Truist Financial Corporation (TFC) Q2 2012 Earnings Report, Transcript and Summary

Good day, everyone. Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Second Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce your host, Mr. Alan Greer, Invester Relations for BB&T Corporation. Thank you. You may begin, Alan.

Thank you, Jenny, and good morning, everyone. Thanks to all of our listeners for joining us today. This call is being broadcast on the Internet from our website at bbt.com. We have with us today Kelly King, our Chairman and Chief Executive Officer; Daryl Bible, our Chief Financial Officer; and Clarke Starnes, our Chief Risk Officer, who will review the results for the second quarter of 2012, as well as provide a look ahead. We will be referencing a slide presentation during our remarks today. A copy of the presentation, as well as our earnings release and supplemental financial information, are available on the BB&T website. After Kelly, Daryl and Clarke have made their remarks, we will pause to have Jenny come back on the line and explain how you may participate in the Q&A session. Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intention, beliefs or expectations. BBT's actual results may differ materially from those contemplated by these forward-looking statements. Additional information concerning factors that could cause actual results to be materially different is contained on Slide 2 of our presentation and in the company's SEC filings. Our presentation includes certain non-GAAP disclosures. Please refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP. With that, I'll turn it over to Kelly.

Thank you, Alan. Good morning, everybody, and thanks for joining our call. We've got a great quarter, guys. We're very excited to report our strongest net income for any quarter in our history. We had very strong growth in revenues. Expenses rates are down if you exclude our Crump and excellent improvement in asset quality. So it's overall a really strong quarter. If you look at some key performance categories. Net income totaled $510 million, which was up 66.1% versus the second quarter of '11. EPS was $0.72, which was up 63% versus second quarter and up 72% annualized versus first quarter of '12. And that's really a result of broad-based strong performance across all of our company operating segments. Daryl is going to give you a lot of detail on that in just a minute. I just want to hit a couple of highlights to give you a sense of how broad-based this is. Our Community Bank did a great job growing deposits. It had strong C&I and direct retail loan growth. Residential mortgage was strong again, $8 billion origination quarter. Dealer Financial Services segment had record production, very strong credit quality. Specialized Lending had a great quarter, with $6 billion of loan originations. And I'm personally really excited about Insurance. It had a strong second quarter with 4.8% organic growth. And then, of course, we also completed the Crump acquisition. And Financial Services, Corporate Banking and Wealth, in particular, continued to perform very well, with loan growth of 54% and 38%, respectively. So a really good performance across-the-board. If you look with me on Slide 3, in the revenue area, total AFT revenues were $2.5 billion, up 20.9% annualized versus the first. Net interest income was $1.5 billion on AFT basis, up 7.4% annualized to the first. And that was really a function of margin improvement and asset growth. In the linked quarter, growth in fee income, it was materially impacted by the Crump acquisition because that was significant for us. Year-to-date, total revenue totaled $4.8 billion, which was up 14.2% versus the first half of last year. In the loan area, our average loans held for investment grew 6.6% versus the first annualized. If you take average loan growth, that was excluding ADC and covered portfolios and other acquired portfolios, it was 9.9% annualized versus the first. And so we had some strong growth in several categories including Other Lending Subsidiaries, Mortgage, Corporate Banking, Direct Retail and Sales Finance. In the deposit area, the highlight there would be the non-interest-bearing deposits. DDA grew $1.5 billion or 22.6% versus the first annualized. Total deposits increased $742 million or 2.4%. I'll give you the more drill down on the makeup of that in a moment. And we continued to have nice improvement in the deposit mix and costs. Credit quality, Clarke will give you a lot of detail on this in a minute, but it was overall really good. NPAs decreased $359 million or 15.9%, ex covered assets versus the first quarter. Foreclosed real estate decreased $157 million or 41%. Foreclosed property expenses decreased $20 million from the first quarter, and NPLs decreased $196 million or 10.6%. So you can see overall, broad-based improvement there. Had good expense control. So if you exclude Crump Insurance, noninterest expenses decreased 8.7% versus the first quarter and we were able to hold FTEs flat, and the combination of those gave us a positive operating lift. If you look at Slide 4, a little more detail with regard to loan growth. It was really strong, especially relative to the market conditions that are out there. So you can see that our total growth was 6.6%. But remember that we still have a material planned runoff in ADC and covered portfolios. So excluding those, total growth was 9.9%. It was pretty broad based. C&I was 3%, but I would point out that we had 1 fairly large leverage leased that expired during that period of time. So if you ex that out, it's 4.4%. CRE is down 3.8%, but recall that, that has been -- that is a slowing rate of decline. We think, pretty soon, that's going to bottom out and we'll begin to see growth there, which we want to have because there's some really good income-producing property opportunities out there. So we see that as a nice positive swing when that moves from a substantial negative to a positive in the near future. Sales Finance grew 9.3%, quarter-to-quarter annualized record production. Residential Mortgage grew 20%. Other Lending Subsidiaries grew 32%. That was broad based, by the way. Strong growth in equipment finance. Small tick up in consumer fees and a lot of strong growth in insurance premium finance, and recall that always happens at this time of the year. Our Grandbridge commercial mortgage was strong, as was prime auto. So direct retail was strong at 10.1%. So you can see it was kind of across-the-board, pretty strong growth, again, especially relative to the market. Very pleased with our Corporate Banking space. As you know, for the last several years, we've been focusing on that strategically. It generated 54% growth in loans versus second quarter of '11. And all of our categories gained momentum here in the quarter. We have end-of-period loans held for investment, up $2.9 billion. Annualized rate of 10.8%. End-of-period C&I grew 8.7%. So what really happened is we headed into the quarter, it was a little low in the first part of the quarter, started building momentum as we headed toward the end of the quarter, and you see that in the numbers. I would point out to you that while we've had strong, for the last several quarters, growth in our mortgages, we have, in early June, discontinued, for the time being, holding our 10- and 15-year mortgages in portfolio, frankly because the rates are just too low for our appetite right now. I would mention to you that BankAtlantic is expected to add approximate $2 billion in loans with appropriate credit marks. And so we still maintain our kind of guidance of expected growth in the third in the 5% to 7% range, excluding BankAtlantic and contingent on the economy remaining kind of like it is. If you look with me at Slide 5, in the deposit area, it was another great quarter: Strong transaction account growth; improved mix and lower cost; DDA, as I mentioned, is at 22.6%; interest checking at 4.1%; money market at 7.8%. So those account areas that we're really focusing on grew strong at 11.2%, second to first annualized. You will see a decline in our CDs. That was by design as we're managing our funding forces and funding our cost, but our total deposits at 2.4% is not really reflective of what we strategically are focusing on. And I would mention to you that we continue to make really good progress in reducing our deposit costs. So in the last year, we have reduced it from 0.72% to 0.44%. We still think we have a little opportunity there. Average CD maturity is a fairly short 14 months. So we expect similar deposit growth in the third, continue to lower deposit cost. We have a pretty good growth, I think, in net new retail deposit accounts at 24,000 year-to-date. And I would again remind you that BankAtlantic is expected to add approximate $3 billion in core deposits upon consummation of that. If you look at Slide 6, I just wanted to mention something we've talked to you a lot about over the last several years. That is, the diversification is really important to us. We think that was one of the real challenges that many institutions had going into the last -- since the Great Recession. We like diversification because it produces more stable revenue, growth and earnings, and we're very pleased we have a very diversified revenue mix. If you look at the pie chart on Slide 6, you would see that about 48% of our revenue comes through the Community Bank, 16% through Insurance. And that's up a couple of percent because of Crump, which we are pleased about. Financial Services is up 11.7%. Specialized Lending makes up about 7.6%. Dealer Financial Services makes up 6.4% and Residential Mortgages makes up 10.3%. So you can see, we're diversified between the Community Bank and the non-Community Bank, and then we're very diversified within the non-Community Bank, which frankly, gives me a lot of comfort as we think about relatively fragile overall economy and bumps and ups and downs. We think that diversification will continue to serve us well in the future as it has in the past. So we feel good about our diversified revenue mix. If you look with me on Slide 7, we continue to have improvement and profitability as we make our way back to normalized earnings. You can see that in the last year, our ROA has gone up from 0.83% to 1.22%. Our ROA GAAP has gone up from 7.25% to 11.21%. I would point out the return on tangible common equity has gone up from 12.32% to 18.85%, so obviously a material difference there that we think is important to note. We said for the last several quarters, and we continue to affirm our long term objective of ROA on GAAP basis is 1.40% to 1.50%. We still think a return on common equity of 14% to 16% is appropriate. Now I would point out to that, that common equity return translates into return on tangible equity in the mid-20 frame, so very, very strong, we think, long term kind of normalized earnings. There are some challenges to that, that you would recognize. Do you know -- the longer the low, flat yield curve remains in place, that makes it more challenging for us. We're still trying to get our hands around the Basel III capital rules, and that may require additional levels of capital. We're still trying to sort through all of that. So far, we're pretty pleased with how we are looking relative to that. So if you look at the quarter overall, it's, we think, very, very strong. Our outlook remains very positive, assuming the economy doesn't materially get worse. So now, let me turn to Clarke for some more detail in the credit area.

Thank you, Kelly, and good morning, everyone. I'm very pleased to report an excellent quarter of improved credit trends with very strong problem asset resolution. In particular, we've continued to execute our strategy to aggressively liquidate foreclosed real estate. This is having a very positive impact on reducing nonperforming assets and related credit costs and certainly contributing to higher earnings growth. So if you'll follow with me on Slide 8, you can see that total NPAs were down 15.9% on a linked quarter basis, which is significantly better than the 5% to 10% guidance we gave last quarter and represents the ninth consecutive quarter with lower NPAs. In fact, total NPAs have declined approximately $1.5 billion or 43.4% over the last 12 months and now, we're at the lowest level since 3Q '08. This linked quarter decline in NPAs is driven by lower NPLs, as Kelly said, of about 10.6% and within that, commercial NPLs were down 11.2%. Residential Mortgage NPL is down 17.8% and direct retail NPL is down 4.3%. So we're very pleased about that, and foreclosed real estate down a large 41.5%. I'm also particularly pleased with the strong results in our commercial book. This quarter, we had lower watch list, early delinquencies, performing TDRs, NPLs and OREOs, all across the board. Now given these positive results and our continued focus on improving asset quality, we are reiterating our guidance for a 5% of 10% reduction target in NPAs for Q3, assuming, as Kelly said, the economy does not deteriorate further from here. If you'll look at Slide 9, we've continued to make significant progress in reducing foreclosed real estate. This quarter, we decreased foreclosed real estate $157 million or 41.5% compared to Q1. And since the second quarter of last year, foreclosed real estate is down $926 million or nearly 81%. As these balances are now down to $221 million, and we continue to be aggressive in our disposition as we go into the third quarter, we think we'll effectively complete the targeted OREO strategy in the next couple of quarters. Our efforts to reduce OREO include a focus on minimizing inflows, which were down 33% compared to last quarter. I'm also very pleased that we've been able to reduce inflows while also reducing charge-offs. We continue to sell existing properties, with Q2 sales activity of $143 million. And we have approximately $70 million already in our pipeline, going into Q3. And what this is doing for us is substantially reducing our foreclosed property expense run rate. So these expenses were down $72 million this quarter versus $92 million in Q1, or about 21.7% or 87.4% on an annualized basis. So we expect foreclosed property expenses to continue to trend lower in Q3 and thereafter as properties are liquidated. Turning to Slide 10. You'll note that our charge-off ratio ex covered loans for the quarter was 1.22%, which was down from 1.28% last quarter and a bit better than our previous guidance. And Q2 losses are actually at the lowest levels in 3 years for us, so we expect total charge-offs ex covered to be in the 1.15% to 1.20% range in the third quarter and to trend lower thereafter as we continue to liquidate nonperforming assets. Given these improved credit trends, we did reduce the allowance by approximately $64 million in Q2, which is essentially the same level we had in Q1. Our reserve coverage remains, we think, very strong at 1.21x nonperforming loans. So overall, we feel very good about our allowance level. So in summary, we're very pleased about the solid pace of credit improvement this quarter. And we believe the strategies that we have set in place and continue to work under are performing exceptionally well. We expect to continue to have strong execution as we move forward. So with that, let me turn it over to Daryl for his comments on the quarter.

Thank you, Clark, and good morning, everyone. I'm going to take the next few minutes to discuss net interest margin, the securities portfolio, fee income, noninterest expense, capital and our segment reporting. Continuing on Slide 11, net interest margin came in strong at 3.95%, up 2 basis points from last quarter, and above our guidance because of the early TRuPS redemption. However, margin would have been 3.87% without the TRuPS redemption. The margin benefits include 4 key drivers. First, an improving asset mix as our Specialized Lending businesses grow faster than other lending categories. Second, we also continue to see CRE runoffs slowing, which will have a positive income impact on margin. As we saw in June, we discontinued holding the conforming 10- and 15-year mortgages in the portfolio. That change will be more noticeable in the mortgage loan growth later this year. Even so, our loan growth expectations remain in the 5% to 7% range, as Kelly shared. Third, lower interest-bearing deposit costs continue to benefit margin. These costs decreased 5 basis points to 44 basis points this quarter. Finally, longer term debt costs from the early TRuPS redemption. Offsetting these positives are the lower interest rate environment and the runoff of the higher-yielding covered assets. As Kelly mentioned, net interest income was up 7.4% annualized from the last quarter, due to the improved margin and a 5% annualized increase in average earning assets. With regard to margin outlook, we expect the margin to be in the 3.90% to 3.95% range in the second half of the year, due to the factors I just described. As you can see on Slide 11, we remain slightly asset sensitive and are positioned for rising rates. Turning to Slide 12. As you know, we consistently maintain a low-risk securities portfolio. Given the low yields available for new investments, we plan to be selective about reinvesting our cash in the second half of the year. This strategy will slow the growth of earning assets, as security balances trend down. The portfolio duration is 2.8 years, and our premium is 1.3%, ensuring a relatively stable yield. On Slide 13, our fee income ratio in the second quarter increased to 42.4% compared to 41% in the first quarter. Insurance income was up $122 million, with the Crump acquisition accounting for $77 million of the increase. The remaining increase reflects 5.7% growth compared to second quarter 2011 and seasonally stronger growth compared to first quarter 2012. We also continue to see evidence of some firming in market pricing. Mortgage banking income was down $34 million compared to a very strong first quarter, due to lower gains on loans sold and $20 million lower in MSR gains. We expect mortgage banking to remain at a similar level in the third quarter. That change in the FDIC loss share income was mostly due to negative accretion, uncovered securities and the impact of cash flow reassessments. We expect the FDIC loss share impact to be $10 million to $15 million lower next quarter, although this is difficult to project. Other income increased $12 million compared to the first quarter 2012, as a result of $42 million in write-downs on affordable housing investments last quarter, offset this quarter by $21 million in lower income on assets for post-employment benefits this quarter. Looking on Slide 14, our efficiency ratio increased to 53.9% compared to 52% last quarter, largely due to the acquisition of Crump as we described last quarter. Compared to last year, we produced positive operating leverage this quarter and we expect this -- that trend to continue. Personnel expense increased $45 million because of $69 million in higher compensation costs related to the Crump acquisition and higher incentives, partially offset by $23 million in post-employment benefit expense. Excluding Crump, FTEs were flat this quarter compared to last quarter. As expected, foreclosed property expense decreased $20 million due to fewer valuation write-downs and significantly lower inventory of foreclosed property expense. And as Clarke mentioned, we expect foreclosed property expense to continue to decline throughout 2012. Merger-related and restructuring expenses were lower than expected because of a delayed BankAtlantic closing. We expect about $50 million in these expenses in the third quarter. Crump added $64 million in expenses this quarter and $7 million in amortization. Without these expenses, noninterest expense would've been down $30 million or 8.7% on an annualized basis. The details of the Visa settlement are largely unknown at this point, but we expect the impact on BB&T to be immaterial. Finally, the tax rate for the quarter was 26.2%. We expect the rate to be up slightly in the third quarter. Looking on Slide 15, our capital ratios remain very strong and include the impact of the Crump acquisition and the redemption of our TRuPS outstanding. Tier 1 common under Basel I fell slightly to 9.7%. We expect the third quarter 2012 Tier 1 common ratio under Basel I to be around 9.5% including BankAtlantic. We estimate our Tier 1 common under the recently issued Basel III rules to be approximately 8.2%. However, this does not include any mitigating actions we will take to improve our capital ratios. Risk rates were higher in the calculation, driven by LTVs on residential mortgages, and the credit conversion factor for unfunded lending commitments. We believe, over time, we can significantly reduce the impact of our risk-weighted assets. We are very comfortable with our Basel III capital levels and feel that we have the flexibility to take advantage of opportunities. We had a very successful perpetual preferred offering last quarter, with the second lowest coupon in the history for our bank. We will be opportunistic about issuing additional preferring. Now, let me point out a few highlights in our segment disclosures. Turning to Slide 16. First, Community Bank net income totaled $177 million, up $72 million versus linked quarter. The main drivers include loan growth, lower foreclosed property expense and lower regulatory costs. Second, our Direct Retail lending continues to be strong, with 10% linked quarter growth. Third, commercial loan pipeline increased 24%, compared to first quarter 2012 as we continue to have a positive outlook for loan growth. Finally, we experienced solid growth in several payment categories, especially merchant services, which was up 12%. Turning to Slide 17, Residential Mortgage was down $59 million on a linked quarter basis from a very strong first quarter, but up sharply compared to second quarter last year. The main drivers include continued strong originations, increased gains on the sale and lighter spreads compared to last year. The loan loss provision is lower compared to last year due to improved credit trends, updated loss factors and the impact of last year's sale of nonperforming loans. Year-over-year portfolio growth increased substantially, with loan service for others growing 8.3%. With lower rates and resulting refi boom, 59% of our production this quarter was from refinance. However, our purchases are up 48% compared to last year. Turning to Slide 18, Dealer Financial Services achieved record loan production for the quarter, in both prime and non-prime auto lending. Net income for this segment totaled $60 million, with regional acceptance achieving higher net interest income due to higher margins. Regional Acceptance losses remained very low, and our prime auto losses were also low at 24 basis points. We continue to open new offices in strong growth markets and are expanding our floor plan financing strategy. On Slide 19, you can see Specialized Lending experienced a strong quarter with net income of $65 million. Loan production increased 19.5% versus first quarter, with seasonally strong contribution from the insurance premium finance. Higher net interest income was driven by exceptional growth in Sheffield Financial, Equipment Finance and Mortgage Warehouse Lending. We are pleased to have an improved operating margin in this segment as a result of a strong focus on efficiency. Moving to Slide 20, Insurance Services generated $66 million in net income, up significantly compared to both common and linked quarter basis. Increased revenue was broad based in almost all insurance businesses. The growth was driven by improved organic growth, as the insurance market is showing signs of hardening and growth due to acquisitions. We continue to anticipate future organic revenue growth, but will have lower revenue in the third quarter due to seasonality. Turning to Slide 21. Financial Services generated $63 million in net income, primarily driven by Corporate Banking and Wealth Management. These businesses had well growth of 54% and 38%, respectively. Investments in Wealth and Corporate Banking revenue producers drove higher noninterest expense for the quarter. We continue to see opportunities in middle market corporate lending and have higher loan commitments versus last quarter. With that, let me turn it back over to Kelly for closing remarks and Q&A.

Thank you, Daryl and Clarke. And just as an overall statement, I'd say we had a strong quarter, our best earnings ever, as I've mentioned, broad-based performance. What you see from us, I think, is what we promised you several years ago, very strong execution on our strategy and diversification and intense -- focusing on execution on the basics. And we're not a complex company, but we execute the basics in banking very, very well. I'll give you as one final example of that, we just received in the last few days a notice from J.D. Power and Associates that we are now being recognized as #1 in mortgage servicing quality for the third year in a row. So we are very pleased with our quarter and now I'll turn to Alan, to you, for questions.

Thank you, Kelly. At this time we would ask Jenny to come back on the line and explain how you may participate in the Q&A process. As in our normal practice, we would ask that you would limit your questions to one primary question and one follow-up so that others may participate in the queue. If you have additional questions, please get back into queue and we will recognize you again. Jenny?

[Operator Instructions] And we will go first to Jefferson Harrelson with KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: If you guys had to write a comment letter on 1 or 2 pieces of the recent NPRs, if you think about the timing issue, the capital limitations, the buffers risk waive and hedging of balance sheet, of CI and capital, those things, I guess, is there 1 or 2 do you have focus on? Or do you think that should be changed in the rules that are being proposed?

Jefferson, this is Daryl. When I look at it, and you can debate what the capital levels should be in some of the categories, but clearly, the Residential Mortgage is getting hit really hard and the higher capital in this mortgage area will definitely have an impact on the economy longer term. Unless the classifications between a Category 1 and Category 2, a lot of mortgages are going from -- to the higher category. They're going to double in capital and maybe quadruple, depending on how it's underwritten and how that -- it's calculated. Other areas, the unfunded loan commitments under a year, does it have a capital charge now, can it have a capital charge? Banks will probably have to either charge higher to get more revenue or the structure is going to change and we won't be doing any year and under unfunded commitment. So there's a lot of areas where they're going to raise capital charges and it's going to have an impact on the economy and growth for sure. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: All right. And a follow-up, if you think about OCI now being in regulatory capital, is that going to just translate maybe into a smaller securities book? So you guys have strengthened yours more held to maturity, maybe more -- holding more mortgages or maybe just holding more capital? How do you think that's going to affect how you run your bank and your balance sheet?

You bring up a lot of good points. Obviously, with OCI and the calculation, we have to maintain a nice healthy margin above the minimum level. So you will see us operate at a level, probably 150 basis points at least over what we have to target, our capital ratios. We also -- as you see, I think we're one of the banks that have the largest percentage of securities and held to maturity. Right now, a third of our securities are in there to avoid some of that -- the risk there. And you could see, you have to weigh the size of the investment portfolio also against some of the liquidity rules that are coming out. They kind of go against and contradict each other. But I think, overall, that the size of the investment portfolio could potentially be impacted as well. You definitely have a lot of different drivers there and you're just trying optimize the best you can without taking undue risk.

And we will go to our next question from Greg Ketron from UBS.

I just have a couple of questions, one on the Crump contribution, maybe for the insurance segment in general. Can you highlight what the Crump contribution was for the quarter? And then, as you look longer term in insurance, maybe what operating margin you think you can achieve in that business overall?

You're right. The contribution specifically on revenue for the quarter was about $77 million, which is in line with what we expected. Recall that, that company is primarily bringing us revenue in the wholesale life business. It does have some wholesale property and casualty. What we like about it is in -- particularly in the life side is, that life insurance is, number 1, much more stable than P&C, and it has higher margins. So you think about property and casualty, EBITDA at one time at being about 20% and life at about 30%. So it's substantially more -- has a better margin. And we like that because, again, it's just balances out our whole insurance business. So it's an exciting opportunity. And I would mention to you, Greg, that even though it's fairly early now, we've had 90 days or so under our belt of being in the family. Everything we see is better than what we thought. So the synergistic opportunities, the quality of the staff, the product making, the brand that they have out in the marketplace is just absolutely fantastic. So it's a home run.

Okay, great. And then on the loan growth, if you can kind of highlight, you're seeing growth in mortgage, the other lending subsidiaries, direct retail. Maybe some of the rates and spreads that you're seeing across these businesses and -- is that an area that we will continue to focus on as we progress in 2012?

Hey, Greg. This is Clarke Starnes and I know Daryl can chip in, too. But our spreads are holding up pretty well on our C&I and Corporate Banking, we're in about the 2.44%, 2.45% range, which is pretty good. CRE for us is typically about 100 basis points above that. So we feel good about that. Our home equity spreads right now are north of 200 basis points and certainly, we watch that. We'd expect it to maybe get a little bit better over time. Our Sales Finance, which is where prime auto is, is about 1.90% overall. And then obviously the Specialized Lending business is much higher than that. So we feel really good about our ability to hold our spreads up in a very, very competitive environment. We think that mix gives us a overall yield advantage with a nice risk adjusted return.

And we will hear next from Todd Hagerman with Sterne Agee. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Daryl, I just wanted to follow up on your margin outlook and the guidance there, raising the number. First, I don't know if you mentioned, are the BankAtlantic and the purchase accounting adjustments that you'll be making there, as well as the -- you announced, I think, today the trust preferred redemption of $2.5 billion. How does that influence your margin outlook with the various dynamics that you kind of walked through in terms of how you're getting to that 3.90%, 3.95%?

Okay. So if you look at it, this quarter, we benefited in margin by the TRuPS redemption. We've got additional $29 million because we're able to amortize that -- some of that fee gain this quarter. The rest of that will come in the first part of July. All the TRuPS that we called were out of the books this week. So when you look at that, we actually lose that coupon from the -- now until the end of the year. That's real money that we didn't have at our forecast before. That's another $70 million of earnings that we had, although we have to pay higher interest cost on there. The other thing that we're doing, as we mentioned it in our opening comments, is we're going to be selective in reinvesting our investment cash flows. So that's going to shrink our investments a little bit. Earning assets will still grow, but it's going to be driven by loan growth. But we are doing that in conjunction with not issuing debt. There's a negative spread right now between your investment yields and what you have to -- cost to borrow, so -- but that strategy actually adds another $15 million to $20 million to net interest income. That actually improves margin. So those are some of the strategies that we have to improve margin this year and in the next year. As far as BankAtlantic goes, we expect that to close and be on our books starting August 1. We have some purchase accounting in there, but it's really not a big driver to the numbers that you're seeing. The mark there isn't a huge mark compared to what we have with Colonial, so it's not going to be a large impact there. It's so small to the size of the company, it's not going to really be a big driver. Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division: Okay. Just to make sure I'm clear, on the TRuPS announcement today, you mentioned that $70 million -- I'm sorry, I didn't get the offset to that in terms of how you're losing that $70 million and on -- in terms of replacement or lack thereof on the funding side.

Yes. So remember, when we had -- when we've talked last quarter, we had our TRuPS coming out in the fourth quarter of this year. So we're basically -- by the MPR coming out, we're able to call our TRuPS early. So we amortized that remaining gain a little bit in July and -- in June and July. But then, those securities, the debt has gone off our books this week. So we're basically replacing that with just funding that we have in deposits within the company and we're shrinking our investment securities to help fund that. All that is positive drivers to net interest income and margin.

And we'll go to our next question from Matt O'Connor with Deutsche Bank.

Can you comment a little bit on loan pricing, specifically in the C&I? Your yields held up well, actually, up a couple of basis points quarter-to-quarter. And we're seeing that from actually a couple of other banks as well and it seems to be contradicting what the said lending survey shows, which is a pretty big decline in loan pricing on C&I. So just kind of a general comment or a general question on C&I pricing and then specifically what's driving your yield up a little bit.

Hey, Matt. This is Clarke. What we've seen is actually a little bit of firming, particularly in the corporate space, particularly around the near-investment grade. Our investment grade continues to be very, very competitive, but it's firmed up a little bit. So we feel really good about that. And that's probably what you're hearing the most about. It's still very, very competitive on the small business side. And the Community Bank-type originations, and that's probably reflecting in the Fed survey to a degree. But again, from our standpoint, we are very focused on the yields that we get and the type of clients that we go after. So we will let credits go overpricing, and that's one reason you've seen us hold up our margin really well.

Okay. And then just a separate topic. As you think about the OREO balances coming down, it sounds like pretty close to 0 or an insignificant amount on the balance. I mean, the cost, did those come down close to 0, too, in a couple of quarters? Or what's kind of like a more run rate cost if the balance itself is really, really low?

Matt, our foreclosure cost will continue to come down. It won't come down to 0, though. I mean, we still have some NPLs that are being worked through and need to go through the cycle. Our inflows are coming down, but it's probably going to take another year to 1.5 years before those balances get to more de minimis levels. But definitely, the trajectory is down in foreclosure expense, but it won't be to 0 this year.

And we'll hear next from John Pancari with Evercore Partners.

Can you discuss in more detail the potential mitigators to the Basel III NPR impact that you indicated? I know you mentioned the Jefferson and a couple items, but I just want to get some more detail on what you can do to mitigate that impact?

Sure, John. Some easy things we can do, we've identified -- so we're at 8.2% right now and we are -- this is a very conservative number. We're assuming all the worst in how we are interpreting the language right now. Obviously, we aren't 100% sure in how it's all going to be applied, so we're trying to be very conservative in this number and this number is what it is today without any mitigation whatsoever. I know others this past week or so have added mitigation, added earnings over time and all that. This is what the number is today. So very, very conservative. Just a couple things we could do, we think, easily, if you look at the commercial construction book, they have a certain percentage of equity that needs to be funded in there. We just need to tweak our rules just a little bit on how we underwrite to get within, so that all of our construction loans follow within that 15%. Clarke feels very comfortable that, that's doable over the next year or 2. And that area, if you look at it, is our home equity lines right now. They're variable rate, they have no caps on them. We can move them from Category 2 to Category 1 just by putting some annual and lifetime caps on that. Those strategies right there raise our capital from 8.2% to 8.5% off of the numbers we have today. So we definitely think and we're going to get together and continue to work on trying to optimize these rules. Obviously, these rules aren't final yet, but we feel very comfortable and confident that our Basel III numbers will be strong and we still have a lot of financial flexibility.

Okay. And then separately, can you discuss your thought process around the potential issuance of capital to support the Basel guidelines as you indicated in your prepared comments and I guess, specifically, around timing, amount and then type of capital?

John, all I can say is that, I think if you look at these Basel III rules long term, you really want to maximize the 150 basis points that's allowed between Tier 1 Common and Tier 1. So we will be opportunistic and try to issue preferred qualifying capital at times we think are advantageous to us to issue, to kind of fill that up. We did a great issuance this past quarter, and we will look for opportunities to do that. We just think longer term, when you look at your capital stack, we believe we really want to fill that extra 150 basis points up there just so we have strong Tier 1 Common, strong Tier 1 and strong total and leverage numbers, all very strong regulatory capital.

We will go next to Gerard Cassidy with RBC.

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

Gerard, this is Kelly. I would say if you look at our specific numbers, it would not affirm the slowdown, because as I indicated earlier, we actually have momentum building through the -- during the quarter. But if you look at what we actually think, what I actually think is happening in the economy, there's no question that it is slowing. And you've certainly seen that in most recent jobs numbers and retail sales numbers, et cetera. And anecdotally, just the problem I've noted during traveling in our regions, a lot, I've talked to lots of business people and everybody you talk to is getting more nervous by the moment because of the uncertainty. I mean, we're heading towards this abysmal cliff and people are getting really focused on it now. So no question, in my mind, the economy is slowing. I personally think it will continue to slow throughout the end of the year until we see what happens in Washington. But I would be very clear to say that we do not translate that into a dismal look -- forward look with regard to our own performance. We actually, as I said before, affirming our loan growth we got is in the 5% to 7% range. But to be honest with you, Gerard, it's because of -- we are moving market share, and we have a lot of business coming our way today, some of the institutions have passed, have some downgrades, frankly, and ratings and other circumstances that have caused clients actually to seek us out. Our strategies in Corporate Banking, Wealth Banking, Specialized Lending, et cetera, are executing extraordinarily well. We're just really fortunate that we've got some really unique opportunities in places like Alabama and Texas, Florida, that we're able to move market share just because of our brand value.

And the second question is more of a technical question. On the Residential Mortgage loan sales that you had in the quarter, what were the spreads that you were able to garner? And how did those spreads compare to what you achieved in the first quarter?

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

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

We were about 2.12% with our spreads. That was actually a little bit lighter than first quarter. So as your pipelines fill up, you are able to basically just have lighter spreads because the pipelines are full and everything is just able to get higher margins.

And we will go next to Erika Penala with Bank of America Merrill Lynch.

Daryl, I appreciate the comments that you made on the margin over the near term. But I was wondering if you could give us a little bit of insight into how we should think about 2013. So it sounds like there are actually some asset remix opportunities that will support the margin in the second half of the year. In 2013, it feels like, for the industry, not just for BB&T, some of the funding cost savings are probably going to taper off. I guess, I'm just wondering, a, if we would continue in terms of reconsidering remixing your assets to support the margin in 2013, if we're staying in this rate environment. And, b, do you have a sense of what sort of a range is for your margin in 2013, if you have the kind of loan growth momentum that you're experiencing but we're staying in this rate environment for longer?

Erika, this is still a very challenging marketplace with a low, slow rate environment. And over time, the lower yields definitely does put pressure on margins and all that. I think our key really to counteract that is to continue to price our funding costs and those should continue to come down, and I think that will continue to come down into '13. We're at 44 basis points interest-bearing deposits. We are not out of gas there yet, so those can still come down and believe that's definitely still doable. If you look at our long term debt, we'll have some maturities next year that we can basically replace at lower cost there, so all of that should be positive. On the asset side, I think you hit a very excellent point. You really just need to drive your assets and try to focus and grow the ones that are the higher yield. So our specialty businesses are growing 3x faster than the total portfolio. CRE is 100 basis points higher than C&I, as Clarke said. So those portfolio should be growing as we're expecting. That said, I'm sure margin will still come down from 3.90% in 2013. But our ability to continue to reprice and counteract those things, I think, will make it more manageable as we get into '13 and '14.

Erika, I would also add -- and this is intuitive, but I think as we go forward and everyone experiences more of the real effect of a prolonged low slight yield curve, everybody's running out of gas. Most have run out of gas earlier than us on that. And as everybody contemplates the shifts in terms of capital requirements on Basel, et cetera, all of that is going to cause, in my view, everybody to get firmer with regard to pricing. Our industry tends to ebb and flow in terms of how we price relative to the risk and we tend to do a better job when we get under pressure. And I think we're under pressure now and I think that would put pressure on the margin and you heard Clark talk about this firming already, just in the last 90 days or so, with regard to some corporate space bookings. So we'll see how that works out, but I personally think you will see a bit more rationality flow through loan pricing as we go forward.

Your next question comes from Michael Rose with Raymond James. Michael Rose - Raymond James & Associates, Inc., Research Division: Just a question on -- just a follow-up question on the margin. I think your longer term guidance is 3.60% to 3.70%, if I remember correctly. Does that include the redemption of the TRuPS and kind of how you think about the margin longer term with the actions that you've taken?

Yes, Michael. I think when you look at it over the next 2 to 3 years, if you look at the TRuPS redemption, I'm having 3.60% to 3.70% as still in that ballpark, it's really dependent on how long the rate environment is and how long that lasts. We still have our covered assets that are running off for the next couple of years, but that guidance has not changed longer term.

And next we'll go to Paul Miller with FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: I have a quick balance sheet question and then an overview question. On the residential mortgage loans you're putting on your books, are they mainly jumbos? And what prices are you putting them on and what duration?

I can give you the mix, Paul, and Daryl can give you the spreads. But for the quarter, we put $2.1 billion on our balance sheet. About 34% of those were the 10 and 15 years, which was about at $712 million. That's what will no longer be portfolio. And 26% were ARMs and about 40% were jumbos and affordable. An so you can see what we'll be holding going forward is primarily variable rates, so...

Yes. If you look at the spreads on that, Paul, the 10- and 15-year conforming had spreads about 3.30% was the -- that was the rate on it, the spreads were 1.20%. But if you look at new originations now, the 10- and 15-year rates are under 3% to probably 2.75% and 2.875%. So we really don't want to have that asset on our books for the next 5 years. Paul J. Miller - FBR Capital Markets & Co., Research Division: So are we -- and are you guiding for lower growth in that residential portfolio because of that?

Yes, we are. Paul J. Miller - FBR Capital Markets & Co., Research Division: And then on the -- an overview question, there's a lot of media reports about the state of Florida in full recovery with the housing. I just wonder what you're seeing down there. I know that's probably one of the areas you pick up a lot of market share because a lot of banks are in trouble down there. But do you feel it's in a recovery mode down there, whichever of you down in Florida?

Well, I think we are very bullish really on Florida, have been, frankly, through the whole cycle because it's such a long term attractive market. But really, in the last 12 months, it's been a pretty dramatic change in Florida. In Miami, for example, a year ago, there were 24,000 unoccupied condo units. And now, they're virtually all gone. I think it's like a 5% vacancy rate. There are like 3 buildings under construction. So what happened is an awful lot of smart money out of Latin America came in and sucked up all the inventory and put it in the runoffs and that stabilized that market and that's why you're now beginning to see some positive growth in terms of the real estate sector. And the overall trends in terms of in migration versus -- we had a year or so of out migration, all of that has changed. I'm not saying it's booming, but based on all the feedback we get from our folks down there and all the general macro data we get, it looks to me like it's dramatically better than it was 2, 3 years ago, and it's steadily improving every day.

And we will hear next from Ken Usdin with Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Kelly, to your point earlier about the environment remaining tough -- the other thing that you guys can, obviously, you in the industry could control is expenses. I wanted to, first of all, just ask you kind of where your are with that internal plan that you've been going on. And then I'll let you answer that one and I have just some follow-ups on some of the particulars of the recent acquisitions.

Yes, Ken. We continue to be very vigilant about the execution. I'll visit 2 parts of that. What we started maybe 9 months ago was the reconceptualization in the expense area. And recall that the way we're approaching that, and frankly it's working perfectly, is to challenge our business leaders to go and then reconceptualize their business from a clean sheet of paper, with the overview from us that it's a new world. And thinking about your businesses today the way you did 5 years ago or a year ago is unappropriate. So think about your businesses as we currently see the new environment. All of our business lines are challenged for those plans from an expense perspective they did. We're now in the execution phase of that. And the projections are exceeding what we had expected. We're now right in the middle of launching the second phase of that, which is reconceptualization on the revenue side and we're going through the very same process where all of our business leaders are putting together revenue optimization plans and we present it up through and roll that to executive management and then as we head in the latter part of this year, will be an execution about a follow-on through next year. So that's a 2-part plan, it's going extraordinarily well. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: And my follow-ups are more just technical and the numbers. Crump now probably adds a little bit more second quarter seasonality, and then we got the BankAtlantic deal closing. So I'm wondering if you can help us understand how to understand the new kind of second to third seasonality from insurance and then how much BBX will add in expenses so we can kind of get an understanding of the forward run rate?

So on Crump, with regard to the second quarter seasonality, that won't be as much as you might think. It will be a little bit of add to that, as it relates to their Property and Casualty business. But Life won't be so much, that I remember Life is kind of a monthly paid kind of thing versus P&C is kind of like you pay in the second quarter and the fourth quarter. So I wouldn't think much about Crump changing our second quarter seasonality. I was just thinking about it being absolutely more income. In terms of BBX, Daryl, maybe you have some color for that?

Yes. So for BBX, it's not significant from a total number. But it's a little less after that we marked. Well, that's a little less than $2 billion in loans that will come on the books. Yields on those loans should be very close to what the yields are on our current outstandings. And then on deposit side, we get I think about $3.4 billion in deposits. Here, 90% of these deposits are non-CDs, all very good core funding. And you get a little bit of fee income pickup from there from service charges and some other things, but that's really the main drivers that you have with BankAtlantic.

And we will go next to Matt Burnell with Wells Fargo Securities.

Just -- Daryl, let me follow up on the NIM question, with a couple of questions on your ability to continue to lower your interest-bearing deposit costs and your long term debt costs. And you mentioned BankAtlantic providing about 90% of its deposits are core funded. What are the costs of those deposits relative to your deposit costs now?

So I'll start with the latter part first, Matt. The deposit cost are higher than ours. I think over time, we will rationalize those costs. But it won't be all at once, we will do it over time. We take a measured of approach on BankAtlantic's deposit cost so they get used to BB&T and our culture and how we deliver our quality products and services. But I think over the next couple of years, it's going to be very good core stable funding for us. But it won't have an immediate impact on us. But you have the mark-to-market accounting there, so you shouldn't see a big impact on the deposit cost. Then, on -- what's the other part of your question, Matt?

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

Yes. So we're at 44 basis points. Right now, we feel that the CD runoff and some sale adjustments in our MMDA accounts, we can probably approach 30 basis points over the next several quarters, so I think all of that is doable and in forecast, assuming rates stay low for a long period of time, that's something that we can definitely accomplish.

And that concludes today's question-and-answer session. Mr. King, at this time, I'd like to turn the conference over -- back over to you for any additional or closing remarks.

Thank you very much, and just thanks, everybody, for joining us today. We really appreciate your support today and on an ongoing basis. Again, we feel very excited about the quarter. It's interesting where I think the industry is selling into is the differentiation between high performance and low performance it's going to be about execution. That's what BB&T always has been great at, it's what we'll remain great at and so we are -- relative to the environment, we are very, very optimistic about our performance as we go forward. Thanks very much everybody, and I hope you have a great day.

And again, that does conclude the call. We thank you, everyone, for participating today.