Truist Financial Corporation (TFC) Q4 2011 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Tamera Gjesdal, Senior Vice President of Investor Relations for BB&T Corporation. Thank you. You may begin, Tamera.

Thank you, Alicia, and good morning, everyone, and thanks to all of our listeners for joining us today. This call is being broadcast on the Internet from our website at bbt.com. We have with us today Kelly King, Daryl Bible and Clarke Starnes, who will review the results for the fourth quarter of 2011, as well as provide a look ahead. We will be referencing a slide presentation during our remarks today. A copy of the presentation, as well as our earnings release and supplemental financial information, are available on the BB&T website. After Kelly, Daryl and Clarke have made their remarks, we will pause to have Alicia come back on the line and explain how you may participate in the Q&A session. Before we begin, let me remind you 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 in 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. I will now turn over the call to Kelly.

Thank you, Tamera. Good morning, everybody, and thanks for joining us this morning. And I would say, overall, for this quarter relative to the economic and industry challenges, it was clearly, in my view, an outstanding performance year for our company. Just a few highlights and then we'll just drill down on some of the numbers for you. On the earnings front, net income was a strong $391 million, up 88% versus fourth quarter of '10. EPS totaled $0.55, up 88% versus fourth quarter and if then annualized 23% increase from the $0.52 end of last quarter, so we really think this is the strongest quarterly earnings in more than 3 years. On the revenue side, looking at it from an FTE basis, net interest income was $1.5 billion, up 9.6% annualized over the linked quarter. That was supported by strong loan growth and larger security balances. Net operating revenues totaled $2.3 billion, which was up an annualized 11.8% versus the third quarter, so a good solid revenue performance. Our loan growth, we felt very good about. It was strong and it was broad-based. Average loan growth was 7.3% annualized versus the third quarter. Average loan growth, if you exclude ADC and our covered and other acquired portfolios, was up 10.1% annualized versus the third, so strong over there. And importantly, the pace of growth accelerated during the quarter. That growth was really focused in C&I, mortgage and direct retail, so it's fairly broad-based. We did continue to have progress in our mix improvement in the deposit area. I would point out we feel very comfortable now relative to our Basel III liquidity requirements. Average noninterest-bearing deposits increased $1.8 billion or a very strong 31.3% annualized in the fourth versus the third. And total deposits increased $6.9 billion or 23.7% annualized versus the third. So strong deposit performance as you've seen for the last several quarters. In the credit area, we had overall continued strong improvement in the credit area. As you'll recall, we'd mentioned that we had decided to execute a more aggressive foreclosed property strategy in the fourth quarter. And so as a result, our NPAs decreased $519 million or 17.5%, which is better than the guidance that we had indicated. And importantly, our foreclosed property area decreased by $408 million or 41.4%, so very strong performance there. So let's drill down a little bit into some of the numbers. If you go with me on the slide -- this Slide 4, we did have a few unusual items this quarter. I'm sorry about the noise, but we think it's all net positive. So we had net securities gains of $103 million pretax, which was a positive $0.09 per share. Due to the more aggressive disposition strategy that we took, we did have additional OREO valuation adjustments of $220 million, which was a negative net earnings of $0.19. We did have some small merger-related charges related to BankAtlantic and some charges related to our expense optimization strategy project. That was $16 million before tax, so that was about $0.01. And then we did have some losses and write-downs to conclude our previously announced NPL disposition strategy. Recall we have moved earlier last year some NPLs into held-for-sale. Glad to say that category is now down to 0 after an $11 million pretax charge there, which was about a negative $0.01. And then we did have a small amount in the Visa indemnification charge. You will recall in 2008, we, as many others, had a sell of the Visa stock, and so we had an $11 million pretax charge there which was about $0.01. So giving you a little color with regard to loan growth. If you go to the deck, Slide 5, I'd say that, overall, our loan production and growth accelerated and it was broad-based. You will see that our C&I grew 11% fourth to third annualized. Other CRE continued our strategic -- strategically directed decline of 8.2%. Sales finance was 4.1%. Revolving credit was strong at 9.4%. Mortgage was 26%. Now other lending subsidiaries was down 1.1%, fourth to third annualized. But remember, we have a lot of seasonality there. So insurance premium finance business was down, but the other subsidiaries were up nicely. For example, equipment finance was up 21.9%. Grandbridge mortgage was up 23.7%. Sheffield, which is a small equipment finance business, was up 23.6%. So that was good as well. Very pleased with our direct retail, which was up 11.2%. I would point out that's largely first lien home equity lines and financing home improvements and that kind of thing. So if you look at our subtotal of loans up 10.1%, excluding the impact of the ADC and covered runoff, even if you include those, it was up 7.3%, which was better than our 4% to 6% guidance. So we felt pretty good about loan growth. A little more detail on that. The momentum kind of accelerated during the quarter. So end-of-period loans was up $2.8 billion, which was annualized 10.5%. The pipeline remains robust. I want to emphasize that we remain focused on high quality, granular, diverse portfolios. We have not changed our strategy in terms of how we pursue corporate loans or any other kinds of loans. So if you think about it, we've said 2 or 3 years, we've talked about our corporate strategy, our wealth strategy, our specialized lending strategy. These strategies are really beginning to pay off and so we've had the best loan growth in 3 years. Looking forward, we've been expecting the first quarter loan growth to be in the 5% to 7% range and that's contingent on what happens with the economy. But based on what we are seeing in the economy, which is kind of slow, positive growth, no double dip, just kind of slow positive 2%, 2.5% kind of real GDP growth, based on that, we would expect that kind of loan growth. So if you look at the deposit area, it is yet again another strong deposit area. We're real pleased about the progress we've made in diversifying our mix and at the same time lowering our costs. So if you look at our noninterest-bearing deposits, fourth to third, annualized is 31.3%. I'll tell you, DDA is just continuing to flood into the banking industry, not just us, but to everybody. That's not necessarily a good sign. It means people are still hoarding a lot of cash. But still, it's very strong and gives us really good base as loans begin to grow going forward. Interest checking is up 9.7%. Money market and savings is up 24.6%. CDs were up by 28.3%, not quite as strong as last quarter, but still very strong. But you can expect to see that coming down some now that we feel that we've kind of got our Basel III liquidity kind of where we want it. So total deposits is up 23.7% which is obviously very, very strong. Very pleased that our interest-bearing deposit cost decreased to 0.56% compared to 0.65%. We think we still have some momentum on the downside going forward with regard to that. Growth in CDs picked up despite a 16 basis point decrease in cost in CDs, so we've bring -- brought the costs down, had good growth and kept the maturity low with average maturity of 13 months. So we, right now, we're looking forward on deposits. We expect solid growth, but we would expect to see a more moderate deposit growth as our CD portfolio would expand at a slower pace, but we'll continue to focus on reductions in aggregate costs. So now with that, let me turn it to Clarke for some color on the credit side.

Thank you, Kelly, and good morning, everyone. I'm very pleased to report another quarter of improved trends in our credit performance. We're particularly pleased with the execution of our strategy to more aggressively reduce foreclosed property balances and a significant decline in total NPAs, which was driven in part by these efforts. On Slide 7, you can see the substantial reduction in NPAs at 17.5%. This was significantly better, as Kelly said, in the 5% to 10% guidance we gave last quarter and represents the seventh consecutive quarter with lower NPAs. It's also noteworthy that NPAs declined approximately $1.5 billion or 38% in 2011 to the lowest level in 3 years. Our efforts to reduce commercial NPAs were also noteworthy for the quarter, including held-for-sale commercial NPLs were down 8.1% on a linked-quarter basis, and we also experienced lower level of commercial watch list credits, nonaccrual inflows, TDRs, early delinquencies and OREOs, so a very, very good quarter on the commercial side. While we did see some seasonal impact on our credit performance in the residential mortgage and specialized lending portfolios, the problem levels were well within our projections and should move back down in the first quarter, which is consistent with our historical experience. Our focus on rapidly reducing NPAs remains a priority. We've previously discussed with you all that there are, we believe, about $700 million in annualized direct credit cost savings that we can realize if NPAs are reduced to more normal levels. We currently expect to realize a considerable portion of that benefit in 2012. We'd ask you to remember the $700 million excludes expected declines in the provision expense. For the first quarter, we expect NPAs to decline in the range of 5% to 10%, assuming the economy holds up. We would note this guidance excludes any special foreclosed property sales, which we think are very possible given our new more aggressive disposition strategy. If you look with me on Slide 8, we explained last quarter that we were moving to a more aggressive strategy to reduce foreclosed property balances. These balances dropped a significant 41.4% as a result. Our efforts were focused on minimizing inflows, which you can see, we were successful at doing over the last 2 quarters. Inflows were down 57% compared to the fourth quarter of last year. This is very important because of the length of time it takes to move assets to the foreclosure process. And I'm also very pleased that we've been able to reduce inflows without negatively impacting charge-offs. We're also focused on more rapidly selling existing foreclosed properties with a good sales quarter in Q4 at $255 million. In addition, we have approximately $100 million in the pipeline and are very confident we'll have a strong sales result in first quarter 2012. In connection with our change to a shorter-hold disposition strategy, we did record a significant $220 million liquidity mark, which was concentrated purposely in the most difficult land-related assets. We're confident this will allow us to move these properties out more quickly and substantially reduce foreclosed property expenses in 2012. I would note that our foreclosed property balances, without consideration of the mark, were down 19.1% in Q4, very strong results, I think. As we said last quarter, this effort will substantially reduce our foreclosed property expense in 2012, so we expect those expenses to trend downward throughout 2012 as the properties are liquidated and to average less than $100 million per quarter, which includes both write-downs and maintenance costs. If you'll turn to Slide 9, you'll note that our charge-offs in Q4, excluding covered loans, were 1.46%, about flat with last quarter and consistent with our previous guidance. For the full year, net charge-offs were 1.59%, excluding covered, down from 2.59% last year, so I think a tremendous year in terms of lower loss experienced while generating $1.5 million reduction in our NPAs. So I think it's really a strong accomplishment for our workout teams. Looking forward, we expect total charge-offs to be approximately 1.30% in Q1, excluding covered, and to trend lower thereafter through the year. Finally, if you look at Slide 10, due to our improved credit performance and the quality of recent originations, our provision expense was lower in Q4 versus Q3. This also resulted in a reduction in our allowance. If you exclude the allowance for covered assets and then reserve for unfunded commitments, it was about $135 million, which is pretty similar to reductions experienced over the last couple of quarters. While our loan loss reserves did decrease this quarter, our coverage ratio of nonperforming loans remained strong at 113% and that's pretty consistent with Q3. While we remain conservative with respect to the allowance because of issues -- lingering issues in the economy and all the uncertainty, I would point out that recent credit vintages are performing very well and are creating some downward pressure in our allowance modeling. So continued improvement in credit quality is likely to allow for further reductions in provision expense. In summary, we're very pleased with the solid pace of credit improvement this quarter. Given the successful execution of our NPA reduction strategies, we're well positioned to benefit from lower levels of NPAs and credit-related costs in 2012. And with that, let me turn it over to Daryl for his comments.

Thank you, Clarke, and good morning, everyone. I'm going to take the next few minutes to discuss net interest margin, our securities portfolio expansion, fee income, noninterest expense, capital and our segment reporting. Continuing on Slide 11. Net interest margin for Q4 came in strong at 4.02%. It was down 7 basis points, in line with prior guidance. The decrease resulted from the runoff of higher-yielding loans being replaced with lower-yielding originations, a decrease in balances and yields, uncovered loans and a greater proportion of investment securities in our earning assets. The margin continues to benefit from lower-funding costs, particularly interest-bearing deposits, which decreased 9 basis points to 56 basis points and lower NPAs. Net interest income increased 9.6% annualized or $35 million on a linked-quarter basis. This was driven by increased balances in both loans and securities. Net interest income related to assets from the Colonial transaction decreased $31 million. Adjusting for the provision for covered loans and the increase in the FDIC loss share offset, net revenues decreased $15 million due to the impact of covered assets. With regard to margin outlook, we expect it to be approximately 3.90%, plus or minus 5 basis points in Q1. The primary drivers for the decline are: continued low rate environment, continued runoff of the covered asset portfolio and a decline in investment yields as a result of a full impact on the Q4 investment sales. The margin will continue to benefit from a decrease in interest-bearing deposit costs, primarily in the CD portfolio. We remain asset-sensitive and are positioned for rising rates. Turning to Slide 12. During Q4, we purchased $9.4 billion of securities, consisting primarily of a mixture of Ginnie Mae securities as well as other agency MBS. The purchase of these securities and significant growth in deposits resulted in a strong -- stronger Basel III liquidity position. We continue to maintain a very low-risk investment portfolio with approximately 99% guaranteed by government agencies. Additionally, approximately 28% is variable rate. The effective duration is 3.3 years. We expect the portfolio to remain relatively stable in 2012. Turning to Slide 13. Our fee income ratio decreased to 38.4% in Q4 from 39.3% in Q3. The decrease was primarily due to lower check card fees from interchange rules, lower investment banking and brokerage fees and commissions due to market conditions and lower volume and higher revenues driven by net interest income. Insurance income in Q4 increased to $254 million, driven by stronger performance in P&C and our Q4 agency acquisitions. Mortgage banking income was up in Q4 to $135 million compared to $123 million last quarter. The increase was due to higher production volume and larger gains on sales. The FDIC loss share income, net, improved $58 million due to the provision for covered loan offset and the cumulative impact of cash flow reassessments. The balance at the end of the quarter for accretable yield decreased to $1.8 billion from $2.1 billion in Q3. The increase in other income includes the net increase of $26 million from lower write-downs on nonperforming loans held for sale, $13 million in higher income related to post-employment benefits offset in personnel costs and $7 million in higher income on venture capital investments. We expect the fee income ratio to be in the upper 30% range in Q1. Looking on Slide 14. Our efficiency ratio improved to 53.5% compared to 54.6% in Q3. Personnel expense increased $8 million or 4.7% annualized. This relates to higher post-employment benefit expense. FTEs were up 90 in Q4 due to insurance acquisitions and up a total of 420 for the full year. When you adjust FTEs for these acquisitions, they would have been down 120 compared to Q3. The increase in FTEs over last year is largely comprised of revenue producers and investment services, wealth management, mortgage lending, direct retail lending and insurance. Foreclosed property expense increased $178 million. This is largely due to the increase in the valuation adjustment in connection with our more aggressive OREO disposition strategy. As Clarke noted, these costs will come down significantly in 2012 as we sell OREO properties. Occupancy and equipment expense was slightly higher due to real estate tax accrual adjustment. Professional services decreased due to lower legal fees. Other noninterest expenses decreased $9 million or 16.5% annualized. The improvement includes a $16 million reduction related to the loss on sale of leveraged leases in Q3, partially offset by an $11 million increase in the indemnification reserve in Q4 related to the 2008 sale of Visa stock. Excluding foreclosed property expense, noninterest expense would have increased 1% versus 2010. Looking to 2012, we expect noninterest expense to decline based on our outlook for lower credit-related costs and anticipated savings from our expense optimization strategy. As a reminder, we expect Q1 personnel expenses to be elevated due to seasonally high comp and benefits and the pension expense. Excluding the true up from our state tax return and discrete items, the Q4 effective tax rate was in line with expectations at 20%. Looking forward, as earnings continue to improve, our corporate tax rate will increase to 25% in 2012. Turning to Slide 15. Our capital ratios declined slightly due to faster earning asset growth, but remained very strong. Tier 1 common is 9.7%. Tier 1 capital is 12.4%. Leverage capital remains strong at 9%. Tangible common remains healthy at 6.9%, and total capital is 15.7%. Our internal capital generation continues to provide significant financial flexibility for a capital deployment in the following order: organic growth, dividends, strategic opportunities and share buyback. In terms of our CCAR submission, we feel good about our plan, which is consistent with these priorities. Our current estimate for Tier 1 common under Basel III remains at 8.8%, flat with Q3. We believe this will meet our capital requirements once the U.S. capital rules are published. Turning to Slide 16. We have added new disclosures on our segments. Here are a few highlights: Community bank net income totaled $49 million, and excluding the OREO mark, was $186 million. The main drivers include loan growth, improved credit quality, deposit growth and improved deposit mix. Average retail loans grew $597 million or 7.8% compared to Q4 2010. We also experienced solid growth in several payment categories: Merchant services was up 21%. Treasury services, credit card and international services also experienced solid revenue growth in Q4. Turning to Slide 17. Residential mortgage net income totaled $36 million. Linked-quarter revenue growth increased due to $18.2 million of gains on loan sales, increased revenue of higher production on $2.9 billion. Additionally, like-quarter net income growth was driven by lower provision as credit quality in this segment continues to improve. Mortgage repurchase activity remains at very low levels with a net increase of only $4 million in our repurchase reserve. Turning to Slide 18. Dealer financial services, which primarily originates indirect prime and non-prime auto loans through franchise dealers had net income of $48 million in Q4, as well as strong loan demand across all segments. Additionally, annual losses at Regional Acceptance are at historical lows, and our prime auto losses remained very low at 22 basis points. On Slide 19, specialized lending experienced strong quarter, with net income of $63 million and an increase in operating margin to 45%, up from 38% a year ago. Sheffield Financial, our small ticket equipment lending group, generated significant portfolio growth of 37% through expanded financing relationships. Grandbridge Real Estate Capital, our commercial banking sub, had record low production of $4.8 billion. Moving on to Slide 20. Insurance services generated $26 million in net income, driven by organic growth from McGriff Seibels & Williams and our recent acquisitions. Our acquisitions of Precept, Liberty Benefits and Atlantic Risk closed in the fourth quarter. Precept and Liberty Benefits will help define our employment benefit strategy with the anticipated health care reforms. For 2012, we anticipate strategic and modest organic growth. Turning to Slide 21. Financial services generated $84 million in net income, primarily driven by corporate banking and wealth management. They had loan growth of 50% and 34%, respectively, in Q4. This segment's operating margin improved to 45% from 40% a year ago. Finally, our corporate banking energy team, established in early 2011, originated 28 new energy client relationships. With that, let me turn it back over to Kelly for closing remarks and Q&A.

Thank you, Daryl. And as you can see, overall, it was a strong quarter for us. We continue to invest to drive revenue and loan growth. The underlying fundamentals, I think, in our loan and deposit business are exceptionally strong. We are continuing to methodically and successfully accomplish our diversification and risk mitigation strategies. We are reconceptualizing our businesses to drive our revenue and expense optimization process. And we believe we will continue to provide the best value proposition in our markets. So if you think about the economy -- the economy, as we've said, kind of a slow but positive kind of growth rate going forward, we're pretty optimistic about our performance in 2012. I would point out that since our company started in 1872, this is our 140th birthday, and while we are very proud of our heritage, we believe that our best days are ahead. We'd be glad now to answer your questions.

Thank you, Kelly. Before we move to the question-and-answer segment of the conference call, I'll ask that we use the same process as we have in the past. You'll be limited to one primary and one follow-up question. If you do have further questions, please reenter the queue. And now I'll ask Alicia to come back on the line and explain how to submit your questions.

[Operator Instructions] We'll go first to Craig Siegenthaler from Credit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: First, just on the loan growth guidance. If we assume a 0% point-to-point loan growth in the first quarter, we're actually going to back into a average loan growth number higher than your guidance. What I'm trying to figure out is, is your guidance more on the conservative side? Or are you expecting a deceleration growth in the first quarter?

Craig, I would say we are trying to be relatively conservative. It's really hard -- to be frank, it's hard to figure out exactly where the loan market is. There's been a lot of commentary so far this season about really strong robust loan growth kind of nationally, which would imply the economy is really booming. We do not see that. We think the economy is kind of sluggish. It is moving forward, but it's kind of sluggish, methodical kind of growth. What we are seeing is, clearly, movement of market share to our company. As we've talked about in the past, we have some very unusual opportunities in the corporate banking space, in wealth strategy and our specialized lending businesses. So we think that our growth is going to be relatively strong, but it's still kind of hard to figure exactly what's happening to the economy, so we're trying to be somewhat conservative. Craig Siegenthaler - Crédit Suisse AG, Research Division: Got it. And just a quick follow-up on OREO. If I go back and kind of look at what you said at the prior conferences in the fourth quarter, we knew OREO disposition activity was going to be high. I didn't know the impact to the bottom line was going to be of this type of magnitude. I'm wondering, did losses on some of these properties materialize more towards kind of the end of the fourth quarter or what kind of drove that?

Craig, this is Clarke. What drove our thinking was not necessarily any change in our loss experience. As we told you guys all along, we believe we were capital strong and had good earnings power and wanted to work with our clients and try to bridge as many as we can and as many of these assets to a better market. So all along, we have been on a very prescriptive, methodical process of revaluing these properties and marking them down to the appraised value on a consistent basis, so nothing's changed there. What's changed and what's reflected in the mark is management decision to change our holding period assumptions substantially. So we're trying to move away from more of a longer-hold view for us to a shorter-hold view, and this mark reflects what we think's a good liquidity discount to entice a loan holder to take these assets over the next couple of quarters or so. And the big economic benefit for us is that the run rate going forward in the foreclosed property expense is substantially better than the present value of this mark. So we feel very good about the strategy and think that it'll benefit us substantially in 2012.

We'll go next to Brian Foran from Nomura.

I guess on the credit, the one follow-up I had was can you give the NPA inflows that you've given in prior quarters? And then also on the OREO, when you talked about the 5% to 10% decline not contemplating any additional special dispositions, just remind us what kind of the baseline run rate of normal OREO sales would be without any special dispositions?

Brian, this is Clarke again. Total inflows for the quarter were up marginally, primarily due to the little bit of seasonal influence in our residential mortgage and our non-prime auto side, which we would expect to see in the fourth quarter and that should come down in the first. But what we're real pleased about is our commercial NPLs were actually down slightly for the quarter. They've come down rapidly to a level that we think is much more manageable to reduce NPLs on an organic basis. So even if the current rate of inflow is on commercial, we would expect another good quarter in Q1 in organic NPL reduction in our commercial book and our total book as well. As far as the 5% to 10% NPA guidance, excluding any special sales, that would assume a normal level of sales based on our previous strategy in about the $200 million range. So if we can do better than that, we should do better.

And then on net interest income, I guess just kind of putting everything together, if we've got loan growth in the high single digits, the margin coming down and the securities book flat, I guess the 2 related questions I had was do you still kind of think the margin ultimately will shake out in the 375 range as the accretable yield benefit steps down, but the core margin expands via loan growth and funding cost reductions? And just kind of overall dollars of net interest income -- or I mean, does everything just kind of shake out to flat next year as these things offset? Or where do you think net interest income will trend as you look forward?

We believe -- I mean, if you look at the forecast that we have pulled together, our net interest income for the year will be up due to the loan growth that we're seeing and achieving, also with the continued drop in our deposit costs, which will continue to benefit. If you actually look at our core margin this past quarter and you basically net out the repricing of the loans and you charge that against the benefit on the deposits, it really just came down due to the covered assets runoff and lower yields there. So as 2012 rolls out, we feel very comfortable the net interest income will be up, but margins will be down. As far as whether 370 or so is the right number really depends on how long interest rates stay down. The longer they stay down, the more pressure that is, but we feel very good about 2012 and have net interest income up even though margins will be dropping.

And just the up is relative to full year '11 or relative to the fourth quarter run rate?

Full year '11.

We'll go next to Todd Hagerman from Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Clarke, I just want to follow up on your comments and just kind of make sure I understand clearly in terms of the OREO. As you mentioned, those environmental-related costs coming down from the $700 million to assuming kind of a $400 million mark with a $100 million run rate, but I guess what I wanted clarification on is if I look at the delinquency levels in the report, delinquencies are up quarter-on-quarter. And so I'm just trying to think about how I reconcile with delinquencies up, that the bucket or the pressure on OREO still seems to be there. So I'm just trying to figure out why necessarily, why that number is coming down so meaningfully over the course of the year relative to what we've seen in the past several quarters.

Well, fair question, Todd. I think a couple of points: One is our inflows are still well controlled and overall directionally coming down, so the big risk in OREO is the commercial portfolio. And as I said, the delinquencies actually went down in the commercial book linked quarter. The only increase we had in delinquency for the quarter was some seasonal impact in resi mortgage and specialized lending effectively. So we don't see a delinquency pickup that would increase our inflows and put pressure on the OREO side there. So given all that, we think with the rate of inflows, how we're managing those not to take title into OREO, so our loss assumptions assume the impact of mitigation against new inflows in the OREO, so we're not taking title as much. So the combination of the normal sales and the controlled inflows, we think, will allow us to achieve that result.

Todd, something else you got to keep in mind. We're kind of in a new phase with regard to delinquencies. Delinquencies are really low, I mean just absolutely. And so while you may have a little seasonal variation from quarter-to-quarter, you don't think about a small change in delinquencies today the way you might have thought about it 2 years ago because we're counting on a somewhat normal kind of phase with regard to delinquencies. We'd certainly have the same kind of correlation to OREO flows as it would have had 2 years ago. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay, that's very helpful. And then, I guess, just maybe, Kelly, just an update in terms of your optimization strategy, just in terms of you didn't provide a lot of quantification last quarter. I'm just wondering if you're willing to kind of give an update relative to your guidance in terms of the lower expenses for 2012 and how that fits in.

Yes, Todd, so we're really engaged in that process now. It's going extraordinarily well. I think I mentioned before that we're using a process whereby all of our business leaders have been asked to take some time and develop a reconceptualization plan of their business, basically a clean sheet of paper approach. They've been asked to and have presented their findings to a subgroup of our executive team led by Daryl. Most of the cases, they presented great plans. In a few cases, we sent them back to do a little bit more work. But I'd say the overall results that are coming in are very pleasing and will be executed on methodically as we go through this year and into next year. We have very intentionally not named some big deal and put some big number on it, Todd, because we feel very strongly, and it's proven to be true, that for our culture, if you give our business leaders the opportunity to do their jobs, the challenge that -- it's a tough environment, we need to control our expenses and that requires a reconceptualization of the business but not nail them with a top down number, they'll come back with even better numbers, and that's exactly what's happening. So it's going extraordinarily well. We're very pleased. It will have positive impact as we think about our efficiency ratio as we go forward and that's what we're primarily focused on.

We'll go next to Ed Najarian from ISI Group.

This is Josh on for Ed. I just had a quick question. You recognized over $100 million of securities gains in 4Q, yet your securities portfolio yield appears to have gone up across-the-board. Am I correct in assuming that means that the weighted average life on the securities book went up? And if so, by how much?

So John (sic) [Josh], if you remember the last earnings call we had, we said the duration of the portfolio was 2.7 and now we're at 3.3. So you are correct in that it is a little bit longer, but we feel very comfortable at the 3.3 range.

We'll go next to Greg Ketron from UBS.

Question regarding loan growth. As you look at commercial loan growth up nearly $1 billion, maybe some color on the sources, whether it's corporate loans, core commercial, syndications and what you're seeing on the spread side?

Greg, we're -- it's pretty broad-based. We talked about in the past that really about 3 years ago, we launched a kind of aggressive new direction with regard to corporate lending, looking at corporate lending from a national perspective, focusing on the vertical industry specializations that we have, focusing on relationship base, keeping it very granular. And we've been executing on that with darn near perfection. And so a fair amount of it is corporate. We are getting good growth in the commercial spaces. We are getting pretty good pickup in our small business. Now that's not dramatically material in terms of the total business, really important long term in terms of the direction. It is not what you call syndicated lending. I mean, a lot of these companies, I think, today are buying large slices of big deals. We are in deals where we're participating with other companies and so you can technically define it as syndication, but the difference for us is, a, we're keeping our granular focus very disciplined. We look at situations -- I see them all the time and it really surprises me where we might hold $35 million to $50 million in a large deal and similar-sized peers would hold substantially more. We're just not going to do that. We just think diversification is an important lesson everybody should have learned from the last recession, and we're staying focused on that. So what we do is contingent to our relationship banking where we go kick the tires, talk to their CEO, talk to their CFO, understand the business, just feet on the ground in the client's office and it's been very successful. But let me pause and see if Clarke would add any other color to that.

Absolutely. And Greg, as far as the spread question, what we're seeing, like everybody else, is that spreads are clearly coming down, probably in the middle market side over the last year or so. We've seen pressure maybe 50 to 75 basis points, but still are all in marginal spreads right now on that type of business, are still in the $200 million to $240 million range, which is pretty consistent with the marketplace. And then as Kelly said, we benefit from a lot of smaller -- small business and community bank-sized lending. It gives us a total, for example, C&I yield is nearly 4%, so good mix there. But as Kelly said, we're not -- we've not changed our risk appetite at all around middle market side. 80% of the syndicated deals we participate in are our own facility sizes, there are 750 or less. It's within industries that we have vertical specialty in. A lot of the growth is coming in our newer markets like Texas, expansion in Alabama and Florida and then things like our new industry segment for energy, so that would become some of the highlights where we're getting the C&I growth.

Appreciate the color. On the -- one last question. On residential mortgage, you committed about $1.2 billion to the balance sheet in the fourth quarter. If you could comment maybe on type of product and whether we could see this continued commitment on into '2012?

Yes, Greg, you're right. We had -- as the -- particularly the ADC and the CRE portfolios have been in conscious runoff over the last year or so, we've augmented the balance sheet with -- by retaining what's new for us as we've been retaining our 10- and 15-year product. We've always portfolio-ed our ARMs and the jumbos and our affordable products, so that's not changed. So right now, the mix of what's going on in the balance sheet is about 20% ARMs, 20% jumbo and about 40% conventional -- I'm sorry, 40% jumbo, I apologize. And then what's in the conventional side is primarily 10 and 15. We're not holding any 30s.

Okay. And you expect that kind of commitment to continue into 2012?

Well, Kelly might want to speak to that. I think you'll us probably reconsider that as our targets are to see that the ADC will continue to run off. But we're also -- would expect, however, that we'd begin to stabilize the other CRE as we are focused and are interested on very high quality income property lending as asset. If that portfolio stabilizes, then we would probably see us later in the year consider pulling back on what we're putting on the balance sheet on the resi side.

We'll go next to Gerard Cassidy from RBC Capital Markets.

Clarke, can you share with us, over the years, when you go back and look at BB&T's credit ratios, it was quite common to have a nonperforming asset ratio of about 1% and net charge-offs below 40 basis points. I know the mix of the business now has changed. What do you think normalization will be on the nonperforming asset ratio and net charge-offs in the future? And when do you think you'll get there?

Great question, Gerard, and we've talked a lot about that. Kelly's mentioned on several calls the diversification plan and derisking strategy we've had over the last 3 years away from so much C&D concentration, more C&I lending, more non-real estate consumers, so you've seen us consciously grow in those areas so that we could produce lower volatility in the future in our default risk. But you may have higher expected losses than we had, had historically. So what we think about is we're trying to build a target portfolio mix that would hopefully achieve maybe a long-term loss rate in the 60 to 80 basis point range, but much less volatility during stress periods. So I think that would give us a good risk return trade-off. And I think if we can do that, then our nonperforming asset target would actually be pretty similar to that 1% earned or a level that you spoke about.

Would you -- is it fair to think because of the underwriting standards of the last 3 years, that the actual net charge-offs, when these loans season, could be below what you think is going to eventually be normal?

Absolutely. I would suggest to you that the type of originations we've been successfully doing over the last couple of years are very, very conservative. The consumer portfolios are all full docked, low loan-to-value, high FICO strata and the commercial originations, as Kelly said, very, very strong underwriting, very conservative exposure level. So I would agree with that.

And then finally, on the C&I loan growth, you guys obviously had strong growth. Was there any benefit or did you guys win any business that maybe normally would have went to the foreign banks? We're hearing some of the other large regional banks talk about some success that they're having in the syndicated area. And of the large C&I loan growth, how much was syndicated-type lending?

I'll give you part of that and Clarke can add some color. Yes, there's no question that the European banks, in general, are going back home and so you're seeing all of us participate in picking up that really, really good business. So -- and BB&T in particular is attractive for a lot of these clients, that we're counting on the foreigns for participation because, in many cases, we didn't have any involvement at all. And so we are able to step into a meaningful position and some really, really fine clients. And that's been kind of across-the-board. It's showing up in all industry segments. It's particularly showing up in energy, for example. There are a lot of packages on the street. We look at them and we'll continue to look at them. But we're pretty conservative in terms of underwriting. And so the odds of us buying a lot of big packages is pretty low, to be honest. But so where we'll benefit is from going directly to the companies where their line participation arrangement has been upset, and we'll be in there working out a direct relationship with them or with the lead bank versus buying packages directly from the European institutions.

And Gerard, our shared credit portfolio grew very nicely in the fourth quarter, up probably close to 50% linked quarter annualized. Even within, there's conservative standards we talked about. Clearly, we heard a lot from those clients around wanting to see a very stable partner in their bank group, and we'd give you a little bit of color. We did just close the largest land syndication we've ever done and it was related to a domestic company with a European parent that had funding issues in Europe. And so that was purpose of the credit. So that's the kind of stuff I think you're seeing out there.

We'll go next to John Pancari from Evercore Partners.

Along the syndicated lines, can you just talk to us about where the yields are coming in on the syndicated portfolio on those newer originations that you just mentioned?

Absolutely. Just to give you some sense for our syndicated book, roughly, you're talking about yields in about the 2.5% range and fees are about 70 or so basis points. So again, still it's very attractive given the risk profile of these credits for us. But it is down considerably from the peak spreads we saw a year or 2 ago.

Okay, great. And then in terms of line utilization and growth in commitments, can you talk to us about how they trended during the quarter? Just trying to get a gauge of what you're seeing in terms of loan demand versus share gains from competitors.

Well, our total utilization in our entire commercial book was about flat at about 34%. I would give you little color, though interesting, on the middle market side or the shared credits, it was actually up to 36%. So what we are seeing -- we're clearly moving market share. Most of our production in these segments are new names for us, so that's a good thing. But unfortunately, it's not necessarily new borrowing activity for those clients or new project finances, dividend recap and refis and that sort of thing. But what we are benefiting from and seeing -- I think others are seeing is more term loan pieces that are coming on to bank balance sheets versus going out to the bond market. So that's raised -- that was the real reason for the increase in utilization in our corporate book.

Okay. Then lastly, can you talk a little bit more about capital deployment? I know you gave your priorities, but can you talk to us about how you're thinking about each one of those priorities? I mean, on the M&A front, specifically, we've heard a lot of the recent media reports around BankUnited looking to sell, then now that's changed and there was some speculation that you had some interest in that franchise. So could you talk a little bit more about each of the priorities for us?

Yes, so we're very clear about our priorities because we think it's consistent with what our shareholders look for. Remember that our focus is on a group of shareholders that are long-term stable shareholders, and we feel very strongly in our fiduciary responsibility to tell them what we're going to try to do and then do it. And so we've been very clear to them and to broad-based investor communities that we're really focused primarily on organic growth. We have invested in organic opportunities over the last long number of years in places like Florida and Maryland and Texas, and we do that on a very consistent strategic basis, so that we're constantly layering in organic growth opportunities and that's why you want to deploy capital in that way. That's obviously the most profitable way to enhance shareholder value. Secondly, we have still about 50% of our shareholders, our private individual shareholders, and they value dividends highly. And frankly, most of our institutional shareholders are good conservative, long-term holders and they value dividends very highly. And so dividends are very important. Over the long term to take a 100-year run on the stock market, dividends are a huge percentage of the total gains of clients and so dividend and the account permanence of dividends is very important. In terms of strategic opportunities, clearly, you want to be looking at how to invest capital strategically. And so we are very, what I call, aggressive in terms of looking at opportunities, but very conservative when we get down to doing the analysis. We look at a lot of stuff. We don't do much and that's because we're very conservative, we're very disciplined, we're very analytical. And so when we say we're going to focus on strategic opportunities, we're going to control asset quality and we're going to do what's economically attractive to our shareholders. It's exactly what we mean, it's exactly what we do and that's exactly what you've seen playing out in all of that stuff in the market. And so you can expect us to continue to behave in exactly the way we have said that we have and have performed in the past.

We'll go next to Erika Penala from Bank of America Merrill Lynch.

I just have one follow-up question to Gerard's question. You mentioned that you think that normal losses would be in the 60 to 80 basis point range based on the mix of your loan book and you guided us towards 130 basis point charge-off number for the first quarter. I guess could you give us a sense of -- and you also mentioned that there's still a downward pressure implied by your allowance models. Could you give us a sense of what benchmarks do you look at or what we should look at in terms of how much more your allowance could come down as the rate of improvement is still directionally correct, but is slowing?

Fair question, Erika. This is Clarke. Again, what we've thought about, obviously, we will fully comply with accounting and the regulatory methodology for reserve setting as it moves forward and changes. But given the current guidance and construct and the way we think about it is if we were seeing our normalized losses moving down to the 60, 80 basis point range, then just from a management standpoint, we're probably comfortable seeing the reserves in at least the 1.5 to 2x that run rate of losses. Obviously, you could see where we are today and expect to see where we might bottom out given where we want to go. And again, all that depends on how the portfolio, in fact, fully performs and the environmental factors. But that's kind of the way we think about it today.

Erika, another point, and for Gerard if he's still listen, too, is when you think about the mix in our business, from historically more dependence on real estate and going forward much more dependence on in diversified and C&I portfolio, you have to think about more than just the interest rate and the charge-off rate or the net risk-adjusted yield. You have to think about the total profitability from the relationship and coming from collateral benefits. So for example, when you have a larger real estate portfolio, you can basically look at the risk-adjusted yield and that's kind of it because there are no other collateral benefits. When you look at a C&I portfolio, you think about a risk-adjusted yield plus the other profitability coming from the collateral benefits and so it's a more comprehensive analysis. So while our historical charge-off rates let's say, let's call it 40 basis point range, is lower than our expected 60 to 80, the net overall profitability will be enhanced because of the collateral benefits that are to come from that broader, more diversified portfolio.

Okay, got it. And one last question. Daryl, where are you repricing your CDs to today?

I'd say right now, Erika, they're probably around 50 basis points, 40 to 50 basis points.

We'll go next to Bob Patten from Morgan Keegan. Robert S. Patten - Morgan Keegan & Company, Inc., Research Division: Quick question on -- most of my questions have been asked, but just on capital. Is there any discussion at the board level or senior management around special dividends as this industry continues to generate excess capital?

Bob, as you well know, we're all thinking about capital in the context of the evolving new framework around Basel, et cetera. We also know -- as you also know, we have to think about it in terms of the CCAR. And so we have our own thoughts and then we have to be guided by what our partners are and from the regulatory perspective. Having said that, though, Bob, I think the industry is poised and BB&T is poised to generate substantial capital as we go forward. And if you start from the premise that we start from, which is that we are already well capitalized today, then looking forward, we would think in terms of our capital deployment hierarchy. And to be honest with you, personally, I like the notion of a special dividend. It's the kind of thing that when the time is right and the economics makes sense, it's a nice reward to your long-term shareholders and particularly now that they've had several years of not getting their kind of normalized cash flows. So while I would stop way short of any kind of promise or even interest, with regard to that, intellectually, to your point, it is appealing and it could certainly play a part in the future. Robert S. Patten - Morgan Keegan & Company, Inc., Research Division: Understand. And just one last question on the TruPS. Any update there in terms of options, rates and so forth?

Bob, the only thing I can tell you is, is we submitted our capital plans. We're waiting to hear from the regulators in middle of March. And at that point, I think you might see potential action plans we can take from that announcement.

We'll go next to Kevin Fitzsimmons from Sandler O'Neill. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: Just a quick follow-up on the subject of M&A. Kelly, can you give just an update on where we stand with BankAtlantic? Is everything on track in terms of closing for that? I know there were a few shareholder lawsuits and this news of the SEC lawsuit against them. I would assume that you're completely protected from that kind of thing, that's the holding company, not the bank, but if you can just give us an update on that.

Yes, so we are aware of the SEC enforcement action. It in no way involves BB&T and we're certainly not going to comment about securities law actions that are related to other parties. But as far as we're concerned, we are proceeding in terms of our pre-acquisition conversion activities. We're proceeding in terms of regulatory applications. And it is our wish and our expectation to perform according to our contract.

We'll go next to Ken Usdin from Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Two questions for you. First of all, relative to the net interest margin, we know that it's going to be down in the first quarter and presumably for the year just based on the covered loan runoff. Daryl, I was wondering, can you size the expectation of the magnitude of the 2 parts? What of the NIM compression comes from lower covered loan income and then what is just -- what is related to core?

Sure. I'll try to summarize it for you, Ken. Every quarter, we have to run cash flow and assessments and we also go through the impairment analysis, so it changes a little bit every quarter. But if you really look at the net impact of the decline in the net interest income versus the less loss on the fee income side, it's probably a net loss of revenue of approximately $100 million for the year. So it's very manageable. So you have margin coming down more, but you have the fee income bouncing back some. So I think that's very doable. We feel very comfortable in '12 that both net interest income and fee income will show positive growth year-over-year. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. And so within that subcomponent, just -- yes, I just want to make sure I understand that. So the loss share giveback was down this quarter because of the provision, right? Because there was that provision one also that you shared back as well. So I would presume that if you don't have that type of excess provision for the covered loans that the -- what's the direction, I guess, just of the fee income component of it? Should that get better or move back higher again from the 46 this quarter?

Okay, so this quarter, you are right in that we did have some more impairments, so there was an impairment that we took where you have the 80% offset. That was worth $33 million adjustment in the fee income line item. So if everything stayed flat, for the first quarter you would probably see the loss or the income item on the FDIC loss share go up a little bit quarter-over-quarter on a linked basis. It's hard to predict when you're going to have impairments because you have to take it at the time it occurs. But if you look overall, it's an 80% offset when it occurs, so it really doesn't have a large impact on your earnings because you had a provision with the offset in the loss share. But if you take away the provision piece, that net $100 million down is really what the impact is. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: So the 2012 impact from -- you think is a $100 million decline from the covered loan side?

Correct. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: For the full year, okay. And then underneath that, how do you expect the core margin to be doing underneath that as you look further out for the year?

So we're going to stick with our guidance to the first quarter, what I can tell you is that the margin in the fourth quarter, if you take away the covered asset piece, it was relatively flat. We had really good stable margin. So it really depends on the loan growth that we're achieving and we feel good about continuing to replace that on our deposits. So we think, overall, our normal operating core margin should be relatively stable. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. My second question, bigger picture question result. I wanted to ask you, guys, about the insurance business. I thought in the line of business that you're talking about it being a growth year both organic and potentially through acquisitions. So I was wondering if you could just walk us through, is it a better core growth year ahead than it was and maybe just kind of frame up the business. And then separately, how you're seeing the acquisition landscape in that business as well.

Yes, so on the organic side, we think it's going to be a better year in 2 regards. We continue to move market share in that business. As you saw, insurance revenues were up 2% and there's still a soft market out there and so we're moving market share. On the other hand, we're beginning to see, for the first time in several years, some firming up in the market, particularly in the wholesale side and that always precedes firming up on the retail side. Certainly, the insurance companies that had a attrition of capital from some of their investment activities and catastrophes. So they're being more aggressive in terms of pricing. We're beginning to see that show up. So we think in terms of market share movement and pricing movement on the organic side, that looks to be positive for the year. Acquisitions are beginning to come back. We really went through 1.5 years where there wasn't much going on. I think everybody was kind of shellshocked and kind of trying to figure out what was going on in the world. You've noticed we've announced 3 acquisitions in the last few months, a couple in the benefits area out in California. That's really important for us as we begin to develop the platform necessary to deal with health care reform, et cetera. And then a PC business up in Maryland area. We think we will continue to see opportunities in property and casualty and in benefits as we go forward. And we think our insurance acquisition activity will be what I'd call kind of normal for BB&T, which is a number of acquisitions during the course of the year, probably not huge. Most of ours are kind of small. There are not many big deals in the insurance business, although you always kind of look at what's available. We continue to have an interest in the life side of the business. We've, for several years, been trying to strategically figure out how to grow the life business. We sell life but it's just a small part of our whole revenue stream and so we're trying to figure out how to do the life business, which will at some point be a change for us when we figure out how to do it.

We'll go next to Christopher Marinac from FIG Partners.

Kelly, just wanted to ask you from an acquisition standpoint, do the returns that you're seeing, as you sketch things out, look greater or is it sort of the same as you've done historically? If you kind of look back in the last 7 to 8 years, is this environment going to be better returns that what you historically have done at BB&T?

In terms of acquisitions, the returns will be better than they have been in the last several years or you won't see us do any because the last several years, as you know, we got out of the business because the returns are too low. The last 12 months or so, there hasn't been much activity while everybody's been trying to figure out what their new normalized earnings are going to be. I think that we're heading into a period where people are beginning to get more realistic about what the new landscape's going to be. In other words, more regulatory oversight, more regulatory costs, scale issues in terms of pressure on pricing, et cetera, et cetera. So I think you're going to begin to see companies think more strategically now that they're kind of out of their jaws of the crisis. And my personal opinion is that will cause companies to be willing to look at combinations. That having been said, today, I would say there's still exuberance on the seller's part in terms of what the prices that they can get and some more of that's got to be wrung out before you can see too much activity.

We'll go next to Michael Rose from Raymond James. Michael Rose - Raymond James & Associates, Inc., Research Division: All my questions have been answered.

We'll go next to Lana Chan from BMO Capital Markets.

I don't know if you've given this number, but on the OREO, can you tell us how much that's been marked down to at this point relative to the original contractual value, including on some of the land components?

I would just say this. We certainly prefer not to give a specific number because we certainly don't want to influence potential buyers. But I would tell you that it's been substantially marked down from original UPB on the loan side as we brought it in. And then we've taken additional marks. So I think it's a large -- I think you'd find it's a very large number and ought to give us the ability to move this out pretty quickly.

Thanks, everyone. Although we have a number of folks left in the queue, we are out of time for questions today. If you have any further questions, though, please feel free to call Alan or myself in Investor Relations. Thank you, and have a great day, everyone.

That does conclude today's conference. We thank you for your participation.