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BB&T Corporation (NYSE:BBT)

Q1 2014 Results Earnings Conference Call

April 17, 2014 08:00 AM ET

Executives

Alan Greer - Investor Relations

Kelly King - Chairman and CEO

Daryl Bible - Chief Financial Officer

Chris Henson - Chief Operating Officer

Clarke Starnes - Chief Risk Officer

Analysts

Betsy Graseck - Morgan Stanley

Gerard Cassidy - RBC

Paul Miller - FBR

Erika Najarian - Bank of America

Steve Scinicariello - UBS

John Pancari - Evercore

Ken Usdin - Jefferies Investment Bank

Keith Murray - ISI

Kevin St. Pierre - Sanford Bernstein

Christopher Marinac - FIG Partners

Nancy Bush - NAB Research, LLC

Gaston Ceron - Morningstar Equity Research

Operator

Greetings, ladies and gentlemen, welcome to the BB&T Corporation First Quarter 2014 Earnings Conference. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded.

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

Alan Greer

Thank you, Felicia. And good morning, everyone, and thanks to all of our listeners for joining us today. We have with us Kelly King, our Chairman and Chief Executive Officer; Daryl Bible, our Chief Financial Officer, who will review the results for the first quarter and provide a look ahead. We also have other members of our executive management team who are with us to participate in the Q&A session; Chris Henson, our Chief Operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer.

We will be referring to a slide presentation during our comments today. A copy of the presentation, as well as our earnings release and supplemental financial information are available on our website.

Before we begin, let me remind you that there may be statements made during the course of the call that express management’s intentions, beliefs or expectations. BB&T’s actual results may differ materially from those contemplated by these forward-looking statements. I refer you to the forward-looking statement warnings in our presentation and our SEC filings.

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

And now I’ll turn it over to Kelly.

Kelly King

Thank you, Alan. Good morning, everybody, and thanks also for joining our call and your interest in BB&T. So, I’d say overall given our normal seasonality and the substantial reduction in mortgage volume, we had a really solid quarter, some driven primarily by insurance, commercial loan growth, credit quality and excellent expense control.

If you look at earnings, net income totaled $501 million versus $210 million in the first quarter of ’13. That was diluted EPS of $0.69 and that was also after 2 one-time negative adjustments totaling $0.03 per share, which I’ll give you a little detail on in just a moment. Of course, our first quarter ‘13 results were reduced by a tax related adjustment of $281 million.

If you look at revenue, revenues were $2.3 billion and that was seasonally lower as you would expect. Results were driven by higher insurance revenues, higher trust and investment advisory revenues offset somewhat by lower net interest margin and a decline in mortgage banking income. Our fee income ratio was very strong at 43.2%.

If you’re following along those lines, I’m on slide 3. Commercial loan growth was very good this quarter. Average CRE income producing properties balances grew 10.6% annualized versus fourth quarter ‘13 that was led by multifamily but also we had some growth in office, retail and industrial. In the case of CRE income and construction, both of these had the best growth rate since the recession and frankly we expect them to continue have good solid growth rates.

Average C&I growth was 3.6% annualized, which was driven primarily by corporate lending. Sales finance was strong, balances grew 7.3% annualized versus fourth quarter and that was primarily driven by prime auto.

Average mortgage loans were a little noise there, so let me explain it to you. Mortgage loans were $8.7 billion, retail loans down by $6.6 billion, pardon me for allergies. That was really just a change relative to our QM compliance adjustments. So, we transferred $8.3 billion from retail to mortgage and that’s just offsetting effect of that.

And deposits: Our noninterest-bearing deposits increased $2.9 billion or 8.8%, although at linked quarter growth was only 0.5% due to seasonality. Average deposits decreased to $188 million or 0.6%. And our deposit mix improved on our cost to client 1 basis point to 0.27%, which was very pleasing.

Our credit improvement continues to be a great story. Net charge-offs were 0.55% of average loan and leases. Now, core net charge-offs are 0.47%, which was down to 0.49% in the fourth. So, what happened there, we had an additional $23 million in charge-off related to a change in process in our non-prime auto portfolio; Daryl will give you more detail on that. But basically net core charge-offs went down again. Loans past due 30 to 89 and 90 declined, NPL declined, NPAs declined, so really, really good levels of credit quality and continuing to improve.

We said in January that our expenses had peaked in ‘13, and would decline in ‘14. So, we delivered. Non-interest expense decreased 14.8% annualized versus the fourth quarter. Expense decline was driven by lower personnel and professional expenses. Efficiency ratio improved and we had positive operating leverage in the first quarter which we were very pleased about. We do expect continued improvement in our efficiency ratio throughout ‘14.

I want you all to know, we are laser focused on expense management and we continue to re-conceptualize our businesses. A lot of the re-conceptualization processes that we developed over the last couple of years are really beginning to kick in now. And frankly, because revenue is relatively slow and probably going to be somewhat slow as mortgage continues to rebound, it’s just really important to be tough on expenses and we are.

So, if you turn to slide 4, with regard to the selected items, we did have an adjustment to non-controlling partnership interest of $16 million after tax which was $0.02 a share negative. We did have merger related and restructuring charges related to severance which was $5 million after tax and then it was a penny after tax impact on EPS.

If you look at slide 5, let me give you a little more color with regard to the lending area. Overall, our loan demand from new business is improving. Large percentage of loan demand in the market I will say to though is refinance and shareholder friendly purposes. But our quarter was kind of interesting; it started out kind of slow, obviously mostly because of weather, volumes really accelerated late into the quarter, and that did impact some of our seasonal business like for example Sheffield start is really getting going and heading into the second quarter. That was slowed a little bit because of the weather, it’s really began to pick up now. So, we’ll see really good growth in that in the second quarter, so overall, really good building momentum.

If you look at absolute numbers, you will see that total loans were 0.9% but taking out the covered loan run-off which you know about, the real -- normal loans were up 2.3 -- 2.1% annualized. But within that are some really good numbers. So, C&I was up 3.6%, CRE income producing was up 10.6%, CRE construction was 3.5%. So, total commercial was up 4.9%. These portfolios had really turned recently and beginning to grow for the first time in a long while but seem to have really good lives as we go forward.

Again, when you look at these numbers, remember, retail is down and mortgage is up, that’s just a watch, so don’t pay any attention to that. Sales finance was strong and 7.3%. Other lending was down seasonally. We do expect double digit growth in those areas in the second quarter. I will point out thought that equipment finance was up 26.8% and that will likely carry on into the rest of the year. So, we’re seeing strong momentum in equipment finance.

So, we have a number of enhanced lending strategies that we are focusing on. I just want to mention you our specialized strategy in CRE lending is really again in production. We have over $1 billion in unfunded consortium loans which kind of speaks to continued momentum. We have a nice pipeline and our new national CRE permanent financing program which will begin in April. Large corporate lending is continuing to produce double-digit growth incremental and outstanding.

Our real strategy over the last several months is paying off and wholesale lending and dealer finance continue to gain moment, we are having double-digit growth there and we expect that throughout the rest of the year. Wealth lending is a real strong story for us; it’s growing fast and really becoming a major driver in our retail business. And we’re gaining general traction in all of our markets but particularly key new markets like Texas and Florida.

So, looking forward, we expect average loans to grow 3% to 5% in the second quarter ‘14, being led by C&I, CRE income producing and construction. Our sales finance will be strong. All the lending subsidiaries are expected to rebound strongly that would be led by insurance premium finance, small ticket consumer finance business and equipment finance. So, I’d say overall lending is improving. We continue to see and believe that there has been a shift in business psychology. I mentioned this in the middle of the fourth quarter. [Businessmen] equally really started focusing on, it’s time to kind of make a psychological turn and invest. And the need to invest out there is really strong.

I’ll just reference a comment from (inaudible) letter last week, which kind of makes this point. They were talking about the aging of buildings and equipment will drive investment this year up to 4.5% to 5% versus 1.5% in 2013. So, this is interesting.

So, if you look at the average age of all fixed assets from buildings to rail equipment, machinery had lengthened to 20.3 years in 2012, highest since 1949 and they’ve gotten even older. Buildings averaged 22.2 years old since the 60s. And so, as we talked about, there has not been a lot of investment in refurbishing and rebuilding and getting ready for expansion. So that are used very positively as we go forward I think with regard to momentum in terms of lending.

So, we remain very focused on disciplined lending. I just want to point out that while our growth may not be as strong as some, even though we think it’s still really good relative to the environment, we will be very disciplined, we are not heavy players in leverage lending business. I’ll just mention to you, you may have seen an analyst data write up in last few days someone is really calling out the issues that a lot of banks would really focus a lot on large leverage lending, I’m not going to comment on which banks he talked about but I will tell you that he had (inaudible) us “BB&&T has been by far the most cautious with the de minimis amount of leverage loans.” That is affirmation of exactly what we have been telling you. And we remain committed to long term profitable loan growth. And I didn’t say we are not going to be aggressive, we’re working really hard, we’re going really on the streets working hard to get all the good loans, profitable loans that are out there. But we are not going to push loan growth at the expense of quality. And that’s been a long standing position of BB&T and it remains so.

So having said that, we have a number of enhanced strategies as I described; and another point to keep in mind, we got a lot of large real estate loans because that was a bigger part of our portfolio that are really been paying off recently. One of the good things is mathematically most of those portfolios have turned and so just mathematically with the same production their growth will go up and we are expecting final production, so that’s really good news.

We have a really good strong I call the action in the bank in terms of moving market share. I would say you have been traveling around talking about folks in the community bank and our corporate lending area, enthusiasm for lending is at an all time high. We are really focused on being the most responsive in the marketplace and we believe ultimately that will be the key differentiator. So we are very excited about lending as we go forward particularly.

If you turn with me to slide 6, just a couple of comments with regard to deposits. Deposits are continuing to behave exactly the way we wanted to the last years, so we continue to improve our deposit mix and cost. You will notice that while non-interest bearing deposits were only 0.5% up, first quarter versus fourth because of seasonality, we did have strong organic DDA growth of 8.8% versus the first quarter and importantly our DDA mix improved to 28.2% versus 24.9% in the first quarter of ‘13. So that’s a whopping big change in one year. And we again pulled our interest bearing deposit cost down by a penny and about a point to 27 basis points. I will point out though that we do think that will be relatively flat as we go forward, not a lot more downside there, because frankly, we and others are having to focus on deposit [acquisition] because of the liquidity in LCR purposes. You’ll see us spend more time growing commercial and retail deposits as we run off some public funds, which has gone unfortunate, but that’s the requirement of the LCR requirements, at least at this point unless they change it. So we feel good about our deposit strategy and sort of are complementary to our lending strategy.

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

Daryl Bible

Thank you, Kelly and good morning everyone. I’m going to talk about credit quality, net interest margin, fee income, non-interest expense, capital and our segment results.

Continuing on slide 7, we continue to see improvement in credit quality, driving lower costs and lower provision. First quarter net charge-offs, excluding covered were $156 million or 55 basis points. These numbers include $23 million in net charge-offs resulting from a process change that accelerated charge-offs in our non-prime auto business.

Excluding this change, core charge-offs were 43 to 47 basis points, down slightly compared to last quarter. We are maintaining a long-term charge-off guidance of 50 to 70 basis points. But for the next few quarters, we believe charge-offs will remain below 50 basis points, assuming the economy does not deteriorate significantly.

Non-performing assets excluding covered declined 6.4% during the first quarter. NPAs as a percentage of total loans were 0.54%, our lowest ratio since 2007. We expect NPAs to improve at a modest pace in the second quarter.

Turning to slide 8, delinquent loans decreased in most categories as credit continues to perform very well. Our allowance to non-performing loans decreased slightly from 1.73 times to 1.7, reflecting strong coverage.

We had reserve release of $80 million during the quarter excluding covered activity and a change for reserve for unfunded commitments. This compares to $67 million released last quarter excluding the same items. We expect future releases if any to be lower as credit improvement stabilize.

Continuing on slide 9, margin came in at 3.52%, down 4 basis points from the fourth quarter. Core margin was at 3.29%. Our margin declined due to higher investment balances purchased in response to the new liquidity rules. For the second quarter, we expect margins to decline approximately 10 basis points. This decline results from tighter credit spreads and new originations and continued write-off of covered assets. These factors were partially offset by improved funding, mix and lower cost. Our duration of equity is a negative 55 basis points at the end of the quarter. We remain slightly asset-sensitive.

Turning to slide 10, our fee income ratio for the first quarter remains fairly stable at 43.2%. Overall non-interest income decreased $74 million. This was driven by a decline in mortgage banking income, lower investment banking and brokerage fees and decline in other income. These decreases were partially offset by a strong performance in insurance.

Insurance income was up $56 million over the fourth quarter due to 9% growth in commissions, stronger performance-based incentives and better information, which allowed us to report $23 million in revenue that normally would have been reported in the second, third and fourth quarters. This is not a one-time benefit, just timing. But even when you consider this, we had really strong results.

We expect second quarter insurance revenues to be similar to the first quarter. Mortgage banking income declined $26 million in the quarter, primarily due to lower residential volumes and lower production of commercial mortgages. Residential gain on sale margins increased from 55 basis points in the fourth quarter to 69 basis points in the first quarter. However, origination volumes were down 29% and loan sales were 51% lower compared to last quarter.

To address the lower mortgage revenues, we are taking aggressive action to align our production and origination businesses to coincide with lower volumes. Investment banking and brokerage were down seasonally this quarter to $88 million compared to record performance last quarter.

FDIC loss share income offset was [worse] by $9 million compared to last quarter. This quarter’s assessment of cash flow significantly changed our outlook for accretable yield and our offset going forward. We expect approximately $20 million improvement in interest income in 2014 versus our prior guidance, but approximately $80 million in greater fee income offset as we amortize the FDIC receivable.

So, our net benefit for 2014 is projected to be $120 million. This is a decrease of $60 million compared to our last projections. In total, this is a positive development in cash flows. Our covered assets are performing better and our losses are down, so we will earn additional interest income on these assets over their lives but in the short run, the changed results and a reduction in the estimated recoverable cash flows from the FDIC, which will be amortized over the next couple of quarters.

Other income decreased primarily due to two items, a $3 million net gain on the sale of consumer lending subsidiary last quarter and a decrease of $19 million income from assets related to certain post employment benefits, which is offset in personnel costs.

Turning to slide 11, we achieved positive operating leverage which drove our efficiency ratio to 59.3% this quarter. Total noninterest expense decreased $53 million or 15% annualized compared to the fourth quarter. This decrease was led by lower personnel costs and lower professional service expense. The personnel expense decrease was mainly due to lower incentives and lower pension expense. Personnel expense included a seasonal increase of $25 million due to the annual reset of social security limits and other payroll taxes.

FTEs were essentially flat compared to last quarter. Professional services declined $13 million reflecting lower legal costs and a decrease in project expenses. Merger related and restructuring charges totaled $8 million in the quarter due to severance accruals.

We still plan to achieve an efficiency ratio in the 56% range in the fourth quarter of this year and we expect positive operating leverage throughout each quarter. Finally, our effective tax rate for the quarter was 27.3%. We expect the similar rate next quarter. As Kelly mentioned earlier our non-controlling interest included a $16 million one-time catch up adjustment which is related to certain partnership profit rights.

Turning to slide 12, capital ratios remain strong and are up from the fourth quarter with Tier 1 common at 10.2% and Tier 1 at 12.1%. We also estimate the Basel III common equity Tier 1 ratio of 10%. We are looking at liquidity, we made excellent progress in the LCR ratio, which is currently 87%. If you recall we have to be at 80% by the first of next year as proposed, remember these rules are not final yet.

Our liquid asset buffer is 16%, so our liquidity position is very strong. We were pleased to receive a no objection for our capital plan. We will recommend to the Board one penny increase in the quarterly dividend from $0.23 to $0.24 this will happen later this month at our regularly scheduled board meeting. And this will result in a dividend yield of approximately 2.5%.

Beginning on slide 13, loan demand picked up significantly in the last four weeks in the community bank for strong growth in retail and C&I. Throughout the quarter we had strong CRE growth and we expect that to continue in the second quarter. Community banking net income totaled $217 million reasonably lower versus fourth quarter but increase from last year. Our dealer floor plan initiative has been very successful as we have grown loans 92% compared to last year and 47% compared to last quarter.

We also surpassed $1 billion in outstanding balances. Also we obtained regulatory approval and expect to close our 21 branch acquisition of Citibank later this quarter.

Turning to slide 14, residential mortgage net income was $63 million. The mix of refi to purchase was 34% and 66% respectively. Remember we added cost late last year due to the organizational realignment to be compliant with QM.

Looking at dealer financial services on slide 15, net income was $35 million for the quarter. This is down on a linked quarter and like quarter basis as credit has normalized, resulting in an increase in loan loss provision. We continue to generate strong production in dealer finance with linked quarter loan originations of 27%. Operating margin in this segment was down slightly versus first quarter last year at 78%.

On slide 16 our segment lending on net income of $59 million, production was down due to seasonality but we will achieve double digit loan growth in this segment in the second quarter.

Moving on to slide 17, insurance had a strong quarter even without the benefit of a $23 million timing change we described earlier. We had good production in both retail and wholesale businesses. Net income was $75 million up 88% versus like quarter due to factors I described earlier. Same store sales excluding the process change was strong at 9% which includes profit commissions from our wholesale businesses. The EBITDA margin improved to 27% versus 25% a year ago.

Recently we closed two small but strategic important insurance acquisitions. The combined revenue of these acquisitions is approximately $11 million.

Turning to slide 18 our financial services segment generated $68 million in net income driven by corporate banking and wealth with growth of 18% and 20% respectively on a like quarter basis. Total invested assets increased $114 billion or 12% annualized growth compared to last quarter. We will continue to drive stronger revenues in the future.

In closing we see additional modest credit improvement, continued expense leverage stronger loan growth and improved fee income production. And with that let me turn it back over to Kelly for closing remarks and Q&A.

Kelly King

Thank you, Daryl. So I think you can see why we say it’s our solid quarter, we did have great credit quality. I would point out to you, that in the CCAR fed’s stress test of all the commercial banks that was [first] we had the level [four] jobs and the base net income, projected through that cycle, so that was a very, very good and affirms our high quality credit portfolio.

We are building long momentum with these enhanced strategies, we have excellent expense control, we have strong fee income, particularly in insurance which is really material and becoming a very, very positive stores [with their] forward. We do believe the market is improving and while it’s not overly robust it is definitely getting better and we saw a really strong improvement as we headed though the end of the first quarter and we think that will carry out through the rest of the year. So we’re excited about the improvement in market and we’re focused on excellent execution and think we will have really good results as we go forward.

Now I will turn it over to Alan.

Alan Greer

Thank you, Kelly. This time we will ask Felicia to come back on the line and explain the Q&A process.

Operator

Thank you. (Operator Instructions).

Alan Greer

Go ahead Felicia that’s fine.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll go first to Betsy Graseck of Morgan Stanley.

Betsy Graseck - Morgan Stanley

Hi good morning.

Kelly King

Good morning.

Alan Greer

Good morning.

Betsy Graseck - Morgan Stanley

Nice to see the expenses really appreciate that. My question is on CCAR and Kelly you talked a little bit about that in your closing remarks and it looks to me like you graded yourself very harshly, I mean in some cases you were even more conservative than the fed. And with your strong capital ratios, the question is why so conservative on [the ask] with no buyback request, I guess I’m wondering what you think, you need to see in order to turn that buyback request back on?

Kelly King

Well Betsy, that's an obviously good question. To be very honest, coming off of our negative experience last year, my strategy was to be absolutely very conservative and take no risk with regard to this process. As you know and from recent revelations it's a somewhat challenging process. And I just simply did not want to take any risk. Although I will admit that does set up a positive opportunity as we head into ‘15 and that's what we were trying to set up.

Betsy Graseck - Morgan Stanley

And do you think there is any possibility of going back in for a resubmit or separately do you take the excess capital that you're generating now and use it in asset allocation maybe going after parts of the loan market that others can't because they are tied around capital?

Kelly King

Yes. So I think the latter, Betsy will be more likely. We always have the option to go in for special request as circumstances justified. And I will point out that we did say in our application that if we were to get a recovery on the Star transaction that that gives us opportunity with regard to buybacks or special dividends. But more likely, you would find us being more aggressive with some of these strategies to lever up that additional capital. I still think that we have best [pay grade] for our shareholders and that's what we would focus first on.

Betsy Graseck - Morgan Stanley

Okay. Thanks so much.

Kelly King

You bet.

Operator

We'll go next to Gerard Cassidy of RBC.

Gerard Cassidy - RBC

Thank you. Good morning Kelly and good morning Daryl.

Kelly King

Hey Gerard.

Gerard Cassidy - RBC

When you guys look at your capital levels, obviously they are very healthy. And as you just addressed with the CCAR, how does acquisitions, Kelly, play into this. There has been apparently a low activity with the bigger banks. What’s your view on the next 12 to 18 months of the M&A market?

Kelly King

Gerard I think, we’re all trying to figure kind of where that’s going on, obviously there is nothing going on today except this small in. I don’t think you will see much activity in the near-term, Gerard, but a little bit different with some people I don’t think markets will shutdown forever either. I think as the Fed gets comfortable with to seek our process, banks with strong capital like BB&T and banks frankly don’t part with any systemic risk, we’ll have the opportunity to look at the combinations as we look forward. I think that’s a good healthy long-term thing for BB&T because we’re really good at it.

But I just want to always reinforce that when we talk about acquisitions that we are not going to take substantially dilutive acquisitions, we just not want to do it, it’s not helpful to our shareholders that doesn’t mean we won’t look at acquisitions, but we look it along, we have to do much as you know from my tenure as CEO. And so we’ll be very cautious and careful. We’ll keep looking. It’s not out of the question for the long-term, but don’t expect much in the short-term.

Gerard Cassidy - RBC

You mentioned systemic risk, how do you, I think most people would agree our four largest banks are too big to fail. Do you know where in your eyes is the cut off line where you’d become a systemic risk bank?

Kelly King

Gerard I think that everybody is including the Fed, personal opinion, is trying to figure this out. But what I personally think right now is, up to $500 billion is kind of a clear non-systemic level. I think a trillion and above is clearly systemic. I think going 500 and a trillion nobody kind of knows. But when you go over $500 billion you’re heading into the territory, you’re heading into a question that is more likely to be more pressure on systemic question. So that’s the reason 180 or so we could double and still be the size of U.S. bank. And so we’ve got lots of opportunity before we even get to that kind of a slow if I could say 500 level.

Gerard Cassidy - RBC

Great. And then just finally coming back to the Tier 1 common ratio under Basel III, clearly you guys are very strong at 10%. Once, let’s say at the end of 2015 all the issues from the past for the industry are behind us, where do you think you will be comfortable in carrying that Basel III Tier 1 common ratio if the requirement for regional banks like yours is 7%, obviously you are not going to have it that low, but what’s the comfort level?

Kelly King

Well, we like everybody are still trying to finalize how we settle that all [incomes]. Your capital level has something to do with your liquidity level and we have all that final numbers there. So, we will be conservative Gerard as you know in capital, but it’s something less than 10 and you know it’s in the 9ish area we think for the current period and what is 9.5 or what is 9, you just kind of ends on how we feel about these other factors.

Gerard Cassidy - RBC

Thank you.

Kelly King

Sure.

Operator

We’ll go next to Paul Miller of FBR.

Paul Miller - FBR

Yes. Can you clarify on your NIM? When you’re talking about a 10 basis points decline in NIM, were you talking about the headline NIM or the operating or core NIM?

Daryl Bible

Yes Paul, this is Daryl. I would tell you that we are talking about our GAAP NIM going down from 352 to 342.

Paul Miller - FBR

And what about any guidance on the core NIM, the 329?

Daryl Bible

I would say approximately half of that amount. So we were 329 on core and we are probably down about 5 on core margin. I think as you look at core margin going forward, it should start to stabilize, but we are just seeing a little bit tighter credit spreads right now in some of our lending categories specifically C&I and prime auto.

Paul Miller - FBR

So, I mean when you’re talking about, so should we see a continued pressure given the current environment throughout the year at this current rate?

Daryl Bible

When we are forecasting our margin right now, we are forecasting current spreads that we’re seeing right now not any further decline. So, we have a nickel going down on core margin next quarter and then it’s starting to stabilize after that quarter.

Paul Miller - FBR

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

Kelly King

That is kind of moving around Paul right now, but I would say there has not been a substantial pick up in the activity, but certainly purchase is dramatically versus refi. So, if you look at purchase only as a way out, if you look at the total, it’s not going to drive the total. So, our purchase is about 65% of our product today which is really good, because we think what you did into the spring, it has been a tough winter; people didn’t get out of the houses to look for houses. You get into a spring people could be back out looking for houses despite that our percentage is much higher on purchase as well for some momentum pick up.

Daryl Bible

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

Paul Miller - FBR

Okay guys. Thank you very much.

Kelly King

Sure.

Operator

We will go next to Erika Najarian of Bank of America.

Erika Najarian - Bank of America

Yes, good morning.

Kelly King

Good morning.

Erika Najarian - Bank of America

Just a question on the loan growth for the rest of the year, sorry I haven’t heard you two. Kelly, your color on both on the business psychology and what your teams are doing in terms of their aggression, they are both very upbeat. As when you look for loan growth for the balance of the year, is it fair to assume that we’ll continue to see the quarterly acceleration in loan growth like you’re predicting for the second quarter of the year versus first quarter?

Kelly King

Yes. I think that will continue to build as regard we go through the year, again because it is business confidence. By the way, one thing I failed to mention earlier, I think it’s pretty indicative of business confidence. I just read this yesterday, so business survey, and employers expect to have 8.6% more college graduates this year. Last year when they asked them that question, it was 2.1%. So when you look at all these factors, there are clearly a lot of green shoots out there in terms of building momentum.

Erika Najarian - Bank of America

Got it. And just a follow-up question on the efficiency ratio, we appreciate the color on 56% range for the fourth quarter this year. As we look out to 2015, I know it’s a little bit early but assuming no major shift in the rate environment in the first half of ‘15, are you expecting to essentially hold the line in the mid 50s efficiency ratio regardless of the revenue environment?

Kelly King

Well, I don’t think it’s [true] to be honest or get anybody to say that they are going to be holding their expense expectation independent of revenue, because obviously the fixed ratio is the function of expenses and revenue. And so if your revenue were decline a lot, you just say well, I’m going to absolutely hit a certain efficiency target that would -- you could completely destroy your franchise. So, we’re not independent in terms of revenue. However, having said that, as I think about ‘15, I think about revenues to have a positive upward momentum. I think business is really strong. I think margins, it will be better set by more loan demand, more loan demand that you have more opportunity to have a little firmness in pricing. So, as you see all of that, that looks to me like some comfort in terms of positive revenue change and with our really tight focus on expenses which will translate into ‘15.

Then I have a lot of comfort in the 56 range and I think as you head into ‘15, you could see a little bit of downward pressure below that.

Erika Najarian - Bank of America

Great. Thank you for taking my questions.

Operator

We’ll go next to Steve Scinicariello of UBS.

Steve Scinicariello - UBS

Good morning everyone.

Kelly King

Good morning.

Daryl Bible

Good morning.

Steve Scinicariello - UBS

I just wanted to follow-up with you just given the strength in the insurance income line and that you have bolted on a couple of other franchises lately. Just kind of curious what kind of the outlook might be from here, both from an organic side and inorganic side and maybe kind of interplay between what we should expect going forward.

Chris Henson

Hey Steve, this is Chris Henson. I appreciate the question. We are very excited about what takes place in insurance we sort of saw this couple of years ago beginning to play out. And so, what you got really is sort of price improvement sort of in 3% to 3.5% range and you have got sort of new business growth in the 1% to 2%. And then we talked about some time ago, as those begin to play, as the economy improves, we also benefited from performance based commissions from really all businesses retail, wholesale, MGU et cetera. And that could range anywhere in the 1% to 1.5% range.

So kind of looking forward, you could see a market this year in the 6 maybe even 6 plus kind of growth rate. And that kind of breaks down in retail and wholesale kind of as follows, retails run in probably about 5% just kind of run rate growth looking forward, wholesale is probably in the 9% kind of range and those mixes kind of roll out of there 6 plus kind of range. So, it really continues to perform we think with sort of underpinnings of the 2 revenue opportunities that we have which is cross-sell life insurance to wealth or broker dealer and P&C clients as well as the EB opportunity, employee benefits from a company we rolled a couple of years, we are now rolling out a plan, we got the whole footprint is -- we’re feeling very, very positive about the whole business.

Steve Scinicariello - UBS

It definitely sounds like very exciting opportunity, you think you might be able to bolt-on some more of these franchises as well are there more opportunities like those out there too?

Chris Henson

I think there could be -- the good news is I don’t think we have to do anything significant. Kind of where we are focused today, we have all the major pieces today. We are about half wholesale, half retail which takes the volatility out of earnings. So it really kind of gives you the good kind level, return to level out to the earnings kind of going forward. We also have dominant market share in Crump life and we have the largest wholesaler in the country. So, we don’t need any big pieces but to your point there are to fill in, we can do within the community bank footprint which is kind of what Woodberry was and then we particularly could have some competency areas like (inaudible) with respect to aviation. We didn’t have a competency there that gave us the ability. So you could see some small fill-ins kind of looking forward.

Steve Scinicariello - UBS

Perfect. And then just changing gears, I know the asset sensitivity dip down a little bit just kind of the funding side, mix shift over there. Are there any things you guys might look to do to kind of start to increase the asset sensitivity over the next couple of quarters?

Daryl Bible

Yes. Steve, what we’re really focused on is growing our core deposits. As we grow our core deposits that will give us more flexibility on the balance sheet because of the optionality and the betas that we project there. So, I think as we continue to build out and add to that that should kind of offset what we’re seeing on the loan side organically. So, I think core deposits is really the key in the answer, it also helps a lot with our liquidity and just makes it more efficient to meet the liquidity ratios.

Steve Scinicariello - UBS

Makes sense. Thank you so much.

Operator

We’ll go next to John Pancari of Evercore.

John Pancari - Evercore

Good morning.

Kelly King

Good morning.

John Pancari - Evercore

In terms of the margin color you gave, how much of that core margin compression guidance factors in any incremental impact from investment securities tied to LCR? And then separately, just want to get an idea on your loan yield expectation in terms of where you’re putting on new loans currently by portfolio? Thanks.

Daryl Bible

Okay. So for the net interest margin piece, I’d tell you that we are basically forecasting out from this point flat investment balances. So there is really not any more margin pressure related from the investment portfolio. It’s really due to the just tighter credit spreads that we’re seeing and our volumes that we’re putting on in the loan side. Just for an example if you want to look at our C&I book, C&I, we booked about 5.5 billion new and renewing assets and the average rate on C&I was about a 231. When you look at our CRE, the average rate on the volume that we booked there, little over a 1.2 billion or 1.3 billion was around 4%.

So we are seeing a little bit tighter pressures in both of those areas, but overall still really good. And from an asset sensitivity position those tend to be more floating rate, (inaudible) asset that will also help our asset risk position.

John Pancari - Evercore

Okay. All right, that’s helpful. And then on the loan growth side on the C&I side, could you give us a little bit more color on the growth you are seeing there, I know you mentioned corporate banking Kelly, want to see what type of credit that is particularly if you are avoiding the whole leverage lending side of the business? And then separately on the CRE side, I know you mentioned permanent financing initiative, want to get a little bit more color there? Thanks.

Clarke Starnes

Hey John this is Clarke, I’ll answer that call. As far as our corporate strategy it’s really aligned around the middle market segment for the industry verticals we follow. So in that regard, we are absolutely winning the high yield leverage sponsored transactions, so really do almost none of that, so most of our focus has been on these verticals. For us the growth is coming out of the area is like our energy group in Texas, REIT portfolios, agro business public finance and really strong in corporate leasing we call it equipment finance. So those are what we are seeing our best opportunities on the commercial middle market.

On the CRE side, predominantly multi-family’s [field] both on the construction and the permanent, but we are starting to see some retail, mostly think nice, high quality single tenant deals some office, we’re actually doing a little bit of hotel and some industrial and for the first time in a long time, we also saw some residential home builder construction on very high quality there. And then finally I would say another big focal area for us that was mentioned is dealer [floor] plan has been very, very strong.

John Pancari - Evercore

Okay. Great thank you.

Alan Greer

Thanks.

Operator

We’ll go next to Ken Usdin of the Jefferies Investment Bank.

Ken Usdin - Jefferies Investment Bank

Thanks, good morning. Daryl, I was wondering if you could talk a little bit more on the NII outlook. Previously you guys have talked about being able to hopefully grow core NII this year, even with the sales of the business and that you made late last year. Do you think that’s still possible given the incremental core margin compression?

Daryl Bible

Our rate forecast right now is for rates to moves in mid ‘15 upward and we will see how that plays out. I would say that our core margin is currently 329; we should end the year in the low 320s. So, I would say it stabilizes there. And probably doesn’t move up until we really get some increases in rates, but hopefully we can get it stabilized in the low 320s.

Ken Usdin - Jefferies Investment Bank

Okay. And my second question is can you just run us through the components of the purchase accounting numbers; you gave us the ‘14. If you have it on you, if you would be able to give us the pieces of how you're at least thinking of interest income and then the loss share back out for ‘14 and ‘15?

Daryl Bible

Yes. So if you look at the full year 2014, the net impact will be $120 million of earnings. If you break it into the pieces, interest income is $390 million and FDIC loss share is a negative 270, let's say you get to the 120. When you get into ‘15, the benefit from the purchase accounting comes down dramatically. The net benefit of like $30 million, interest income like $190 million with the $160 million offset. So, it's pretty much out of our run rate as you get into 2015.

Ken Usdin - Jefferies Investment Bank

Okay, perfect. Thank you.

Daryl Bible

Welcome.

Operator

We'll go to Keith Murray, ISI.

Keith Murray - ISI

Thank you. Could you just spend a minute to talk about reserve release likely [doing] a linked down here, is that more a function of loan growth that you are expecting or are you seeing anything in the credit books that you think in a three-six months out whether it’s delinquencies et cetera you kind of hitting a bottom here?

Clarke Starnes

Hey Keith, this is Clarke, very good question. What you are seeing for us is consistent with others and that all the higher risk managers have been burning down and that’s where the releases have come from today, as our portfolio is just stabilizing and returning to a more normalized level and we would expect the provision start at some point matching charge-offs and as we grow our portfolio we would have to increase reserves at that point out. So we would certainly not expect the level of releases we’ve seen over the last several quarters as we move forward, but it’s not reflective of any concern at all about asset quality. In fact I would say to Kelly’s point about the CCAR results and our own view of risk we think we have built a very sustainable high quality portfolio and there is nothing in our assumptions about reserves that would indicate any concerns about increased risk at this point.

Keith Murray - ISI

Thank you. Kelly, maybe just a broader M&A question, when you think about bank M&A today you have done a lot of retooling of branches and technology et cetera. Is there a concern in your mind that if you purchase a bank today sort of going to have to reinvent the technology and the branches et cetera where the costs upfront might be different than they were in the past. Is that something that you think about?

Kelly King

Yes Keith, we think a lot about that. I would tell you we are not as aggressive as some people are about the eminent [demise] of the branches and everybody just want technology and all that although we do think those are real trends, things just don’t change as fast as lot of people think. But, so we tracked all of that into our acquisition model of the acquiring companies. So, depending on what the state of technology is, if it needs to be rebound we simply build that into our expected investment we have to make. And therefore we would lower the price to generate our desired level of return. So, just because they have dilapidated brand system or have (inaudible) in technology, we’ll not preclude it from doing it, we would just suggest the price.

Keith Murray - ISI

Thank you. And then just finally, do you have any update on where you stand in the Star’s appeal process?

Kelly King

No, it’s still in the normal kind of process; probably fourth quarter would be our guess. We’ve been surprised, it could have happened earlier, but we would guess fourth quarter.

Keith Murray - ISI

Thank you very much.

Kelly King

You are welcome.

Operator

We’ll go next to Kevin St. Pierre of Sanford Bernstein.

Kevin St. Pierre - Sanford Bernstein

Good morning. Kelly, you mentioned the somewhat negative experience in last year’s CCAR, but the results of the actual stress test last year were very good just like this year. So now with two straight years of strong relative performance on the stress test, is it fair to say that if we’re sitting here next year and you had 11% Tier 1 common that we’d see more than a 30% total payout ratio? And if yes, would you favor special dividends or share repurchase maybe talk about priorities?

Kelly King

Yes. So, if those conditions exist, which we fully expect them to, certainly we would expect to apply for more than 30% total payout, absolutely. And so again it’s been very conservative. This year doesn’t give anything away it just keeps it in the pot, makes it available for our subsequent decisions. So as always, we would like to use excess capital to grow organically, like to do acquisitions, do as many being as aggressive as reasonable dividends including the possibility of special dividends.

But if none of those seem to be the right decision then buybacks moves out the list in terms of our thinking. But I will remind you that we think about the issue of buybacks more than just reducing our capital. We never go and do a bunch of buybacks that the price still has a bad decision for the shareholders. And so it’s pretty complex decision as you know. But the order priority would be as I described and I think you could reasonably expect us to be more aggressive in some form of fashion as we head into ‘15.

Kevin St. Pierre - Sanford Bernstein

Great, thank you. And a quick one for Daryl and/or Clarke, you mentioned in your comments Daryl that for the next few quarters, your quote was next few quarters you expect charge-offs to be below 50 to 70 basis point normal range. Is that because you’re hesitant to forecast beyond the next few quarters or do you -- or is your expectation that net charge-offs will rise in 2015?

Clarke Starnes

Kevin, this is Clarke, great question. There is nothing to imply that we necessarily think, there will be a big change. But as we said before, our normalized range based upon the way we’re trying to grow the portfolio and deposit mix what we’ve chosen for our company that that [‘15] would probably through this cycle long-term sustainable (inaudible) certainly if the economy stays strong and as we’re rebuilding early coming out of the older stuff running off then we could be below that range. So we’re just I think being cautious and conservative.

Kevin St. Pierre - Sanford Bernstein

Great, thank you very much.

Kelly King

Sure.

Operator

We’ll go next to Christopher Marinac of FIG Partners.

Christopher Marinac - FIG Partners

Thanks. Daryl, you mentioned earlier about the need to grow core deposits, so I was curious if you expect any change even if it’s [deferred] models than the overall funding costs of those few quarters?

Daryl Bible

Yes, Christopher, what I would tell you is that we’re pretty much at the floor on deposit costs. I would maybe forecast maybe a couple of more basis points coming down and that's really coming down in the CD book. I think if you look kind at how we're pricing our now accounts and our MMDA accounts. We're offering very attractive rates and we're getting a lot of good traction in growing both retail and corporate balances in those areas. And I think that’s gained momentum in the community bank area and our large corporate area and I think that's going to play out throughout the year.

Christopher Marinac - FIG Partners

Okay, great. And then Kelly just a follow-up for you, you mentioned about loan growth and kind of increased activity across the footprint. Is there a difference between their larger metro areas and the smaller more midsized markets?

Kelly King

Yes, I would say there is. In two regards, one is in some cases some of the largest metro areas they got to being down the most have a bigger ramp up possibility because of that part being down. And then just a nature of large urban markets is they have more large businesses. And to be honest, the largest businesses in my market and I’m pleased across the country are doing much better today than the small medium-sized businesses are largely because they have international opportunities and they have bigger scale.

And so just a mathematical nature of that means there would be more lending opportunities in the larger markets, [let’s] not to say that smaller markets are bad, it's just they are not growing today as fast because they don't have the large international components flowing through these large businesses.

On the other hand, I will remind you that one of the reasons we like large and smaller markets, all these markets might not grow as fast in the rising time they don't go down as fast. And so it’s now a really good part of our diversification strategy and we like them both.

Christopher Marinac - FIG Partners

Great, thanks very much guys.

Kelly King

Yes.

Operator

We'll go to Nancy Bush, NAB Research LLC.

Nancy Bush - NAB Research, LLC

Hi Kelly, how are you?

Kelly King

Hey Nancy.

Nancy Bush - NAB Research, LLC

Just a quick question sort of an add-on there, your optimism about business conditions I think is very well received but I am just sort of wondering about are you seeing a kind of resurgence across the Southeast or is it very spotty or if you could just comment on how the Southeast seems to be proceeding, I would appreciate it.

Kelly King

Nancy, you have been the best around in terms of really focusing on the markets, specifically the Southeast. I would say, it’s generally broad based. And as I travel around to the Florida or Texas or South Carolina where I have been recently, there is a broad based kind of generic change in mood. And so I think that is not market specific. I think frankly, you and I have talked about how the Southeast is going through a long-term kind of secular change in the nature of Southeast vis-à-vis Northeast. I think the Southeast in general is getting ready to have 10 to 20 years of relatively positive robust improvement, mainly because of something I think most people have focused on, and that is the change in currency value of the retirees wanting to move to Northeast to Southeast. So for 25 plus years, they were facing currency devaluation as the Southeast was growing fast and that market was not growing at all, so they could every year, they could sell their house and buy latest house because the currency went down. That’s exactly flipped, we did a 50% discount on the Southeast and their values haven’t gone down as much.

So I think you are going to see some upward push particularly in real estate and related service in places like Florida. The market slot was fighting for a while and they have gaining again, Texas growing 1,000 people a day and so I think it’s across the board and it’s relatively positive.

Nancy Bush - NAB Research, LLC

Just as an add-on to that, I mean could you speak to sort of the residential picture, residential construction picture in the Southeast? I mean what are we going to see in this next cycle?

Daryl Bible

I think in the short run Nancy what you’re going to see is kind of interesting is you’re going to see some ramp up in prices and existing homes because we’re going to go through a [valley] here of construction because of no lots available. We’ve been through 5 years where we didn’t develop any lots and it takes in many cases 18 months or so to get zoning and all to get the new lots going.

So what you’re seeing today is more of the large national builders are moving into bay, the lots are already developed so that they can -- they have the capital and they just have to get the lots. So, you’re going to see upward prices on existing lots, upward prices on existing homes relative to their phenomenon. But simultaneously you will see A&D building because there is a dearth of lots out there. So I think hopefully won’t be as robust as it was in the last 10 years or so before the crisis. But I think you get ready to see a solid development of momentum in A&D and verticals in the single family. And multifamily is still strong. I think it stays strong for next year or so. And then I think as the economics single versus rental costs, you’ll see multifamily plateau. And so we’ll be -- we’re making that shift now, we’re already focusing more on single family A&D and construction to be ready for that intending change.

Nancy Bush - NAB Research, LLC

Thank you very much.

Daryl Bible

You bet.

Operator

And our final question comes from Gaston Ceron of Morningstar Equity Research.

Gaston Ceron - Morningstar Equity Research

Hi, good morning.

Kelly King

Good morning.

Gaston Ceron - Morningstar Equity Research

Just very quick question going back to the M&A topic it sounds like perhaps not a lot on the firm burner in the near term but certainly still lots of interest on the long term. I am curious as you kind of assess your experience with the Citi branch acquisition; I’m curious how that has kind of affected your appetite or interest in acquisition, future branch acquisitions of this kind versus in prior banks. I mean do you -- has your experience been so positive that you continue to see this as a kind of way to go out to franchise in key states?

Kelly King

Yes. I think you are going to see likely more of -- you are seeing more, you will see a continuing trend of branch sell out fast, some of the largest institutions that are having capital issues and/or trying to narrow the product lines and/or market focuses, just like our opportunity coming out of Citi’s decision in Texas is a really good opportunity.

Now, it depends on the institution, it depends on the nature of their branch distribution, have they run it in a way this relationship oriented or they’re just trying to push product, not so much the nature of the buildings and the technology but nature of the strategies in the marketplace, like for example the Bank Atlantic acquisition process is really good because while they have some problems on top of the house, they have a really good basic of retail strategy that we’re able to build on.

So Texas right now for us that looks very, very good. And I think that will be very good as we go through. If we see other situations like that, we would be very aggressive in looking at it. Certainly one of the advantage of branch acquisition is it eliminates any whole bank risk issues around BSA, AML et cetera. So it’s -- it would be how on our list but not necessarily to the exclusion of whole banks.

Gaston Ceron - Morningstar Equity Research

Great. Thanks for the color.

Kelly King

You bet.

Operator

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

Alan Greer

Thank you, Felicia. And thanks to all of you for joining us. This concludes our call. Thank you and have a good day.

Operator

That does conclude today’s conference call. Thank you for your participation.

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