Truist Financial Corp (TFC) 2011 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation first quarter earnings 2011 conference call on Thursday, April 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.

Ms.

Gjesdal, you may begin.

Thank you, Clayton, and good morning, everyone, and 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 first quarter of 2011, as well as provide a look ahead.

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

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

After Kelly, Daryl and Clarke have made their remarks, we will pause to have Clayton 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 provide public earnings predictions or forecasts.

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

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

Additional information concerning factors that could cause actual results to be materially different is contained on slide 2 of our presentation and in the Company's SEC filings.

Our presentation includes certain non-GAAP disclosures.

Please refer to page 3 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 to everybody and thanks for joining our call today.

We had overall a solid quarter based on particularly continued improvement in credit costs, progress in our balance sheet diversification, and especially strong performance in corporate banking, which I want to spend a little bit of time talking with you about.

So if you're following along in the deck, I'm on page -- slide 4.

We had $225 million in first quarter net income available to shareholders, up 19.7% compared to Q1 '10.

Our EPS was $0.32, which was up 18.5% compared to Q1 '10.

So good, solid performance numbers there.

We also had solid average loan growth, particularly when you look at the detail.

We were pleased to have overall total loans held for investment growth of 1%, particularly good in a challenging economy and our intentional material runoff in real estate loans.

That total does mask some strong performances under there, where we had 3.8% growth in sales finance, 22.7% growth in residential mortgage, and also very strong 8.7% growth in C&I.

So the components of loan growth are much stronger than the aggregate total.

Likewise, in deposits we had strong growth in average client deposits, especially in low cost deposits.

Our average client deposits increased $2.1 billion or 8.7%.

Importantly, client deposit excluding CDs, we have had a strategy, as you know, over the last several quarters of managing down our CD costs.

They increased $3.2 billion or 16.8%.

And for the second quarter in a row, our credit metrics improved across the board, which I'm very excited about, so OREO, NPLs, performing TDRs, delinquent loans, NPL inflows, watch list loans and charge-offs all declined again this quarter.

So now I'm able to have two wonderful slides taped to my ceiling over my bed.

So this is a really good thing.

I'm looking for about ten of them, Clarke.

So we'll keep that trend going.

We did sell approximately $500 million in problem assets during the quarter.

And we expect to sell something more than $500 million of problem assets during the second quarter.

I would point out that we are moving to what I would call a cleanup phase on loans held for sale, and remember, now we only have about $189 million left, so that program is about over.

Our outlook remains very positive on credit costs; that they will continue to come down over the next several quarters and Clarke's going to give you a lot of detail on that in just a minute.

If you'll turn with me to slide 5, remember, as we talk about this, that two and a half years ago, we said we would be focusing for the next several years on balance sheet diversification, because going through the crisis, we determined that we were heavier invested in real estate than we wanted to be and really wanted to improve our low cost transaction accounts.

So we've been focusing very strongly on that through our community bank.

The execution has been outstanding.

We believe we have the best value proposition in the marketplace based on independent research showing that our client service quality is the best amongst our peer group.

So in terms of mix improvement [along] the area, we were very pleased to see the first quarter's new production mix was 85% C&I and only 15% CRE.

So that continues to move down the road in terms of improvement mix.

Same thing in the deposit mix improvement area.

We did have a strong 8.7% increase in average client deposits, as I mentioned, on a link quarter basis.

Importantly, we had net new transaction accounts up 15,000 and first quarter is usually one of our not strongest quarters.

Noninterest-bearing deposits increased to 21% of client deposits in first quarter versus 18% last year.

That's a material change in one year.

We were very pleased to be a leader in introducing a money market account.

It's actually a cash reloadable card.

It's really good for the under-banked segment, gives them an opportunity to have a, effectively, a debit card, which they can load with cash at their discretion.

It's been very, very well received.

We did move in the quarter towards Bright Banking, as we moved away from free checking and actually have introduced in the first couple of weeks of April our new Bright Banking lineup, which is effectively a variety of products where you can have free, but you have to have various qualifiers.

There's no pure free with no otherwise justifying balances.

The test results we did in the first quarter on this new product lineup were very, very strong.

So now, as I said, it's effective in the second quarter and we think that will be well executed on.

In the small business area, we continued to be strong and make progress.

We had 2% growth in total households compared to last year.

And I would point out that we are a very strong small business lender and particularly in the SBA program, which really helps a lot of our smaller clients that are not as capitalized as they would like to be.

So we were the most active lender in SBA in North Carolina and Virginia, two of our largest states.

We're very pleased about that.

We had a number of other growing niche lending businesses, like small ticket consumer, prime auto, commercial leasing, commercial mortgage, all those businesses doing well.

As we mentioned to you in the past, last 3 years or so, we've been focusing on our trust and investment advisory business.

That continues to go well.

Trust and investment advisory revenues were up a strong 9.7%.

Wealth is doing even better.

Revenues up 14% compared to the first quarter of '10, so that business is really gaining traction for us.

And our investment services produced a record quarter.

As I mentioned in my preliminary comment, I'm very excited about our opportunity in corporate banking.

This continues to do extraordinarily well.

For example, we had 21% growth in large corporate banking compared to the first quarter of '10.

In the first quarter, we were in the top ten in southeast in book running in the middle market space.

Our energy team, which we mentioned to you before, is now in place, been in place for about five or six weeks.

We actually had a report from them earlier this week.

They are off to a great start.

They have already done several deals.

There are several more deals that are going to be closed in the next 30 days and they have only been with us a few weeks; so very, very impressive, this new team.

Opportunities there for us is very, very strong.

And in this whole corporate space, I would tell you that our pipeline is very strong.

It gained momentum in the first quarter.

We are expanding some industry specializations and so we expect a very, very good performance in this corporate banking area, where in general we have just been underrepresented.

The fact is, for a bank our size, we have a tiny share of the national corporate banking market.

And so now that we are out aggressively looking for it, we've been extremely well received.

Our name is well known.

Our quality institution plays well.

And, frankly, a lot of these large companies need and want a bank like us in their group.

So good results so far, excellent opportunity going forward.

I remind you that we've been aggressively adding revenue producing FTEs.

We've hired 200 or so since last year at this time.

There will be others added during the course of the year, because we think the revenue opportunity is budding and we are making investments to take advantage of that.

If you turn with me to slide 6, a little more detail is the loan area.

I would say our loan performance is very solid, particularly given our diversification.

I know there's a lot of concern out there about what's happening in the market, what happened in the first quarter.

I would describe the first quarter as a mixed quarter.

The first part was pretty strong.

We did definitely experience a slowdown in the second half of the first quarter.

I personally think this had to do with all that's going on in Japan and Northern Africa, and every time we have these major global events, it just kind of sets people back.

They take a little bit of time to digest it and think about it.

But the underlying strength of the economy we think is very firm, confidence we believe will continue to build.

Fact is, companies need to invest and they have been sitting on their hands for several years and they have got to invest in plant and equipment and other revenue-producing opportunities.

I believe based on discussions that business leaders are very encouraged by the tone in Washington around deficit discussions.

I know S&P didn't feel too good about it, but given the reality of that group up there, I think it's pretty encouraging that both sides are talking about cutting and both sides are throwing out big numbers.

And so that's the first time that's happened in a long time.

So I'm pretty optimistic that while it will be nasty probably in the process, we'll get some meaningful deficit reduction and that will be very encouraging to the market.

So, if you look at our average loan growth highlights.

C&I, again, it's a strong 8.7% on a link quarter annualized basis.

Other CRE did see a link quarter decline, which again, part of that portfolio we are trying to run off.

Auto was down a little bit from what we would hope, 3.8%, but still good and probably will pick up and grow later through the year.

Residential mortgage was a strong 22.7%.

Specialized lending on a link quarter basis did decline 7.2%, but we have the lowest group of specialized lendings in there.

And a couple of them are pretty seasonal, particularly on insurance premium finance business and so you have to kind of look under the covers.

So, for example, our commercial mortgage business is up 131%; commercial leasing is up 23%; small ticket consumers up 4.5%.

So, all of our special lending strategies are working great.

It's just you get some seasonality there and we think it will come back stronger as we head into the rest of the year.

I would point out that, as you know, we have been very consciously for the last 3 years very focused on running down our ADC portfolio.

We peaked about $9 billion; we are down to about $3 billion.

You see for this quarter annualized it was down a whopping 41%.

Covered and other acquired loans were down 35%.

So, if you look at our total loan growth, again, at 1%, that's masked by those substantial run offs.

The subtotal excluding that is a pretty strong 5.2% and then C&I is up 8.7% and large core is up 21%.

So, if you kind of walk through the progression of the strategies that we're focusing on, we feel pretty good about our loan growth and prospects going forward.

We did say in January that we expected 3% to 5% in loan growth for the year and, frankly, we still feel very good about that guidance for the year.

If you follow with me on page 7, our diversification plan in deposits is very much on track.

You can see that over the year, our deposits are relatively flat, but again, that's been the mix change.

So you will notice that noninterest bearing deposits quarter over -- year-over-year is up 13.7%.

Now, the first quarter annualized at down 0.7% but remember we get seasonality in the first quarter.

So, it's best to look really on deposits that common quarters and so other client deposits are up 8.1%.

Client CDs were down 31%.

That is exactly on plan.

Remember, we inherited a lot of single service, very expensive CDs through Colonial and some remaining through some of our previous mergers that were just really not full banking relationships and so given the relatively soft loan demand, it just didn't make sense to keep paying high prices for CDs.

So we've been consciously running that portfolio down.

It continued to help improve our costs.

Interest bearing deposit costs decreased 0.82% in the first quarter compared to 0.90% in the fourth.

So it's come way down already and continues to improve, which is a part of that strategy.

I will point out that we have kind of completed that strategy of CD runoff.

We kind of bottomed.

We now have a strategy of stabilized and relatively slow growth as we go forward.

And you can see that in the states in between, the common quarter comparison and link quarter comparison.

So you can look for that to be stable to kind of slowly growing as we go through the rest of the year.

Importantly, average client deposits including CDs increased $3.2 billion or 16.8% on an annualized link quarter basis.

That is very strong growth in the deposit area.

So we feel good about our loan diversification strategy, our deposit diversification strategy and think they will continue as we go forward.

Now let's turn to Clarke and get some more detail in our credit trends.

Thank you, Kelly, and good morning, everyone.

I'm very pleased to report continued positive trends in our credit performance for the first quarter.

As Kelly indicated earlier, we again experienced broad-based improvement, reflected by link quarter improvements in our key credit performance measures from the early stage indicators all the way through to non-performing asset levels and losses.

This performance reflects the second consecutive link quarter improvement in our credit indicators and is very consistent with our efforts to move more aggressively and resolve problem credits and move through the last stage of this credit cycle.

Given these solid results and an improving economic outlook, we continue to feel confident about our future credit direction.

Over the next several slides, I'll share some color and key drivers for these improving trends.

Slide 9 provides more detail, providing the early stage indicators.

As we discussed last quarter, our internal watch list problems continue to decline, reflected by a 2.6% decrease this quarter.

We also experienced a very strong reduction in early stage delinquencies.

That would be the 30 to 89 and 90-day plus buckets of over 20%.

This is in fact the lowest level of delinquencies in three years.

A 21.8% reduction in commercial delinquencies, together with very strong results in our retail-oriented portfolios contributed to these results.

As we have discussed with you all numerous times during this credit cycle, our primary credit issue has been the stress in the single-family ADC portfolio.

Remind everyone, it still only represents 3% of total loans, yet accounted for approximately 22% of NPLs, 21% of non-accrual inflows, and 17% of losses this quarter.

Therefore, we have been working very diligently to work through the problems in this portfolio as quickly as possible.

I'm really pleased to tell you we made excellent progress this quarter, reducing balances by quarter end by over $500 million, including the held for sale bucket.

As a result, we feel very good about the progress towards right-sizing this lending segment, which should help us substantially reduce non-accruals and total non-performing assets as we look ahead.

Turning to slide 10, we're very pleased to report a third consecutive quarterly decrease in both performing TDRs and non-accrual inflows.

Total performing TDRs decreased 11.3% this quarter, including a 27% decrease in commercial TDRs.

Even though TDRs are low, we continue to believe that prudent modification efforts do positively impact our portfolio performance.

You can see this as 73% of all TDRs are in the performing status and 90% of performing TDRs are in fact current.

Our non-accrual inflows were also lower this quarter, down 8.3%, with commercial inflows down 8.1%.

As commercial inflows make up the majority of total inflows, their continued improvement is another indicator of improved credit quality.

We'll note that the current level of commercial inflows continues to reflect our aggressive efforts to resolve existing watch list credits.

As our watch list continues to decline, we would expect that inflows would continue to improve each quarter as we move ahead.

Slide 11 indicates that total non-performing assets peaked about a year ago and has steadily decreased for four consecutive quarters.

Total NPAs were down 2.7% in the quarter, with NPLs down 2% and OREO down 4.2%.

Looking ahead, we expect to see steady reduction in non-performing assets each quarter, with a major opportunity to accelerate the reduction associated credit costs in the second half of this year.

Strong execution of our problem asset disposition strategy drove these results.

As Kelly indicated, we sold more than $500 million of problem assets in the quarter.

We are very pleased that the average sale prices were consistent with our targets.

This includes OREO sales of approximately $177 million, which we think frankly is very good, given that the first quarter is usually a seasonal low point for OREO sales.

We also had non-performing note sales of approximately $326 million.

So the total non-performing held for sale note bucket was reduced to $189 million by quarter end.

Remind you all that it started at $1.3 billion a couple quarters ago.

We continue to revalue this remaining inventory on a quarterly basis and marked it down to about 50%, which is consistent with our actual results for the program to date.

As Kelly also mentioned earlier, we expect to produce a similar level of problem asset sales in the second quarter, likely to be more than $500 million.

This will include certain loans probably that will be classified today as held for investments.

I do want to reiterate what Kelly said.

While we don't expect to continue the transfer of large blocks of loans to held for sale, we will from time to time sell problem assets when we get a good opportunity.

On slide 12, you'll note that our charge-offs for the quarter were down nicely, 1.65% or almost 25% compared to the fourth quarter.

This is the second consecutive quarter with considerably lower losses.

As a result, we continue to reaffirm our prior charge-off guidance, which is for charge-offs to decline through about 150 basis points later this year.

Due to the improved portfolio performance, our provision expense decreased significantly this quarter and came in at about 84% of net charge-offs.

While our provision was down for the quarter, we continue to maintain very strong NPL coverage ratios at 103%, excluding our covered loans.

Our current allowance now is approximately 1.5% current quarter charge-offs, which we feel very good about.

So continued improvement in our credit quality trends against a more positive economic outlook should allow for further reductions in provisioning and other credit-related costs in 2011.

Daryl will give you more color in a moment regarding those specific credit-related costs.

Finally, looking at slide 13, I would also like to comment on the current mortgage environment, which we believe is a very good story for BB&T.

As we have told you all before, we operate a very traditional low risk mortgage business and it is very focused on client service.

Remind everyone, we were again named the highest in customer satisfaction from J.D.

Power among all mortgage servicers.

Over the last several months, we've completed various reviews of our mortgage servicing processes and standards and we feel, frankly, very good about our program.

We didn't participate in private label securitizations actively.

We don't have issues with robo-signing or dual tracking assignment issues, we don't foreclose through MERS.

And also, we have had a very successful HAMP modification program with a much higher success rate on the conversion of the trial mods to permanent mods versus the industry.

In terms of repurchases, we had a decrease first quarter with only $38 million in total repurchases.

So this issue really is immaterial for us and very modest compared to what others in the industry are experiencing.

Finally, BB&T is not a participant of any regulatory or legal settlement process regarding mortgage servicing.

So, in summary, everything that we're seeing from a credit perspective is positive and continues to move in a better direction.

The success over the last several quarters and the execution of our asset disposition strategy, combined with a clearer improvement that we're seeing early credit quality indicators supports our confidence that our credit problems peaked last spring.

So, we would expect improved results and lower credit costs each quarter as we move through 2011.

So with that, I'll turn it over to Daryl for his comments.

Thank you, Clarke, and good morning, everyone.

I am going to discuss net interest margins, fee income, noninterest expense, capital, and the dividend.

I would like to continue on slide 14.

Net interest margin came in at the higher end of our range we discussed on our last earnings call.

For the first quarter, margin was 4.01%, down 3 basis points from the fourth quarter.

The margin continues to benefit from positive funding mix changes, lower cost of funding, and wider credit spreads.

When you adjust for non-performing assets and interest reversals to a more normalized level, our net interest margin would be about 10 basis points higher.

Net interest income on covered assets decreased $23 million compared with last quarter.

However, the impact on revenues was a positive $19 million.

We are raising our guidance for margin for 2011.

We expect margin to remain in the 4%-plus range for the rest of 2011.

The drivers for this improvement are faster loan growth, positive funding mix changes, and falling interest-bearing liability costs.

Also, as you can see on the graph on slide 14, we remain asset-sensitive and well positioned for rising rates.

Turning to slide 15, our fee income ratio fell to 40.1% from 41.8% in the fourth quarter.

The decrease was mostly attributable to lower mortgage banking income and service charges on deposits.

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

Our goal is to minimize this lost revenue, while continuing to be responsive to our clients.

We told you last quarter that product and pricing initiatives were being tested throughout our footprint.

As a result, we introduced BB&T Bright Banking earlier this month.

Bright Banking replaces our free checking product.

If a client does not meet the various qualifiers, they will be charged a monthly maintenance fee.

Approximately two-thirds of our clients already meet the qualifiers to avoid the monthly maintenance fee.

Bright Banking significantly reduces the number of unprofitable retail checking accounts.

Going forward, we will continue to test product and pricing initiatives in order to offset the effect of new regulations.

Check card and bank card fees both remain strong due to higher activity and increased account penetration.

Mortgage banking income for the first quarter was $95 million compared to $138 million in the fourth quarter.

This decrease was mostly due to a 32% decline in application volume, lower net gain on MSR hedging, and lower margins on production.

Investment banking and brokerage fees and commissions contributed $87 million for the quarter, still very strong compared to the all-time high of $97 million in the fourth quarter.

Finally, this quarter the FDIC loss share returned to a net expense due to no provision offset for covered loans as we saw last quarter.

The expense was $58 million.

In terms of our outlook for fee income, we expect stronger fees from insurance, plus improved service charges related to Bright Banking, and growth in investment banking.

The insurance market is showing signs of improvement due to better economic conditions.

Our focus on corporate banking will help drive stronger investment banking revenues.

On slide 16, you will see that the efficiency ratio increased to 57.1% from 55.3% last quarter, primarily due to lower revenues this quarter.

Going forward, we expect the efficiency ratio to trend down for the remainder of 2011, falling to the mid-50%s due to stronger revenues and moderating expenses.

The efficiency ratio is also higher due to significant credit costs.

Assuming a more normal environment, we estimate that the efficiency ratio would fall about 2.5 percentage points.

Given this, we will have more significant positive impact on earnings as credit costs come down.

We estimate approximately $700 million of earnings are tied up in foreclosed property, personnel, legal, professional, loan operating, processing, and loss revenues due to higher non-performing assets.

When these costs and revenues normalize, we will see $0.60 to $0.65 lift in earnings per share excluding the impact from lower provision expense.

Personnel expense increased $15 million or 9% annualized link quarter, mostly due to higher Social Security and unemployment taxes due to the annual reset.

Foreclosure expense decreased $19 million or 47.6% annualized, largely due to lower losses on write-downs on foreclosed properties.

We are pleased to see these costs coming down.

Professional services decreased $21 million, primarily due to improved credit environment.

Additionally, our FTEs were relatively flat on a link quarter basis and decreased 564 on a common quarter basis, mainly related to Colonial.

We plan to continue adding FTEs in revenue-producing areas throughout 2011.

We will continue to focus on driving positive operating leverage, which, as I said earlier, will move our efficiency ratio back towards the mid-50%s this year and ultimately to the low 50%s in the next couple of years.

The first quarter effective tax rate of 19% was on target with what we communicated last quarter.

On slide 17, you will see our capital ratios remained among the strongest in the industry.

All of our capital ratios increased in the first quarter.

Tangible common at 7.2%, Tier 1 common improving to 9.3%, Tier 1 capital at 12.1%, leverage capital at 9.3%, and total capital of 15.8%.

Our internal capital generation provides significant financial flexibility for both organic and strategic opportunities.

Based upon our preliminary assessment with our current projection of Tier 1 common under Basel III, we are well in excess of the required minimums.

Turning to slide 18, in March we received no objection to our proposed capital plan from the bank regulators and we immediately raised our dividend and announced a special $0.01 dividend, which will be paid in the second quarter.

Our targeted dividend payout ratio remains at 30% to 50% of earnings.

Related to future capital actions, we currently plan to call our trust preferred securities in 2013, as the instruments start to lose regulatory capital, and issue approximately $1.75 billion in late 2012 of Tier 1 qualifying instruments in order to maximize 150 basis points allowed over Tier 1 common.

Lastly, we are very pleased to remain with the strongest dividend payout ratio among the 19 stress tested banks.

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

Thank you, Daryl.

So, we think we are well positioned for the future based on the following.

We do expect meaningful declines in our credit costs, as Clarke described.

Our client service metrics and value proposition in the market are at all-time highs.

Our outlook for loan growth is steadily improving.

We do expect stronger revenues throughout the remainder of the year and the underlying performance of virtually all of our businesses is strong and we have specific opportunities to point out to you in C&I lending, corporate banking, prime auto, investment banking, wealth and specialized lending.

And then just as a reminder, we think overall long-term corporate strengths are the kind of emerging re-intermediation process, which we continue to believe will be material for us and the industry.

Significant investment revenue growth strategies over the last several years, which is really paying off now and going forward.

Meaningful merger opportunities, our community banking model is, we believe, the best in the marketplace and we operate in some of the best growing markets in the country, maybe in the world and we believe we have the best team on the street.

So, we're very optimistic about the future.

We believe our best days are ahead.

So, Tamera, with that, let me turn it to you for Q&A.

Thank you, Kelly.

Before we move to the question and answer segment of the conference call, I'll 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 and one follow-up.

If you have further questions, please reenter the queue so that others may also have opportunity to participate.

And now I'll ask Clayton to come back on the line and explain how to submit your questions.

(Operator Instructions) Brian Foran with Nomura.

How should we think about the earnings or the revenue net of provision impact from acquired assets; keeps going up.

Maybe, what's the stock of accretion left to realize there?

And how do you think about replacing that revenue over time?

Is it more about growing the underlying base of loans, or as this revenue starts to fade someday, will expenses come down to offset it?

How should we think about refilling that $245 million bucket over time?

Brian, this is Daryl.

We have about $2.3 billion left of accretable yield that will come in over the life of the assets.

I would say that our core margins, as these assets run down and things normalize, would probably be still in the $370 millions, but that's probably a couple of years off.

I think we will continue to benefit through our diversification strategy and loan growth on the asset side, as well as on the funding side.

We have positive mix changes occurring on both sides, as we are growing both sides of the balance sheet.

Brian, this is Clarke.

I'd also mention to you, we have over 200 people specifically dedicated to managing these assets.

So, a good bit of that cost is variable and will come down as the accretion burns through.

And then just a follow-up, I apologize if I missed this during the prepared remarks, but securities portfolio, $8.3 billion moved to held to maturity.

Can you just tell us what's going on there?

Yes, Brian, we moved basically our floating rate securities into held to maturity.

Right now these are basically LIBOR plus 100- to 130-type spreads, and they float with LIBOR.

They do have interest rate caps on them in the 6% to 7% range.

If rates were to take off and go up really high and get capped out in that 6% to 7% range, they were to extend out and be more under water.

So by putting them in held to maturity, which we had the ability to do that, it basically reduces any Basel III capital hit that we would have going forward.

So it's a good earning asset.

We can hold onto it now.

There's no credit risk to it.

And if rates were to go up, they get capped out at pretty high levels and we don't really have any capital hit for Basel III.

Todd Hagerman with Sterne Agee.

Daryl, I guess just a question on the M&A side.

Obviously, I think the last couple of weeks there's been an increasing amount of chatter, so to speak, in terms of potential deal activity out there.

And it seems as if the opportunities for BB&T continue to increase.

Could you just talk about, I guess, from one standpoint, how you guys are viewing the M&A landscape right now, how you're thinking about the discipline surrounding some of these potential opportunities, and how that kind of dovetails into your capital plan that you submitted with the Fed.

Todd, this is Kelly.

So you're right, there's kind of like an all-time-high amount of, I think chatter is the right word, about mergers.

I do think that as we had been expecting, a lot of companies are beginning to look forward and see that while the economy is going to grow, it's going to be growing at a relatively slow pace.

There are lots of headwinds in terms of fee income.

There are lots of headwinds in terms of scale-related costs.

And so I think a number of institutions are beginning to think about the wisdom of remaining independent versus combining and being a part of a larger, high-quality organization.

So, as we have said, we consider potential mergers as an important part of our future.

It's certainly not the most important.

Most important part is organic growth, because we're in great markets and have made great investments in those markets, but it will be important.

We think about mergers as having to meet 3 very strict criteria.

They have to be strategically attractive, and that can be a combination of scale that helps us strategically with regard to levering costs and/or entering and of course, expanding attractive markets.

The second is we have to be able to ring fence the quality issues.

We're not going to do a merger that increases our risk.

So it's very [mark] and other strategies we would have to be able to manage that risk.

And then third is all of that has to turn into meaningful accretion for our shareholders.

We're simply not interested in mergers just for merger's sake.

We're about the business of growing shareholder value, and that looks like mergers that make sense have to be meaningfully accretive.

So we screen them through those criteria.

We look at the opportunities that are available and make decisions accordingly.

And if I may, just if you could just expand in terms of the capital consideration, how that would fit in there.

In other words, with some of these opportunities out there and you talked about ring fencing the quality issue, so to speak, how does that kind of play into the capital consideration, the potential perhaps that you may have to raise additional capital if it fits into some of those other buckets?

Well, obviously, as you know, with deals today, you do take a meaningful mark, depending on the quality of the portfolio, as a part of the deal.

And then depending on the equity structure of the acquisition target, and depending on our equity structure, the combination of those three factors determine whether or not you need to raise capital.

We are very capital strong, and so we do have some opportunity there, and so we would just have to look at the target and the quality of the asset and the required mark to determine whether or not there would be any required capital raises.

If, however, there was a required capital raise, we think that would be reasonable and very doable, because we would only do one that met our criteria, which means to potential investors, it would be strategically attractive managed-asset quality and very accretive.

So we think raising capital, if required, would be a very attractive opportunity.

Ken Usdin with Jefferies.

Daryl, just looking at the loan balances, the averages were pretty similar to the period-end.

And I'm just wondering, as you look ahead, can you talk a little bit about more specifically what areas of the loan buckets you expect to grow.

And also, how much more CRE decline do you think we can see over the course of the next year, next few years?

Sure.

So for the loan growth, I think you're going to see us continue to grow C&I.

That's going to be a large increase for us.

Our sales finance will probably pick up more momentum as we get into the second and third quarter; seasonally they are performing very strongly.

Our mortgage loans, as we continue to maintain and portfolio 10- and 15-year mortgages that will grow.

And then in specialized, that will turn this quarter and be positive.

Within there we have two [growth] that will pick up the seasonal benefit and premium finance, as well as Sheffield.

Sheffield has some strategic relationships with Polaris and Suzuki, and we think they are going to be growing very fast.

As far as run-off of portfolios, we would expect the covered portfolio to continue to come down at its pace that it's been happening, and then the ADC portfolio will continue to come down, but probably at slower paces than what we've seen the last couple of quarters.

We're seeing good signs where possibly our direct retail lending stopped shrinking maybe in the next quarter or two, and maybe stabilizes, which would be a very positive sign for us.

Okay.

And then my follow-up, this is just a clarification, but when you guys talk about average loan growth in the 3 to 5 range, are you talking about that also inclusive of both covered loans and held for sale?

Or is that just the core?

We're talking about the total loans held for investment.

So we are factoring in the run-off on covered, as well as ADC.

So on our slide page, it's that line item that shows 1% growth this quarter on a link-quarter basis.

Craig Siegenthaler with Credit Suisse.

Just a question for Clarke on his comments related to the opportunity for BB&T to accelerate problem-asset disposition in the second half.

I'm just wondering if this acceleration did occur, could this lift total flows above guidance?

And what I mean is, if you break apart kind of core-flow trends, and then also the flows associated with an asset-disposition acceleration, could that go above guidance or is your guidance for total flows, including any potential asset disposition?

Our guidance around losses anticipates continued asset disposition, not necessarily a number of additional large bulk-sale transfers.

So the existing charge-off guidance and guidance on NPA reduction assumes a more normalized effort to do the problem resolution.

And so we haven't really factored in any additional enhancements to that right now.

And Clarke, you don't expect to do any kind of bulk transfers to held for sale this year.

I think you said that earlier.

Could you just refine those comments?

Yes, I guess what we are trying to say, a couple of quarters ago, as you know, we made a strategic decision to move a big block of non-performing residential mortgages.

I think it was second quarter of last year, about $500 million.

And then we moved about $1.3 billion or so of non-performing commercial loans, and that was our big strategic move to a held for sale strategy to accelerate the dispositions.

What we're saying now is that we don't have any specific plans to consider large bulk transfers at this time.

However, we'll continue to watch the market.

We'll look at the trends in our portfolio.

And if we think it makes sense to consider a large sale from time to time, we would consider it.

But it has got to be economically more attractive than holding those assets and continue to service those.

Matthew O'Connor with Deutsche Bank.

My first question's for Daryl.

If you could just give maybe a little more detail on that $0.60 to $0.65 of earnings leverage over time, maybe split it between expenses and revenues, and just some thoughts on the path to that in terms of timing.

Okay.

So the first part, the $700 million, all we really did is look at the drag on the non-performing assets, and we think that's worth about $130 million pre-tax.

Then on the expense side, within foreclosed property, we think that as our OREO balances decline to, let's just say they go down to about $500 million, that should basically reduce the write-downs about $350 million, and then our maintenance costs will come down proportionately and that's another $100 million.

And then you're looking at other expenses, and other expenses would be personnel, as we have higher FTEs in our workout groups and loan sale groups and all throughout there, as well as legal and professional and all those items.

We think that's worth $120 million to $130 million easily.

These are very conservative estimates, and we don't count any release or any lower provisions.

So we're just trying to look at what happens to the efficiency ratio as these credit costs come down and things start to normalize.

We have a lot of leverage here.

And thoughts on the timing of that $700 million coming back in earnings?

It's going to come down proportionally as our NPAs come down.

So as our NPAs continue to come down every quarter, you are going to see these expenses start to reduce every quarter.

It's probably over the next year or two.

Okay.

And actually, the NPA is just a good segue into a question for Clarke.

As we think about the outlook for credit, the pace of decline in NPAs, do you think it could accelerate from here, or what would be your expectation on that?

Well, we don't want to over-promise, but we think it will be a steady decline.

Frankly, I think it should be higher than what you saw this quarter.

Inflows were still elevated, but down from Q4.

We think the key there is to see those inflows get more in the commercial side, more in the $500 million range.

They were still about $700 million this quarter.

So as those commercial inflows move down, we clearly should see an increase in the pace of reduction each quarter.

And frankly, that would be our expectation.

John Pancari with Evercore Partners.

Daryl, can you give us some color in terms of the seasonality that you saw in service charges this quarter, and how that could impact next quarter?

And I guess more specifically, what we could view as a pretty good run rate going forward for that line?

There's a lot of moving parts there.

We came down this quarter due to seasonality, as well as Reg E impacts that we're seeing.

We are forecasting service charges to be up in the second quarter, and continuing to be up.

You have the wild card with Durbin in there and all that, but we would say that our service charges would be up in the magnitude of approximately $15 million to $20 million on a link-quarter basis.

We have a couple more processing days, and as we rolled out Bright Banking, Bright Banking started earlier this month, but it rolls out for our existing customers later in the quarter, so it's really being offered to our newer customers for the first couple months.

So that impact really rolls into more in the second half of the year.

Okay, all right.

Then my follow-up is for Clarke.

I'm sorry if you have alluded to this at all yet, but the longer-term outlook for the loan loss reserve; just want to get your thoughts.

It's sitting here at around 273 basis points of loans, and as you mentioned that you expect some continued declines in NPAs and credit costs.

Can you talk to us about what you view as a more normalized level as you see the improvement materialize?

Absolutely.

We've had a number of discussions about that.

Just some of the things that we think about is what the longer-term mix of assets we have in our portfolio.

To Kelly's point, we're trying to move toward a more diversified, less volatile, more capital-efficient mix in the loan book.

And we think as we accomplish that strategy that we would anticipate at this point that view of normalized losses probably in the 60 to 80 basis points annually, which is obviously materially less than today.

And while we continue to look at the potential new guidance around allowance methodology and the impacts that would have, just based on what we know today and our view of the potential change in asset mix and loss performance, we would think about maybe 2 times the normalized loss rates.

So you maybe think about 150 basis points or so.

And again, that could change as we have more information and more visibility, but that will be our best guess today.

Chris Mutascio with Stifel Nicolaus.

My first question for Clarke.

Clarke, I tend to look at the non-accrual loans held for investment on a quarter-to-quarter basis versus total NPAs, because it washes out the inflows and outflows from the held for sale portfolio.

When I look on page 13 of your release, it looks like that the non-accrual loans held for investment, the actual pace of those is actually increasing.

The non-accruals are up $278 million this quarter versus an increase in fourth quarter of $176 million.

Can you help bridge the gap between the improvement we're seeing in several different trend items for credit quality versus the actual increase in non-accrual loans held for investment?

Absolutely.

That's a fair question.

We look at both segments and we look at the total; so both are important to us.

And so obviously we did have an increase this quarter on a link basis in the held for investment.

And we provided you a little more detail, if you'll notice in the tables, we've broken out the commercial into the three key buckets the way we manage it, C&I, other CRE, and ADC.

So we did have an increase in non-accruals held for investment this quarter, but our total did come down.

Obviously, we do look at both buckets and the efforts to resolve credits and get the balances out, whether it's through held for sale bucket or held for investment bucket, are just as intense.

What I think you're seeing in the held for investment this quarter is really our efforts to more aggressively push through the watch list.

I mentioned earlier, our watch list is not going up.

We're not seeing nearly as many new credits being identified.

We know where our problems are.

So we're pushing harder to get the credits out.

So what I think you're seeing, and what we believe is that you're seeing us move those watch-list credits we previously identified, and in many cases to resolve them we'll go ahead and put it on non-accrual and seek a liquidation strategy.

And I feel good about that because you can see the early indicators coming down materially.

So our expectation is that you should start seeing steady declines in the held for investment side each quarter as we move ahead.

And Chris, just a point of clarification, as you know, our long-term strategy is to be very relationship-focused, to work very hard with our clients who go through difficult times.

But the reality of this is the [disparations] lasted longer than anybody expected, particularly in the real estate area, and so we frankly have hit an inflection point where we have held on and worked with these clients as long as we can, and so now it's time to turn to the attention of our shareholder.

And as Clarke said, therefore these long-standing identified credits that we've been working with, we are now into disposition phase for those, and that's what's causing you to see a bump-up in the held for sale, I mean held for investment, because we just decided to go ahead and put them in a liquidation status.

Thank you for the color.

And my follow-up, Daryl, when does the tax rate normalize, and at what level does it normalize at?

I would say our tax rates will continue to go up year-over-year.

I would guess probably 2013 would be more of a normalized level.

And at that point, based upon the amount of tax-exempt income we have, tax credits that we're investing in, we're probably in the low 30%s would probably be a normal tax rate for us would be my guess right now.

Greg Ketron with Citi.

Just a couple of questions.

One, Clarke, probably for you, in terms of the loss on disposition of property, looks like about $86 million this quarter versus $74 million last quarter.

You disposed of $500 million.

It looks like a 17% mark.

Overall, it's been running about 50%, 51%, which is where you have the remaining disposition marked.

Would you anticipate this quarter that we could see a pretty sizable drop in those losses?

Absolutely.

What we didn't tell you yet, if you look -- you're exactly right.

The program to date -- our mark has been about 50%.

This quarter we did have a larger strategic sale that had a higher mark, and so that's what's reflected this quarter.

The remaining inventory is much smaller.

Our plan right now would be a more one-by-one asset disposition to end-market buyers, and our experience for that kind of strategy has been a much lower mark.

So we would anticipate it coming down.

Okay.

Thank you.

Then the other question is on insurance.

Do you have any sense or color yet, one, on what kind of insurance revenue increase we may see going forward in light of the global events?

And then, two, is there a reset period where the premiums are reset, like July 1 or later this year?

Yes, Greg, it's Kelly.

We clearly think the global events, along with the fact that we've been in a protracted soft market, are lining up to begin to harden the market.

We're already beginning to see that in some cases.

So we think we'll see a general hardening over the next while.

And in terms of the other factors that drive revenue, it's just a pure new business.

And we continue to add small agencies; our McGriff and CRC wholesale businesses continue to do well relative to the market.

And so I think the combination of those will likely put upward pressure on insurance revenues over the next several quarters.

Mike Mayo with CLSA.

Just wanted to understand more about the expansion in national corporate banking.

When you say that, do you mean syndicated loans or some other areas?

So there is some of that growth in syndicated.

We are more willing to look at syndicated participations with syndicate partners.

We, as I indicated, are much more successful now in being the lead syndicator, so the syndication business is improving.

Now, I will point out that we don't just buy blind participations in syndications like some companies do.

We underwrite the credit specifically ourselves.

We only do syndications where we can have a relationship with the client and get other collateral benefits, and so we do not actively participate in levered sponsored area.

So, that's a higher risk than our appetite.

And then a lot of the corporate market improvement is in just our pure regional banking and our capital markets corporate banking calling officers calling directly on clients where there's not a syndication, but we're just being a part of their small group.

So, they might have 2 banks and they just want a third bank.

It's not a true syndication.

It's just that we are part of their bank group.

Since you -- everyone has some hold level, so what percent of the increase in commercial loans, say from the fourth quarter, relates to these syndicated loans?

Clarke, do you want to take that?

I would say it's a fairly substantial portion.

I would remind you all, we're very conservative on our client-level holds and risk-grade limits, and so we don't have a different level of hold limit for these credits as we would any commercial loan in our regional markets.

And so the granularity in this portfolio is still very attractive and very low loan sizes relative to the rest of our portfolio.

But I would say that it's becoming a larger portion of our quarterly production.

Matt Burnell with Wells Fargo Securities.

I have a follow-up, I guess, on the non-performing loan increase this quarter.

I'm just curious, it sounds like your guidance, despite what happened quarter-over-quarter in the first quarter, is that NPL and NPA balances will go down.

And I'm sorry if I missed this in your prepared remarks, but I just want to make sure that you're guiding, or at least providing, an outlook for NPA formation that is below what we've seen in the past couple of quarters.

Matt, you're exactly right.

That's our guidance that inflows to new non-accruals would be down sequentially as we move forward each quarter, and that the loan sales for investment in non-accruals would go down steadily.

So we are expecting to see lower levels as we progress forward.

Great, thank you.

And for my follow-up, maybe a question to Kelly.

It sounds like from your comments earlier to a question that your M&A criteria really hasn't changed in terms of needing to be GAAP accretive in the first year excluding merger charges.

But I'm just curious as to whether or not your tangible book value dilution tolerance has changed at all relative to what's going on in the market.

No, our criteria, you're right, has not changed.

We focus mostly on accretion of EPS.

We think that is the primary driver.

Frankly, most of the deals won't have any material book value dilution.

You could see some tangible dilution because of the marks.

But the primary criteria is on controlling the quality of the asset and the asset quality and the earnings accretion.

Christopher Marinac with FIG Partners.

Kelly, is there a (inaudible - technical difficulties) in the next 12 months that nothing happens on M&A, and it's just organic for BB&T?

Chris, I don't think that's likely.

I think it's most likely there will be some M&A activity, to be honest.

There's a lot of -- I would say there's a material increase in interest in M&A activity, so in terms of the likelihood of BB&T having discussions, I think that's very high.

In terms of us doing deals, it's a little harder for me to judge because I only control half of the discussion.

But we will be eagerly talking to Canada to submit our criteria.

There seems to be today some potential acquirers that don't have our same criteria.

That is, they are willing to take substantial and sometimes permanent dilution.

We won't be a party to those transactions.

So all of that having been said, I think if I had to guess, I would guess we would do some deals this year, not a lot.

We're not interested in a bunch of small ones.

You could see us maybe do one or two of decent size, but if so, they would be the kind of deals that you would be very happy to see us announce.

Very well.

Kelly, thank you.

You bet.

Betsy Graseck with Morgan Stanley.

I know there's been a lot of questions on NPAs.

I just had 1 tweak to that question flow.

You talked about commercial inflows reflecting the aggressive efforts to resolve the existing watch-list accounts.

Could you talk about how the watch list is progressing, and how far through that kind of repositioning you think you're through now?

Great question, Betsy.

We feel very good about our repositioning of the portfolio.

We said before we think right-sizing the ADC long-term is probably something in the $2 billion to $3 billion range.

We're already at $3 billion.

But obviously the housing market's still tough, so we probably will have to come down more to find the bottom, and then it may go back up.

So we're real close there.

On the other CRE, we think that there are attractive future opportunities there, so we don't think we are going to consciously try to run down that portfolio anymore, so we think it will be -- see some growth with some potential -- with strong underwriting.

From a portfolio repositioning standpoint, we think we're in really good shape.

So the big growth will occur in the C&I side.

So what we're doing, back to the watch list, is trying to identify particularly in the ADC and CRE area where we think those stressed credits are that need to go ahead and be resolved.

And we think we're materially through it.

The watch list continues to come down each quarter, and we're just not identifying many new problems.

We're at the point of the cycle where we're just substantially moving toward liquidation.

So I would say the majority of the credits have been identified, and now we're in the liquidation mode.

So, as we look at the slide on page 10, you have the chart on inflows to non-accrual assets.

As we think to 2Q, 3Q, that commercial inflow you're anticipating will be coming down at a faster rate of change than has been the case over the last quarter?

We think so.

Obviously, we could be wrong.

But we would anticipate you would start seeing a sharper decline in the level of non-accruals in those areas as we pull through more of this watch list.

Chris Gamaitoni with Compass Point.

Just two clarifications.

When you said you were more willing to recognize losses and stop working with clients on real estate loans, did you mean commercial or residential or both?

Well, we're really talking about both there.

We treat both kinds of clients the same.

Again, we've worked with them as long as we possibly can, but then there's a point of inflection where you have done all you can do, in which case you have to execute on liquidation, and so it covers both categories.

Okay, sure.

And then just on the M&A side, you made the comment that there would be one or two of decent size.

I don't want to pin you down exactly, but could you give me a range of what decent size means?

I would be a little hesitant to try to nail down specifics, but I have said in the past that we're just really not interested in anything less than $3 billion or $4 billion, not that you couldn't see some kind of an assisted deal below that or something, but I think you can generally think of, when we're thinking about target deals, they would certainly be greater than $3 billion or $4 billion.

Gerard Cassidy with RBC Capital Markets.

Daryl, can you give us an idea of what you're hearing on when the regulators may come out with their guidelines on where the capital ratios need to be on the [SIFI] buffer?

And also, do you think that the Federal Reserve and Basel will be wrapped up by the end of this year?

Sure, Gerard.

We've had discussions with the regulators throughout the last several quarters.

My best guess, to answer your latter question first is, probably we're hearing maybe late third quarter we might get the new NPR for Basel III for US banks.

They pushed us back a little bit.

They are working really hard trying to come up with all of the new rules and regulations, and they are actually taking a lot of feedback from banks like us and peers, just trying to understand what the impacts are.

So I think they are doing as good a job as they can to come up with some really good rules when it is announced.

As far as the buffer, I don't really know how much.

Obviously, the larger institutions like JPMorgan would probably have much higher buffers than an institution like BB&T.

The magnitude of that is really hard to say right now, Gerard.

I just don't want to stick my neck out on there.

It's really in the hands of the Fed and the other regulators right now.

Okay.

And then finally, on the NPL formation, when you guys look at it, has been trending down, which obviously is positive.

Is there a possibility that we could see eventually just GAAP down, where it's a -- instead of being just down $100 million or $200 million, it drops $400 million to $500 million?

Is there anything like that, that could happen in the next 2 or 3 quarters on that formation?

I think our best estimate is a steady sequential decline versus any sort of sharp movement given what we see.

Thank you.

Jefferson Harralson with KBW.

Mine have been asked.

Thanks, I appreciate it.

There are no other questions in queue.

I'll turn it back over to Tamera for closing remarks.

Thank you, everyone, for your questions today.

We appreciate your participation in today's conference call.

And if you need any clarification or if you need information presented today, please call Alan or myself.

Have a great day, everybody.

This concludes today's conference call.

Thank you for your participation.