Truist Financial Corp (TFC) 2012 Q2 法說會逐字稿

Good day, everyone.

Greetings, ladies and gentlemen.

Welcome to the BB&T second quarter 2012 earnings conference call.

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, Mr. Alan Greer, Investor Relations for BB&T Corporation.

Thank you, you may begin, Alan.

Thank you, Jenny, 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 2012 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 made their remarks, we will pause to have Jenny come back on the line and explain how you may participate in the Q&A session.

Before we begin, let me remind you that 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 2 and the appendix of our presentation for the appropriate reconciliations to GAAP.

With that, I'll turn it over to Kelly.

Thank you, Alan.

Good morning, everybody.

Thanks for joining our call.

We've got a great quarter, guys.

We're very excited to report our strongest net income for any quarter in our history.

We had very strong growth in revenues, expenses writes are down if you exclude Crump, and excellent improvement in asset quality.

So, it was overall a really strong quarter.

If you look at some key performance categories, net income totaled $510 million, which was up 66.1% versus second quarter of '11.

EPS was $0.72, which was up 63% versus second quarter, and up 72% annualized versus first quarter of '12.

And that's really a result of broad based strong performance across all of our company operating segments.

Daryl is going to give you a lot of detail on that in just a minute.

I just wanted to hit a of couple highlights to give you a sense of how broad based this is.

Our community bank did a great job growing deposits, had strong C & I indirect retail loan growth.

Residential mortgage was strong again, $8 billion origination quarter.

Our Dealer Financial Services segment had record production, very strong credit quality.

Specialized lending had a great quarter with $6 billion loan originations, and I'm personally really excited about insurance, a strong third quarter with 4.8% organic growth.

And then, of course, we also completed the Crump acquisition.

In Financial Services, corporate banking and wealth in particular continued to perform very well with loan growth of 54% and 38% respectively.

So, really, good performance across-the-board.

If you look with me on Slide 3 in the revenue area, total FTE revenues were $2.5 billion, up 20.9% annualized versus the first.

Net interest income was $1.5 billion on a FTE basis, up 7.4% annualized to the first.

That was really a function of margin improvement and asset growth.

In linked quarter growth in fee income, it was materially impacted by the Crump acquisition because it was significant for us.

Year-to-date total revenue totaled $4.8 billion, which was up 14.2% versus the first half of last year.

In the loan area our average loans held for investment grew 6.6% versus the first annualized.

If you take average loan growth, though excluding ADC and covered portfolios and other applied portfolios, it was 9.9% annualized versus the first.

So, we had some strong growth in several categories, including the lending subsidiaries, mortgage, corporate banking, direct retail and sales finance.

In the deposit area, our highlight there would be the non-interest bearing deposits.

DDA grew $1.5 billion or 22.6% versus the first annualized.

Total deposits increased $742 million or 2.4%.

I'll give you a little bit more drill down on the makeup of that in a moment.

And, we continue to have nice improvement in deposit mix and cost.

Credit quality, Clarke will give you a lot of detail on this in a minute, but it was overall really good.

NPAs decreased $359 million or 15.9% ex covered assets versus the first quarter.

Foreclosed real estate decreased $157 million or 41%.

Foreclosed property expenses decreased $20 million from the first quarter, and NPLs decreased $196 million or 10.6%.

So, you can see overall broad based improvement there.

Had good expense control.

So, if you exclude Crump Insurance, non-interest expenses decreased 8.7% versus the first quarter and we were able to hold FTEs flat.

And, the combination of those gave us positive operating leverage.

If you look at Slide 4, a little more detail with regard to loan growth.

It was really strong, especially relative to the market conditions that are out there.

So, you can see that our total growth was 6.6%.

But remember that we still have a material planned run-off in ADC and covered portfolios.

So, excluding those, our total growth was 9.9%.

It was pretty broad based.

C & I was 3%, but I would point out that we had one fairly large leverage lease that expired during that period of time, so if you ex that out it's 4.4%.

CRE is down 3.8%, but recall that that has been -- that is a slowing rate of decline.

We think pretty soon that's going to bottom out and we'll begin to see growth there, which we want to have, because there's some really good income producing property opportunities out there.

So, we see that as a nice positive swing when that moves from a substantial negative to a positive in the near future.

Sales finance grew 9.3% quarter to quarter annualized record production.

Residential mortgage grew 20%.

Other lending subsidiaries grew 32%.

That was broad based, by the way.

Strong growth in equipment finance, small ticket consumer, seasonal strong growth in insurance premium financing, recall that always happens this time of the year.

Grandbridge Commercial Mortgage was strong, as was sub-prime auto.

So, direct retail was strong at 10.1%.

So, you can see it was across-the-board pretty strong growth, again especially relative to the market.

Very pleased with our corporate banking space.

As you know, for the last several years we've been focusing on that strategically.

It generated 54% growth in loans versus second quarter of '11.

And all of the categories gained momentum during the quarter with end of period loans helped investment up $2.9 billion, annualized rate of 10.8%, end of period C & I grew 8.7%.

So, what really happened as we headed into the quarter, it was a little lull in the first part of the quarter, started building momentum as we headed towards the end of the quarter, and you see that in the numbers.

I would point out to you that while we've had strong, for the last several quarters, growth in mortgages, we have, in early June, discontinued for the time being holding our 10 and 15 year mortgages in portfolio.

Frankly, because the rates are just too low for our appetite right now.

I would mention to you that Bank Atlantic is expected to add approximately $2 billion in loans with appropriate credit marks.

And so, we still maintain our guidance of expected growth in the third in the 5% to 7% range, excluding Bank Atlantic and contingent on the economy remaining like it is.

If you look with me at Slide 5, in the deposit area it was another great quarter, strong transaction account growth, improved mix, and lower cost.

DDA, as I mentioned, was up 22.6%, interest checking up 4.1%, money-market up 7.8%.

So, those account areas that we are really focusing on grew a strong 11.2% second to first annualized.

You will see a decline in our CDs.

That was by design as we're managing our funding sources and funding cost.

So, total deposits of 2.4% is not really reflective of what we really strategically are focusing on.

I would mention to you that we continue to make really good progress in reducing our deposit cost, so in the last year we've reduced it from $0.72 to $0.44.

We still think we have a little opportunity there.

Average CD maturity is a fairly short 14 months.

So, we expect similar deposit growth in the third, continued lower deposit cost.

We're having pretty good growth, I think, in net new retail deposit accounts at 24,000 year-to-date.

And I would again remind you that Bank Atlantic is expected to add approximately $3 billion in core deposits upon consummation of that.

If you look at Slide 6, I just wanted to mention something we've talked to you a lot about over the last several years.

That is that diversification is really important to us.

We think that was one of the real challenges that many institutions had going into the last --- this great recession.

We like diversification because it produces more stable revenue growth and earnings, and we are very pleased we have a very diversified revenue mix.

If you look at the pie chart on Slide 6, you'll see that about 48% of our revenue comes through the community bank, 16% through insurance.

And that's up a couple of percent because of Crump, which we're pleased about.

Financial Services is up 11.7%, specialized lending makes up about 7.6%, dealer Financial Services makes up 6.4%, and residential mortgages makes up 10.3%.

So, you can see we are diversified between the community bank and the non-community bank.

And then, we're very diversified within the non-community bank, which frankly gives me a lot of comfort as we think about relatively fragile overall economy and bumps and ups and downs.

We think that diversification will continue to serve us well in the future as it has in the past, so we feel good about our diversified revenue mix.

If you look with me on Slide 7, we continue to have improvement in profitability as we make our way back to normalized earnings.

You can see that into last year our ROA has gone up from 0.83% to 1.22%.

Our ROE GAAP has gone up from 7.25% to 11.21%.

I would point out that return on tangible common equity has gone up from 12.32% to 18.85%, so obviously a material difference there that we think is important to note.

We said for the last several quarters and we continue to affirm that our long term objective of ROA on a GAAP basis is 1.40% to 1.50%.

We still think a return on common equity of 14% to 16% is appropriate.

Now, I would point out that that common equity return translates into return on tangible equity in the Mid-20%s range.

So, very, very strong we think long term normalized earnings.

There are some challenges to that that you would recognize; the longer the low flat yield curve remains in place, that makes it more challenging for us.

We're still trying to get our hands around the Basal III capital rules that may require additional levels of capital.

We're still trying to sort through all that.

So far, we're pretty pleased with how we're looking relative to that.

So, if you look at the quarter overall, it's, we think, very, very strong.

Our outlook remains very positive, assuming the economy doesn't materially get worse.

So now, let me turn to Clarke for some more detail in the credit area.

Thank you, Kelly, and good morning, everyone.

I'm very pleased to report an excellent quarter of improved credit trends with very strong problem asset resolution.

In particular, we've continued to execute our strategy to aggressively liquidate foreclosed real estate.

This is having a very positive impact on reducing non-performing assets and related credit costs, and certainly contributing to higher earnings growth.

So, if you'll follow with me on Slide 8 you can see that total NPAs were down 15.9% on a linked quarter basis, which is significantly better than the 5% to 10% guidance we gave last quarter and represents the ninth consecutive quarter with lower NPAs.

In fact, total NPAs have declined approximately $1.5 billion, or 43.4% over the last 12 months, and now are at the lowest level since Q3 '08.

This link quarter decline in NPAs is driven by lower NPLs, as Kelly said, of about 10.6%.

And within that, commercial NPLs we're down 11.2%, residential mortgage NPLs down 17.8%, and direct retail NPLs down 4.3%.

So, we're very pleased about that -- and foreclosed real estate down a large 41.5%.

I'm also particularly pleased with the strong results in our commercial book.

This quarter we had lower watch lists, early delinquencies, performing TDRs, NPLs, and OREOs.

So, across-the-board, and given these positive results and our continued focus on improving asset quality, we are reiterating our guidance for a 5% to 10% reduction target in NPAs for Q3.

Assuming, as Kelly said, the economy does not deteriorate further from here.

If you'll look at Slide 9, we continue to make significant progress in reducing foreclosed real estate.

This quarter we decreased foreclosed real estate $157 million, or 41.5% compared to Q1.

And since the second quarter of last year, foreclosed real estate is down $926 million, or nearly 81%, as these balances are now down to $221 million.

And we continue to be aggressive in our disposition as we go into the third quarter, we think we'll effectively complete the targeted OREO strategy in the next couple of quarters.

Our efforts to reduce OREO include a focus on minimizing inflows, which were down 33% compared to last quarter.

And I'm also very pleased that we've been able to reduce inflows while also reducing charge-offs.

We continue to sell existing properties, with Q2 sales activity of $143 million.

And, we have approximately $70 million already in our pipeline going into Q3.

And what this is doing for us is substantially reducing our foreclosed property expense run rate.

So, these expenses were down $72 million this quarter versus $92 million in Q1 or about 21.7% or 87.4% on an annualized basis.

So, we expect foreclosed property expenses to continue to trend lower in Q3 and thereafter as properties are liquidated.

Turning to Slide 10, you'll note that our charge off ratio ex covered loans for the quarter was 1.22%, which was down from 1.28% last quarter and a bit better than our previous guidance.

And Q2 losses are actually at the lowest level in three years for us.

So, we expect total charge off ex covered to be in the 1.15% to 1.20% range in the third quarter and to trend lower thereafter as we continue to liquidate non-performing assets.

Given these improved credit trends we did reduce the allowance by approximately $64 million in Q2, which was essentially the same level we had in Q1.

Our reserve coverage remains, we think, very strong at 1.21 times non-performing loans.

So, overall we feel very good about our allowance level.

So, in summary, we're very pleased about the solid pace of credit improvement this quarter.

And we believe the strategies that we have set in place and continue to work on are performing exceptionally well.

We expect to continue to have strong execution as we move forward.

So, with that, let me turn it over to Daryl for his comments on the quarter.

Thank you, Clarke, and good morning everyone.

I'm going to take the next few minutes to discuss net interest margin, the securities portfolio, fee income, non-interest expense, capital, and our segment reporting.

Continuing on Slide 11, net interest margin came in strong at 3.95%, up 2 basis points from last quarter and above our guidance because of the early TRUPS redemption.

However, margin would have been 3.87% without the TRUPS redemption.

The margin benefits include four key drivers.

First, an improving asset mix as our specialized lending businesses grow faster than other lending categories.

Second, we also continue to see CRE run-off slowing, which will have a positive impact on margin.

As a result, in June we discontinued holding the conforming 10 and 15 year mortgages in the portfolio.

That change will be more noticeable in the mortgage loan growth later this year.

Even so, our loan growth expectations remain in the 5% to 7% range, as Kelly shared.

Third, lower interest bearing deposit costs continue to benefit margin.

These costs decreased 5 basis points to 44 basis points this quarter.

Finally, longer term debt costs from the early TRUPS redemption.

Offsetting these positives are the lower interest rate environment and the run-off of the higher yielding covered assets.

As Kelly mentioned, net interest income was up 7.4% annualized from the last quarter due to the improved margin and a 5% annualized increase in average earning assets.

With regard to margin outlook, we expect the margin to be in the 3.9% to 3.95% range in the second half of the year due to the factors I just described.

As you can see on Slide 11, we remain slightly asset sensitive and are positioned for rising rates.

Turning to Slide 12.

As you know, we consistently maintain a low risk securities portfolio.

Given the low yields available for new investments, we plan to be selective about reinvesting our cash in the second half of the year.

This strategy will slow the growth of earning assets as security balances trend down.

The portfolio duration is 2.8 years and our premium is 1.3%, ensuring a relatively stable yield.

On Slide 13, our fee income ratio in the second quarter increased to 42.4% compared to 41% in the first quarter.

Insurance income was up $122 million with the Crump acquisition accounting for $77 million of the increase.

The remaining increase reflects 5.7% growth compared to second quarter 2011 and seasonally stronger growth compared to first quarter 2012.

We also continue to see evidence of some firming in market pricing.

Mortgage banking income was down $34 million compared to a very strong first quarter due to lower gains on loans sold and $20 million lower in MSR gains.

We expect mortgage banking to remain at a similar level in the third quarter.

The change in the FDIC wash year income was mostly due to negative accretion on covered securities and the impact of cash flow reassessments.

We expect the FDIC wash year impact to be $10 million to $15 million lower next quarter, although this is difficult to project.

Other income increased $12 million compared to the first quarter 2012 as a result of $42 million in writedowns on affordable housing investments last quarter, offset this quarter by $21 million in lower income on assets for post-employment benefits this quarter.

Looking on Slide 14, our efficiency ratio increased to 53.9% compared to 52% last quarter, largely due to the acquisition of Crump as we described last quarter.

Compared to last year, we produced positive operating leverage this quarter and we expect that trend to continue.

Personnel expense increased $45 million because of $69 million in higher compensation costs related to the Crump acquisition and higher incentives, partially offset by $23 million in post-employment benefit expense.

Excluding Crump, FTEs were flat this quarter compared to last quarter.

As expected, foreclosed property expense decreased $20 million due to fewer valuation writedowns and significantly lower inventory of foreclosed property expense.

As Clarke mentioned, we expect foreclosed property expense to continue to decline throughout 2012.

Merger related and restructuring expenses were lower than expected because of the delayed Bank Atlantic closing.

We expect about $50 million in these expenses in the third quarter.

Crump added $64 million in expenses this quarter and $7 million in amortization.

Without these expenses, non-interest expense would have been down $30 million or 8.7% on an annualized basis.

The details of the Visa settlement are largely unknown at this point, but we expect the impact on BB&T to be immaterial.

Finally, the tax rate for the quarter was 26.2%.

We expect the rate to be up slightly in the third quarter.

Looking on Slide 15, our capital ratios remain very strong and include the impact of the Crump acquisition and the redemption of our TRUPS outstanding.

Tier 1 common under Basal I fell slightly to 9.7%.

We expect the third quarter 2012 Tier 1 common ratio under Basal I to be around 9.5% including Bank Atlantic.

We estimate our Tier 1 common under the recently issued Basal III rules to be approximately 8.2%.

However, this does not include any mitigating actions we will take to improve our capital ratios.

Risk rates were higher in the calculation, driven by LTVs on residential mortgages and the credit conversion factor for unfunded lending commitments.

We believe over time we can significantly reduce the impact of our risk weighted assets.

We are very comfortable with our Basal III capital levels and feel that we have flexibility to take advantage of opportunities.

We had a very successful perpetual preferred offering last quarter, with a second lowest coupon in the history for our bank.

We will be opportunistic about issuing additional preferred.

Now, let me point out a few highlights in our segment disclosures.

Turning to Slide 16.

First, community bank net income totaled $177 million, up $72 million versus linked quarter.

The main drivers include loan growth, lower foreclosed property expense, and lower regulatory costs.

Second, our direct retail lending continues to be strong, with 10% linked quarter growth.

Third, commercial loan pipeline increased 24% compared to first quarter 2012 as we continue to have a positive outlook for loan growth.

Finally, we experienced solid growth in several payment categories, especially merchant services, which was up 12%.

Turning to Slide 17, residential mortgage was down $59 million on a linked quarter basis from a very strong first quarter, but up sharply compared to second quarter last year.

The main drivers include continued strong originations, increased gains on the sale, and wider spreads compared to last year.

The loan loss provision is lower compared to last year, due to improved credit trends, updated loss factors, and the impact of last year's sale of non-performing loans.

Year-over-year, portfolio growth increased substantially, with loan service for others growing 8.3%.

With lower rates and resulting refi boom, 59% of our production this quarter was from refinance; however, our purchases are up 48% compared to last year.

Turning to Slide 18.

Dealer Financial Services achieved record loan production for the quarter in both prime and non-prime auto lending.

Net income for this segment totaled $60 million, with regional acceptance achieving higher net interest income due to higher margins.

Regional acceptance losses remained very low, and our prime auto losses were also low at 24 basis points.

We continue to open new offices in strong growth markets and are expanding our floor plan financing strategy.

On Slide 19, you can see specialized lending experienced a strong quarter, with net income of $65 million.

Loan production increased 19.5% versus first quarter with seasonally strong contribution from the insurance premium finance.

Higher net interest income was driven by exceptional growth in Sheffield Financial, equipment finance, and mortgage warehouse lending.

We are pleased to have an improved operating margin in this segment as a result of a strong focus on efficiency.

Moving to Slide 20, insurance services generated $66 million in net income, up significantly compared to both common and linked quarter basis.

Increased revenue was broad based in almost all insurance businesses.

The growth was driven by improved organic growth as the insurance market is showing signs of hardening and growth due to acquisitions.

We continue to anticipate future organic revenue growth but will have lower revenue in the third quarter due to seasonality.

Turning to Slide 21.

Financial Services generated $63 million in net income, primarily driven by corporate banking and wealth management.

These businesses had loan growth of 54% and 38% respectively.

Investments in wealth and corporate banking revenue producers drove higher non-interest expense for the quarter.

We continue to see opportunities in middle market corporate lending and have higher loan commitments versus last quarter.

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

Thank you, Daryl and Clarke.

And, just as an overall statement, I'd say we had a strong quarter, our best earnings ever, as I mentioned, broad based performance.

What you see from us, I think, is what we promised you several years ago, very strong execution on our strategy of diversification and intense focusing on execution on the basics.

We're not a complex company, but we execute the basics in banking very, very well.

I'll give you as one final example of that, we just received, in the last few days, a notice from J.D. Power and Associates that we have now been recognized as number one in mortgage service and quality for the third year in a row.

So, we are very pleased with the quarter.

And now, I'll turn it, Alan, to you for questions.

Thank you, Kelly.

At this time we would ask Jenny to come back on the line and explain how you may participate in the Q&A process.

As is our normal practice, we would ask you would limit your questions to one primary question and one follow-up so that others may participate in the queue.

If you have additional questions, please get back in the queue, and we will recognize you again.

Jenny?

Thank you, sir.

(Operator Instructions)

Jefferson Harralson, KBW.

Can you guys hear me?

Yes, good morning.

Great.

If you guys had to write a comment letter on one or two pieces of the recent NPRs, if you think about the timing issues, the capital limitations, the buffers, risk weighting, hedging, soft balance sheet, OCI and capital, all those things.

Is there one or two that you would focus on, or do you think that should be changed in the rules that are being proposed?

Jefferson, this is Daryl.

When I look at it, you can debate what the capital level should be in some of the categories, but clearly, the residential mortgage is getting hit really hard.

And, the higher capital in this mortgage area will definitely have an impact on the economy longer term.

With the classifications between category I and category II, a lot of mortgages are going from --- to the higher category.

So, they're going to double in capital and maybe quadruple it, depending on how its underwritten and how that is calculated.

Other areas, that the unfunded loan commitments under a year doesn't have a capital charge now, going to have a capital charge.

Banks will probably have to either charge higher to get more revenue, or the structure is going to change.

And we won't be doing any year and under unfunded commitments.

So, there's a lot of areas where they're going to raise capital charges, and it's going to have an impact on the economy and growth for sure.

Great, and a follow-up.

If you think about OCI now being in regulatory capital, is that going to translate maybe into a smaller securities book?

I see you guys are shrinking yours, more held to maturity, maybe holding more mortgages or maybe just holding more capital.

How do you think that's going to affect how you run your bank on your balance sheet?

You bring up a lot of good points.

Obviously, with OCI in the calculation, we have to maintain a nice healthy margin above the minimum level.

So, you will see us operate at a level probably 150 basis points at least over where we have to target our capital ratios.

We also, as you see, I think we're one of the banks that have the largest percentage of securities in held to maturity.

Right now a third of our securities are in there to avoid some of the risk there.

And, you could see -- you have to weigh the size of the investment portfolio also against some of the liquidity rules that are coming out.

They go against and contradict each other.

But, I think overall the size of the investment portfolio could potentially be impacted as well.

But, you definitely have a lot of different drivers there, and you're just trying to optimize the best you can without taking undue risk.

Greg Ketron, UBS.

Good morning.

Good morning, Greg.

Congrats on the quarter.

Just a couple of questions.

One, on the Crump contribution, it may be for the insurance segment in general, can you highlight what the Crump contribution was for the quarter?

And then, as you look longer term at insurance, maybe what operating margin you think you can achieve in that business overall?

Well, Greg, the contribution specifically on revenue for the quarter was like $77 million, which was in line with what we expected.

Recall that that company is primarily bringing us revenue in the wholesale life business.

It does have some wholesale property and casualty.

What we like about it is, particularly in the life side, is that life insurance is, number one, much more stable than P&C, and it has higher margins.

So, you think about property and casualty EBITDA over time, it being about 20% and life at about 30%.

So, it's substantially more -- it has a better margin, and we like that, because again, it just balances out our whole insurance business.

So, it's an exciting opportunity.

And, I would mention to you, Greg, that even though it's fairly early now we've had 90 days or so under our belt of being in the family.

Everything we see is better than what we thought.

So, the synergistic opportunities, the quality of the staff, the product making, the brand that they have out in the marketplace is just absolutely fantastic.

So, it's a home run.

Okay, great.

Thanks for the color there.

And then, on the loan growth, if you can highlight -- you're seeing growth in mortgage, the other lending subsidiaries, direct retail.

Maybe some of the rates and spreads that you're seeing across those businesses?

And is that an area that you'll continue to focus on as we progress in 2012?

Hi, Greg.

This is Clarke Starnes, and I know Daryl can chip in too, but our spreads are holding up pretty well.

On our C & I in corporate banking you're in about the 2.44%, 2.45% range, which is pretty good.

CRE for us is typically about 100 basis points above that.

So, we feel good about that.

Our home equity spreads right now are North of 200 basis points.

And certainly we watch that, would expect to maybe get a little bit better over time.

Our sales finance, which is where our prime auto is, is about 190 overall.

And then, obviously the specialized lending businesses is much higher than that.

So, we feel really good about our ability to hold our spreads up in a very, very competitive environment.

We think that mix gives us an overall yield advantage with a nice risk adjusted return.

Todd Hagerman, Sterne, Agee.

Good morning, everybody.

Good morning.

Daryl, I just wanted to follow-up on your margin outlook and the guidance there, raising the number.

First, I don't know if you mentioned, are the Bank Atlantic and the purchase accounting adjustments that you'll be making there as well as the -- you announced, I think, today the trust preferred redemption of $2.5 billion.

How does that influence your margin outlook with the various dynamics that you walked through in terms of how you're getting to that 3.90%, 3.95%?

Okay, so, if you look at it, this quarter we benefited in margin by the TRUPS redemption.

We got an additional $29 million because we were able to amortize some of that fee gain this quarter.

The rest of that will come in the first part of July.

All the TRUPS that we called were out of the books this week.

So, when you look at that, we actually lose that coupon from now until the end of the year.

That's real money that we didn't have in our forecast before.

So, that's another $70 million of earnings that we had that we don't have to pay higher interest costs on there.

The other thing that we're doing, and we mentioned it in our opening comments, is we're going to be selective in reinvesting our investment cash flows.

So, that's going to shrink our investments a little bit.

Earning assets will still grow, but it's going to be driven by loan growth.

But we're doing that in conjunction with not issuing debt.

There is a negative spread right now between your investment yields and what you have to cost to borrow.

So, that strategy actually adds another $15 million to $20 million to net interest income.

So, it actually improves margin.

So, those are some of the strategies we have to improve margin this year and into next year.

As far as Bank Atlantic goes, we expect that to close and be on our books starting August 1.

We have some purchase accounting in there.

But, it's really not a big driver to the numbers that you're seeing.

The mark there isn't a huge mark compared to what we had with Colonial.

So, it's not going to be a large impact there.

It's so small to the size of the company, it's not going to really be a big driver.

Okay, and just to make sure I'm clear, on the TRUPS announcement today, you mentioned the $70 million.

I'm sorry; I didn't get the offset to that in terms of how you're losing that $70 million and in terms of replacement or lack thereof on the funding side.

Yes, so remember when we had, when we talked last quarter, we had our TRUPS coming out in the fourth quarter of this year.

So, we're basically, by the NPR coming out, were able to call our TRUPS early.

So, we amortized that remaining gain a little bit in July and -- in June and July.

But then, those securities, the debt is gone off our books this week.

So, we're basically replacing that with just funding that we have in deposits within the company.

And we're shrinking our investment securities to help fund that.

All that is positive drivers to net interest income and margin.

Matt O'Connor, Deutsche Bank.

Hi guys.

Good morning.

Can you comment a little bit on loan pricing?

Specifically in the C & I, your yields held up well, actually up a couple basis points quarter to quarter.

And we're seeing that from actually a couple other banks as well.

And it seems to be contradicting what the Fed lending survey shows, which is a pretty big decline in loan pricing on C & I. So, just kind of a general comment or a general question on C & I pricing.

And then, specifically what's driving your yield up a little bit?

Hi, Matt.

This is Clarke.

What we've seen is actually a little bit of firming, particularly in the corporate space, particularly around the near investment grade.

Investment grade continues to be very, very competitive.

But, it's firmed up a little bit.

So, we feel really good about that, and that's probably what you're hearing the most about.

It's still very, very competitive on the small business side and the community bank type originations.

And, that's probably reflecting in the Fed survey to a degree.

But again, from our standpoint, we're very focused on the yields that we get and the type of clients that we go after.

So, we will let credits go over pricing, and that's one reason you've seen us hold up our margin really well.

Okay, and then, just a separate topic.

As you think about the OREO balances coming down, it sounds like pretty close to zero or an insignificant amount on the balance.

I mean, the costs, do those come down close to zero too in a couple quarters?

Or what's more like a run rate cost if the balance itself is really, really low?

Matt, you know, our foreclosure costs will continue to come down.

They won't come down to zero, though.

We still have some NPLs that are being worked through and need to go through the cycle.

Our inflows are coming down.

But it's probably going to take another year to year and a half before those balances get to more de minimus levels.

But definitely the trajectory is down on foreclosure expense, but it won't be to zero this year.

John Pancari, Evercore Partners.

Good morning.

Good morning, John.

Can you discuss in more detail the potential mitigators to the Basal III NPR impact that you indicated?

I know you mentioned to Jefferson, a couple items, but just wanted to get more detail around what you can do to mitigate that impact.

Thanks.

Sure, John.

Some easy things we can do.

We've identified -- so we're at 8.2% right now and we are -- this is a very conservative number.

We're assuming all the worst in how we're interpreting the language right now.

Obviously, we aren't 100% sure on how it's all going to be applied.

So, we're trying to be very conservative, and this number is what it is today without any mitigation whatsoever.

I know others this past week or so have added mitigation, added earnings over time and all that.

This is what the number is today, so very, very conservative.

You know, just a couple things we could do, we think easily if you look at the commercial construction book, they have a certain percentage of equity that needs to be funded in there.

We just need to tweak our rules just a little bit in how we under write to get within so that all of our construction loans fall within that 15%.

Clarke feels very comfortable that's doable over the next year or two.

Another area, if you look at it is our home equity lines right now.

They're variable rate.

They have no caps on them.

We can move them from category 2 to category 1 just by putting some annual and lifetime caps on that.

Those strategies right there raise our capital from 8.2% to 8.5% off of the numbers we have today.

So, we definitely think, and we're going to get together and continue to work and try to optimize these rules.

Obviously, these rules aren't final yet, but we feel very comfortable and confident that our Basal III numbers will be strong.

And we still have a lot of financial flexibility.

Okay, and then, separately, can you discuss your thought process around the potential issuance of capital to support the Basal guidelines as you indicated in your prepared comments?

And, I guess specifically around timing, amount, and then type of capital?

Thanks.

John, all I can say is that I think if you look at these Basal III rules, long term you really want to maximize the 150 basis points that's allowed between Tier 1 common and Tier 1. So, we will be opportunistic and try to issue preferred qualifying capital at times we think are advantageous to us to issue to fill that up.

We did a great issuance this past quarter.

And we will look for opportunities to do that.

But we just think longer term when you look at your capital stack, we believe we really want to go that extra 150 basis points up there just so we have strong Tier 1 common, strong Tier 1, and strong total and leverage numbers, all very strong inventory capital.

Gerard Cassidy, RBC.

Good morning gentlemen.

Good morning.

A question for you.

I may have missed this and I apologize, but are you guys, with the Federal Reserve indicating that the US economy is decelerating, are you guys seeing in your June numbers or your early July numbers any evidence that business is slowing down in your footprint?

Gerard, this is Kelly.

I would say if you look at our specific numbers, it would not affirm the slowdown.

Because as I indicated earlier, we actually had momentum building through the quarter.

But, if you look at what we actually think, what I actually think is happening in the economy, there is no question that it's slowing.

And you've certainly seen that in most recent jobs numbers and retail sales numbers, etc.

And anecdotally, just because of my nature of traveling in our regions a lot, I've talked to lots of business people, and everybody you talk to is getting more nervous by the moment because of the uncertainty.

We're heading towards this abysmal cliff and people are getting really focused on it now.

So, no question in my mind the economy is slowing.

I personally think it will continue to slow throughout the end of the year until we see what happens in Washington.

But I would be very clear to say that we do not translate that into a dismal forward look with regard to our own performance.

We're actually, as I said before, affirming our loan growth guidance in the 5% to 7% range.

But to be honest with you, Gerard, it's because of we're moving market share.

We have a lot of business coming our way today.

Some institutions have had some downgrades, frankly, in ratings and other circumstances that have caused clients to actually seek us out.

Our strategies in corporate banking, wealth banking, specialized lending etc, are executing extraordinarily well.

We're just really fortunate that we've got some really unique opportunities in places like Alabama, Texas, and Florida that we are able to move market share just because of our brand value.

Thank you.

Second question is more of a technical question.

On the residential mortgage loan sales that you had in the quarter, what were the spreads that you were able to garner?

And how do those spreads compare to what you achieved in the first quarter?

Are you talking about the mortgages or the OREO assets, Gerard?

The mortgages, the gain on sale of the mortgages of the residential origination?

Oh, we were about 2.12% was our spreads.

That was actually a little bit wider than first quarter.

So, as your pipelines fill up, you're able to basically just have wider spreads because the pipelines are full, and everything is just able to get higher margins.

Erika Penala, Bank of America Merrill Lynch.

Good morning.

Good morning.

Daryl, I appreciate the comments that you made on the margin over the near term.

But I was wondering if you could give us a little bit of insight into how we should think about 2013?

So, it sounds like there are actually some asset remix opportunities that will support the margin in the second half of the year.

In 2013 it feels like -- for the industry, not just for BB&T -- some of the funding cost savings are probably going to taper off.

I guess I'm just wondering, A, if you would continue in terms of reconsidering remixing your assets to support the margin in 2013 if we're staying in this rate environment.

And, B, do you have a sense of what a range is for your margin in 2013 if you have the loan growth momentum that you're experiencing but we're staying in this rate environment for longer?

Erika, this is still a very challenging marketplace with the lowest loan rate environment.

And, over time, the lower yield definitely does put pressure on margins and all that.

I think our key really to counteract that is to continue to price our funding costs.

And those should continue to come down, and I think that will continue to come down into '13.

We're at 44 basis points interest bearing deposits.

We are not out of gas there yet.

So, those can still come down and believe that's something that's still doable.

If you look at our long term debt, we'll have some maturities next year that we can basically replace at lower cost there.

So, all that should be positive.

On the asset side I think you hit a very excellent point.

You really just need to drive your assets and try to focus and grow the ones that are the higher yields.

So, our specialty businesses are growing three times faster than the total portfolio.

CRE is 100 basis points higher than C & I, as Clarke said.

So, those portfolios should be growing as we're expecting.

That said, I'm sure margin will still come down from 3.90% in 2013.

But, our ability to continue to reprice and counteract those things I think will make it more manageable as we get into '13 and '14.

Erika, I would also add that, and this is intuitive, but I think as we go forward and everyone experiences more of the real effect of a prolonged low flat yield curve, everybody is running out of gas.

Most have run out of gas earlier than us on that.

And, as everybody contemplates the shifts in terms of capital requirements on Basal, etc, all of that is going to cause, in my view, everybody to get firmer with regard to pricing.

Our industry tends to ebb and flow in terms of how we price relative to risk.

We tend to do a better job when we get under pressure.

And, I think we're under pressure now.

And, I think that will put pressure on the margin.

And, you heard Clarke talk about some firming already just in the last 90 days or so with regard to some corporate space bookings.

So, we'll see how that works out.

But, I personally think you'll see a bit more rationality flow through loan pricing as we go forward.

Michael Rose, Raymond James.

Hi, good morning.

Good morning.

Just a question on the -- just a follow-up question on the margin.

I think your longer term guidance is 3.60% to 3.70%, if I remember correctly.

Does that include the redemption of a TRUPS?

And how do you think about the margin longer term with your actions that you've taken?

Thanks.

Yes, Michael, I think when you look out over the next two to three years, if you look at the TRUPS redemption and everything, I think 3.60%, 3.70% is still in that ballpark.

It's really dependent on how low the rate environment is and how long that lasts.

We still have our covered assets that are running off over the next couple years.

But, that guidance has not changed longer term.

Okay, thanks.

Paul Miller, FBR.

Yes, thank you very much.

I have a quick balance sheet question and an overview question.

On the residential mortgage loans you're putting on your books, are they mainly jumbos?

And, what prices are you putting them on, and what duration?

I can give you the mix; Paul and Daryl can give you the spreads.

But for the quarter, we put $2.1 billion on our balance sheet.

About 34% of those were the 10 & 15 years, which says about a $712 million.

That's what we'll no longer be portfolioing.

26% were ARMs and about 40% were jumbos and affordable.

And so you can see what we will be holding going forward is primarily variable rates.

Yes, if you look at the spreads on that, Paul, the 10 and 15 year conforming had spreads of about 3.30% was the -- no, that was the rate on it, the spreads were 1.20%.

If you look at new originations now, the 10 and 15 year rates are under 3%.

They are probably 2.75% to 2 7/8%.

So, we really don't want to have that asset on our books for the next five years.

So, are you guiding for lower growth in that residential portfolio because of that?

Yes, we are.

And then, on the overview -- an overview question.

There's a lot of media reports about the State of Florida in full recovery with the housing.

Just wondering what you're seeing down there.

I know that's probably one of the areas you pick up a lot of market share, because a lot of banks are in trouble down there.

But do you feel it's in a recovery mode down there?

What's your overall view down in Florida?

Well I think we're very bullish really on Florida, have been, frankly, through the whole cycle, because it's such a long term attractive market.

But, really in the last 12 months it's been a pretty dramatic change in Florida.

In Miami, for example, a year ago, there were 24,000 unoccupied condo units and now, they are virtually all gone; I think it's like a 5% vacancy rate to like three buildings under construction.

So, what happened is an awful lot of smart money out of Latin America came in and sucked up all that inventory and put it into rentals.

And that stabilized that market.

So, now you're beginning to see some positive growth in terms of the real estate sector and the overall trends in terms of in migration versus we had a year or so of out migration.

All of that has changed.

I'm not saying it's booming.

But, based on all the feedback we get from our folks down there and all of the general macro data we get, it looks to me like it's dramatically better than it was two or three years ago, and it's steadily improving every day.

Ken Usdin, Jefferies.

Thanks.

Kelly, to your point earlier about the environment remaining tough, the other thing that you guys can obviously, you and the industry can control is expenses.

I wanted to first of all just ask you where you are with that internal plan that you've been going on?

And then, I'll let you answer that one, and I have just some follow-ups on some of the particulars of the recent acquisitions.

Yes, Ken, thanks; we continue to be very vigilant about the execution on really two parts of that.

What we started maybe nine months ago was the reconceptualization in the expense area.

And recall that the way we are approaching that, and frankly it's working perfectly, is to challenge our business leaders to go in and reconceptualize their business from a clean sheet of paper with the overview from us that it's a new world.

And, thinking about your business today the way you did five years ago or a year ago is inappropriate.

So, think about your businesses as we currently see the new environment.

All of our business lines were challenged to put forth those plans.

From an expense perspective, they did.

We're now in the execution phase of that, and the projections are exceeding what we had expected.

We're now right in the middle of launching the second phase of that, which is the reconceptualization on the revenue side.

And we're going through the very same process where all of our business leaders are putting together revenue optimization plans.

They will be presented up through and rolled up to executive management.

And then as we head into the latter part of this year, we'll begin execution, and that will follow on through next year.

So, it's a two part plan.

It's going extraordinarily well.

And my follow-ups are more just technical in the numbers.

Crump probably adds a little bit more second quarter seasonality.

And then, we've got the Bank Atlantic deal closing.

So, I'm wondering if you can help us understand how to understand the new second to third seasonality from insurance?

And then, how much BBX will add in expenses so we can get an understanding of the forward run rate?

So, on Crump with regard to the second quarter seasonality, that won't be as much as you might think.

It will be a little bit of add to that as it relates to their property and casualty business.

But at life it won't be so much that way.

Remember life is a monthly pay thing, versus P&C is you pay in the second quarter and the fourth quarter.

So, I wouldn't think much about Crump changing our second quarter seasonality.

I would just think about it being absolutely more income.

In terms of BBX, Daryl, maybe you have some color on that.

Yes, so for BBX, it's not significant from a total number.

But, it's a little less, after we mark the loans, a little less than $2 billion in loans that come on the books.

Yields on the loans should be very close to what the yields are in our current outstandings.

And then, on the deposit side, we've got, I think about $3.4 billion in deposits.

90% of these deposits are non-CDs, all very good core funding.

And you get a little bit of fee income pick up from there from service charges and some other things.

But that's really the main drivers that you have with Bank Atlantic.

Matt Burnell, Wells Fargo Securities.

Good morning, everyone.

Daryl, let me follow-up on the NIM question with a couple questions on your ability to continue to lower your interest bearing deposit costs and your long term debt costs.

And you mentioned Bank Atlantic providing about 90% of its deposits are core funded.

What are the costs of the deposits relative to your deposit costs now?

So, I'll start with the latter part first, Matt.

Their deposit costs are higher than ours.

I think over time we will rationalize those costs, but it won't be all at once.

We'll do it over time.

We'll take a measured approach on to Bank Atlantic's deposit costs as they get used to BB&T and our culture and how we deliver our quality products and services.

But I think over the next couple years it's going to be very good core stable funding for us.

But it won't have an immediate impact on us.

But you have the mark-to-market accounting there, so you shouldn't see a big impact on the deposit costs.

Then on -- what was the other part of your question, Matt?

Your ability to reduce your own deposit costs and long term debt costs.

Oh, deposit costs.

Yes, so we're at 44 basis points.

Right now, we feel that through CD run-off and some adjustments in our MMDA accounts we can probably approach 30 basis points over the next several quarters.

So, I think all of that is doable and the forecast that, assuming rates stay low for a long period of time, that's something that we can definitely accomplish.

That concludes today's question and answer session.

Mr. King, at this time I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, very much.

And, thanks to everybody for joining us today.

We really appreciate your support today and on an ongoing basis.

Again, we feel very excited about the quarter.

It's interesting, where I think the industry is settling into is the differentiation between the high performance and low performance is going to be about execution.

That's what BB&T always has been great at.

It's what we remain great at.

So, we are -- relative to the environment, we are very, very optimistic about our performance as we go forward.

Thanks very much everybody, and hope you have a great day.

Again, that does conclude the call.

We thank you, everyone, for participating today.