BB&T's CEO Presents at Goldman Sachs U.S. Financial Services Conference (Transcript)

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BB&T Corporation (NYSE:BBT) Goldman Sachs US Financial Services Conference Call December 11, 2013 1:10 PM ET


Kelly King -- Chairman and CEO


Ryan Nash – Goldman Sachs

Ryan Nash – Goldman Sachs

All right, we’re going to get started, up next, we have BB&T. BB&T is one of the few banks that has remained profitable every quarter in the past few years due to their strong underwriting practices, diversified fee income stream and strong corporate culture that I’m sure Kelly will share with us.

The company has invested in quite a few growth initiatives including expanding its footprint and practice, building out its corporate banks, both of which should drive higher growth in years to come.

Here to tell us more about the BB&T story, is Kelly King, Chairman, President, and CEO. For that, I will turn it over to Kelly.

Kelly King

Thank you, Ryan. Good afternoon, everybody, thanks for -- thanks for coming. So I thought I would make this a general comment, kind of about the environment and the economy. And frankly, I would say to you that I am -- more optimistic about kind of where we are and where we’re going than a few months ago. I think we’ve had some pivotal positive changes that are kind of unfolding.

Obviously, a couple of months are pretty strong, employment growth has been good. I think a not so small event occurred yesterday as we see the beginnings of an agreement into Congress with regard to the budgets. So I think that’s kind of a water shed event.

We’re seeing a number of the rules get to be clearer in the banking industry today. And while you may not like exactly what a particular rule is, I think all of them, by and large have been reasonable, and the clarity of having them laid out gives you a lot more confidence as you try to make decisions going forward.

So I’m actually feeling pretty positive and I think a lot of that is going to spill over into an improving economy as we go forward, and I think that would be good for our industry and good for our business as well.

I’m just going to hit a few of these slides fairly quickly. I know you’ve all seen them. I just want to make a couple of clarifying points. So with regards to loan growth, the fourth quarter is going to be kind of a flattish kind of quarter for us. And the reason for that is several. One is we, as you know, have some seasonal specialized lending businesses that will be slow just seasonally for this time. Our mortgage warehouse business will be down. We have the contingent run off of our colonial cover loan portfolio and so some of those will be -- count as negative drain events.

And to be honest, after the 30-day -- in the October type of government shutdown, things really did hit a lull in October and November as we kind of headed into that period. Now, we’ll tell you more recently, things are beginning to look up as we have some conversations about maybe not hitting a budget wall this time, so momentum seems to be improving.

In fact, November was our second highest lump production mark in the last six months. And so we’re beginning to feel some excitement out there, I think people are turning positive and I think we’ll have a relatively flattish growth for this quarter as I outlined, I think as we look forward to next year, we feel that -- we feel pretty good about momentum.

In the deposit area, things look strong, frankly, the overall inflow of deposits is still very robust, we continue to push down overall deposit rates. We think we will probably get down to that third -- below 30 as we indicated in the first part of the year.

You may see a little bit of outward pressure on that as we head into next year because with the new liquidity requirements in the industry, I think you got to see most of the banks, maybe all of the banks focusing a bit more on core deposits than we have historically. So that might have a little bit of outward pressure, but nothing material as we head into that.

Our core margin continues to be resilient. We will, as we’ve indicated, expect about a 10 basis point decline in the GAAP margin. A lot of that, most of it is because of a lending subsidiary that we sold at the first part of the quarter that represents about 6 basis points, and then some of the contingent run off of the colonial portfolio.

The core margin continues to remain very stable, and we expect that to be relatively stable as we go forward.

Fee income continues to be relatively strong for us, obviously, if you look at the graph, it’s tailing down in the third quarter, but I’ll remind you that that is largely because of our seasonal insurance business which has a seasonal slow third quarter, comes back strong in the fourth quarter.

So you could expect to see how fee income ration come back in the fourth quarter. Obviously part of the drain on fee income is mortgage business and that will continue to slow some as we head through the fourth and into next year, depending on what happens to rates. But overall, we’re still pleased. Thankfully, next year, as we look forward into the fee business areas, other than mortgage, we would expect almost all if not all of our other fee areas to increase as we head through the year.

Credit quality continues to be just absolutely outstanding. We had a really nice third quarter, inflows of non-performance continues to decline, all of our delinquency metrics continue to improve, and we expect to see that continue as we go forward. We had a really good recovery. So we’re beginning to see some of those assets that were written down in the last several years, beginning to see some recovery, so that was nice.

We set our account of long term range in terms of charge offs as 55 to 75 basis points. We’ve grown through that in the third quarter. And you could see the possibility of breaking below that for the next two or three quarters, depending on however recoveries go. But overall, the story in credit is very, very good.

Capital strength continues to be very strong. We continue to create capital nicely every quarter, we feel good in terms of our Basel III position. And so we really don’t think as the rules are unfolding, that we have any material capital issues.

We think and I always like to try to remind you every time we get together that quality relationships with our clients is the most important point to make. And that is frankly because every business is ultimately successful or not based on the value proposition that they offer in the marketplace.

BB&T has a very high value proposition in the marketplace and that’s frankly because our quality to our clients is superior to those of our peers. You can see that representative in the slide. We’re really pleased about our performance in terms of our Greenwich recognition which simply shows that we are best in class in terms of small and medium-size business relationships. Really, really stellar recognition in the mortgage area.

And frankly with all this going on in the mortgage area today, it’s a good time to get really good recognition in the mortgage. And so for four years now in a row, first time J.D. Power has ever had that, four years in a row we’ve now received best in class in terms of mortgage loan service quality. So we’re very, very proud of that.

So if you can look at ’14 in a bit of a summarized way we have some challenges that covered asset runoff will continue. That has about $140 million net drag as we head into next year on a net of BB&T [ph] recovery basis. That’s kind of a last big year of that runoff.

Mortgage banking would continue to decline probably in the 18% to 20% level. We’ll have some additional capital expenditures in some of the systems of our projects that we’ve been working on. And credit spreads are still tough until see some improvement in rates which may well actually improve some as we head into -- in the next year.

On the other hand we still have some really good strong opportunities. A lot of revenue initiatives I’ll allude to in just a second. Our pension expense is actually going to be a real bright spot next year. Because with the discount rate going up, we expect that our pension rate will be about $70 million less next year, while for the last several years it’s been going up precipitously so that will be a real positive lower loan loss provision and an improved loan mix all are real positive as we head into the year.

I will just make a commentary. With regard to expenses because we’ve mentioned on the last quarter call and had some questions about our expense level because obviously our efficiency ratio did go up quarter-by-quarter as we headed through ’13.

That’s because we really did need to invest in putting in some new improved systems like general ledgers, commercial loans systems. These systems are necessary to comply with new requirements under Dodd-Frank and under the CCAR proposition, but also frankly because some of the systems are somewhat old and it just makes us more efficient as we go forward.

So we’re investing in a new GL system in a new commercial loan system. Frankly, we’ll be leapfrogging over some of the other competitors. And while it’s somewhat painful to do today, it fits really well for the next several years in terms of being able to provide information not only to the fed but also for ourselves in terms of internal.

So the way to think about that is those expenses will be kind of ramping up -- have been ramping up during ’13. They’ll begin to plateau pretty shortly and then they’ll begin to kind of come down. And then it’ll actually get even better as we have the efficiencies of the new system kick in.

So you shouldn’t think that our expenses have moved up and they’re going to stabilize at a high level, rather a better way to think about them is that they did move up and they’ll be coming back down as we head through ’14. And so we expect as we head towards the end of ’14 that our efficiency ratio will be back down into the 55% to 56% level and that’s a good place.

So it’s more of a temporary spike than it is a long term change in our ongoing discipline of expenses. I’m not going to cover all of these revenue items but I did just want to highlight that the saddle [ph] that we’ve been working on for the last 18 years or so continue to do extremely well.

We continue to invest on our corporate banking and national markets. I recall that for a number of years we really were not very well penetrated in those markets. About four years ago we started making meaningful investments in those areas and it’s a really ripe opportunity for us because we now for the first time are putting seed on the street, if you will, in places like Chicago, in California and New York and so forth.

And so those relationships are really beginning to develop at a rapid pace. We’re really beginning to expand our wealth advisory business over the last few years. We’re moving it up to even higher level receptivity to the -- the product offering is very, very high.

We are continuing to invest in our insurance business. It’s a really big business for us so it’s running about 15% or so of our revenue now. It’s a very stable and growing business. It’s really a good diversification source of revenue for us. It’s one of the main reasons why our revenue in the last five years has grown at about four times the level of the median of our peers and so it gives us that time of steady growth versus the volatility that you see in a lot of other businesses.

And we continue to invest in some other areas as well. I would just final highlight our investment in Texas. As you know it’s a very large state, 26.5 million people growing at about 1,000 people per day. We’re just kind of really getting started there but our value proposition is being received extremely well. We’re very excited about being a part of that great market.

We’ve just invested 30 new commercial branch operations there that are growing really rapidly. And we expect really good things to continue to happen for us in Texas.

And so while with some challenges in terms of economy while with some challenges in terms in some expenses, on our temporary basis, there are many positives that are offsetting with regard to that. We’re pleased it’s relatively optimistic as we go forward.

I did just want to finally point that the real differentiator in BB&T is that we try to focus a lot of our attention in terms of building our relationships with our clients, with our associates, with our communities so that we ultimately deliver optimized return to our shareholders.

And it's really is about values. It’s about culture. Basically everybody has the same kind of products and strategies are very, very similar but there are lots of cultural differences and organizations. And what we focus on is building a place so that our clients can grow their businesses. We’re highly focused on having them be prosperous. We’re creating a place where our associates can learn and grow and be fulfilled in their work.

We work really hard in the communities and in projects like a lighthouse project. In the last five years, in this difficult period of time we’ve done over 5,000 projects because of eight million people in our marketplace are otherwise socially and economically deprived. And we continue to do a really good job for our shareholders.

And so we think values are the primary differentiator and BB&T has been for a long time and will continue to be for a long time in the future.

That is a quick update, Ryan, in terms of what’s going on at BB&T and maybe we can spend some time talking about it.

Ryan Nash – Goldman Sachs

Absolutely. And thank you.

So, Kelly, I wanted to start -- one of the last slide, you had outlined a handful of BB&T’s initiatives for 2013 whether it was with the corporate banking buildup, the Texas buildup, and colonial market buildup, as we’re looking into 2014, which of these initiatives do you think you’ve gotten the most traction with over the last couple of quarters?

And which of these along with other potential initiatives are you most excited about as we look into 2014?

Kelly King

So I think the most traction in the last couple of years has been the corporate national banking strategy and the reason is because BB&T is an interesting organization. We kind of got to be relatively large, relatively fast.

I mean I’ve been with the company 41 years but in 1995 we were only a $10-million [ph] company. So we’ve grown really quickly and at the same time that a lot of other institutions that we serve in the national market were going away for one reason or another.

And so kind of simultaneously the market really needed another top 10 player and we became a top 10 player. And so with a great appetite for going out into that market, we found that people well-received our request to be a part of their teams. So that went really well.

I also think our Texas strategy in the last few quarters has been extremely strong, the traction has been great, the value proposition goes well. I tell people -- I think people in Texas kind of like us maybe because that's the way we talk of something.

And even -- and this is a fantastic market. We love it down there, it’s growing really fast and we’re growing rapidly. I’m very excited about it.

Ryan Nash – Goldman Sachs

Are there other markets out there that look like Texas that BB&T can go and put in 30 or 40 branches, build some loan production offices and generate growth --

Kelly King

Yes. We want to test it further in Texas to make sure it really works. We feel very good about it but as soon as the works are done, I’m really confident will -- we have many places across the country that we can do that.

We don’t intend to kind of build a national, what you call baseline retail operations, that just takes a long time but you can build a commercial operation from a de novo basis which is basically what we’re doing in Texas. And so there are many places -- are continuing out in the southern area, our in the Midwest, there are many, many markets that we can build out like that as well.

So we have these other markets like Swardon [ph] Alabama that we haven’t really fully materialized our potential, and Texas and Midwest and other opportunities are available as well.

Ryan Nash – Goldman Sachs

Just switching gears to loan growth. I mean your opening remarks were much more positive than you’ve been on loan growth, the past couple of quarters. I think you talked about slow growth for, you know potential for multiyear period. And it sounds like you've been after a flat quarter in 4Q from -- pick up loan growth. Can you just talk about which areas or which products do you think we're going to see the biggest pickup and what do you think the biggest drivers of the pickup that we're going to see?

Kelly King

So I think we're going to see a relatively stronger pickup in CRE. CRE has been relatively soft for the last 18 months or so except in multifamily whether it's been a pretty fast pace almost above all developing in RB [ph] and multifamily so -- but otherwise it's been relatively slow. We're beginning to see now some interest in new activity. We're beginning to see the single family residential beginning to grow. We're beginning to see shopping center growth activity again. Office is still relatively weak. Hospitality is strong, medical is strong. So I think CRE in general will grow rapidly.

The consumer portfolio is beginning to emerge, consumer sentiment is improved and as I said that national corporate banking strategy is very strong in terms of lending. So I think they are already a number out there that will grow at nice paces as we go forward.

Ryan Nash – Goldman Sachs

Do you think our economists are calling for 3% GDP growth when an exit run rate above that almost 3.5%. You think -- you've been talking about 3% to 4% loan growth over the past couple of years. I'm assuming you'll give us more of an update on the 4Q earnings as well. But do you think we could grow at a pace faster than the 3% to 4% that we've talked about?

Kelly King

Well, I think that kind of depends on the particular spaces how it kind of moves and to be honest I think it depends on what the environment is. We could have been growing loans a lot faster the last 18 months to be honest and we have -- we've been very transparent about why we've not. And that is because to use an old phrase we're just not very excited about jumping on either front [ph] end into the fire.

And a lot of loan growth over the last 18 months really has been outside of our appetite. I mean there's been a lot of leverage lending which we're just not really interested in doing. It's too rich for our appetite. A lot of companies are really increasing the whole position and we like granularity, we like diversification.

But even with that having said, I think we'll have more robust growth as we go forward depending on how the economy does. We're making some adjustments. We've moved to be a bit more price competitive in some of those areas. We're not going to move in terms of taking more risk in terms of cluster, but we move to be price competitive. We're improving our whole positions, some, and so I think all of that combined together with a very strong specialized lending business. I think we'll do well.

Ryan Nash – Goldman Sachs

Just a follow up on that last point. Are you actually using underwriting requirements across different businesses? Which ones you're actually using and is it just on price where you're using?

Kelly King

No, we're not using underwriting structure because we think memories are very short in our business, that used to be an early [inaudible] it took about 10 years for people to forget how bad it was then they started doing pricing stuff again. This year seems to be about five years and so we are not going to release our underwriting requirements at all.

But we do recognize [inaudible] out there so we're going to be more price competitive. But mostly we think we're going to win the game based on being more responsive. I'm convinced that the way you really win the game is to be the most responsive in the business and that's what I think we can do and we'll continue to do.

Ryan Nash – Goldman Sachs

And just one other thing that you commented on just consumers looking a little bit better in specialized lending growth. This year was obviously a very, very good year for all your niche lending business. Given the economy is looking a little bit better can we continue to see growth in a similar pace as we look into 2014?

Kelly King

I really think we can. These small businesses we have are really good and combined with some with [inaudible] portfolio for us. So for example we have a company called Sheffield [ph] which is a national business and it lends money for like snowmobiles and lawn tractors and it's just doing really, really well. The consumer appetite for that is very strong. These small landscape operations that doing very well.

And so we keep adding new providers like the Wires [ph] in the snowmobile area which is doing great. So we think we can continue to expand that and frankly the quality is very good because we work very close with the manufacturers they don't want lower quality either. So they're not pushing us to take a lot of low quality business because it's better for them and it's long term so it's a matter of getting a higher share of the various manufacturers and more manufacturers in our portfolio. And so that has gone well and I think will continue.

As for GEICO for example which is an insurance premium finance business. With largest in United States, largest in Canada, it grows directly with the growth in insurance premiums which are rising as we are now in the second, third year for holding [ph] markets. So yes, a number of things specialized lending continue to look very good.

Ryan Nash – Goldman Sachs

Great. Switching to expenses and operating leverage. You've obviously highlighted a couple of revenue headwinds that you have for your -- just getting mortgage we had obviously had a big slowdown in refinance activity and we do have an accretable rollup. But can you just give us a sense as you came up with a level to hit for efficiency in the fourth quarter of '14, can you just talk about some of the things that you do on the expense side one, to get you there and two, do you think you can continue to make progress on the efficiency ratio beyond 4Q '14 that that would -- big pick up in short-term rates?

Kelly King

So obviously it faces the ratio as a function of the numerator and the denominator and so part of the challenger over that last little while is in the denominator. But we have some temporary headwinds I described in terms of some of the systems investments. I'll say it again just to be sure I'm clear, that those are temporary and they will begin to wane as we go forward plus, we will pick up efficiencies because a lot of the systems that we have out there are dated and so there are a lot of tentacles out in the system that are -- where you're developing informational spreadsheets on a manual basis, that will be replaced with a fully automated system so it will be much more efficient. So I think that will subside, our pension expenses are going to be lower.

We started a year and a half or so ago doing a number of things in terms of efficiency improvement. We -- this is the temptation to come out with some grand plan with some grand number I just observed over the year. They don't seem to work out so well in retrospect. We rather prove it over the long term. But for example in our community bank we've done a number of things to improve efficiency. In the last three months we reduced the number of our agents from 37 to 23 which is a substantial improvement. We challenged really every business leader to look at their business from a clean sheet of paper. We said basically the world has changed. It is not going back. It is important to redesign your business, re-conceptualize your business, find the ways to do what you need to do but do it more efficiently.

If you come from a top down to say cut your expenses by 8%, that just creates a morale problems that people can't perform at the desk. But if you challenge your business leader to do the best they can and find better ways to do what they do and with less expense, it's incredible what great ideas they come up with. So we have a very long list of improvement initiatives out there that are being put in place even as we speak. And so I'm very optimistic that we will continue to move the efficiency ratio, instead for a long time that would be a long term -- is in the low 50s.

Right now for this year we're looking in the 55, 56 level. We'll need a little help on the numerator side -- I mean on the denominator to get it down below 50. But I think long-term we can still do it because I think the mix of our business is attractive for that and we are really discipline-focused. We're very relentlessly focused on staffing.

Our staffing continues to decline even as we invest in some of these other areas. So it's just a day-to-day part of the business. You have to be relentlessly focused on every expense. I tell our people you need to save the rubber bands and save the paperclips. People were laughing when I say that but look, with 35,000 associates, that adds up. But more importantly when they see the bosses worrying about the paperclips and the rubber bands they understand that expenses are important around here. And they take it very importantly, and it begins to make a really big impact.

Ryan Nash – Goldman Sachs

That's a lot of paperclips. Just Kelly, switching gears to credit, you obviously talked about -- maybe not specific to BB&T, but obviously been loosening standards, people holding bigger deals doing more leverage transactions. When you look at the trajectory of your credit, you obviously you said that we could see a couple of quarters of running below the 55 to 75. When -- at some point when we see both a pickup in growth and interest rates. Do you think that we could see credit and growth decouple where we actually see credit --where we see growth accelerating and credit losses remaining benign or do you think that the combination of a faster economy, growing economy with further loosening of underwriting would lead to an uptick in credit?

Kelly King

That's a really good question. The way I think about that is we are basically down ahead of trough. I think it's to be a relatively raw trough. So think of it like a really wide U because I think it will stay at the lower part of that trough because as you say the economy is getting better. We've been taking [ph] just pristine credit for the last two or three years particularly with -- state recoveries from some of the charge-offs that we've had over the last five years.

And so for those reasons, I think you can expect to see growth move in a non-correlated way with charge-offs for a period of time. Now over time, there will be a relationship and then what we do in terms of observing as a function of what level of reserves we need, the service and gap influence on that is a regular influence on that.

But that feels like we’ve kind of seen the trough with regard to reserve levels. But I do think you’ll see some opportunity to grow a little faster than -- then charge-offs will grow and that’ll be good for the industry for allowing it.

Ryan Nash – Goldman Sachs

Switching gears to capital. I know that -- as you’re planning ahead for this year, I mean given the experience that you had last year, can you just talk about what -- you outlined priorities of a dividend and buyback or M&A, but given the fact that you are either had or close to the 30% cap on dividends, can we see a dividend increase in this year’s exam[ph]? And how do we balance potential for buyback and other strategic use of the capital?

Kelly King

So this was -- it was a challenging year for us with regards to the stakeout [ph] process. I will say we’ve made tremendous progress. During the course of the year we feel really, really good as we head into ’14. Nothing is guaranteed in this environment today.

But there were some investments that we needed to make that we’ve absolutely made and so the feedback we get and the feeling we have is very, very positive. I think with regard to overall capital distribution, I think we being the industry and the regulators are trying to find a new world.

Today I would say that everybody’s pretty conservative on both sides because of what we’ve kind of been through. If you’ve been through a period in your career where you release your dividends one time, you don’t ever want to go through that again -- I promise you it’s not any fun.

And so -- yet we kept our dividend at a higher rate than most everybody else. We’ve raised it several times since. So as you said we did have a relatively high dividend pay rate today, we have one of the highest dividend yields in the industry to date.

So we always want to use our capital for organic opportunities first, we liked our dividend, second. And then we placed our growth opportunities with M&A and buybacks as the fourth. With M&A may not being very attractive and active to date, dividends and buybacks seem to be most important.

You can expect us to be relatively conservative as we head into ’14 because again we have a high dividend rate. And I think everybody want to be just a bit more conservative. But I think it’s important to look past this short run period. I have a lot of confidence that over time the regulators are going to be reasonable with regard to distributions.

I think we’ll begin to move back to more normalized where there won’t be quite as much ironclad this 30% kind of rule which they continue to say by the way, there is a 30% [inaudible] of the 30%, so -- but I think you’ll see the move when the rules get settled on liquidity and capital. And we think that will normalize in terms of economy. I think you’ll see them move to a more normalized environment that will allow us to have more reasonable returns in terms of dividend and distributions in terms of growth and or buybacks that’ll be very pleasing to our shareholders.

Ryan Nash – Goldman Sachs

One more question before I open it up to the audience. I was reading, studying one of the accounting firms, and it said 25% of CEOs from banks one to 20 billion said they were likely to sell their bank to share I think it’s at 70% year-over-year.

When you think about M&A into 2014, do you think we’re finally going to break the logjam whether it’s the first half or the second half of the year and finally start to see a bit of a pickup in deal flow? We're still a couple of years away from this?

Kelly King

I saw the same study and I was interested in -- I’m very consistent -- we'd figure out that idea when I talk to the bank CEOs. I think there are a number of reasons for that. I think the CEOs have -- there are many cases that they have about as much fund as they want to have in this environment. It’s been a pretty tough five years.

But more importantly I think -- and they’re looking very rationally at the economics of the new world and they’re recognizing that it’s going to be very difficult to generate the kind of returns to the shareholders that makes sense. And so a combination with a good institution makes a lot of sense as they go forward. But this appetite for sellers, is increasing. Today, the buyer appetite when I talked to my colleagues is not very strong because people are concerned about can it get -- approved, you know, what kind of risk will I be taking on with the acquisition target. And so I think people are relative to make that kind of move today.

I think that begins to subside as we head into this year. I really think, you know, just to -- the state of slots [ph] with, you know what are your capital level, what is the liquidity? Like today for me, it’s hard to know how to price a deal when you don’t know what kind of capital or kind of liquidity you got to hold.

And I think that’s quickly moving to the side lines and so as the seller appetite increases, buyer appetite I think will increase. I think economics will be reasonable. And I expect to see larger break [ph], I really do. I think the long term mega trend is powerful. 20 years or so, we had 18,000 things to do, we have 7,000 basis, it's not as likely -- like a new idea that we’re going to have consolidation in the industry, we had a lull. It will continue, and it will be good for the industry, it will be good for the clients. And it will be really good for the shareholders.

Ryan Nash – Goldman Sachs

Maybe we’ll open up to the audience.

Question-and-Answer Session

Unidentified Audience Member

Good afternoon, Kelly. I just want to go back to the efficiency ratio target. And given the headwinds on revenue side, mortgage and accretable [ph] yield, and things like that, I’m assuming that a large majority of the target is being driven on the extent side. And then my second part of the question is, how much of this is related to taking cost out of the mortgage company and you know, improvement in this systems cost run rate, things that you’ve been talking about lately versus doing other things within the franchise, you know, cutting branches, people, et cetera.

Kelly King

Yes. So it will be -- the reduction in this -- threshold will be subsiding of the increased systems as you alluded to. It will be a right passing of the mortgage function. We had a little bit of unique situation in that most of the large banks from a number of years ago, took all of their mortgage lending out of the branches, being a kind of a community bank focused organization. We kept mortgage lending in the branches. And so we queue in, you really can’t take risk of doing that.

So over the last few months, we’ve been in the process of moving all mortgage [inaudible] into our mortgage company and we had to spend a lot of time and we were kind of overstaffed there to be honest, make sure we get it really right.

As we head into ’14, there’s a nice opportunity to rise out of that as we go forward. But you know, over the last 18 months, we put a number of initiatives into place across the company, virtually every part of the business where we’ve asked every business to rationalize their business and come up with cost efficiency plans, we have lots of programs going on simultaneously in the community bank and across the staff functions in terms of improving efficiency.

So some of the expenses that everybody has heard about into how likely expenses are going up, there’s just a lot of other expense areas that are going down. We’ve been keeping our staffing flat to down for a good bit of time now, that’s going to continue as we go into the next year.

So it’s a broad based effort. I believe the new world is a world where everybody has to be really creative that we really focus, we have to be really tough. The expense side of the business is not fun anymore, but we try to make it a little less onerous than some.

This notion of top-down cut expenses -- is easy for a CEO to do, but it’s very counterproductive, it creates fear, it creates anxiety, it takes away people’s sense of empowerment. What we try to do is start from the bottom-up. We say, look, the world has changed, here’s the broad context of what we’re up against, we got to do a good job for our shareholders, and we want to still do a good for the deposits [ph], and so we’re going to give you the challenge. You got to figure out a way to do your business, do it better with quality and less expensively, and we’d like for you to come back and figure out how to do it.

I overheard [ph] a little saying several years ago that works pretty well that we’re talking about expenses and I hear people talk about the challenges. I said, well you know, I know it’s really tough, but I really believe you’re smart and figure it out. But that leaves them with my challenge because not many have come back and said, I’m smart and I figured it out, but they’re working on it pretty hard and coming up with great ideas and I’m pretty confident.

Unidentified Analyst

Just going back to your comment on deposit costs, maybe rising in the back of the LCR, do you think that continues in a rising rate environment? And then secondly, are there any additional costs you have to incur to comply and just build up the systems?

Kelly King

No I think in terms of systems cost with regard to compliance on the deposit side, that’s pretty steady state, nothing really onerous -- such change there materially. So I think that there are a couple of factors with regard to deposit cost as we go forward. You're going to see some institutions and clearly BB&T, several, put some more emphasis in terms of mix of deposits, because with the LCR requirements today, really core deposits is really a quarter of the cost, it's kind of technical as you know, but you just don't want some volatile deposits in today -- so you might have a little bit more basic $10,000 fee base [ph] just so you can keep that core deposit mix in there.

Well I don't think it's a material factor, but it's a factor. The biggest factor is the beta that you apply to your cost of funds as the market moves up. So certainly if rates go up, cost of deposits will go up.

But my experience has been, and I think particularly in this case, you'll see a quote-unquote kind of drag our feet as rates go up, you'll see your loans rate go up faster than deposit rates. And it kind of works the other way, it's going down.

So you see us kind of dragging our feet. So don't expect the beta rates to be as high as you might expect as we go up the curve. That allow for us to have some increasing spread as we go forward. And so I think it'll be a net positive.

Ryan Nash – Goldman Sachs

Maybe we have time for one more question. If not, we'll -- we could end with that. All right, great. Well, please join me in thanking Kelly.

Kelly King

Thank you all, very much. Thanks very much.

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