Truist Financial Corporation
Q2 2010 Earnings Call Transcript

Published: 22 Jul 2010

[Operator:]

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Second Quarter Earnings 2010 Conference Call on Thursday, July 22, 2010. [Operator Instructions] 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.

[Tamera Gjesdal:]

Good morning, everyone. Thank you, Barbara, and thanks to all our listeners for joining us today. This call is being broadcast on the Internet from our website at BBT.com/investor. We have with us today Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, and Clarke Starnes, our Chief Risks Officer, who will review financial results for the second quarter of 2010, 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 quarterly performance summaries is available on the BB&T website. After Kelly, Daryl and Clarke have made their remarks, we will pause to have Barbara come back on the line and explain how those who have dialed into the call may participate in the Q&A session. Before we begin, let me make a few preliminary comments. BB&T does not make 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 1 of our presentation and in the company's SEC filings. Our presentation includes certain non-GAAP disclosures and we would refer you to Slide 2 and the appendix of our presentation for the appropriate reconciliation to GAAP. And now it is my pleasure to introduce our Chairman and Chief Executive Officer, Kelly King.

[Kelly King:]

Thank you, Tamera. Good morning, everybody. Thank you for joining our call today. It could be a little different today than in the past, we’ve asked Clarke Starnes, our Chief Risk Officer to join us and we’re introducing a slide deck for you, which we hope will make it a little easier for you to follow our commentary. So I'm going to cover the quarterly highlights, talk about a few special items effecting earnings, talk about a very significant [indiscernible] (13

[Clarke Starnes:]

Thank you, Kelly, and good morning, everyone. If you’ll follow with me on Slide 12, I'll try to share some thoughts about our overall credit quality transfer the quarter. As Kelly indicated, we’re very pleased with the overall results which reflect directly the concerted effort to accelerate the resolution of our problem assets. And as you can see overall metrics did improve on a linked-quarter basis with lower early-stage delinquencies, a continued lower level of 90 day still accruing in our first reduction in MPAs as Kelly said since first quarter of '06. Our losses, if you exclude the marks on the loan sales and the allocated reserves that went with that, were approximately 2.06% for the quarter versus 1.99% linked-quarter first. Our heaviest losses continued to be centered in our ADC portfolio to give you some context on that. ADC represents about 10% of our commercial portfolio, but 50% of our total commercial losses. It represents 5% of our total loan portfolio and is generating 30% of our losses and represents 30% of our remaining NPLs. So that's where our focus is on an accelerated disposition strategy. We were pleased that we reduced our ADC balances about $526 million for the quarter and over $2 billion over the last four quarters. It's about a 30% reduction over the year. And I would note for you that we were able to reduce, over the last year, our Atlanta and Florida exposures by over 50% and that's where we've had our highest default rates in severity. The good news for the quarter is we continued to see stabilization in our consumer-orientated and retail likes portfolios and specialized lending and those have lower early stage moderating nonperformers and very good loss experience. We are continuously some deterioration in C&I and CRE outside ADC, however, those levels of deterioration are well within our forecast and we believe at this point they are manageable. If you look with me on Slide 13, I'll try to provide a little more color around the problem asset dispositions for the quarter. We described many times for you historically, we've approached problem asset management differently than other banks. We have a strong commitment to work with our clients during difficult periods, trying to avoid early forced liquidation. This is a form of a bridging strategy to a better market and it's served us very well over the years, and resulting in a long-term basis, lower nonperformers and losses and frankly very loyal clients for the long run. So we've been able to do this through very good client selection and what we believe is superior underwriting. While the strategies continue to work well during the cycle and we've avoided as Kelly said, dumping assets into a highly stressed market, it does appear it's time for us to be more aggressive and I think that's for two primary reasons. One is its very clear that asset pricing liquidity for these problem assets and real estate’s very much improved over the last two years. And another point that's very important is the clients are also much more realistic about where values are and what their position is and they’re more willing to be cooperative with us in these liquidation strategies, that makes it easier than adversarial liquidations. So in the second quarter, we initiated a three-pronged NPA reduction strategy and it really has three components. One was a targeted nonperforming residential mortgage folks sale, the second was the initiation of a nonperforming commercial note and short sale program, which we initiated late in the quarter; and then a very aggressive OREO liquidation effort. And that also included, as Kelly said, a major revaluation of the entire portfolio from an appraisal standpoint and that resulted in $682 million reduction in problem assets as Kelly mentioned. We additionally moved $150 million of both commercial and residential mortgage problem loans to help for sale. We have targeted sales for those in the third quarter and going into the fourth quarter. These sales were accomplished with a consolidated additional loss against the remaining unpaid balance of approximately 12%. The bulk of this additional mark was really related to the mortgage sale and that was not a surprise to us because you obviously have to pay a higher liquidity premium to do a large sale through a dealer. We're seeing much more modest marks on our commercial and mortgage short sales and you'll see I spoke heavily on that strategy and the remaining quarters. But we felt like this mortgage sale gave us a very good jump start on disposition strategy. One other point that I think is very important for the quarter, we did a deep review of our top 50 problem of commercial credits. We aggressively identified those credits that likely needed to be considered for liquidation now and this resulted in a number of those credits being put on non-accrual. So you will note a $400 million or so increase in NPLs and commercial but that was very targeted and by design and we have developed very specific acquisition strategies for these credits in upcoming quarters. So we feel very good about our plan and I believe you will see meaningful improvement, as we come through the next several quarters, as we execute on this plan. On Slide 14, it looked at early-stage indicators, which are very positive across the board. We continue to experience very stabilizing trends in our early 30 to 89 90 day still accruing outside a mortgage change we made in the quarter around FHA credits was actually down as well. We have very low levels relative to the industry in those areas. So what we believe is these early-stage improvement in role rates and migrations are clearly indicating improvement in many sub-portfolios and will help us to get better clarity around our credit as we move forward. On the next slide, we did want to give you a little bit of detail around our TDRs and restructured loans. We know that was a big topic last quarter. As we told you, we've gotten much better clarity with the regulatory agencies and auditors regarding TDR classification and as a result, our rate of increase in TDRs incrementally for the quarter actually moderated considerably 14% increase versus 60% in the quarter as we told you it would. Approximately 80% of all our modifications in the TDR status are performing and over 90% of performing TDRs and 83% of all TDRs are actually current from a delinquency standpoint and even after six months seasoning, we have very low re-default rates on these assets. So we will continue to utilize modifications as appropriate in the future as an effective strategy to help troubled borrowers. On Slide 16, we were very successful with our best quarter ever and OREO sales we liquidated $252 million of properties for the quarter, generating $231 million of proceeds. The other big note for you is that the mix dramatically improved. We sold 29% of that disposition was in lots and land, up considerably from prior quarters. The inflows were also lower than prior quarters and within our expectations. Additionally, the incremental marks we took on the sales and even the revelations for the quarter, if you go back to losses against the original unpaid balance of the loans at non-accrual that have flowed all the way through OREO, are roughly about 44% mark and that's very consistent with the low forties we've been experiencing for the last several linked-quarters. And finally, I'm very happy to report the third quarter pipeline is very strong. We're already up to $120 million under contract, and we have several of our top 10 properties ready for sale. On the next slide, we did experience the large OREO expense for the quarter related to the sales and a revaluation process. As part of the risk-reduction strategy, we did a comprehensive review of the entire OREO portfolio and reappraised over 1,600 properties for the quarter to ensure that we had appraisals on average that were no more than six months old. And that did result in an incremental write-down linked-quarter of about $61 million. But we do believe this positions us very well to accelerate disposition in the future. And finally, on Slide 18, I want to talk a little bit about growth. We feel very good about our loan growth results for the quarter even though market demand is very weak. I think some of the numbers I've seen are that the industry’s generally contracting about 6%. We believe we are bucking that trend. Our growth is much better. We believe reflecting market share movements resulting from our strong brand position. The other thing, as Kelly said, the composition of the growth also very positively supports our diversification efforts around real estate and move away from so much real estate concentration. And so outside the targeted runoff in ADC and the covered portfolio, we actually grew 2.6% for the quarter. C&I was very positive at 2.5%. We’re really benefiting from a major investment we've made in corporate middle-market banking. We have a number of new bankers aligned with our industry vertical teams and they're producing excellent results right now. Our corporate book was up 12.6% for the quarter and production from these corporate teams was actually up 60% for the quarter, so we're taking full advantage of that, and we think that’ll help us in the future. Specialized lending continues to perform particularly well around our small ticket equipment company and our low risk premium financed business. In the main general bank, our auto book and our credit card portfolio also is growing very nicely along with the excellent quality trends we're seeing there. A final note there is that we did have strong originations for the second quarter at $17.45 billion, up 13.4% on a linked-quarter basis and that's setting us up for a very strong pipeline in Q3, which will give us, we believe, better than industry growth opportunities as we move forward. So with those comments, let me turn it over to Daryl for his thoughts for the quarter.

[Daryl Bible:]

Thank you, Clarke. Good morning, everyone by continuing on a presentation, let’s turn to Page 19. As Kelly talked about, noninterest earning deposits were up 18.2% annualized on a linked basis. Interest checking is also up 17.1%. We are very pleased with the progress we are making on improving our deposit mix. Net new accounts increased 123% on a common basis and 68% on a linked-quarter basis, primarily due to Colonial and the success in our sales initiative. We continue to manage our cost and mix by aggressively reducing CD pricing and balances given softer loan demand. As a result, CDs were down 27% on an annualized link basis. Other interest bearing deposits are down 90% as a result of not needing euro dollar funding, which is part of the deleverage strategy. If you turn to Page 20 of the presentation, our margin continues to benefit from better-than-expected performance on loans acquired from Colonial and lower deposit costs. Net interest margin increased to 4.12% for the second quarter, up 56 basis points compared to the second quarter of 2009 and 24 basis points compared to the first quarter of 2010. Excluding the benefit from the cash flows of covered assets, net interest margin would have been 3.81% in the second quarter, which is flat from the adjusted first quarter margin. The core margin benefited from lower deposits off the three basis points, as well as improved credit spreads in retail and commercial loans. Offsetting these positives was unfavorable mix change to the deleverage strategy. Adjusting for the deteriorating asset quality, including OREO, non-interest margin would've been approximately flat on a linked-quarter basis and three basis points better on a common quarter basis. If you normalize asset quality, we would probably have about 12 basis points higher net interest margin. We expect margin to be relatively stable in the forward flow range, plus or minus three basis points for the remainder of the year. Then we take a moment to talk about the second quarter cash flow assessment. The results indicate further positive performance on the acquired loan portfolio, resulting in additional loan accretion of $100 million. For the fourth quarter, we received a $242 million of accretive OREO and $3 million on other accretables, totaling $245 million. We have approximately $3.4 billion left in accretable yields to flow through earnings. This will occur over the life of these assets. Recovery of previous impaired loans will have resulted in $2.3 million reversal of provision. We have only three out of the 41 pools which are now impaired. As a reminder, approximately 80% of both the additional accretion and provision reversals are offset in the FDIC receivable and noninterest income. Also due to better performance, as Kelly talked about, we established a liability to pay the FDIC as a result of the claw back. Turning to Page 21, during the second quarter, we sold $13 billion of securities with a taxable equivalent yield of 3.99%, and purchased $5 billion of mortgage-backed securities yielding 3.32%. As you heard us say, our stated target for the securities portfolio is to be in the range of 15% to 20% of earning asset. By deleveraging, we have reduced our securities to 18% of earning assets, so we're in the right place where we want to be. While our long term goal is to be neutral to interest rate, the deleveraging strategy increases our asset sensitivity. For example, up 100 basis points in interest rates, we went from 0.47% to 1.56% in interest income over the next 12 months. As you know, that the single most important variable when looking at sensitivities is really the beta on managed rate deposits. We model very conservative re-pricing assumptions compared to market rate changes so that we will be in a position to pay very competitive rates as interest rates rise in the future. The portfolio duration on the securities portfolio decreased from 4.6% to 3.7%. And lastly, as we shrunk the balance sheet, all of our capital ratios improved across the broad. Turning to Page 22, our fee income ratio improved from 40.8% to 39% in the first quarter of this year. Insurance continues to perform reasonably well given soft market, up 2.1%. Mortgage banking income increased 96% on a linked-quarter basis due to lower interest rates resulting in higher refinance activity. Service charge on deposits were essentially flat despite the adoption of our self imposed lower fee policies. Other non-deposit fees and commission continues to show growth in the direct pay and Letters of Credit business. Check proceeds and bank proceeds are both better due to higher activity and increased penetration. Other income variance of negative $44 million is comprised primarily of decreases in $19 million in Rabbi Trust, $10 million related to lower trading gains, $10 million in client derivative rating and $2 million in decreased payable processing income due to the sale of our Payroll business in the fourth quarter of 2009. As we stated, the FDIC loss share in the amount of a negative $78 million reflects an 80% offset of additional accretion identified in the first quarter of '10 and second quarter of 2010 cash flow assessment. We expect noninterest income to be relatively stable, but down slightly in light of the regulatory changes. But over time, we believe we will be able to offset the majority of these changes and produce positive growth over a long period of time. On Page 23, our efficiency ratio experienced slight deterioration due to the Colonial conversion and the higher costs associated with the credit environment. Efficiency is expected to flatten out over the next couple of quarters and improve as credit cards start to subside. Low regulatory cost will be headwinds. Merger-related charges, as Kelly talked, peaked in the Colonial conversion we expect about $10 million to $20 million left in merger-related expenses. All of the Colonial cost savings has been realized and we expect the full run rate of $170 million this quarter. Current occupancy and equipment costs reflect reasonable run rate going forward. Professional services increased, primarily due to increased production and outsource services. Loan processing charges increased primarily due to mortgage loan repurchase reserves of $3 million, approximately $2 million for merchant expense and $1.5 million for commercial loan inspection and appraisal fees. Other noninterest expense was up due to an increase in advertising and public relations expense of approximately $8 million, $2.5 million in deposit-related expenses and $10 million in other operating charge-offs. Excluding special items and expenses related to the Colonial acquisition, noninterest expenses were up 4% compared to the second quarter of last year. The risk reduction strategy Kelly and Clarke referred to earlier will reduce our noninterest expenses over time. Turning, looking at FTE, they decreased 326 on a linked-quarter basis and 1,657 on a common quarter basis primarily attributable to Colonial. Finally, our effective tax rate for the quarter was 10% compared to 19.8% in the first quarter. We expect our effective tax rate for the full year to be in the mid-teens and no unusual items. Turning to Page 24. Capital ratios remain very strong and all improved from the first quarter level. Tangible common at 7%, up from 6.4%, Tier 1 common at 8.9% up from 8.6%, Tier 1 capital at 11.7%, up from 11.6% and leverage at 8.9%, up from 8.7%. We remain one of the strongest capitalized financial institutions in the industry. This concludes my remarks; let me turn it back over to Tamera to explain the Q&A process.

[Tamera Gjesdal:]

Thank you, Daryl. Before we move to the Q&A segment of this conference call, I'll ask that we use the same process as we have in the past to give fair access to all participants. You'll be limited to one primary question and one follow-up. If you have further questions, please re-enter the queue. Additionally, after we finish the Q&A segment we will ask Mr. King to come back on the line for some closing remarks. Barbara, if you wouldn't mind please, come back on the line and explain how to submit the questions.[Operator Instructions] We'll take our first question from Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

I wanted to dig in a little bit into the loan sales and just get a sense of some of the color around the loan sales? You were indicating that the market had changed a little bit, and I guess what I'm wondering is, at what type of price point are you willing to sell? Obviously, you're taking some losses, so I just wanted to understand, are you determining the volume of what you're selling based on specific hurdle rates that you're trying to hit or is it a function of something else?

[Clarke Starnes:]

Betsy, this is Clarke. I'll answer that. We are looking at the relative pricing in the market and we do have a threshold of -- we try to look at the current mark on a present value basis versus the cost to hold these assets over time. And we feel like -- of course the mortgage sale was a bulk sale through a dealer. We knew that wouldn't have a much heavier mark but our strategy for the commercial note sales and the remaining mortgage short sales that we're doing would have much more mark smart. So we factored all that into our consideration versus the write-downs we're already carrying on those loans and the allocated reserves and our strategy is to try to dispose of these assets with little remaining P&L mark and not raise our cumulative losses that we feel like we are already embedded in there.

[Betsy Graseck:]

In terms of the timing during the quarter, you indicated commercial sale was late in the quarter but I'm just wondering, did the decline in rates have anything to do with the decision to sell the loans? Did it bring down your hurdle rates to the extent that more loans you decided to sell, was there any movement within the quarter, April, May, June?

[Daryl Bible:]

Betsy, this is Daryl. What I would tell you is, loans really don't trade too much on the direction of interest rate. When we looked at the quarter, we made a decision kind of midpoint in the quarter that we were going to sell these and we just kind of went through and executed the transaction. It was a competitive process and we just thought that timing was right, based upon what Kelly said earlier, there were more bidders, more competition and just higher valuations of what we've seen in the past for these type of credits.

[Kelly King:]

I think that's particularly the case on Daryl's point there, residential mortgages would be more sensitive to rates, Betsy. But the commercial side is a lot less sensitive and it's more of customized one-off and so it's more based on the investor's view of the property and the return that's not as rate driven.

[Betsy Graseck:]

And the 120 you have under contract right now for the current quarter is more Reg E or?

[Kelly King:]

That's commercial OREO. It's really OREO, it's probably a similar mix to what we're seeing. It's a pretty good percentage of lots and lands. I'd say in excess of 30% component of lots and lands, including several subdivisions.

[Operator:]

And next, we have Craig Siegenthaler of Crédit Suisse.

[Craig Siegenthaler:]

Just a follow-up to Betsy's question on the MPA disposition, and maybe actually it's even better if Clarke handles this one, but of the $682 million of loans, we know now about $79 million are delinquent but can you give us what this mix looked like in the first quarter? Meaning, what was non-accrual and what was accruing as of the first quarter for this $682 million?

[Clarke Starnes:]

The majority of the assets were not accruing in first quarter. So very little of these would've migrated this quarter. These were existing delinquent problem assets that were already on non-accrual.

[Craig Siegenthaler:]

I'm wondering when is the typical timing of the safety and [indiscernible] (1

[Kelly King:]

That varies over time, sometimes they're on an annual cycle, sometimes they're on a 15 to 18 month cycle. It varies all over the place.

[Craig Siegenthaler:]

Was there one in the first or the second quarters?

[Kelly King:]

We don't disclose when we have safety and [indiscernible] (1

[Operator:]

And next is Bob Patten of Morgan Keegan.

[Robert Patten:]

Kelly, a million questions but I just want to focus on Colonial was such a good deal for you. Obviously ahead of schedule and unplanned with everything you wanted to get out of there, where do you see this landscape, obviously regulatory environment changes the rules, little banks have limited access to capital. Are you guys -- can you talk about the landscape of both little banks and larger banks in terms of the next two years and maybe the next five years? I'd like to get your view.

[Kelly King:]

Yes, thanks, Bob. Well I think it's material to be honest I think as the rule-making becomes clear and as we understand the economics of all the changes. First of all, it will be very difficult for the smaller institutions to make the kind of adjustments to their cost of revenue charts that some of the bigger banks will make. So the net and visual impact on them will be worse in my view. But more importantly, I really expect for the next two or three years to see a substantial increase in regulatory compliance and cost. And I think that could be really, really problematic for the smaller institutions. It won't be easy for anybody, but it still matters. And so if you are substantially larger, complying with any one particular rule, the state cost of compliance is potentially the same for a large institution as it is a small one. So, again, both of those factors I think make it really, really difficult for the small institution in the new rules. And so, I personally predict a pretty substantial consolidation over the next few years coming out of all of this, not just the regulatory reform, but the whole economic crisis. I mean, what the crisis has done is it's revealed some of the fundamental flaws in their strategies and execution abilities of institutions. Not trying to be critical of my peers, but it's just a realistic answer to the question. And so I think the small institution have a tough row to hoe going forward. I think the bigger institutions will have to adapt their strategies and will be able to do so. And so you will definitely see a higher concentration of the business flow controlled by the top, let's say 15 institutions, five years from now than there is today.

[Robert Patten:]

Do you see BB&T as a bigger southern power house or do you see it going more national in five, 10 years?

[Kelly King:]

Bob, the way I see it over the next five or three years, 10 years in the labor [ph] (1

[Operator:]

And next, we have Jefferson Harralson of KBW.

[Jefferson Harralson:]

I some more questions on the OREO class and the disposition strategy, is your target $600 million or $700 million a quarter and would you expect that the OREO class remain flattish if you're successful in what you're trying to do?

[Clarke Starnes:]

We would expect continued sales or dispositions in a similar range for the next several quarters. But we think our core OREO cost will be relatively moderating as we move forward. So we don't expect a big rise in the OREO write-down expense since we've done a deep re-evaluation of the portfolio.

[Jefferson Harralson:]

On the margin and the increase from Colonial, it sounds like you're thinking that's a fairly recurring benefit that's going to come, as long as the losses at Colonial stay? Where do you think they're going to be?

[Daryl Bible:]

Yes, Jefferson. I mean, the people that are working out the loans in Colonial are doing a great job, and because of that we're getting a huge benefit out of that. And one of my prepared remarks, I talked about additional accretable yield of $3.4 billion, that will flow through earnings over the life of these assets. So I think we're going to continue to have this benefit for a while.

[Jefferson Harralson:]

How about just that 381 core margin, can you just give us some guidance what do you think it goes?

[Daryl Bible:]

Yes, I think our core margin; excluding accretable yield is performing very well. I mean it was stable quarter-over-quarter. Our credit spreads I talked about, improved both on retail and commercial. Donna and Ricky are doing a great job on how we're managing our deposit pricing. So I think overall, our core margin in the company is holding up really well and with the positive benefit that we're getting on the work out of the Colonial assets we're seeing a huge benefits.

[Operator:]

And next we have Heather Wolf of UBS.

[Heather Wolf:]

I just have a couple of quick follow-up questions on the margin, Daryl, when you gave the guidance in the back half of around current levels, how much visibility do you have into the timing of the Colonial disposition assets?

[Daryl Bible:]

What I would tell you is we run to cash flows every quarter. We've been running the cash flows the last two quarters now and what we're seeing is, is improved performance on the marks and which is basically moving dollars from non-accretable to accretable, which is why we're seeing more inflows into the accretable yield which is helping margins. I have projections for the rest of the year and into next year. That can reverse if the performance goes the other way. So right now, we have a favorable trend. Sandra and her team in Florida are doing a great job working these assets out. It takes a lot of work and effort to do a good job with these assets. And as long as the economy stays where it is, I think we'll continue to perform well but there's always variables with it, it works in certain places. But I think we feel pretty comfortable for the rest of the year that we're going to be about what we were this quarter.

[Heather Wolf:]

Just a point of clarification on the re-class from accretable to accretable, at least at some of the other banks that we've seen, that re-class doesn't always flow through NII each quarter, is there something related to your loss share agreement that makes you recognize that in NII immediately?

[Daryl Bible:]

It's not immediate, it moves into accretable and then it goes through earnings over time over the life of the assets. We really look at the accounting, there's three pieces, so a part of the benefit goes to net interest margin, then you have an offset in the FDIC receivable but then if you have impairments, that also flows through on the provision side. So last quarter you recall, we did have impairment on eight pools [ph] (1

[Heather Wolf:]

So the margin top that we saw this quarter related not just to the re-class from not accretable to accretable but disposition on impaired assets, is that correct?

[Daryl Bible:]

No, what I would say is that when we're re-writing the cash flows, we had better performance on these assets, which allowed us to move $4 into accretable and then the dollars that weren't accretable, the portion of assets that actually paid off this quarter, basically think of it like a bond, it's accretion on a bond, so a portion of that accretable yield goes into earnings over time as assets are write-off.

[Operator:]

And next we have Kevin Fitzsimmons of Sandler O'Neill.

[Kevin Fitzsimmons:]

On the subject of TDRs, I know we've talked the past couple of quarters about a lot of that growth being the realignment of how you guys would define TDRs versus the regulatory guidance that came out in October 2009, wondering if are we basically at a level now where that realignment is done and so when we further increase in TDRs will be just what organically is occurring. And then secondly, just wondered if you guys could touch on the Gulf oil spill and I know a lot of the Colonial presence is basically protected by the FDIC, but in terms of your legacy Florida exposure where you're most concerned about and what you're watching closely?

[Clarke Starnes:]

Kevin, this is Clarke. As far as the TDRs, I think you're exactly right. I think the last several quarters we had noise around clarification on the classification and that's pretty much behind us, so I think any incremental TDR inflows you see at this point will be true modification due to deteriorating borrowers and our ability to helping them. So I think that's the way you ought to look at it. As far as the Gulf Coast exposure, we have taken a deep dive on that and just for reference we have about $2.5 billion of loans in those affected areas, the good news for us is the far majority of those assets are wrapped with the loss share and even at this point, we're not see a big increase or incidence of borrowers coming to us with issues related to the spill yet and for those few that are, many of the cases, they are filing claims. We are anecdotally seeing some benefit on the East Coast of Florida, and the tourism side you see some of the activity migrating over there and fortunately for those folks on the Gulf side, but as far as our legacy assets in those areas, it's very minimal and we just don't think there's going to be much impact.

[Operator:]

And next we have Paul Miller of FBR Capital Markets.

[William Wallace:]

This is actually William Wallace on for Paul today. I had two quick questions, one is I appreciate how it's practically impossible to really predict the impact of any other regulatory reform changes out there. But I'm wondering if as it relates to the Durban portion, the debit fee portion of the bill that was just passed if you would be willing to quantify the debit fee income from 2009 or perhaps expectations for 2010?

[Kelly King:]

Our, kind of bucket if you will, in that kind of run rate is about $230 million. What some people have tried to do is to project what percentage of that they will lose based on the vague language in the law about covering incremental cost and prod cost. But again, as I said earlier, William, it really is virtually pulling numbers out of the air. And our opinion to try to figure that out in terms of what the actual rate will be. And then again, you're just not going to see companies I think sit by and not make changes. I mean it's so easy to change, and for example, to date we don't even have a charge for a debit card. And so if we have all of these reductions income we'll simply have a $5 mark for whatever charge the debit cards. So it's not hard to substantially mitigate that, the irony for this with often times the congressman did not understand the consequences of their actions is it will probably drive up costs to the consumers.

[William Wallace:]

I think you mentioned in you're prepared remarks that you currently have a study to figure out where some mitigating product offerings et cetera could come from, do you expect that we might hear from that next quarter or is there something that could take a little longer to figure out?

[Kelly King:]

I think you'll begin to see some of it next quarter, and then it'll be ensuing over the next several quarters but you'll begin to see definitely from us information regard to changes next quarter.

[William Wallace:]

Lastly, I may have missed it in the remarks, but I know you said your tax rate was about 10%. Was there any favorable recovery or anything in there? I know you said the mid teens effective rate for the year, I'm just to figure out what happened in the quarter with that rate?

[Kelly King:]

No, William. It's really when you have to forecast the earnings for the company, we basically just make sure that our average tax rate for the year would be around 15%, 16%. So since we're at 19% the first quarter, we had to lower it to 10% this quarter but we think we'll be in the mid teens for the rest of the year, averaging that in the rest of the year and for the end of the year as well.

[Operator:]

And next we have Adam Barkstrom of Sterne Agee.

[Adam Barkstrom:]

Daryl, I want to follow-up on the tax rate. I mean, remind me or remind us why is that rate, you're saying 15% to 16% for the year, why is that so low?

[Daryl Bible:]

The function of how much tax-free income that we have, in relation to how much taxable income. So if you look, we have a couple of billion dollars of municipals and you have some portfolio, we have also government finance unit that's tax exempt. We also have a couple hundred million in tax credits. So if you factor all that in and you use that proportionately, since our taxable income is down, then it basically comes out to be what the tax rate would be. As our earnings increase and taxable income goes up, than our higher tax -- you'll see a higher tax rate out of us. But since we have all the lower tax exempt income, which is more our taxable income, that's why you're seeing a lower rate from us.

[Adam Barkstrom:]

Kelly, maybe for you and maybe Clarke, you can comment as well, but just thinking about this asset disposition plan this quarter, I think I have a sense, but is this going to be kind of an ongoing initiative or was this sort of a -- for this, at least for 2010 kind of a hard look at the portfolio. Kelly, you talked about pulling in future losses into this quarter because of a number of elements But I'm just curious and you characterized core charge-offs versus non-core charge-offs, I'm just curious if we're going to see this in the next couple of quarters or is this kind of at least for 2010 was this kind of it?

[Kelly King:]

Adam, I think we basically started in the second quarter, a strategy that will be continuing for the next few quarters. Again, assuming the economy remains constant and the investor remain constant. The big change is a year and a half ago there was basically no borrowing for anything. Today, the investor community has changed dramatically and they smell that things are turning and it's time to buy. And so the demand, if you will, has increased substantially. And so we wanted to be in the market while the demand was high. So what you saw in the second quarter was a substantial bulk sale in mortgage because that's, as you know, the most commoditized types of product that they can package up and sell as kind of a total package. And then a smaller amount of commercial but the ongoing strategy is fairly intent at looking at specifically commercial types of foundations. It's possible you do both sell around that, although I say it's unlikely, mostly you'll see a fair amount of activity in commercial dispositions over the next two or three quarters and the lengthiness will be just having to get done in any one particular quarter. But the strategy will be consistent.

[Adam Barkstrom:]

Clarke, just one quick one, back in the footnotes looking at the value day [ph] (1

[Clarke Starnes:]

Absolutely, what we found is that we were more conservative in the industry around when we were non-accruing FHA/VA insured loans when many others were not. And what's occurring as you know, the FHA is requiring modification programs for service or so, a lot of originations we sold into the Ginnie pools we have to buy back out and do mods on them [ph] (1

[Operator:]

And next we have Chris Spahr with CLSA.

[Unidentified Analyst:]

I'm calling on behalf of Mike Mayo. Just a quick question on the margin and the timing of the sales securities, can you give us a sense of what you sold it in the quarter?

[Daryl Bible:]

Yes, the securities were sold in the middle of the quarter, so if you look at the average balance sheet, our balance sheet is showing only about $4 billion or $5 billion reduction. If you look at the balance sheet at the end of the quarter you can kind of see where the new balance sheet run rate is. From a margin perspective, I would say it didn't have a huge impact on margin. As you saw it initially, it reduces your cheapest source of funding, which is your overnight money, your Fed funds so that's why it had a little bit of pressure on benefits margin.

[Unidentified Analyst:]

And under what rates now are you basing your core margin outlook?

[Daryl Bible:]

Our base forecast basically we use blue chip and we also look at the forward curve. The model that we have on the forecast we talked about, basically has rates flat up until mid-next year when the Fed starts to increase rates and I think we have maybe a 50 or 75 basis point hedge fund rate at the end of '11. So it's a very modest rate rise. If rates stay stable though and don't go up for the foreseeable future, it would have minimal impact on our margin.

[Operator:]

And next we have Christopher Marinac with FIG Partners.

[Christopher Marinac:]

Could you just clarify how much of the reserve is allocated towards the TDRs? Just sort of similar to what the queue has disclosed last quarter?

[Clarke Starnes:]

I'm not sure I have that with me, Daryl, but we can certainly follow-up. I don't know if I have that data with us Tamera.

[Daryl Bible:]

Yes, Chris, we can call you after the call and give you that number.

[Operator:]

And next we have Gary Tenner with Soleil Securities.

[Gary Tenner:]

Question regarding non-accrual inflows if I missed it in the slides I apologize. But what were they in 2Q and then remind us what they were in 1Q?

[Clarke Starnes:]

Inflows were more modest in Q1 related to our commercial, so the big change for Q2 was on the commercial side, so we actually had inflows on commercial of about $400 million. That was up from first quarter and the inflows related to the other portfolios were relatively stable to down.

[Gary Tenner:]

Can you not give us a total for each order or?

[Clarke Starnes:]

We can certainly follow back up. Again, we don't have that detailed information here.

[Daryl Bible:]

We show the inflows on OREO.

[Clarke Starnes:]

But we don't have it for nonperforming loans in the deck.

[Gary Tenner:]

Just Kelly, I wonder if you could talk about dividend buybacks, how the regulatory changes, changes your outlook there given pretty long lead time on the solutions of trust preferred, so how you look at that?

[Kelly King:]

I don't think the trust preferred change, changes my view at all relative to the dividend side [indiscernible] (1

[Operator:]

And next we have Ken Usdin with Bank of America - Merrill Lynch.

[Unidentified Analyst:]

Hi, it's actually Ian Foley for Ken. Quick question on the securities portfolio, I understand repositioning it for longer-term if the Fed is presumably on hold for a while what level of loan growth would you need to kind of keep the margins stable on the coming quarters?

[Clarke Starnes:]

Right now the cash flow simply shows the portfolio is a little bit over $2 billion for the rest of the year. So I think we feel comfortable that we'll be able to replace the cash flows and securities, re-invest those to keep the size where it is and we're hopeful that loan demand starts to have growth in the third and fourth quarter.

[Operator:]

Although we have a number of callers left in the queue, unfortunately we're out of time and I'd like to now turn the call back over to Mr. King for closing remarks.

[Kelly King:]

Thank you, Tamera. Thank you, everybody for joining us. We really appreciate your interest in following us quarter-to-quarter. So thanks for your support. Overall, we consider this to be another very solid typical BB&T kind of quarter, fundamental core performance in most of our businesses remain very strong, despite sluggish economy. Consistent with what we said all along, we did implement a more aggressive strategy when prices were appropriate to reduce our balance sheet risk and exposure to nonperforming assets. That's off to a good start. We continue to remain very conservative with regard to our allowance position because of a little hesitancy in the economy. So we'll see how that plays out. We certainly saw a great opportunity in terms of desensitizing and deleveraging our balance sheet and take advantage of that. It also allowed us to strengthen our capital levels, which as you know, are amongst the leaders in the industry. We are clearly on track enabling us as core take-away with our long-term plan to diversify our loan mix and our deposit mix which will ultimately end up in a more profitable and stable revenue stream, as we have less volatile exposure to real estate. So if you think about from a long-term point of view, we remain very, very optimistic even as we struggle to get some economic footing nationally, we think that is temporary in nature and the long-term opportunity for us is wonderful. Remember, we still have this major re-intermediation that is already taking place as the shadow market is basically shut down. We don't think it'll change much, this re-intermediation is strong. The consolidation in the industry is going to allow the stronger institutions like BB&T to participate more effectively. So we feel extremely confident about the future. We're not out of the woods, we're not trying to grow big trees, we're not trying to be over confident, don't have me saying that but what we have to do, we know how to do, and we're doing it with deliberation and consistency. And so when you look beyond that temporary execution on the remainder of the credit cycle, the opportunity for us on the revenue and profitability perspective looking forward looks very, very optimistic. Thank you, all very much for covering us and your support and I hope you have a great day.

[Operator:]

And that does conclude today's conference call. Thank you for your participation.