Truist Financial Corp (TFC) 2010 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation fourth-quarter earnings 2010 conference call on Friday, January 21, 2011.

At this time all participants are in a listen-only mode.

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

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms.

Tamera Gjesdal, Senior Vice President of Investor Relations for BB&T Corporation.

Thank you.

You may begin, Tamera.

Thank you, Yvonne, and good morning, everyone.

Thanks to all of our listeners for joining us today.

This call is being broadcast on the Internet from our website at bbt.com.

We have with us today Kelly King, our Chairman and Chief Executive Officer, Daryl Bible, our Chief Financial Officer, and Clarke Starnes, our Chief Risk Officer, who will review the results for the fourth quarter of 2010 as well as provide a look ahead.

We will again be referencing a slide presentation during our remarks today.

A copy of the presentation as well as our earnings release and supplemental financial information is available on the BB&T website.

After Kelly, Daryl and Clarke have made their remarks, we'll pause to have Yvonne come back on the line and explain how those who have dialed into the call may participate in the Q&A session.

Before we begin let me make a few preliminary comments.

BB&T does not make prediction or forecasts.

However, there may be statements made during the course of this call that express Management's intentions, beliefs or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different is contained on slide one of our presentation and in the Company's SEC filings.

Our presentation includes certain non-GAAP disclosures, please refer to page two and the appendix of our presentation for the appropriate reconciliations to GAAP.

And now it is my pleasure to introduce our Chairman and Chief Executive Officer, Mr.

Kelly King.

Thank you, Tamera, and good morning, everybody.

Thanks for joining our call.

We'll begin on slide three and just an overall comment, I feel really good about the quarter.

We sort of had record revenues.

We had across-the-board improvement in credit trends which we'll discuss and really good progress in diversifying our balance sheet.

I would also say that since the last quarter, I feel materially better about the overall economy.

I base that on three factors.

One, the election is being perceived very well and is instilling a level of confidence that we haven't seen in a couple of years.

QE2, while being questioned by some, is certainly stimulative in the short term and the tax deal that was reached at the end of the year brings a level of certainty to business people.

So based on what we expected and based on recent conversations with business leaders, I'm measurably more optimistic as we look forward into the year from an economic point of view.

Looking at our highlights, we had record annual revenues $9.4 billion, increase of 5.8% compared to last year.

Our pre-tax, pre-provision earnings were $3.6 billion.

Importantly, our pre-tax pre-provision earnings were up 18.1% compounded over the last 15 years, which we think is maybe the most important way to look at a company from a long-term point of view.

We did have strong improvement in earnings, as you can see our fourth-quarter net income available to common shareholders was $208 million, up 12.4% compared to the fourth quarter of 2009.

Fourth-quarter EPS totaled $0.30 which was up 11.1%.

2010 net income per year available to common was $816 million, up 11.9%.

So good solid improvement relative to last year and we feel good about that.

We also feel good about improving loan growth.

We think this is really important as we go forward.

So we had annualized loans growing on an annualized linked quarter basis, just to give you a few metrics, 28.7% growth in mortgage, 6.9% growth in C&I, which as you know has been a target for us, 6.3% growth in sales finance and 7.4% in revolving credit.

So really good numbers especially relative to the economy as it existed in the fourth quarter.

We also made really good progress in our deposit area.

Our non-interest bearing deposits were up 18.3% on an annualized linked quarter basis.

Importantly our total transaction account to positives were up 19%.

These are really, really strong numbers and demonstrates that our community banking model is really working.

Very pleased to report that our credit metrics improved across the board.

Clarke's going to give you some real detail about that, but I would like to let you know that we've sold in total about $600 million in non-performing assets, $343 million in problem loans and $249 million in OREO, so really good progress there.

And even though the holidays it's difficult to execute on contracts, we already have $125 million under contract for the first quarter, so that's very encouraging.

We had across-the-board improvement in various credit metrics, including declines in OREO, NPLs, TDRs, delinquent loans, NPL in-flows and watch list loans, so really, really strong across-the-board improvement in our credit metrics.

If you'll slip with me to slide four.

We always try to point out to you some unusual items.

We did have $99 million in security gains in the quarter which was about a positive $0.09 per share.

We had a small amount of merger-related charges, only about $4 million.

But we did have in the area of losses and write-downs on loans sold, or held for sale in connection with our NPA disposition strategy, we had $62 million negative hit there which was about $0.06 per share.

If you'll move with me to slide five, I'd like to give you a little more color in terms of some key drivers of profit improvement from a long-term point of view.

I've mentioned to you the last couple of quarters credit matters and of course it matters a lot.

The real key, we think, looking forward for our Company and the industry is revenue growth and the investments that we have made in revenue production over the last several years is really beginning to pay off.

I will encourage you to dig into the numbers because some of the effect of that is being masked by the securities deleveraging which we did, of course Daryl will explain more detail on that, but it certainly leaves us in a much less risky position as we look forward to expected rising rates.

But underlying that is very strong revenue production improvement and we feel really good about that.

And it's primarily being driven by a community bank model.

It really works.

It frankly works better in tough times than in even good times because what we've been able to produce is the best value proposition in the marketplace, that has actually improved relative to our competitors during this cycle and is generating really good results.

To give you some details around that, our C&I versus CRE mix continues to improve.

We had a really good fourth quarter in commercial lending, producing a record $10.3 billion in loans.

December was the best closing month for commercial loans in our history.

2010 new production mix, I'm really personally happy about this, was 84% C&I, 16% CRE.

We told you two years ago we were going to start really focusing on a five-year plan on diversifying our assets and liabilities.

This is proof we're executing on what we said.

New commercial commitments were up a whopping 89% on an annualized linked quarter basis, so really good loan production numbers.

And the deposit area, equally as strong.

Average DEA increased 18.3% annualized linked quarter, very glad to see net new transaction accounts up 95% compared to last year.

And small business area is really beginning to move for us, 5% growth in total households compared to last year.

We've been placing a lot of attention on bundling where we try to sell three or more services to a client when they open a checking account, and bundling sales efforts increased 25% compared to last year.

Importantly, BB&T is trying to be a leader in terms of helping our economy grow in terms of particularly focusing in the small business area, not only in the deposit areas I've described in terms of accounts, but also in the lending area.

I'm proud to say that SBA recognized us as the most active lender in North Carolina and Virginia, our two largest core markets, so really good performance there and really supportive of our communities.

Mortgage lending had another strong quarter with fourth-quarter originations of $8.4 billion.

You have seen that we have been, for the last couple of quarters holding more of our production on our balance sheet.

Frankly, it's very good high-quality good yielding assets in a time when other assets are hard to find, and so that's been a conscious strategy that may subside some as we go through this year as other commercial C&I and small business production picks up.

Corporate banking is an area of major emphasis for us, has been for the last year and a half, it's really gaining momentum now.

We had a 25% growth in large corporate banking loans compared to fourth quarter of 2009.

Had some really nice movement in our niche lending businesses, I'll give you a little more detail on that in just a minute on the next slide.

Revenue per FTE, which is one of the main measures we use to look at our productivity, increased 9.3% compared to the year of 2009, so very strong performance there.

We placed a lot of emphasis on our Wealth business, Trust and Investment advisory.

So our Trust and Investment advisory revenues increased 10.5%, our Wealth production was up 29% compared to last year's fourth quarter, so very strong numbers there.

Investment banking and brokerage is doing really well.

We had record revenues in those areas, $352 million.

And we had record levels of equity and debt capital markets deals.

We are really beginning to be a significant player into the equity and debt capital markets in terms of deals that we lead and certainly a major participate in syndications.

If you turn with me to slide six, a little more detail in terms of our loan growth.

Our C&I did increase 6.9%.

You will notice that other CRE is down 12.8%, that has obviously been a conscious strategy.

Sales financed automobiles is up 6.3%, revolving credit up 7.4%, mortgage is up 28.7%, as I said we're holding more mortgages on our balance sheet.

Specialized lending is down 5.4% but that is really one big area in that in our insurance premiums financing business is pretty cyclical and drags that down some.

But if you look under that, our non-prime auto business is up 9.2%, equipment finance is up 18.2%, small ticket finance is up 9.4%, so some really strong numbers underlying that total number.

Now, direct retail is still soft.

It's down 2.8%.

The decrease is slowing, we think, in the next quarter or so that will hit an inflection point, we'll begin to see growth in direct retail.

But the consumers, while increasing in confidence, is still not yet out substantially borrowing and that's something we all have to kind of watch for.

You'll see that our ADC continues very aggressive reductions by design, down $746 million or 67%.

Our covered and other acquired loans are down, as you would expect, 27%.

So if you look at total loans, it's a small 0.1% increase.

But a better way to look at that is that if you include held for investment ADC run-off and covered, but if you exclude the assets that we transfer to held for sale, which we think is a fair way to look at it, what you really see is our underlying growth is about 4% which is a good solid number and we feel really good about that.

So overall, I would say very good loan growth, especially given our progress in diversification and we expect those trends to continue.

If you look at slide seven, really good progress in our deposit mix, kind of the other part of our two-pronged diversification strategy.

Non-interest bearing deposits up 18.3%, interest checking up 22.8%, other client deposits up 16.7%.

These are linked quarter annualized numbers.

You will see that client CDs are down a significant 57.2%.

We told you in the last quarter that we had been consciously allowing some of the more expensive single service household CDs to run-off, a meaningful amount of that related to Colonial and that has helped us to manage our margin.

And frankly, we just didn't need those deposits because of the relatively lower loan growth as we experienced 2010.

So we feel good about that strategy.

We have recently made an adjustment in that strategy because as we look forward we see prospects of increased loan growth and therefore, we've adjusted our CD strategy.

So you'll begin to see those stabilize to grow slowly in the CD area and that will correspond with increased loan demand.

I would point out more importantly our transaction account deposits are up 19% on an annualized linked quarter basis.

We increased net new transaction accounts by over 110,000 in 2010, a 95% increase.

This is a result of the whole community bank really becoming more effective and frankly a substantial improvement in our Colonial acquisition.

Non-interest bearing deposits increased to 21% of client deposits compared to 18%.

This has been a long-standing challenge for us in terms of our margin but really, really good progress in 2010 with regard to that.

And importantly, our interest bearing deposit costs decreased to 0.9% in the fourth quarter compared to 1.23% in the fourth quarter of 2009.

So you can see what's happening is this has allowed us to adjust our mix, get more important long-term transaction relationship accounts, manage our CD costs, and jettison some CDs that didn't matter in terms of total relationships, and as a result, manage our costs down, which has helped our profitability.

So with that let me turn it to Clarke now for some important and I think encouraging details in the credit area.

Clarke?

Thank you, Kelly, and good morning, everyone.

I'm very pleased to report positive credit performance for the quarter.

As Kelly mentioned earlier, we experienced a broad-based improvement in credit quality that's reflected by linked quarter improvements in essentially all of the key credit performance measurements from early stage indicators all the way through to non-performing asset levels and losses.

This improvement is very consistent with our efforts to more aggressively resolve problem credits and move through the last stage of this credit cycle.

So follow with me on page eight, you can see these results which include lower levels of watch list credits, total delinquencies, TDRs, NPL in-flows, NPL OREO, total NPAs and losses.

Given these strong results and a better economic outlook, we feel more confident about our future credit direction as we begin 2011.

What I'll try to do over the next several slides is to share some color and key drivers for these improving results.

On slide nine, it provides more detail regarding the early stage indicators.

As we discussed last quarter, our internal watch list problems continue to decline reflected by a 7.2% decrease in the watch list this quarter.

We also saw a notable decline in early stage delinquencies, those 30 to 89 and 90 buckets of 11.5%.

In fact, included in this level is the lowest 30 to 89 level since the first quarter of 2008.

Driving this performance was a significant reduction in our commercial delinquencies at 39.6%.

It's also interesting to note that our overall retail delinquencies were basically flat for the quarter when we would typically see a fourth quarter seasonal increase.

Our covered loan portfolio from the Colonial acquisition continues to outperform our initial expectations with total delinquencies from a client perspective down 58% linked quarter and this is the second consecutive quarterly reduction.

I would note that our problem asset reporting this quarter excludes government insured mortgage balances in the tables, which is more consistent with peer reporting, but we have included these balances in the footnotes in our release tables.

I would note that for you.

As we've discussed throughout this credit cycle, our primary credit issue has been the stress in the single family home builder ADC portfolio, and while it only represents about 7% of total commercial loans, it still accounted for approximately 39% of commercial NPLs and 33% of commercial losses this quarter.

So we've been working very diligently to work through the problems in these portfolios as quickly as possible.

As Kelly said we made excellent progress in the quarter, significantly reducing the balances and we've actually contracted the balances over $2 billion throughout 2010.

So as a result, we feel very good about the progress we're making to right size this lending segment, which we believe is probably more like $2 billion to $3 billion for a right size over the longer term.

And so the intense focus on getting to the right level in this portfolio should help us substantially reduce non-performing assets and losses as we move forward.

If you'll turn to slide 10, we're very pleased to report a second consecutive quarterly decrease in both performing TDRs and non-accrual in-flows.

Total performing TDRs decreased approximately 10% this quarter, including a 25% decrease in commercial TDRs.

We still believe these modification efforts, however, positively impact our portfolio performance and that's evidenced by the fact that 75% of all our TDRs are in a performing status and 87% of the performing TDRs are current.

It's also notable that only 25% of our commercial-- performing commercial TDRs are related to the high stress single family ADC loans.

And-- so we'll continue to use TDRs judiciously to help our clients that are experiencing financial difficulties but we would still expect to see steadily declining levels and overall TDRs as our portfolio quality continues to improve.

In addition to creating less TDRs each quarter, our non-accrual in-flows were also lower, they were down 10.2% for the quarter and notably commercial in-flows down 18.1%.

But since commercial in-flows make up the majority of total in-flows, the continued improvement in this area is another indicator of improved credit quality.

The current level of commercial in-flows primarily reflects our aggressive efforts to resolve existing watch list accounts.

So as our watch list continues to decline we would certainly expect future level of commercial in-flows to reduce as well.

On slide 11, you can see that total non-performing assets basically peaked in Q1 and have steadily decreased for three consecutive quarters.

Total NPAs were down 4.2% for the fourth quarter on a linked basis with NPLs down 4.6% and OREO down 3.5%.

One of the drivers of this improvement was strong execution in our problem asset disposition strategies.

We sold, as Kelly said, approximately $600 million of problem assets in the quarter at average sales prices that were generally consistent with our targets, OREO sales totaled $249 million and note sales of approximately $343 million.

So the total amount of commercial notes in the held for sale portfolio was reduced to $521 million at quarter end.

One of the things we're very careful about, though, is the re-evaluation in this portfolio on a quarterly basis, we've marked it to about a 47% mark which is consistent with our sales results to date.

I would note that sales activity remains strong.

We've already got $125 million contracts to date and we've got good activity.

We're very committed to our four-pronged sales strategy we described last quarter.

We had a good mix of sales in all those channels this quarter and we're very confident we'll successfully liquidate the remainder of the portfolio over the next quarter or two.

On slide 12, you'll note that our GAAP charge-offs for the quarter were 2.15%, which is considerably lower than the 3.54% in the third quarter.

This number does include about $26 million of marks related to several loans that were moved from held for investment to held for sale and sold in the quarter.

Excluding the losses attributed to those loans, our core losses of 2.07% were consistent with the guidance we provided last quarter and very similar to the level of core losses we've had over the last several quarters.

So due to the improved portfolio performance, our provision expense for the non-covered portfolio essentially covered charge-offs, although we did not elect to release reserves for the quarter.

The total allowance continues to provide strong coverage of NPLs at 126% on a GAAP basis and 119% once you exclude the covered loans.

You will note that the total provision expense for the quarter included $100 million provision related to the 033 review of the cash flows related to the covered loans from the Colonial acquisition.

The accounting treatment for these loans requires immediate recognition of any impairment of individual loan segments through the provision expense, but you should remember that this provision is 80% offset by the FDIC loss share receivable fee income.

Daryl will discuss the 033 review in further detail in just a moment.

So, continued improvement in our credit quality trends against a more positive economic outlook should allow for us to reduce provision expense as we go into 2011.

So in summary, the positive results over the last several quarters and the execution of our asset disposition strategy, together with clear improvement in the various credit quality indicators, gives us more confidence that our overall credit problems have peaked and we should expect improved results as we go through 2011.

Certainly achieving these results will require continued efforts over the next several quarters, but I'm particularly proud that we've been able to work through the majority of our problems consistent with the objectives we've stated all along of assisting as many clients as we can during a very difficult credit cycle while preserving shareholder value.

So with that, I'm going to turn it over to Daryl.

Thank you, Clarke, and good morning, everyone.

I would like to continue on slide 13.

I'm going to discuss net interest margin, investment activity, fee income, non-interest expense and capital.

After that I will discuss our outlook for some key drivers for 2011.

Net interest margin came in a bit better than what I expected.

For the fourth quarter it was 4.04%, down five basis points from the third quarter.

We said that margin would be down around 10 basis points for the fourth quarter, however, we continue to see better overall improvements on the Colonial portfolio.

Adjusting for the FDIC loss share asset as an earning asset which is similar to our peers, our adjusted margin dropped eight basis points to 3.75% for the fourth quarter.

This decrease is due to the de-risking strategy.

The margin benefited from positive asset and funding mix changes, lower cost funding and improved credit spreads.

When you adjust non-performing assets and interest reversals to a more normalized level, our net interest margin would be about 11 basis points higher.

Net interest income on covered assets increased $42 million compared to the prior quarter.

Based on results for our re-assessment of the fourth quarter, included a loan loss provision of $100 million related to the acquired loans from Colonial.

Remember, under the terms of the loss share agreement, this additional provision is offset 80%, resulting in an $80 million increase in non-interest income.

So while there are a lot of moving parts from Colonial this quarter, the net impact is a positive $12 million compared to last quarter.

Turning to slide 14.

Before rates went up in the fourth quarter, we completed our de-risking strategy of a securities portfolio.

We sold $6.5 billion of securities with a yield of 3.68%.

Later in the quarter we purchased $7.6 billion of short average life and floating rate securities yielding an average of 1.35%.

This generated net gains of $99 million for the quarter.

We added these high-quality securities to increase our asset sensitivity and reduce OCI risk.

These floating rate securities comprised 22% of the total portfolio at year end.

We also sold $400 million of non-agency mortgage-backed securities to reduce potential future losses for impairment.

For the past three quarters, we have sold a large amount of pass-through securities and generated about $550 million in net gains.

Most of these gains would no longer be present as increases in interest rates have lowered the value of these longer duration fixed-rate securities.

We lengthened the CD portfolio by being a little bit more aggressive on longer term CD pricing.

This is in response to the increase in fixed-rate loan demand such as residential mortgage and automobile loans.

These efforts will have a positive impact on the growing total client deposit at a slightly faster pace.

Finally, we unwound about $1 billion of received fixed swaps for the quarter.

All of these actions have made us more asset sensitive, positioning us to benefit in a rising rate environment.

Turning to slide 15, our fee income ratio fell slightly to 41.8% from 42.3% in the third quarter.

The decrease was mostly due to decreases in insurance income, deposit service charges and mortgage banking income.

As expected, service charges on deposits decreased due to regulatory changes.

However, we are pleased that we are performing better than our original estimates.

We continue to adjust pricing and products in 2011.

The goal is to minimize the loss of revenue while remaining responsive to our clients.

Mortgage banking income for the fourth quarter was $138 million compared to $184 million in the third quarter.

This decrease was mostly due to narrow mortgage spreads on loans sold and a decrease in valuation of mortgage servicing rates and related hedging.

Investment banking and brokerage fees and commissions continued their outstanding revenue growth in 2010, setting us up for positive momentum in 2011.

Check card and BankCard fees both remained strong due to higher activity and increased account penetration.

Finally, the FDIC loss share income nets to zero this quarter.

The $80 million provision we discussed was offset by negative accretion due to higher interest income on covered assets.

On slide 16, you will see that our efficiency ratio increased slightly to 55.3% from 54.1% last quarter.

Personnel expense increased $37 million, or 22.9% annualized linked quarter, mostly due to higher production-related incentive expenses in the capital markets and mortgage groups and post employment benefits.

Foreclosed property expense decreased $5 million, or 11.9%, largely due to lower losses and write-downs on foreclosed properties.

Additionally, our FTEs increased by a total of 23 on a linked quarter basis and decreased 1,040 on a common quarter basis, mainly related to Colonial.

Looking out into 2011, we plan to add FTEs in revenue producing areas.

We continue to expect a reduction in non-interest expenses as our asset quality issues abate.

We will continue to focus on driving positive operating leverage which will move our efficiency ratio back towards the low 50% range in two to three years.

The fourth quarter effective tax rate was lower, producing an annual rate of 12%, consistent with our level of pre-tax earnings, tax exempt income and tax credits.

On slide 17, you will see our capital ratios remain one of the strongest in the industry.

Tangible common at 7.1%, Tier 1 common improving to 9.1%, Tier 1 capital at 11.8%, leveraged capital at 9.1% and total capital of 15.5%.

We believe that BB&T already meets the capital levels required by Basel III, based upon our preliminary assessment and our current projection of Tier 1 common under Basel III at 7.5%.

Turning to slide 18, we want to give you some key drivers and performance for 2011.

As a reminder, this includes forward-looking commentary which Tamera mentioned at the beginning of this call.

For loans, we continue to experience faster growth in C&I and consumer loans and declines in commercial real estate.

This will result in an overall growth rate of 3% to 5% in total loans held for investments.

For deposits we expect them to increase 1% to 3% with much higher growth in lower cost deposits.

Again this is consistent with our goals of improving the mix of deposits.

Based upon the growth rates, spreads remaining at current levels and a relatively stable yield curve, we expect net interest margin to be in the high 390s for the full year plus or minus five basis points.

Non-interest income will be affected by overdraft charges and debit interchange fees.

And higher interest rates will negatively impact residential mortgage production.

In light of these factors we see non-interest income being relatively flat excluding security gains.

For non-interest expenses we should see expenses start to decrease as asset quality improves, resulting in a slight decline in expenses.

As earnings improve the corporate tax rate will increase to an annual rate of around 20%.

And finally, we see net charge-offs trending down through 2011 to 1.5% or a bit better later on.

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

Thank you, Daryl.

So in summary, we feel like we are really well positioned for the future.

Our underlying performance of our businesses is strong, as you've seen.

Client service metrics are at historic highs, C&I loan growth accelerated during the quarter, likewise, substantial improvement in the deposit mix area and accelerated DDA growth.

And we're making-- maintaining a positive revenue growth in a very challenging environment, significant investments in revenue businesses and as we have mentioned we will be adding several hundred revenue producers during the year.

And we expect meaningful declines in the credit cost area in the coming months, continued steady declines in in-flows with more significant decreases we expect in the second half.

In NPAs, we expect continued declines as we complete the disposition strategies.

TDRs, as Clarke described, we expect to continue to decline.

So if you look at kind of the macro strengths that we have looking forward as we've talked to you about in the past we think this industry wide re-intermediation is going to play well for us because of our capital strength and our lending expertise.

Significant investments in revenue growth opportunities will continue to pay a dividend for our shareholders.

We think there will be merger opportunities as the industry continues to consolidate.

Our community banking model we believe and can support produces the best value proposition in the market.

We are fortunate that we are in some of the best markets in the country, maybe in the world, and we have an outstanding team, really a deep culture that allows us to execute on strategies that we think are important.

So with that, we'd be glad to take your questions.

Thanks, Kelly.

Before we move to the question-and-answer segment of the call, I will ask that we use the same process as we have in the past to give fair access to all participants.

You will be limited to one primary question and one follow up.

If you want further questions please reenter the queue.

Yvonne, will you please come back on the line and explain how to submit their questions?

Thank you.

(Operator Instructions)

And we'll take our first question from Adam Barkstrom with Sterne, Agee.

Hi guys, good morning.

Good morning, Adam.

Hello, Daryl, wondering if you could-- I've got a list of questions here, bear with me one second.

Actually, Kelly and Clarke, maybe you guys could give a little bit more color.

Just curious, the performing TDRs that you highlighted were down this quarter.

Just could you give us more color why, I mean was that-- were they charge-offs, did they return to performing?

And then what types of loans were those mostly?

Thanks, Adam, this is Clarke.

I'll answer that.

It was a mixture of what you said.

Well, certainly some were liquidated, others cured and then frankly, we're not doing as many new TDRs and modifications at this stage of the cycle, but the majority of those are CRE, other CRE and C&I, and we're doing less ADC as I said.

Okay.

And then, as a follow up, I guess it's one of the big questions on everybody's mind, Kelly, is the dividend, and curious as to your commentary on that?

Certainly it was a focal point on the Wells Fargo call and certainly the JPMorgan call.

Curious what you're saying now about dividends?

Yes, so as you know, Adam, we are all in the process of the capital stressing process with the Fed.

All of the data had to be in by January 7.

We made, we think, a really good submission.

We feel really confident about our capital levels and our projected capital levels even through difficult stress scenarios, and so we're very confident that we will be qualified to have a dividend increase.

Obviously, they get to decide and so none of us can say with any certainty what will happen.

We'll know I guess in the March time frame.

But we would certainly hope to have a small increase but Adam, as I pointed out you should not look for BB&T to have a huge increase like the others because remember, they are mostly trying to get their dividend to where we've been for the last two years.

So we have the fourth highest dividend of the S&P banks, 2.5% or so yield.

And so while we want to have a small increase to show our shareholders that we are committed to returning capital to them, we just don't want people to expect it to be a huge increase because it wouldn't make sense.

Because we need to, of course, return capital to our shareholders but importantly, we need to maintain capital for important organic and acquisition opportunities as we go forward.

Okay, great.

Thank you.

Thank you, sure.

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

Thanks.

Good morning, everyone.

Good morning, Craig.

Kelly, with excess capital still growing here, can you update us on your thoughts for M&A?

And also, if bank acquisitions are still attractive here after several new data points in the quarter?

Yes, well, clearly we will be creating meaningful capital as we go forward.

And I think a lot of people are thinking in terms of substantial dividend increases and a lot of people are talking about major capital repurchase programs.

We certainly are thinking in terms of dividend increases.

We're not thinking so much about repurchase programs because we do think that we will have opportunities to lever our capital in terms of acquisition opportunities.

So we remain I would say meaningfully aggressive with regard to looking at merger opportunities.

But I think the key is going to be how things settle out with regard to the reasonableness of mergers.

We've said in the past and I remain committed to a disciplined approach.

Any mergers that we consider have to meet three criteria.

And that is being sure that it is strategically compelling, that it is an acquisition where we can ring the asset quality so that we don't take on any material level of asset risk, and that it's meaningfully accretive to our shareholders.

Some of the recent data points that you alluded to would suggest that some buyers are going to be heading back to the '90s or the last decade in terms of pricing.

I think that's more of an aberration than a sustained trend.

I think you're going to find most of us being pretty disciplined in terms of pricing deals.

And frankly, the acquisition targets need to be very careful in terms of partners that they consider because people that are willing to go out and pay exorbitant prices are not likely to be able to generate the long-term returns they might think they're going to offer because the market, I don't believe, is going to tolerate overpaying for deals today or going forward.

Thanks, Kelly.

And just a quick one for Clarke on credit quality.

With commercial loans held for sale ending around $520 million and also $600 million of problem loan sales in the quarter, how should we expect these levels to both trend in the first half given the charge-off guidance?

We would expect as I said that the held for sale portfolio would be liquidated over the next quarter or two.

Given the velocity we have, we think we'll be out hopefully by mid-year.

Got it.

Thank you guys.

Sure thing.

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

Thanks, good morning.

Good morning.

A couple ones on some of the outlook.

You had mentioned that you do expect charge-offs to trend downward positive with direction in 2011.

But Clarke, what can we expect as far as reserve release this year, outside of the Colonial $100 million it looks like you matched this quarter?

So given your comments on delinquencies, how are you thinking about the reserve and reserve levels?

Certainly, a very good question.

We've been thinking a lot about it.

As we've said before, we intend to be pretty thoughtful and considerate about the appropriate level of our reserves and we want to avoid, frankly, the risk of a premature release.

However, given the continued improvement in our credit trends and as I said a more positive economic outlook, we would expect lower provisioning as we move forward and that's likely would include some releases.

Okay.

And then on the fee income side, ex securities gains you're talking about holding it kind of flat even with the headwinds that you mentioned so I'm just wondering, can you talk to the areas that you do expect to grow to have enough juice to offset those expected declines?

Sure, Ken, this is Daryl.

What I would tell you I mean is we see Insurance, our Investment Banking growing, our other deposits, Trust, BankCard, all those line items growing next year.

And with a magnitude enough to offset the run rating of all those other factors?

Right now, I think the biggest wild card is the Durbin amendment and the debit interchange fees, and Kelly might want to comment on that?

Yes, Ken I just-- before I mention that, just keep in mind, we have made substantial investments in corporate banking and capital markets and as those corporate banking relationships pick up, that generates huge related capital markets businesses.

So when you look at our wealth strategy, capital market strategy, investments and insurance, et cetera, all of those we think are going to be really performing well in 2011.

On this Durbin thing, I think it's premature to start trying to project what earnings impact that may have.

I am reasonably optimistic that before July, when it is supposed to kick in, that we will see some change coming out of Congress with regard to this.

I've talked to a lot of people.

There is a lot of effort going on to try to explain to Congress that this whole Durbin amendment is an absurd intervention into the free market system.

First of all for Congress to step in and specifically implement price controls in one area is just silly on its face.

But more importantly, we can demonstrate that what they are-- what the effect of this will be bad for consumers, bad for the institutions, bad for the economy.

And so many Congressmen are beginning to be sensitive to that, including Barney Frank, who has recently said on several occasions that he is quite willing to work with the Republicans to revisit this issue.

So we're being reserved right now in terms of what impact that may have.

We think it'll be muted.

But in the event it is not, then we would expect to make appropriate fee and pricing changes in other areas to compensate for it over a reasonable period of time.

Interesting color, Kelly.

One more question for Daryl.

Daryl, can you just split out for us when you think about the margin coming down to the 390s next year, just what you're expecting from-- to-- either comparison of the dollars of Colonial year-over-year and then versus what the core is doing?

Because you illustrated on the slide but can you just help us understand the moving parts a little bit better?

Sure.

What I would tell you is we think margin for next year is going to be relatively stable, so it shouldn't really trend higher or lower, but be relatively flat.

And core should be pretty much reflective of that.

Colonial has about $2.4 billion of accretable yield yet to come through as the assets amortize down and that's going to be decreasing as those assets come down, but it's still going to be a fair portion of what you're seeing come through right now.

So it's still definitely going to contribute to margin overall and keep our margin close to 4%, but I think overall core margin should be relatively stable, especially as we're growing our assets and getting a positive mix change by the yields that we're getting there and attracting low cost deposits.

Both of those drivers are really helping maintain our margin on a core basis.

Okay, so decline is mostly lower Colonial relative to the fourth quarter?

There was a little bit of overhang from the de-risking strategy win investments in the fourth quarter so you have a full quarter impact in the first quarter.

Okay.

Thanks very much.

You're welcome.

And we'll take our next question from Gerard Cassidy with RBC Capital Markets.

Thank you, good morning, guys.

Good morning.

Kelly, if I look at BB&T's long-term profitability on an ROA basis from 1997 to '06, which we kind of view as peak profitability for the banking industry, it looked like you guys had about 152 basis points on assets as your profitability.

When we get out of this mess and we're back to normalized times, whenever that is, 2013 possibly, what do you see your ROA coming in at considering how the business has changed?

That's a really good question.

I think that when it all settles down, ROAs will be in the 140 to 150 level, not materially different than in the past.

Now remember, ROA depends meaningfully on what levels of equity we end up with because when you have higher equity, you will definitionally have higher ROAs.

So I'm assuming in this that we will have ROEs in the 16% to 18% kind of level, because we think equity is going to be relatively inflated prior to those previous periods.

And so I think what you're seeing is it's a movement on the equity side upward.

It's putting some pressure on ROA, but the increase in equity is holding up ROA, the headwinds are pushing down on ROA, and when you get through with it all, it won't be a material difference in ROA as we go forward.

Great.

And Daryl, you'd showed us that you shortened up the maturity of your Investment portfolio.

If, for some reason, the Fed starts to raise rates sooner than we all think and we're in July and August and they start raising the Fed funds rate and possibly Fed funds is 1.5 %, 2% by the end of the year in the long curve and we still have the upwardly sloping curve, what does that do for your margin and then also the impact on the Investment portfolio?

From an Investment portfolio perspective we will probably have about a third of our securities that will be floating rate.

So as that goes up, if it goes up 100 basis points, if a third of the portfolio is increasing and then you're still replacing, I would probably say 30 to 40 basis point positive impact on the portfolio for given 100 basis point move.

So as far as how much impact you have on margin, you can see on our tables that we basically benefit with a rising a rate forecast, so I would say margins would continue to improve if rates really go back up.

The first 50 won't be as great because we have a lot of commercial loans that have artificial floors on them, such that you won't get a repricing there, but after the first 50 basis point move our net interest income will improve and probably in the 5 to 10 basis point range.

Thank you guys.

Thank you.

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

Good morning, everyone.

I wanted to follow up on one of the earlier questions in terms of the fee income.

Daryl, can you give us a little more color on how the-- how we should think about the service charge on deposit trends which you noted were negative in the quarter and the very strong numbers that you put up in check card fees and BankCard fees?

And how you're thinking about repricing a lot of your retail and small business products to reflect the new regulatory environment?

Sure, so Matt, the service charges, we expect to be relatively flat year over year for us.

And then as far as the BankCard and check card fees we're planning to have high single-digit, low double-digit growth in those line items.

Matt, I might add that what we are doing and, I think, what most are doing, is frankly restructuring our deposit products.

We went through the last decade or so of giving everything away and free checking et cetera, et cetera.

We are moving already back to, really back to where you were more in the '70s and '80s, where you'll have fees for accounts unless people keep substantial balances or other revenue producing business with us.

So the days of free checking are gone and the days of pricing more standard fees for accounts will be what you will see going forward.

And then they will be adjusted over time depending on the overall revenue levels of growth and also our cost structures.

So it'll take a little time for that to adjust out, but, excuse me, but in the bottom line, I don't think when all settles out the whole fee business will be materially different.

It'll just -- materially different in terms of levels, it will just be different in terms of structure.

Okay, that's helpful, thank you.

And then a follow up for Clarke.

Clarke, you mentioned the ADC portfolio you thought should be at a normalized level going forward of about $2 billion to $3 billion.

You had $4 billion at the end of the year in that portfolio with about $2 billion in run-off in 2010, so do we -- should we expect the ADC portfolio will be down to sort of where you want it on a long-term basis by the end of 2011?

Great question and I think that's the right way to view it.

We would view that to get to the initial right size is probably another three quarters or so.

So I mentioned the $2 billion to $3 billion on the longer term basis is probably the right size, but with muted starts right now, we would expect to be more on the lower end of that.

And then as the market improves and there's more construction starts then we would obviously have a normalized level at the higher end of that range.

So in our view, we've probably got another three quarters or so to really get it to where we need to be so we feel confident by the end of the year we'll probably be close.

Okay, great.

Thanks very much.

We'll take our next question from Brian Foran with Nomura.

Hi, good morning.

Good morning.

Morning.

Morning.

I have a question on the covered loan interest income and I apologize but I'm going to rattle off a couple of numbers just to make sure because I don't understand it every quarter.

Page 11, we've got $271 million of interest income on covered loans and another $50 million from covered securities, both with about a 60.5% yield.

So I guess the first question is as I try to translate that, it's big, it's about 15% of interest income, but can you walk us through how does that actually translate to pre-provision earnings?

I'm assuming the funding costs that we should put against that is higher, e.g.

the long-term debt book, I'm assuming part of that is also from Colonial.

I don't know if there's non-interest expenses and workouts that are big enough that you can call out, I'm assuming that portfolio has a high servicing cost.

And then when you talk about the FDIC offset and the 3.75% adjusted core margin, can you just clarify, does that strip out any of this or is that just a provision offset when you talk about the FDIC offset and fees?

Okay, Brian, a lot of questions here so what I will tell you is, is that the fee income was netted to zero.

So we had the $100 million in provision that Clarke talked about, 80% of that was offset in the FDIC receivable.

But then we had the accretion from the loans and the securities, and those basically cancelled out, which basically had a net zero impact on the FDIC receivable this quarter.

You are correct in that all we're really showing on the table is the purchase accounting for the assets.

We do not show what the funding cost is of these assets.

We don't show what the operating costs are or anything like that.

So we're just showing you an earnings impact based upon the accounting of these assets, but obviously the net profitability of all of that is lower due to these other costs that are layered in there.

What you will see over time is that these assets will continue to wind down so that accretion on the income of these assets will decrease as the assets come down.

So the impacts will be less and less on net interest margin.

There's still about $2.4 billion of accretable yield left to come through and we'll probably expect that over the next 2 to 3 years on average, but there will be a long tail because the loss share agreement on the retail side goes out 10 years.

But it's definitely helping keep our GAAP margin higher.

The rate that we show, the 3.75% basically includes the FDIC loss share asset as an earning asset so it kind of puts those earnings part of that asset so you can kind of see what the full GAAP margin is altogether, which is maybe one way you could look at it.

Some of our peers show margin that way with all of it netted together, we just basically show you all of the pieces separated.

So I guess as a follow up, when we think about core margin, should we think about a third margin that tries to adjust for the accretion here, or I guess let me phrase it a different way.

As we think out to 2013 or so when the majority of the accretion is realized and you're in that long tail phase, is 3.75% a sustainable core margin even after accounting for the loss of this high-yielding asset or is it lower?

How do you backfill the yields that's ultimately going to be lost, the $320 million of interest income you've got this quarter?

Yes, I think if you get out to 2013, our asset quality issues are behind us and you basically get that pick up of that 11 basis points there, so I think we feel pretty comfortable.

3.70%, give or take 5 or 10 basis points, is a good core margin once everything flows through with Colonial and the asset quality issues, that's probably a good reflection of what our margin is.

That said, these are real earnings.

They are accreting to capital and it's basically capital that can be used to support organic and strategic growth or be returned to the shareholder.

I don't know if I'm out of follow ups but the 3.75% core margin you show, when we try to calculate that can you give us the denominator or I guess the numerator and denominator we should use to back into that 3.75%, just the numbers?

You basically take the income from the loss share asset in the numerator, and then you take the FDIC loss share asset, that's a non-earning asset, put that in the denominator as an earning asset.

If you have any more detailed questions--

Okay.

-- Tamera or Alan can follow up with you.

I appreciate it, thank you.

You're welcome.

And we'll take our next question from Christopher Marinac with FIG Partners.

Thanks, good morning.

Kelly just was curious on your overall appetite for more goodwill on the balance sheet and how that might impact your decision on potential acquisitions going forward?

Well, I don't think more or less goodwill independently will be a factor.

I think it'll be a matter of looking at the EPS accretion, and certainly we look at the internal rate of return and net present value in our merger models and they would drive us.

So we're not opposed to goodwill at all, it just depends on how the whole earnings stream works through in terms of our models and specifically in terms of EPS.

Okay.

And I guess my follow up just is more general about overall geography down the road.

I mean is your long time picture of being in growth markets with strong demographics still the same or would this environment cause you to expand or bend some of your long-term principles on that?

Well, we think your markets and the characteristics of them is obviously really, really critical because if you think about it banks are nothing more or less than a reflection of the markets they serve.

And so therefore, it's very important to be in attractive growth markets, which we are.

That having been said, that would not preclude us from looking at expanding into less high growth margins, as we did, for example, in West Virginia.

You really just have to look at two kinds of strategies.

And so in the slow growth market, you have to focus much more emphasis on the cost control, having deep relationships with your clients and expect slower loan growth.

In the higher growth markets of course you invest in revenue production and you have higher increases in costs but you bring a nice profit to the bottom line.

I personally think that I've kind of thought about this Christopher over the last two or three years, I really think there's some merit to some more diversification in terms of markets.

To be honest with you I'm real happy that we had Kentucky and West Virginia in the last 2 or 3 years.

I wouldn't be opposed at all for example, to have some exposure in the Midwest.

I think the Midwest is a market that has been in a state of decline but has probably found its bottom.

With all that's been going on in manufacturing and the auto industry, it's quite possible the next 10 years or so that market may surprise a lot of people.

I wouldn't want to be domiciled in the Midwest but a nice blend of fast growing markets and good stable more rural and manufacturing type markets is actually a pretty good place to be.

Great, Kelly.

Thank you very much for your comments.

You bet.

Thanks.

A follow up from Adam Barkstrom with Sterne, Agee.

Hi guys, hello again.

I don't remember if it was asked, I don't think it was but, Clarke, could you -- you mentioned in your slides that the problem loan sales kind of -- can you remind us within a range of where the pricing-- where those pricing ranges are?

Yes, Adam.

As I mentioned earlier, we sold for the quarter, we sold about $311 million worth of notes, commercial notes.

We also had OREO sales of $249 million.

But as far as pricing and valuations, we originally-- when we moved the commercial notes to held for sale last quarter, we took an initial mark of about 45%.

Since that time, our sales activity has in -- we've revalued those assets consistent with that activity and it's about 47%.

So we're very close to our marks and what I would tell you is our four-pronged strategy is working really well as you would-- and we had a good mix of all four channels this quarter.

So what we see is that we get very strong pricing when we can do a direct sale, particularly if there's [lawyer] involvement, in finding the sponsor and then as opposed to, for example, an auction where you're going to have your weakest pricing but you can move the assets very quickly.

So we think that it's important for us to use a mix of that but I would suggest to you that blending all that out, that's resulted us in our marks and our sales activity being very close to what we had originally targeted.

Okay.

And then Kelly, I wonder if you would care to comment on the pricing that we saw for the Sterling deal?

Well I wouldn't, Adam, comment specifically about that deal.

But I would say that when we look at deals like that, we think in terms of our three criteria of strategic alignment; asset quality, control and resulting in meaningful accretion.

I would say that some of the prices that I've seen recently in our models would produce permanent dilution, and so we would not be interested in deals that are that pricey.

I know sometimes people think in terms of deals like that as being justified because of the scarcity and other considerations, but we think in terms of it end of the day.

If it's permanently diluted to your shareholders it's not a good deal.

And so I think you're seeing a little bit of exuberance right now that will probably wane when the reality of those kinds of prices settle in.

Great.

Thank you, Kelly.

You bet.

We'll take our next question from Bob Patten with Morgan Keegan.

Good morning, everyone.

Good morning, Bob.

I guess the question is to Clarke.

Can you give some color around where you think the credit-related foreclosure expense is and marks, and where that line is going to be going over for the rest of the year?

Obviously peaked last second quarter, steadily moving down and break it down into what are marks, what's maintenance and so forth.

Great question, Bob and what we would suggest is that we would still have reasonably heavy but steadily directionally declining levels in the valuation marks and write-downs over the next couple of quarters trending downward particularly as we hit the second half of the year.

So in our own internal view and forecasting we've assumed, again trending downward, but still healthy levels of costs to eliminate OREO as we move forward.

I'd also remind you that the maintenance expenses is really a function of the notional size of the portfolio and the way you can think about that is the maintenance cost on that is typically about 10% of the notional balance on the annualized basis.

So that continues to be a very consistent number for us, so as that number comes down, the OREO notional comes down, you're going to see that maintenance cost drop accordingly.

As far as the held for sale marks, again we will continue to revalue based on sales activity and so we reset the portfolio at the end of the year based on the sales to date.

And so we'll see how the activity in demand goes for the remaining assets in the pool right now and then we'll adjust accordingly.

And so we would expect potentially some more marks if we chose to exit more rapidly but hopefully we'll be close to what we had originally put in.

Okay.

And Daryl, a quick question.

Just in terms of what's left over on the securities gains side, I may have missed that so I apologize.

What's left in terms of the opportunity to take over securities gains over the next couple quarters?

I think at year end the portfolios at net loss but there is approximately $50 million to $100 million left of gains, so we don't really have any plans to do anything.

Our de-risking strategy is pretty much over with.

Okay.

Thanks guys.

Thanks.

And that concludes the question-and-answer session today.

At this time, Tamera, I will turn the conference back over to you for any additional or closing remarks.

Thank you, Yvonne, and thanks, everyone, for your questions.

We appreciate your participation.

If you have any follow-up questions or need clarifications, please give Alan Greer or myself a call.

Thanks and have a good day.