Truist Financial Corp (TFC) 2011 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation second-quarter earnings 2011 conference call on Thursday, July 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, Kelly, 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 second quarter of 2011 as well as provide a look ahead.

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

A copy of this 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 Kelly 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 remind you BB&T does not provide public earnings predictions or forecast.

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 two 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.

Now it is my pleasure to introduce the Chairman and Chief Executive Officer, Mr.

Kelly King.

Thank you, Tamera, and good morning, everybody.

Thanks for your interest in BB&T.

We are excited about presenting our results for you today.

In fact, we believe this is our best overall quarter in two years; you can see that as we go through the various parts.

So starting out with our focus on earnings, we did have net income available to shareholders that was $307 million, a 46.2% increase in net income versus second quarter 2010.

EPS was $0.44, up 46.7%, and it was really the strongest EPS number we have had since the first quarter of 2009.

There were many very positive aspects to the quarter, but obviously a significant amount of the improvement was because of improved credit quality which we will talk about.

Our revenues totaled $2.2 billion, up 28% on an annualized basis since the second quarter.

That was largely driven by lower deposit cost, strong insurance -- as you recall, our second quarter is a very strong insurance quarter for us -- and lower losses on the sell-off of our problem assets.

And also for the last, really year and a half, we have continued to hire revenue producers and that is helping drive our revenue production.

In the credit quality areas a really, really good quarter; significant progress in credit quality improvement.

OREO, NPLs, performing TDRs, delinquent loans, NPL inflows, watchlist loans, and core charge-offs alls declined.

Really great.

NPAs decreased 13.2% and, importantly, NPA inflows decreased 24.9%.

Clarke is going to give you a lot of color on that in just a bit.

In the loan area, our average loan growth was 3.4% versus first quarter.

Now that does exclude our run-off portfolios in ADC and our covered portfolio is still solid in this relatively slow environment.

The growth was pretty broad based.

It was led by growth in specialized lending, sales finance, C&I, and mortgage, and we will give you a little more detail on that.

In the deposit area we had average non-interest-bearing DDA increased $1.2 billion or 22%.

Average client deposits increased $1.8 billion or 7.1% and average client deposits, excluding CDs, increased $2.5 million or 12.3%.

So overall solid performance in earnings, revenues, credit quality, loans, and deposits.

Let's go to a slide four, give you a little more detail on some of our key areas relative to our revenue strategies.

Importantly, our community bank model continues to produce the best value proposition in the market.

We know that based on direct client feedback, but also based on statistical feedback we get from independent outside research firms; we have the best quality offering of any of our major competitors in our marketplace.

And we have made excellent progress through the community bank and diversification strategies on the loan and the liability side.

So if you look at some of the lending points our second-quarter new production mix was 85% C&I versus 15% CRE.

That again is that focus on that diversification strategy.

In our new C&I production was up an annualized 10% compared to the first quarter and June was our second-best production since 2009, so it was really strong.

We finally have a turn in direct retail.

While it didn't show up on the average, the point growth second versus first was 2% annualize growth on point to point.

And that is after 11 quarters of run-offs.

So that is an important inflection point because we have had good steady production, it's just that we have had such strong run-off in some of the areas we wanted to run off.

Now that that has turned, it's almost mathematically certain to continue to grow at an increasing rate as we go forward.

So we feel good about that.

In the deposit area, as you know, we and most others are going through some pretty material structural changes in our deposit lineup because of the recent regulatory changes.

We have now successfully rolled out our Bright Banking package, which is our basic replacement for free checking.

It's going very, very well.

We continued to have significant growth in non-interest-bearing deposits, as I mentioned.

So our strategies are moving away from free checking into our new Bright Banking product, and moving away from more price sensitive CDs and into more DDA transaction accounts is really working very, very well.

A number of the investments that we have made in our niche lending businesses continue to pay off for us.

You will recall that over the last really five or six years we invested heavily in those areas.

And in all of those areas they are producing really good results, which is why I will show you in a moment our specialized lending increase was very significant in this environment.

On the fee side, our trust and investment advisory business is doing well.

Income increased by 15.4% compared to second quarter 2010.

That is really a function of better markets and better execution.

A lot of that execution is coming out of our wealth division where we have been focusing intensely on for the last few years.

And it's really beginning to be fruitful now where our revenue as well increased 11.8% compared to second quarter of 2010.

So that business is working well.

We continue to add revenue producers in the wealth area, because we have a lot of fertile opportunities out there.

I want to spend just a minute on our corporate banking area and be sure that, number one, you realize it's a major focus for us, but also I want to be clear about what it is we do.

After our first-quarter call I think we had a little bit of confusion about what it is we are doing here, so let's be clear.

What we are doing is participating in what the market considers to be the middle market.

Sometimes you will hear us say large corporate, because for us large is a small or right in the middle of the middle market in terms of the market recognizing it.

So we really haven't changed in terms of the kinds of companies we are focusing on; it's just that we have broadened our focus.

So our focus remains on middle market; it remains relationship based.

We are only doing businesses where we go out and call on the clients.

We call on the CFOs; we call on the CEOs.

We are in their offices.

We are not out buying just syndicated tranches, syndicated packages.

In fact, to give you a feel for this, our target is, in terms of revenue size, is for public companies with $250-plus-million dollars in revenue, private companies $500-million-plus, and really total borrowings of $500 million or less.

So you can see that the really big companies that a lot of the very large national players are dealing with is just not our market.

So we are focused on that solid middle-market group, which is where we have a great interest and a great specialty.

Now the reason we are having such good results is because we have broadened our markets.

We have got some great new markets that we are underserved in -- Texas, Alabama, Florida -- and we really viewed this strategy as a national footprint.

So our bankers are out developing relationships that meet our target criteria across the country and we have particularly unique opportunities in Texas, Alabama, etc., where we have recently had some expansion.

Also, we have expanded some of our vertical concentrations.

Energy is one that we have recently added that we are focusing a lot of attention on and getting phenomenal results.

We are really only focusing those areas where we have expertise, where we have research expertise and staff expertise, so that when we are calling on these clients we are not only in their offices, we know something about the business and we know about their industry.

I want to re-emphasize that our underwriting standards have not changed.

They are conservative and are focused on the same principles that we have had for a long, long time.

Given that we are having good results.

I would point out that our shared national credits gets a lot of focus, part of this thrust is in shared national credits.

As you know, that is basically just where multiple companies are doing -- bank companies are doing business with one company.

That doesn't inherently make it a syndicated credit; it just means multiple companies are in there doing the banking.

We do have a shared national credit portfolio that is growing modestly, but the outstanding balance is $3.1 billion so it's not like a massive part of our portfolio.

The broader issue is this broad middle-market corporate banking focus.

Importantly though, it is growing.

Our end-of-period balances increased 11.5% compared to the first quarter, so we are getting good leverage there and getting the kind of credits that we are trying to focus on.

One final point on the quality issue, I just want to emphasize we avoid leverage-sponsored lending.

We have strict hold limits; we have not changed those.

So we are not stretching the parameters in terms of the risk factors in terms of how we approach this.

We simply have expanded the market territory and the focus of having, frankly, more bankers on the street looking for the business.

So turn with me now, if you are following on slide five.

Just a little bit more detail on loan growth.

Like in past quarters you will see that our absolute total loan growth on a second-quarter annualized basis is a modest 0.6%.

But remember we have a really big-time run-off in our ADC portfolio at 42.5% decline and a modest run-off in our covered portfolio at 20.5%.

So if you exclude those, our normal focused portfolio grew 3.4% on an annualized basis.

C&I was 2.6%.

Sales finance, which is doing great, and quality is phenomenal.

The yields are good, 5.9%; residential mortgage 8.6% and specialized lending, as I indicated earlier, is doing really well growing 11.9%.

So the lending strategy is working exactly the way we want.

More than two-thirds of our total net loan growth is non-real estate.

Our loan yields are holding up nicely.

There is a lot of competition in the market, no question, but our loan yields decreased only 3 basis points versus first quarter, so our folks are doing a nice job in terms of holding up our yields.

Our growth did gain moment during the quarter.

For example, our end-of-period loans were up $810 million, annualized 3.2%.

And if you isolate in on C&I, which is our primary thrust, the end of period or point-to-point was up $579 million or 6.9%.

So what you can see is that as we move through the second quarter we started gaining momentum.

Now if you recall in the first quarter it started out really strong coming out of the strong end of the fourth quarter, but it started slowing a little bit into the first quarter as we went through this little soft patch.

Now we are seeing that while there is still uncertainty in the market place to be sure, our volume started really building as we headed toward the second quarter -- into the second quarter.

A lot of that, frankly, is where we are moving market share.

Really where we are being allowed to have relationships with companies that have lost other relationships with banking companies that have gone out of business or merged away and we, as a top 10 player, are a very good candidate to be a big part of their banking group.

And so we are having really good success with those.

I am reasonably optimistic as we head into the third quarter in the lending area.

So if you will turn with me to slide six, just a couple of comments in the deposit area.

I would say mostly our strategy of diversification is about as close to excellent execution as I can imagine.

Our DDA is up 22.2%; our interest checking up 67%.

Our CDs, as in previous two or three quarters, are down 12.8%; that was by design.

Recall our strategy there is to move out some of those more expensive single-service CDs, because, number one, they are expensive and, number two, frankly, we don't need excess funding today and so buying expensive single-service CDs makes no sense.

So we have not been doing that.

So total client deposits are up 7.1%, which is very good.

Our average client deposits, excluding CDs, increased $2.5 billion or 12.3% on an annualized linked-quarter basis.

Interest-bearing deposit cost did decline to 0.72% compared to 0.82% in the first quarter.

So we are getting the diversification we want in the areas we want it in, and that is helping us get diversified and bring our costs down at the same time.

Which of course was our strategy, but it's pleasing to see that we are able to make it work.

And I would say that looking forward we expect to see continued strong deposit growth in the second half of the year, which will allow us to continue to keep an appropriate amount of downward pressure on costs, which will help support our improving margin.

So now let me turn to Clarke and let him give you a good bit more detail and color with regard to the credit quality area.

Clarke?

Thank you, Kelly, and good morning, everyone.

I am very pleased to share continued improvement and positive trends in our credit performance for the second quarter.

We are particularly pleased that the pace of credit improvement accelerated meaningfully this quarter.

As Kelly indicated earlier, the credit improvement was broad-based, reflected by linked-quarter improvements in all key credit performance measures from early-stage indicators to NPAs and core losses.

This performance reflects the third consecutive linked-quarter improvement in each credit indicator and is consistent with our previous guidance and expectations to more aggressively resolve problem credits and move through the last stage of this challenging credit cycle.

These results are summarized on slide seven.

While we have shown you a similar slide the last two quarters, we are pleased to report greater decreases in many categories this quarter.

Results include lower levels of watchlist credits, delinquencies, performing TDRs, NPA inflows, NPLs, OREOs, total NPAs, and core losses.

Given the successful and sustained execution of our problem asset resolution strategies over the last year, we would expect continued improvements in our asset quality results as we move forward.

Over the next few slides I will share some additional color and key drivers for these improving trends.

Slide eight details a significant linked-quarter decrease in non-performing assets.

Total NPAs were down 13.2% in the quarter with NPLs down 16.8% and OREO down 5.7%.

Total NPAs peaked five quarters ago and has steadily decreased with a cumulative reduction of approximately $1 billion.

Significant improvement in the inflows of new problem assets and continued strong execution of our asset disposition strategy drove these results.

We sold $675 million of problem assets in the quarter with average sales prices consistent with our targets.

Disposition of the loans totaled approximately $448 million, which included retail mortgage of $271 million and commercial notes of $177 million, as well as OREO sales of $227 million.

Total problem asset sales over the last 12 months have totaled $2.2 billion and the remaining commercial NPLs in the held-for-sale portfolio have been reduced to a level of only $116 million.

These strong disposition efforts have supported a material reduction in our non-performing assets.

As we conclude this accelerated disposition strategy, we feel very good about the execution.

Due to this successful disposition strategy and lower NPL inflows, we now anticipate a more traditional, but continued, aggressive approach to problem asset workouts but with less reliance on larger bulk sales efforts.

Turning to slide nine, you can graphically see the 24.9% decrease in total NPA inflows.

This reduction was driven by a 24.9% decline in commercial NPA inflows and lower inflows in each of our reported lending segments.

This quarter's inflows are substantially below at 47%, the levels experienced in the second quarter last year.

As I mentioned on the call a couple of quarters ago, reducing quarterly commercial inflows to $500 million or below will allow us the opportunity for continued improvement in non-performing assets without reliance on aggressive note sale efforts.

As we continue to work through our identified watchlist accounts, we would expect ongoing improvement in the inflows each quarter.

Talking about TDRs, total performing TDRs decreased 10% this quarter including a 25% decrease in commercial TDRs.

As part of our asset disposition strategy, we have been offering fewer modifications, particularly in our commercial portfolio, with the majority of our TDRs offered to our residential and consumer borrowers.

This is evidenced by the fact that in 2Q 30% of our performing TDRs were commercial versus 58% in the second quarter of 2010.

We still believe, however, that prudent modification efforts are appropriate for some of our borrowers and enhance our overall results.

This is supported by the fact that 76% of our TDRs are in a performing status and 90% of performing TDRs are, in fact, current.

Now let me comment on the new accounting guidance related to TDRs.

Based upon discussions with our accountants and regulators, we really don't expect much impact on our results, if any.

We believe the conservative approach to accounting for modifications we have previously taken is consistent within the new guidance.

On slide 10 you will note that our total charge-offs for the quarter were 1.8%, up from 1.65% last quarter.

However, this amount does include $87 million in charge-offs which include loss on sale and allocated reserves for the mortgage sale we completed this quarter.

Excluding the mortgage sale, core charge-offs were 1.46%, down 11.6% compared to last quarter.

This core level of charge-offs reflects the lowest level in more than two years.

Our charge-off guidance last quarter was that we would break through 1.5% by the end of that year.

On the core basis we have obviously met this project a couple of quarters early.

For the remainder of 2011 we expect total quarterly charge-offs at levels consistent with the core loss levels we experienced this quarter.

Due to the improved portfolio performance, our provision expense decreased this quarter and came in at approximately 70% of total charge-offs.

However, the provision was 78% of core charge-offs.

While our provision was down this quarter, we actually improved our NPL coverage ratio to 114%, excluding covered loans.

I would also point out that when you adjust for the impact of the small colonial impairment we had this quarter, about $15 million, and the specific reserves associated with the mortgage loan sale, we had a reduction in our allowance of $78 million this quarter which is only modestly higher than the $64 million last quarter.

Continued improvement in our credit quality performance will likely allow for further reductions in provision expense and other credit-related costs in the second half of the year.

Finally, looking at slide 11, we also experienced a very strong reduction in early-stage indicators.

Total watchlist assets were down 9.5%.

Early-stage delinquencies, the 30 to 89 and 90 days past due buckets, were down 11.7% to the lowest level in three years.

A 46.6% reduction in commercial delinquencies combined with better-than-anticipated seasonal results in the retail-oriented portfolios drove this improvement.

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

As a result, we have been working diligently to reduce the exposure in this segment.

I am very pleased to report that we made excellent progress reducing balances $400 million including held-for-sale this quarter, and additionally NPL inflows in this segment for the quarter were down 47% over first quarter.

With lower inflows and much reduced exposure, we believe the remaining credit issues in this portfolio will be very manageable.

So in summary, we were very pleased with the faster pace of credit improvement this quarter.

Everything that we are seeing from a credit perspective is very positive and continues to move in the right direction.

The sustained execution of our asset disposition strategy coupled with clear improvements in early credit quality indicators, including lower inflows, supports our confidence in our credit direction.

We just want to remind you all we have significant earnings leverage due to the sizable credit infrastructure we have had to build and these credit costs can clearly be reduced in coming quarters.

Therefore, we would expect further improved results and lower credit costs for the remainder of the year.

With that let me turn it over to Daryl.

Thank you, Clarke, and good morning, everyone.

I am going to discuss net interest margin, fee income, non-interest expense, and capital.

Continuing on slide 12, net interest margin for the quarter came in very strong at 4.15%, up 14 basis points from the first quarter.

Our margin continues to benefit from positive funding mix changes, lower cost of funding, and increased yield on covered loans and lower non-performing assets compared to last quarter.

Specifically, the 83 basis point decrease in the average cost of long-term debt was the result of issuing new debt at favorable rates and repositioning of hedges, which can then be amortized over the expected life of the instrument.

When you adjust for non-performing assets and interest reversals, so a more normalized level, net interest margin would be about 9 basis points higher.

Net interest income on covered assets increased $19 million compared with last quarter.

Adjusting for additional provision of $15 million on covered loans and an increase in the FDIC loss share expense, net revenues decreased $19 million for covered assets.

With regard to margin expectations, we expect the margin to decrease to a range of about 4.05% to 4.10% for the remainder of 2011.

This is driven by lower yields on loans, a less favorable asset mix, and a slightly higher cost of long-term debt.

However, margin continues to benefit from positive funding mix and falling costs of interest-bearing deposits.

Also, you can see on the graph on slide 12 we remain asset sensitive in our position for rising rates.

Additionally, given the uncertainty of the rate environment, we also positioned ourselves to benefit should rates decrease 25 basis points.

Turning to slide 13, our fee income ratio increased to 40.8% in the second quarter from 40.1% in the first quarter.

The increase was driven by higher insurance income, service charges on deposits, check card fees, bank card fees, and merchant discounts.

As expected, insurance income is usually strongest in the second and fourth quarters.

Additionally, insurance market is showing some signs of improvement due to better economic conditions.

Service charges on deposits increased $10 million or 29.7% annualized linked-quarter, primarily due to the rollout of Bright Banking and other new service offerings at the beginning of the quarter.

As a reminder, BB&T Bright Banking replaced free checking and, as Kelly said, the rollout has been very successful.

Both check card and bank card fees remain strong due to increased activity and account penetration.

Mortgage banking income for the second quarter was $83 million compared to $95 million in the first quarter.

This decrease was primarily due to a 33% decline in application volume, a lower net gain on MSR hedging, and fewer sales and lower margins on production.

Trust and investment advisory income increased 18.7% annualized linked-quarter as market conditions improved.

FDIC loss share income offset increased $23 million as a result of the impact of cash flow reassessments, which showed improving cash flows from covered assets.

In addition, the balances at the end for accretable yield increased to $2.5 billion from $2.3 billion last quarter.

This is the result of decreased loss projections in the covered loan portfolio.

The net loss on securities resulted in an $18 million in OTTI, largely offset by gains on non-qualified pension assets.

Finally, we are modifying our prior estimate for the impact of Durbin, posting order change, and Reg E.

We currently expect the total annual run rate impact of $395 million in lower revenues versus our prior estimate of $450 million.

To date we have identified offsets for about half of the impact of service charges and check card fees.

We are working on additional revenue generators to close the gap further.

As this process moves forward, we will continue to introduce new product and service offerings for our clients.

On slide 14, our efficiency ratio improved to 55.8% compared to 57.1% last quarter, primarily due to increased revenues.

We also achieved positive operating leverage and expect this to continue for the second half of the year as non-interest expenses are expected to decline.

Personnel expense decreased $11 million or 6.4%, mostly due to lower FICA and unemployment taxes.

FTE employees increased 252 this quarter, but are essentially flat compared to the second quarter last year.

Our second-quarter hires include revenue producers in wealth management, capital markets, electronic delivery, and mortgage lending.

Professional services increased $13 million due to revenue-producing business expenses in specialized lending , specifically premium finance and small ticket equipment finance , in addition to legal expenses increased due to the credit environment.

Other non-interest expenses increased $21 million, largely due to the litigation-related recovery in the first quarter of this year.

Finally, the second-quarter effective tax rate was 21.8%, in line with our expectations.

Turning to slide 15, our capital ratios continue to remain among the strongest in the industry.

Tier 1 common improved to 9.6% from 9.3% last quarter.

Tier 1 capital is 12.3% compared to 12.1%.

Leverage capital is 9.5% compared to 9.3%, tangible common remains healthy at 7.2%, and total capital is 16% compared to 15.8%.

Our internal capital generation continues to provide support for both organic and strategic opportunities.

Our current estimate of Tier 1 common under Basel III (technical difficulty) [8.3]%, up substantially compared with last quarter.

We believe we will meet the Basel III requirements, including SIFI buffer, once the regulators publish the US capital rules.

In addition, we are well ahead of our projected capital levels as presented in our annual plan.

This positions us with additional financial flexibility.

Let me reiterate Clarke's comments related to the new TDR accounting guidance.

We feel very confident that the accounting change will not have a significant impact on BB&T, and we feel certain that our TDRs will continue to decline as we move forward.

With that let me turn it back to Kelly for closing remarks

Thank you, Daryl.

So as you can see, overall we have had improvement in our credit trends (technical difficulty) accelerated.

We have strong fundamentals across our business lines.

We are successfully accomplishing all of our strategies that we have set out, many of which we set out three years ago.

We continue to invest to drive revenue and loan growth, and we are seeing that realized.

And we believe we are providing the best value proposition (inaudible) the most important driver of long-term revenues and profitability.

So at the end of the day we believe our best days are ahead and look forward to demonstrating that over the next several quarters.

Now we will stop and entertain your questions.

Thank you, Kelly.

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

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

If you have further questions, please re-enter the queue.

Now I will as Kelly to come back on the line and explain how to submit your questions.

(Operator Instructions) Mike Mayo, CLSA.

I just wanted to follow up on the growth in the commercial loans.

If you had three categories to give the reason to, one reason would be there is a pickup in commercial loans generally.

The second category would be market share gains and the third category would be increased risk taking.

Now how would you explain the commercial loan growth?

Also, I heard the 11% growth versus the first quarter; that was just the middle-market loans, that was not the shared national credits, is that correct?

Yes, that is right and so clearly the primary driver of ours would be market share movement, no question about that.

The second would be to some degree some pickup in loan growth in general as these markets are beginning to get a little more confident, although to be honest there is a lot of reservation out there still today because of what is going on in Washington and Europe, etc.

The third one, increase in risk, would be zero in terms of the impact on ours.

And one follow-up.

What is the loan utilization rate this quarter compared to last quarter?

It's about 34%, 35% and still kind of flat.

Okay, so that is really market share expansion?

All right.

That is right.

Thank you.

Matt O'Connor, Deutsche Bank.

I just want to drill down a bit on the funding side of the equation.

We are seeing some of the stronger banks be able to lower their funding costs.

We saw that from you guys, both the deposit rates came down, the long-term debt costs came down.

Maybe just a little more color in terms of what drove some of the decline in long-term debt specifically, and then just how much more opportunity there is to bring down the funding costs in total from here.

Matt, I will take part of that.

Daryl will cover the debt part.

As you can see from our numbers, and really kind of from general industry numbers, the industry is kind of flush with deposits right now because consumers aren't spending as much.

They are paying down debt and/or saving more; saving rates are up pretty significantly.

Businesses are remaining very, very cash flush.

And so to say money is flooding in wouldn't be a particularly strong overstatement.

So while you want to be fair to your clients, it certainly gives us an opportunity to manage down rates, particularly when we have, as I indicated earlier, single-service type clients.

So I think there is still opportunity.

Our projection is that at least for a while now, the next certainly several quarters, the most likely is that rates are going to be relatively flat.

There is just no energy in the market out there to cause the Fed or anybody else to try to raise rates.

If anything if they could figure out how to lower them they probably would.

So I think there is a little bit of opportunity to go down.

Obviously, we are pretty close to floor and so it's not dramatic there, [a move downward] on the deposit side.

And then Daryl can speak to the debt side.

So just to reiterate what Kelly said, we expect our deposit costs to go down probably 3 to 5 basis points again this quarter.

On the long-term debt piece, it's really a function of some new debt issuances we did and we swapped those.

We also were able to unwind some hedges and able to amortize those gains over the estimated life.

So the combination of those two really had our long-term debt costs come down.

That should stay down at that level, maybe bounce up a little bit, but should stay relatively close to that level that we are at on a go-forward basis for the next couple of years.

Okay.

And then just as my follow-up, obviously there has been a lot of derisking of the credit book the last few quarters here.

It has come out of costs that has been offset with the revenue strength.

But as we think about the asset sales and credit improving going forward are there more bulk sales that you would expect and some related hits from that or is it more just kind of slugging through loan by loan at this point?

Matt, this is Clarke.

I think the latter is the best description.

We don't anticipate any additional large transfers.

Remind you all last year we transferred almost $1.9 billion in our strategy and we have got that notionally down to $230 million and now $116 million on a book basis.

And we are almost out, so we feel very good about that.

What we are transitioning to now is more of a single-name, credit by credit, aggressive disposition strategy.

Included this quarter we did a good bit of that, so we think within our current charge-off guidance and problem asset improvement guidance that we will be able to do those types of strategic liquidations without a big impact on losses and still have good credit improvement.

Okay, thank you.

Todd Hagerman, Sterne Agee.

Good morning, everybody.

Clarke, I just wanted to drill down a little further on the disposition strategy, just as I think about the level of OREO.

You are still carrying in excess of $1 billion; the held-for-sale component came down just under $2 billion this quarter, most of that through the commercial line.

But the question center, as you know, you talk about this loan by loan kind of slugging it out over the remaining quarters, if you will.

I am just trying to think about how do I think about underlying credit quality as it relates to that held-for-sale bucket and that excessively large, proportionally the OREO category?

How do I think about the credit quality trends and the pace of improvement going forward?

Fair question, Todd.

The way we think about it -- I mentioned for us mathematically we really needed to get new NPL inflows in the commercial side and down under $500 million.

If you just look through how we would reconcile through that our movements to OREO and out, our loss taking, and then what we would call resolutions, those would be upgrades to accrual, they would be short sales with our borrowers, they would be strategic one-off sales or, frankly, asset sales or payments by the clients.

And so at a lower inflow number we can make all that work, even with the levels we are carrying now, and see, we think, steady quarter-to-quarter decreases in the NPA levels without any significant impact on our loss guidance.

So it all comes down to reducing those inflows.

We do have very active appetites still from the strategic investor community and with the borrowers contacts for a number of these assets, so we are able to work, many times cooperatively, with the borrower or sell the note ourselves without having to resort to a big bulk sale.

I hear what you are saying, Clarke, but as I think about it I mean should I think about just again kind of that pace of improvement and kind of the level of mortgage that are within those categories?

Is it, as we have seen here the last couple quarters, a mid to high single-digit kind of pace or can we look for something a little bit greater than that?

Usually I think about it with the current economic outlook, barring any significant shock from here, even with the slow economy what we would expect is a mid to high single-digit improvement each quarter or more.

And so it's going to depend about how aggressive we are, but we feel very comfortable we will stay in that steady range.

Great, thank you.

Craig Siegenthaler, Credit Suisse.

Thanks.

Good morning, everyone.

Just first on your longer-term kind of NIM expectations here, are you still kind of expecting a core NIM in the 3.70% to 3.80% range?

And I am also wondering how did your underlying core NIM trend in the second quarter from the first quarter when you back out Colonial, elevated NPAs, and excess liquidity?

So, Craig, we still are, if you look at long-term net interest margin we are still in the 3.70%, 3.80% range.

That hasn't changed.

As far as the core margin goes, our core margin did expand and it was mainly driven by the benefits that we saw on the right-hand side of the balance sheet, both on deposits and long-term debt.

So it was up easily probably 10 of the 14 basis points on a core basis.

Got it.

Then when I look at slide 13 on your expectations for Durban Reg E and also order change, if I just think about the run rate of revenues now and then I move into the fourth quarter when Durban begins, what is the impact -- and you can give us annualized or on a quarterly basis -- just from Durban and order change, because really Reg E is already in the numbers now?

That is right.

So if you just look at our line item on check card fees, we would expect that to fall about $40 million from third to fourth quarter due to Durban.

So that would be the impact from a quarter-over-quarter basis.

If you just look at the interchange, you can annualize that and it is probably about in the $150 million range.

There is seasonality on a quarter-to-quarter basis, but --.

Keep in mind, Craig, that while we have made changes that pretty substantially cover all of the issues we had on the Reg E and the NSF side, we have not yet made any changes with regard to picking up or replacing the income on the debit side.

We are evaluating like everybody else a lot of strategies.

We will be executing strategies to substantially replace that.

We are trying to be careful.

We just literally got the final ruling in the last couple of weeks, so we will be doing some testing.

We will be doing some careful thinking about this.

Daryl is right, we will probably get that kind of change in the fourth because we are not going to rush out and make dramatic changes.

This is a very delicate thing because debit cards are now the majority of the payment system.

So if we have to do some testing with our clients to figure out where the sensitivities are and where can we best recover our costs.

But make no mistake about it, over a period of time we will recover these costs -- recover these revenues because it's too significant for us to just absorb.

And I think the market is going to figure out how to do it; it may take a few quarters but we will figure it out.

Got it.

Understand.

Thanks, Kelly.

Thanks, Daryl.

Betsy Graseck, Morgan Stanley.

Good morning.

Just wanted to touch base on slide 14 where you talk about the expense ratio.

You indicated positive operating leverage this quarter and that you anticipate that is going to continue going forward.

Could you just give a sense of how you are thinking about that trajectory over the next several quarters, given the puts and takes on things like Durbin, as well as what you expect you can get to as a normalized, quote-unquote, efficiency ratio?

So for the next order or two, Betsy, the way we are going to get positive operating leverage is we are going to get it on the expense side of the income statement.

Our revenues, we expect net interest income to be higher, we expect fees to be down a little bit in the third quarter, but our expenses will come down which will help drive the operating leverage.

We are still expecting when we talked last quarter our efficiency ratio to continue to trend down.

It will probably be in the mid 50%s the rest of this year but start to move down next year, especially as these credit costs continue to decline.

Our target is still to get back -- historically we have been in the low 50%s.

We believe our operating run rate can get us back to the low 50%s.

We just got to really get through all the -- the asset quality to come down to more normalized levels.

Betsy, just a little more color.

Keep in mind that there is still embedded in our expense structure a ton of costs all related to credit.

It's legal costs and it's allocation of time of our officers that are devoted to credit resolution versus revenue.

It's just on and on and on.

So that will slowly and steadily come down.

Also, to be honest, over the last couple of years we have invested a lot of money in building out our infrastructure to have stronger risk management systems and economic capital systems and so forth.

Because, as a top 10 institution today and with Basel III around the corner, we felt that it was necessary to invest heavily in building out those systems so that we are a first-class, top 10 institution, which we have largely done now.

So as those costs -- the credit costs continue to go down as the infrastructure costs begins to moderate that begins to release some of the pressure on the efficiency ratio.

So the follow-up is that you have got capacity internally to do more, given the infrastructure you have done, as well as on a capital perspective you indicated internal capital generation is high enough to support not only organic but also opportunity for strategic growth.

Could you just give us a sense as to or remind us what you are looking for as it relates to strategic opportunities?

Yes.

So, Betsy, in terms of strategic opportunities that is obviously the more significant opportunity in terms of levering infrastructure cost.

It's kind of interesting, the strategic margins, the merger scenario I think is beginning to aid us, probably about a year later than we all thought but it's beginning to accelerate.

We certainly plan to be aggressive with regard to looking at acquisition opportunities as we have, but I always try to remind everybody that, because there is just so much oversized emphasis on mergers, that the number one focus for us is on organic growth.

We have such great markets and such great underutilized strategies that we simply are going to measure ongoing focuses on organic.

Notwithstanding that, however, we will be looking at the various opportunities that are available.

As you know, they are very unpredictable.

But when we approach those we will approach them as we have said, and that is they have to meet our three criteria.

Number one, they have to be strategically attractive.

Number two, we have to have able to [reign] the asset quality.

We are just not just going to take on an institution with a bunch of asset quality that we can't control.

We control it because (inaudible) but of course that has great implications for your price.

And then third is it has to be meaningfully attractive to our existing shareholders, otherwise it makes no sense to us.

So as long as they meet those criteria we will pursue them, and to the extent that they do not we will pass on them.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning, everyone.

Actually I want to follow-up, I guess, on another direction on Betsy's question in terms of the capital levels.

Obviously, your capital levels are quite strong now, particularly the Basel III Tier 1 common ratio being above 8%.

Your dividend payout ratio now, however, is above 30%.

So how are you thinking about potentially increasing if you did buybacks in an environment where you continue to exercise the discipline that you have shown already in terms of acquisitions?

Matt, this is Daryl.

What I would tell you is we target our dividend payout ratio to be between 30% and 50%.

I would expect us to stay in the probably lower half of that range going forward.

As our earnings continue to improve, I would expect our dividend to improve proportionately to that.

As far as buyback goes, we really do buyback as the tail on the dog, really targeting what capital you need it to be.

We need to meet our organic growth opportunities first.

We still continue to look at strategic opportunities.

At the end of the day, if we still have access capital then that would be something that would be considered, but I wouldn't expect buyback anytime this year at least.

Okay.

Maybe, Clarke, could you provide a little more color in terms of the credit infrastructure comments I guess that Daryl made and what the size of those are relative to the operating expenses that you are currently reporting?

Think if you recall, Matt, last quarter Daryl laid out the non-personnel-related, what we believe, direct cost on an annualized basis to be probably $0.75 billion or more.

We still feel like that is a good proxy.

But beyond that, to Kelly's point, we have several hundred people and a number of associated costs in a workout infrastructure area that we think has substantial capacity to either be brought down or support future strategic opportunities.

So we think between the two the leverage is pretty significant.

We are just really scratching the surface on an improvement.

It's just now starting to happen.

That is right.

We are just now beginning to see the significant reduction common quarter, for example, in the OREO expense right now.

But the majority of it we have not realized yet.

Okay, thanks very much.

Bob Patten, Morgan Keegan Investments.

Good morning, everybody.

That was my question, but just in general where do you guys see the opportunities based on what you are seeing?

It looks like end of period loans for a lot of the banks are starting to move a little versus average for the quarter.

So it looks like things have picked up.

But is it in the small business, is it the CI, is it -- again Mike Mayo asked is it taking share, is it acquisitions?

What markets?

Is Birmingham your best market?

Where do you really see the opportunities?

Bob, it's really pretty broad based in terms of markets.

Obviously, we are getting really phenomenal opportunities in places like Birmingham and Mobile, Alabama, and Huntsville, Alabama, and places like that where we have good existing infrastructure and just have never been a part of the lending operation in that market.

So that same thing in Florida and so those are going really well.

But also when we are pursuing these verticals specialty areas in various parts of the country, and it's all basically in C&I, we are having tremendous success.

Because again kind of think about it like this, at about the same time we decided that we wanted to be a participant in that national corporate middle-market space a lot of these companies were looking for another partner because a number of their existing partners had gone away -- the NatCities of the world and Wachovias of the world and First Unions.

So we were looking at the very same time they were receptive and so it has been very receptive.

But it's across the board; it's in C&I.

Small business is not yet really moving to be honest.

That is the part of the business economy that is still struggling.

It's one of the largest systemic issues in terms of job creation, because they do create the majority of the jobs, but they are still struggling.

Now the fallout rate in that market is slowing as they get stabilized, but as you can imagine they are still very reticent to go out and invest real quickly.

They are still kind of hanging on by their fingernails.

I think the large market is just doing better.

They just have more flexibility to respond to the environment.

And, frankly, they have stronger balance sheets and so they are willing to make more investments, so I think that is why you are seeing that.

Then in our particular case it's just a lot of market share movement.

Okay.

Then to Clarke.

Clarke, when you guys look at your annual reviews for lines of credit and small business and middle market, are you seeing improvement year over year in the financial presentations that the companies are giving you in terms of updated appraisals and updated financial information?

Absolutely, Bob.

I would say, while businesses are very reticent to borrow, they are absolutely improving their health year-to-year.

And so particularly in the middle-market side the improvement in operating earnings and particularly in their balance sheets and their liquidity levels looks really good.

They are just very reticent to borrow.

And, to Kelly's point, the majority of what we are seeing and funding into is refis or dividend recaps; very little fixed plant and equipment expansion, a little bit of M&A.

So again improving, strong looking balance sheets, just not a lot of new activity.

We are just fortunate to be able to participate in a number of those refinances.

Okay.

Thanks, guys.

Appreciate it.

Brian Foran, Nomura.

I guess on the insurance brokerage business, recognizing the seasonality but focusing more on year-over-year growth, we have gone from negative 4% in 4Q to negative 1% in 1Q to plus 4% in 2Q.

Is it possible -- do you have a sense of how much of that is pricing versus how much of that is market share?

And for those of us who don't know the business well, is mid single-digit growth rates a reasonable guess at the go-forward or is it still accelerating right now?

Well, that is a good question, Brian.

We are still in this proverbial soft market.

There has been just a little bit of price improvement in the wholesale space which precedes the retail, but not dramatic.

So we have not yet turned to a hard market.

While all of our folks predict that it is right around the corner, I will say they have been saying that to me for several years.

I think the fact is there is relatively excess capital still in that business, and as long as it is you are going to stay with prices kind of like where they are.

So our increase is market share movement.

We have clearly been very successful in the marketplace in terms of our strategy.

So typically what you would see if the market is down 4% or 5%, you might see us up 1% or 2%.

We tend to have that kind of spread over the market based on our strategy and I really kind of think that is the way to think about it going forward.

I think over -- say to next year.

Assuming no change in the prices, then you can kind of think about our growth in the 2% kind of range, maybe 3%.

If you get some price improvement -- this thing is like an annuity; it is a lever factor that is like 1-to-1.

So when we do hit the hard market, which is why we keep investing in this and continuing to make acquisitions, because it's a great business for us today with about $1.1 billion in revenue and very profitable.

We are the most profitable -- I mean most productive of the top 10 brokers, have been for the last six years in a row.

And so it's a really good business.

Not growing quite as fast as we would like, but got a lot of future opportunities.

And then if I could follow up on the swap benefit or the hedging benefit you talked about on the long-term debt.

Is this like -- mechanically do you pull forward an amortization gain and then that gain steps down each quarter going forward, which I guess would be akin to what we saw at Huntington last year?

Or is this more like you had pay fixed swap that was out of the money; it now ends so there is a consistent drag that just doesn't show up in the numbers?

I guess what I am really asking is does the benefit from the swap amortization thing you referenced decrease over time or is it a constant benefit going forward?

Yes, Brian, it's Daryl; two things to that.

So part of it was we did some new issuances, we put on new swaps so we are basically trying to be a floating rate to us.

So some of the benefit you saw there will change as LIBOR changes.

Right now LIBOR is down a little bit from when we put them on, but that is probably forecasted to be relatively stable for the next year or so until the Fed decides to raise rates.

On the piece that was unwound from a gain perspective, it's done more on a level yield type basis.

I would expect it probably to bleed down a little bit.

It shouldn't be substantial, but I would say that the benefit should cause the long-term debt to go up a couple basis points a quarter.

But substantially you still have that benefit there for the remaining estimated life of those instruments.

So we feel pretty good for the next couple years that what you see in the benefit there is going to be close to that, just up a little.

Thank you.

Ed Najarian, ISI Group.

Good morning, thanks.

Most of my questions have been answered, but I just have one quick question.

On the back of a pretty good quarter with provision to loan ratio I think in about the 1.25% to 1.30% range, the ROE was still at 7.25%.

So I know you talked about operating leverage, revenue growth, potentially some more credit quality improvement, but what is your ROE target over the long term for this company?

And how quickly do you think you can get to a double-digit ROE and maybe what are some of the near-term drivers that will get us to a double-digit ROE?

Ed, the important question on that that we are all wrestling with is what is the E, what are going to be the equity levels.

But if you kind of assume (multiple speakers)

I think you are kind of at your appropriate E right now; it's probably not going to have to go much higher.

Yes, we agree with that, absolutely.

So clearly we are thinking the new world the new normalized ROE is in the 14% to 16% kind of range.

It certainly will be improving steadily, literally, I think quarter by quarter.

The big drivers are we have still got huge costs, as Clarke just alluded to, with regard to credit costs in the business.

As those credit costs come down there is really not a lot else in the business that has to change over time for us to get back to kind of that normalized kind of level.

Now we will be changing and improving a lot of other things in terms of efficiencies and other types of revenue, but the big drag on ROE today is still walking credit cost.

So you think you can double -- so from this kind of performance that you can double the ROE of the company?

Yes.

Okay.

And literally that can be -- that can happen from revenue growth, the expense saves -- all that is enough?

Because it seems -- again I just look at the numbers and certainly there seems like a number of things that can continue to improve, but it doesn't seem like there is a massive amount of additional credit leverage, given where the provision level was this quarter.

There is some, but it seems like given the amount of reserve recapture and where the provision was that a good chunk of that is behind you.

How would you respond to that?

Well, you are just looking at part of the equation and that is understandable, because it's hard to see.

But we know, and this is kind of what we kind of outlined, I think, last quarter, but the embedded cost in credit resolution throughout the entire income statement is huge.

And so when you begin to let that bleed off over time, in addition to some more normalized level of reserves and provision costs, then you will begin to get that.

Let me get Clarke to kind of review again the issue of all of those embedded costs.

We think, Ed, again the direct costs alone are at least $.075 billion.

When you add in all the personnel side you could be heading up toward north of $1 billion.

Then the other thing to remind you all that we said last time and we still believe, with our current view of loan asset mix and as we move forward with our diversification strategy, our long-term risk appetite around loss taking with that mix is probably 60 to 80 basis points annualized losses.

And while we don't know what the new world will totally be around allowance, we would expect that to maybe be two times that level.

So I think the combination of the credit cost coming down and a more normalized provisioning world and allowance levels certainly make a huge impact.

In terms of the operating cost expense savings, that $0.75 billion to $1 billion, how much of that is personnel related?

Out of about $700 million I would say when we came up -- we were very conservative.

I would say it was a little over $100 million was FTEs, which we know when we came up with that number that some of the people that are on the workout group side now would get redeployed as revenue producers.

So if we were just being true to that we would have much more decrease in those support groups, but we think long-term we are going to redeploy a lot of the FTEs back into the field to actually produce revenue.

So we are a little bit conservative on the actual savings on the personnel side.

Okay, okay, great.

That is very helpful.

Thank you.

You are welcome.

John Pancari, Evercore Partners.

Good morning, everyone.

On the margin you talked about your outlook implying some modestly lower loan yields.

Can you talk about the loan pricing that you are seeing right now and how competition might be impacting your expectation for loan yields in the coming quarters?

Fair question.

What we have seen is that there is absolutely pressure in the marketplace, particularly in the segments we are playing it on the middle-market side, and it's coming down.

While it's still very favorable relative to the peak in 2007, it is coming down.

And what I would suggest to you is that in our case that segment in the market place we have seen pressure probably in the 25 to 50 basis point range thus far.

So it is clearly a lot of pressure out there but that is kind of our experience to date.

Okay.

And is it mainly on pricing, are you seeing some compromise terms?

It started with pricing and certainly the most pressure is on pricing, but we are beginning to see in a number of structural issues developing around tenor and term and other deal structure issues.

And, frankly, we were just not choosing to participate in those areas.

So we are seeing risk taking out there in the marketplace at a higher level, but even all that being said it is still better structures than we saw (technical difficulty).

Okay.

And then lastly, can you just talk about your plans for reinvestment of liquidity into the securities portfolio?

I am sorry if you may have indicated some expectations earlier on the call.

But you put up some good growth in the bond portfolio this quarter and just want to get your thoughts about what type of investments and duration that you are looking at for the coming quarters.

So, John, for what we bought this past quarter we were really conservative on the durations we bought ; floating-rate CMOs, short fixed-rate CMOs, and adjustable rate mortgage-backs which drove that increase.

As our liquidity continues to improve we would probably see us continue to purchase more securities next quarter trying to manage our overnight liquidity position.

I think, depending on what we see right now, we will do securities similar to that.

We may start to go out a little bit longer with a different mix of securities, so I think it's going to be a combination of securities going forward.

Okay, great.

Thank you.

Gerard Cassidy, RBC Capital Markets.

Thank you.

Good morning, guys.

I may have missed this, so I apologize if you already answered this question, but do you guys have any levels where you are comfortable with the commercial mortgage portfolio?

When do you think that and the ADC portfolio will bottom out and will stabilize?

I will do part of this and then let Clarke can chime in.

But the ADC portfolio is basically at the bottom.

I mean part of it will go down a little bit more, but it's pretty low.

We have said $2 billion to $3 billion and it's kind of in that range.

On the CRE side we have actually got some opportunity now because we have a pretty good appetite for multifamily.

We are fortunate in that we have a really good production vehicle in multifamily in our Grandbridge operation, and so we can take that, let's say, minus 2% CRE portfolio and we can actually begin to grow it now over the next several quarters.

So that is a growth opportunity, revenue opportunity, and, the way we look at it, risk diversification.

Because our risk tolerance issue was not around income-producing properties; it was around ADC.

And so, yes, the ADC has about found it's bottom; might start growing a little bit by the end of this year but it won't be a material issue.

On the other hand, CRE will be a growth opportunity for us.

And then the second question on the mitigation strategies for the Durbin amendment, what is the prospect in your guy's opinion that banks move to an actual annual fee for a debit card similar to what credit cards charged today?

Or even if you go back 25 years ago, before the ATMs charged for the foreign transactions they were for free and then obviously now we all pay a fee.

Do you think the industry will be brave enough to step forward and say because of this we need to charge you $25 a year for a debit card?

I absolutely do, Gerard.

It's ironic in a lot of these areas we are going back to the future, so yes I think that will be an annual fee of $25.

Whether it will be $2 dollars a month I don't know, but my guess is when it settles out it will be something in that neighborhood.

Thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, everyone.

Just two quick questions.

Just reserve releasing not a surprise that that is part of the story here, but just wondering if you can comment on the pace to expect going forward.

When I look at pace this quarter I am thinking it's probably a little elevated from the disposition activity you had with charge-offs so do we look at it being more at a pace from the prior quarter?

Then secondly, Kelly, just wondering if you could comment on M&A in non-bank-related M&A.

Specifically -- well, not to get specific on an institution but there has been a lot of discussion about a Southeastern-based broker-dealer that is on the block.

Again, just generally, conceptually is that even something we should think about you all looking at and wanting to add to in your business?

Thanks.

Clarke, you take the first part and then I will do the M&A part.

Kevin, regarding the reserve release I think you are pretty much on track.

The way we think about it and believe that you should think about it in this quarter, you got look at our core provision, our total provision was $328 million.

We had a $15 million impairment for a small Colonial pool, but if you adjust for that we also had $53 million of allocated reserves for the resi mortgages we sold.

So obviously those reserves were tied to those loans.

So when you adjust for that the way we think about the allowance reduction for the quarter was about $78 million.

That was about a little under 19% of our pretax and if you look at last quarter our allowance reduction was $64 million, which was actually 22% of pretax.

So what drove all of this is credit quality improvement and, given the fact that we were not going to be doing any large bulk transfers at this point, I think you will see a fairly steady, normalized improvement in provisioning provided.

And we are very comfortable that we will achieve this, that our critic quality continues to improve.

So on the M&A side I think you can expect to see us continue to do insurance acquisitions.

Admittedly in the last year and a half so we haven't done as many, but the market really kind of changed.

I think with the soft market, with the overall uncertainty in the market a lot of sellers just kind of went into hibernation for a while.

But that has really changed in the last 90 days so I think you will see us continue to pursue a fairly aggressive bolt-on strategy for insurance acquisitions.

On the broker-dealer side it's unlikely you would see us do anything of any material size there.

Number one, the one you are probably referring to, we suspect probably won't end up going with a bank.

But we are pretty pleased with the broker-dealer arrangement we have; it supports our franchise very well.

We can grow it organically.

We don't really see the broker -- acquiring a large broker-dealer as an essential part of our business.

We have a really good, robust capital market business and a strong retail operation.

So you might see us do a small bolt-on type of thing but any type of big one I wouldn't expect to see in our future.

One thing you may see, though, Kevin, that I think a lot of people are beginning to think about is kind of a non-traditional bulk acquisition which you can somewhat characterized mergers as.

I think you may see more non-whole company asset purchases as this whole re-intermediation process unfolds.

You haven't seen too much of it so far, but I think you will see more of that in the future.

And that is something we are going to certainly be looking at.

Okay, great.

Thank you.

Jefferson Harralson, KBW.

Thanks.

I would like to follow up Pancari's securities yield question; it seems like there is some opportunity there over time if you want to.

What is the current duration of that MBS portfolio?

And when I see that 1.69% yield there what could that be without a lot of extra effort?

So, Jefferson, what I can tell you is about 30% of the portfolio is floating rate, so when rates do increase we will get benefits and those yields will rise.

I will tell you that our duration right now of the portfolio is in the mid-3% range or three-year range.

It fluctuates depending on pre-payments, but I would say it's anywhere from 3.25% to 3.75%.

Going forward I would just say we expect purchases to be mixed.

What I said earlier; some fixed-rate longer duration as well as some ARM and floating rate securities.

Okay, all right.

Thanks, that is helpful.

Although we have a number of callers left in the queue, we are out of time for today's conference call.

Alan and I will be reaching out to you for your follow-up questions.

Thank you, everyone, for your questions.

We appreciate your participation today and give us a call if you need anything.

Thank you.

That does conclude today's conference.

We thank you for your participation.