store sales up 4.7%. But if you noted the fourth quarter over fourth, it was up 7%, which indicates some positive edge on price firming. So this really happens, we think, over the next 3 to 5 years in about 4 different ways. First, you get the firmness in pricing that will come to us and should come over, like I say, 3 to 5 years. With any improvement in the economy, like Kelly was talking about, you really begin to drive more units. And so you have more exposures to cover, which is a volume driver. And then thirdly, we have these various synergies that we've talked about. You just alluded the Crump. With Crump, we have on the P&C side, cost takeout us we put those 2 companies together. On the revenue side, we have really kind of several drivers. We have one cross-sell and more through a dedicated team that we built internally, cross-selling insurance to our wealth clients, our broker-dealer clients, our P&C insurance clients. We have the opportunity, as Kelly alluded to earlier, to drive the institutional side of the business. We have the independent side, we think, sort of hit a bottom, if you will, this past year with uncertain sort of tax laws. We think that has potential to kind of come back closer to average. And so you have a number of synergies in the business. We didn't talk about the health care reform. That's a whole other approach that we have working. And then fourthly, as you get sort of 2 years into this 3- to 5-year cycle, as you know, the business works, we have profit commissions that will come back to us really. Then there's no cost in profit commissions. As you perform for your underwriters, you get a sharing of the profit over time. So we think we are well positioned. In fact, we don't know of another platform that's positioned this well and we think it's really up from here in the next 3 to 5 years, so we feel very strong about it.

Operator

We'll take our next question from Greg Ketron with UBS.

Gregory W. Ketron - Citigroup Inc, Research Division

Question on the loan growth or market opportunities and maybe this is for you, Kelly. As you look across the footprint, you look at some -- what could be some of the loan growth drivers as 2013 progresses. You have had M&A in the marketplace through the RBC acquisition by PNC and then Wells Fargo's continued integration of Wachovia. And then also, the securitization markets just kind of being, really, not starting up at this point and some maturities coming out of CMBS channels. And I was just wondering, as you get beyond the first quarter and the loan growth of 2% to 4% and we move through the rest of 2013, what kind of opportunities do you think may exist on the loan growth side?

Kelly S. King

Well, that's what we're all trying to figure out, so it's a good question. I think you'll see that kind of multifaceted. The first thing you're going to see if the economy ramps up is you're going to begin to see some draw down of existing credit lines. I mean, our utilization rates are still low. And so without any new production, you could see a substantial increase in our book just because of the increase in utilization rates. Then you are going to see a substantial change, I believe, in our numbers in terms of our effective execution on high-quality CRE. I mean, that's been a substantial negative runoff. I mean, if you switch that from big negative to slightly positive, it's a huge ramp-up in terms of increased outstandings. You alluded to disruption in the marketplace that is still accruing to our benefit. We think the market will settle down. Those companies will be really good competitors, but it takes more time than everybody thinks to settle into some of these major acquisitions. And so we are still benefiting from that and will during the course of this year and a little bit of into next year. The reintermediations impact on loan growth is something I've been talking about for 3 or 4 years. It's not been as pronounced at this point as I thought it would be, but it is happening and I think it is going to accelerate. And so there are a lot of maturities out there in the pipeline that are going to have to be placed and I think a lot of that is going to end up on bank balance sheets and we have a good appetite for that. So I think it'll be a widespread array of loan opportunities and then when you add to that our initiatives in terms of increased corporate banking platforms, increased strategy, commercial strategies in Texas and continue to grow off a really good foundation in our Specialized Lending businesses, expanding our mortgage business in terms of wholesale financing, all the financing in the wholesale side, we just have a long list, to be honest, of growth opportunities. And so, I'd say in terms of the loan growth, we're being consciously always trying be conservative. But when you kind of look at what we're doing, it's hard to say that there's not more reason to be a little more optimistic.

Gregory W. Ketron - Citigroup Inc, Research Division

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

Clarke R. Starnes

Greg, this is Clarke. Pricing remains very competitive, as you can imagine, particularly as you go up the risk curve on the investment grade side. But for us, positively, while we continue to see runoff of the older assets, our new loan spreads were relatively stable for the quarter. To remind you all, we talked about last time our C&I spread right now is 230 off. This is a pretty good spread, but the CRE opportunity, it tends to run 80 basis points or more above our C&I rate. So as we can gain more traction, as Kelly said, that really gives us a nice margin benefit.

Operator

We'll go next to Paul Miller with FBR Capital Markets.

Thomas LeTrent - FBR Capital Markets & Co., Research Division

This is actually Thomas LeTrent on behalf of Paul. Two quick questions for you guys. I believe in the Residential Mortgage Banking segment, you guys have been about, I don't know, 40-60 retail to correspondent. Can you talk a little bit about how you see that mix developing going forward?

Clarke R. Starnes

Yes, Tom, this is Clarke. Historically, we were primarily a retail originator, but over the years as there was disruption in the correspondent side, we have dramatically benefited from that. We have a very clean program we've run over the years. We never got involved to any degree in the broker side. So we have a lot of community banks and high-quality private correspondents over our network. And so over the last couple of years, you've seen a little more proportion in that segment than our Retail segment. And so while we certainly wouldn't want to be overweighted on the correspondent channel, we'd expect that to be variable from year-to-year and so we would expect, particularly as we look into '13, maybe a little higher level of correspondent to retail. But as rates go back up and over time, you could see those numbers be a little more consistent to one another. One other benefit we have is we did establish a mandatory delivery program this year. We actually originated a couple of billion, almost $3 billion, in that channel this year. So that's another nice growth opportunity for us. So all in all, we would see a higher percentage of correspondent in our platform that we have historically had, but we think the risk profile is very, very good.

Kelly S. King

Just a general point for you and others and just if you think about BB&T's lending strategy, if you go back 5, 10 years ago, basically all of our lending strategies were in our existing footprint, kind of the Mid-Atlantic, Southeast. But we have consciously expanded through a national lending strategy but in what we consider to be very controlled, focused areas. So, for example, we have a national specialized lending strategy in certain businesses, where we are really, really good at it. Our Corporate Banking is now a national lending strategy and our mortgage is a national lending strategy. But we do that through this correspondent network where we can get high-quality paper on an inefficient -- on an efficient basis to lever up our manufacturing process. And so that's just one example of several of how we moved, I think, judiciously into a national lending platform on a very economical basis.

Thomas LeTrent - FBR Capital Markets & Co., Research Division

Okay, great. And then one quick follow-up. In your C&I growth, can you talk a little bit about where you're seeing, I guess, the growth come from, like what sectors specifically, if you can?

Clarke R. Starnes

Yes, Thomas. We're seeing, as Kelly mentioned, we've had 5 or 6 initiatives that we've been working on that we're seeing some really good performance from '11 to '12 and indicators as we go into '13. Example, asset-based lending year-over-year production was up 40%. We feel very good about that. The dealer opportunity, having over 6,000 dealers in this wholesale opportunity is tremendous for us. We have a pipeline approaching $500 million. We've got tremendous opportunity to grow that book off of a big retail paper business, something in the wholesale we never did much of. Small commercial is another thing we put a lot of emphasis on, improving our process. We're seeing small commercial pick up year-over-year, 15%. But linked quarter annualized up 55%. So focusing on that core Community Bank lending seems to be going very, very well, along with process change. Income-producing properties, up 64% linked annualized; year-over-year, up 60%. Our regional Corporate Banking, not the national platform that Kelly talked about, up 33% year-over-year; 39% linked quarter annualized. And we also have a professional association strategy that we're working on with doctors, lawyers, et cetera, that is a core function within the Community Bank. So partnering with these large corporate initiatives, partnering with these specialized lending initiatives, we see a broad-based opportunity in lending that if we can continue to do our jobs, meeting the value proposition that we put forth to our customers and hopefully get a little help in terms of leadership toward the fiscal issues that our country faces, that could be a key that could really turn on some very nice loan growth for us. But irrespective of that, we're going to be really focused on these initiatives. We see it playing out broadly across our footprint. Washington, D.C.'s is doing well; north Atlanta, the urban part of Atlanta is doing well; Florida; our Texas opportunity. We just see some broad-based opportunities across-the-board and we're going to keep pushing, do underwriting correctly, be as judicious as we can to deliver value, hold up pricing as best as we can, but also be mindful of competition. And we feel very good about these broad-based opportunities.

Kelly S. King

And then just one final note on loans, just outside the Community Bank, the -- remember, we've got these 8 corporate verticals that we've been putting into place for the last 2 or 3 years, they are being executed on. We have, frankly, relatively small market shares in the national space in these verticals and so that'll add supplemental growth in our Corporate Banking area as well.

Operator

We'll go next to John Pancari with Evercore Partners.

John G. Pancari - Evercore Partners Inc., Research Division

Can you talk a little bit about the magnitude or the benefit of stabilization in commercial real estate and then ultimately the growth you could see there? I know you mentioned it a couple of times, Kelly. Just want to get an idea just how much of a benefit could we actually see in 2013 as this stabilizes and you actually start to see some growth?

Kelly S. King

Well, that's a good question and, we haven't to this point tried to project an absolute mathematical target on that. But let me just give you a perspective on it. That's been a very, very, very big part of our business for, really, in my whole 40 years. And to be honest with you, notwithstanding the last 3 or 4 years, we've made a lot of money in real estate over the long term. We gave back some of it in the last 2 or 3 years. But overall, the long-term return on that investment has been phenomenal so we are very good at that. When done properly, it's a very good business. But it's been running down at a 30-plus percent clip for the last couple of years, and we now see a bottom. We're looking for growth. So I think the mathematical impact on that on total portfolio could be a 1 point or 2 just when you turn that in terms of the marginal incremental benefit on that. So I think it's very positive, John. I think it's something we know how to do really well and we are, frankly, in a lot of good markets where our value proposition is very, very strong and the opportunity for us to move relationships from some of these other companies that don't have quite the capacity we have today is very, very good.

John G. Pancari - Evercore Partners Inc., Research Division

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

Kelly S. King

Yes.

John G. Pancari - Evercore Partners Inc., Research Division

Okay. All right, and then my second question on the M&A side, I know, Kelly, you mentioned you could see some smaller deals. Can you remind us how you would characterize a smaller deal in terms of the asset size?

Kelly S. King

So I think in terms of smaller deals as being -- I don't want hurt anybody's feelings, but I think in terms of smaller deals for us as being that $3 billion to $10 billion. You're going to probably see a lot of deals done out there in the $1 billion level. You're unlikely to see us doing something in the $1 billion level. You never say never in this business. If you had some little deal -- a really strategically significant thing in one little market you might do something, but I would think in terms of $3 billion to $10 billion. And there are a number of opportunities in the whole space that we think may become available in that area. Really, if you can do $3 billion, $4 billion, $5 billion deal in this environment we're really good at it. We have a very efficient merger and conversion team. And so we think it's what I'd call the ground game of merger strategy. It's up and running well. We're on the street talking to other people that are considering making changes. And so I think that's where you'll see the predominant activity. Although things could change, but, as I said, before I do not expect it.

Operator

We'll go next to Matt Burnell with Wells Fargo Securities.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Just to -- Kelly, I'm sorry if you've already covered this, but you sound perhaps a bit more optimistic in terms of the potential for commercial loan demand assuming things can get settled a bit in D.C. I guess I'm curious as to if you've seen any increased demand in the commercial commitment since the election, or are your borrowers continuing to more or less sit on their hands awaiting further information and further clarity out of Washington?

Kelly S. King

No, there's actually been some ramp-up in terms of loan production. I mentioned earlier, you might not have been on the call, but I mentioned that, for example, in the Community Bank our loan production year-over-year was up 26%. For the fourth quarter annualized, it was up 32% compared to the third. So clearly there is increased demand out there in terms of getting -- kind of, what I call, kind of getting ready to play and so we're booking CRE commitments that are unfunded. We're booking lines of credit for companies that are not yet funded. So yes, there is -- clearly, there's a more positive attitude than a year ago. And I think that what they're doing basically is they're locking in their commitments. They're getting their plans ready to go. And then, they want to see things settle down. They've seen now what the deal is on taxes. Not what they wanted, but it's not draconian. And now they just got to see that we're not going to run off the cliff in terms of the economy because of the fiscal issues and when that resolves itself, which I think it will in a reasonable way, I think you're going to see people decide that we just got to go ahead and run our business. CEOs have a natural process. When things are really getting worse, they hunker down completely. When things begin to stabilize, they begin to look around a little bit. They remain conservative. And then at some point, when things look a little bit bright, you just have to get back to say, we just got to run our business. And that's where we are today and I think you will see companies decide to make investments and I think we're going to be the beneficiary of that.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Okay. And for my follow-up in terms of the mortgage sales that you made in the quarter, can you comment on the gain on sale margins on those and what your expectations are for those margins over the course of 2013?

Daryl N. Bible

Yes, Matt. You may not have been on it, but we did cover that, but I'll give it to you again. That's okay. Fourth quarter, our gain on margins were 229 basis points, about $160 million in dollar terms. As we look out into '13, we expect some pretty good volume compared to 2012, although we'll probably have slightly tighter margins going forward. Right now, our retail margins are well north of 400. Probably, as you get into '13, that's going to trend down at least into the 300s. And where our margins over our correspondent network are over 100, that's going to pierce through 100 sometime throughout the '13.

Operator

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

Erika Penala - BofA Merrill Lynch, Research Division

My questions have been asked and answered.

Operator

While we still have several questions in the queue, we need to conclude the call given the time. I would now like to turn the conference back over to Kelly King for any additional or closing remarks.

Kelly S. King

Thanks, everybody, for being with us today. We really appreciate it. I think what you've heard us say is that it was a really good quarter, a great year. We have some reservation about the economy, but relative to that, we feel very bullish about our business as we go forward. Notwithstanding the fact that we just celebrated our 140th year anniversary, we feel very strongly our best days are ahead, and we look forward to reporting that to you going forward. Have a great day.

Operator

Thank you, ladies and gentlemen. This does conclude today's presentation. You may now disconnect.

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