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Executives

Clarke Starnes - Chief Risk Officer and Senior Executive Vice President

Daryl Bible - Chief Financial Officer and Senior Executive Vice President

Kelly King - Chairman, Chief Executive Officer, President, Member of Executive & Risk Management Committee, Chairman of Branch Banking & Trust Company and Chief Executive Officer of Branch Banking & Trust Company

Tamera Gjesdal - Senior Vice President of Investor Relations

Analysts

Adam Barkstrom - Sterne Agee & Leach Inc.

Matthew Burnell - Wells Fargo Securities, LLC

Craig Siegenthaler - Crédit Suisse AG

Kenneth Usdin - Jefferies & Company, Inc.

Brian Foran - Goldman Sachs

Robert Patten - Morgan Keegan & Company, Inc.

Christopher Marinac - FIG Partners, LLC

Gerard Cassidy - RBC Capital Markets, LLC

BB & T (BBT) Q4 2010 Earnings Call January 21, 2011 8:00 AM ET

Operator

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation's Fourth Quarter Earnings 2010 Conference Call on Friday, January 21, 2010. [Operator Instructions] It is now my pleasure to introduce your host, Ms. Tamera Gjesdal, Senior Vice President of Investor Relations for BB&T Corporation. Thank you. You may begin, Tamera.

Tamera Gjesdal

Thank you, Yvonne, 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 fourth quarter of 2010, as well as provide a look ahead.

We will again be referencing a slide presentation during our remarks today. A copy of the presentation, as well as our earnings release and supplemental financial information is available on the BB&T website. After Kelly, Daryl and Clarke have made their remarks, we will pause to have Yvonne come back on the line and explain how those who have dialed in to the call may participate in the Q&A session.

Before we begin, let me make a few preliminary comments. BB&T does not make predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Additional information concerning factors that could cause actual results to be materially different is contained on Slide 1 of our presentation and in the company's SEC filings.

Our presentation includes certain non-GAAP disclosures. Please refer to Page 2 and the appendix of our presentation for the appropriate reconciliations to GAAP. And now it is my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Kelly King.

Kelly King

Thank you, Tamera, and good morning, everybody. Thanks for joining our call. We'll begin on Slide 3 and just an overall comment, I feel really good about the quarter. We start to have record revenues. We had across the board improvement in credit trends, which we'll discuss and really good progress in first time on our balance sheet.

I would also say that since the last quarter, I feel materially better about the overall economy. I based it on three factors. One, the election is being perceived very well and is instilling a level of confidence that we haven't seen in a couple of years. QE2, while being questioned by some, is certainly cumulative in the short term. And the tax deal that was raised at the end of the year brings a level of certainty to business people. So based on what we expected and based on recent conversations with business leaders, I'm measurably more optimistic as we look forward into the year from an economic point of view.

Looking at our highlights, we had record annual revenues, $9.4 billion, increase of 5.8% compared to last year. Pretax pre-provision, earnings were $3.6 billion. Importantly, our pretax pre-provision earnings were up 18.1% compounded over last 15 years, which we think is maybe the most important way to look at a company from a long-term point of view. We did have strong improvement in earnings. As you can see, our fourth quarter net income available to common shareholders was $208 million, up 12.4% compared to fourth quarter of '09.

For fourth quarter, EPS totaled $0.30, which was up 11.1%. 2010 net income for the year available to common was $816 million, up 11.9%. So good solid improvement relative to last year, and we feel good about that. We also feel good about improving loan growth. We think this is really important as we go forward. So we had annualized loans going on an annualized link-quarter basis. Just to give you a few metrics, 28.7% growth in mortgage; 6.9% growth in CNI, which as you know, is kind of a target for us; 6.3% growth in sales and 7.4% in revolving credit. So really, really good numbers specially relative to the economy as it existed in the fourth quarter.

We also made really good progress in our deposit area. Our non-interest-bearing deposits were up 18.3% on an annualized linked-quarter basis and importantly our total transaction accounted by this were up 19%. These are really, really strong numbers and demonstrates that our community banking model is really working.

I'm very pleased to report that our credit metrics improved across the board. Scott Cross is going to give you some real detail about that. But I would like to let you know that we sold in total about $600 million in non-performing assets, $343 million in private loans and $249 million in OREO. So really good progress there. And even though the holidays is difficult to execute on contracts, we already have $125 million under contract for the first quarter. So that's very encouraging. We had across the board improvement in various credit metrics including declines in OREO, NPLs, TDRs, delinquent loans, NPL inflows and watch list loans. So really, really strong across the board improvement in our credit metrics.

So we'll move to Slide 4. We also try to point out to you some unusual items. We did have $99 million in security gains in the quarter, which is about a positive $0.09 per share. Quite a small amount of merger-related charges, only about $4 million. We did have in the area of losses and write-downs on loans sold or held for sale in connection with our NPA disposition strategy. We had $62 million negative here that was about $0.06 per share.

If you will move with me to Slide 5, I'd like to give a little more color in terms of some key drivers of our cost improvement from a long-term point of view. I mentioned to you the last couple of quarters credit matters and of course, it matters a lot. The real key, we think looking forward for our company and the industry is revenue growth. And the investments that we have made in revenue production over the last several years is really beginning to pay off.

I will encourage you to dig into the numbers because some of the effect of that is being masked by the securities deleveraging which we did, of course, Daryl will explain more detail on that. But it certainly leads us in a much less risky position as we look forward to expected rising rates. But underlying that is very strong revenue production improvement and we feel really good about that, and it's primarily being driven by a community bank model. It really works and frankly works better in tough times and in even good times, because what we've been able to produce is the best value proposition in the marketplace that has actually improved to relative to our competitors during the cycle and in generating really good results.

To give you some details around that, our C&I versus CRE mix continues to improve. We had a really good fourth quarter in commercial lending, producing a record $10.3 billion in loans. December was the best closing month for commercial loans in our history. 2010 new production mix, I'm really personally happy about this. It was 84% C&I, 16% CRE. As we told you two years ago we were going to start really focusing on our five-year plan on diversifying our assets and liabilities, this is proof we're executing on what we said.

Our new commercial commitments were up a whopping 89% on an annualized linked-quarter basis, so really good loan production numbers. And the deposit area equally is strong. Average DDA increased 18.3% annualized linked quarter. Very glad to see net new transaction accounts of 95% compared to last year. And small business area is really beginning to move for us. 5% growth in total households compared to last year. We've been placing a lot of attention on bundling, where we try to sell three or more services to a client when they open a checking account and bundling sales obviously increased 25% compared to last year.

Importantly, BB&T is trying to be a leader in terms of helping our economy grow in terms of particularly focusing in the small business area. Not only in the deposit area as I have described in terms of accounts, but also in the lending area. I'm proud to say that SBA have recognized us as the most active lender in North Carolina and Virginia, our two largest core markets. So really good performance there. And really supportive of our communities.

Mortgage lending had another strong quarter with fourth quarter originations of $8.4 billion. You have seen that we have been for the last couple of quarters holding more of our production on our balance sheet. Frankly, it is a very good, high-quality, good-yielding assets in the time when other assets are hard to find and so that's been a conscious strategy. That may subside some as we go through this year, as other commercial C&I and small business production picks up.

Corporate banking is an area of major emphasis for us, have been for the last year and a half, it's really gaining momentum now. We had 25% growth in large corporate banking loans compared to fourth quarter of '09. Had some really nice movement in our Niche Lending businesses. I'll give you a little more detail on that in just a minute on the next slide.

Revenue per FTE, which is one of the main measures we used to look at our productivity increased 9.3% compared to the year of 2009. So very strong performance there. We placed a lot of emphasis on our Wealth business, trust and investment advisory. So our trust and investment advisory revenues increased 10.5%. Our wealth production was up 29% compared to last year's fourth quarter. So very strong numbers there.

Investment banking and brokerage is doing really well. We had record revenues in those areas, $352 million and we had record levels of equity and debt capital markets deals. We are really beginning to be a significant player in the equity and debt capital markets in terms of deal that we lead and certainly a major participant in syndications.

If you turn with me to Slide 6. A little more detail in terms of our loan growth. C&I did increase 6.9%. You will notice that other CRE is down 12.8%, that has obviously been a conscious strategy. Sales finance automobiles is up 6.3%, revolving credit up 7.4%. Mortgage is up 28.7%, as I said we're holding more mortgage on our balance sheet. Our specialized lending is down 5.4%, but that is really one big area embedded in our insurance premiums. Financing business is pretty cyclical and drives that down some. But if you look under that, Non-prime Auto business is up 9.2%, equipment finance is up 18.2%, small ticket finance is up 9.4%. So some really strong numbers underlying that total number.

Now direct retail is still soft, it's down 2.8%. The decrease is slowing. We think in the next quarter or so that will hit an inflection point, we'll begin to see growth in direct retail. But the consumers, while increasing in confidence, are still not yet out substantially borrowing and that's something we all have to kind of watch for.

You'll see that our ADC continues, a very aggressive reduction design, down $746 million or 67%. Our covered and other acquired loans are down as you would expect, 27%. So if you look at total loans, it's a small 0.1% increase, but a better way to look at that is if you include helpful investment, ADC run-off end covered. But if you exclude the assets we transfer to help the sale, which we think is a fair way look at it, which we really see as our underlying growth is about 4%, which is a good solid number and we feel really good about that. So overall, I would say very good loan growth, especially given our progress in diversification and we expect those trends to continue.

If you look at Slide 7, really good progress in our deposit mix, kind of the other part of our two-pronged diversification strategy. Non-interest bearing deposits up 18.3%, interest hedging up 22.8%, other client deposits of 16.7%, these are linked-quarter annualized numbers. You will see declines, three days are down, a significant 57.2%.

We told you in the last quarter that we have been consciously allowing some of the more expensive single service household CDs to run off a meaningful amount of that related to Colonial, and that has helped us to manage our margin. And frankly, we just didn't need those deposits because of the relatively lower loan growth, as we experienced in 2010. So we feel good about that strategy. We have recently made an adjustment in those strategy because as we look forward, we see cost base have increased loan growth. And therefore, we've adjusted our CD strategy. So you'll begin to see those stabilize to our grow slowly in the CD area, and that will of course probably increase that loan demand.

I would point out more importantly, our transaction account deposits are up 19% on an annualized linked-quarter basis. We increased net new transaction accounts by over $110,000 in 2010, a 95% increase. This is a result of the whole community bank really becoming more effective. And frankly, a substantial improvement in our Colonial acquisition.

Non-interest bearing deposits increased to 21% of client deposits compared to 18%. This has been a long-standing challenge for us in terms of our margin, but really, really good progress in 2010 compared to that. And importantly, our interest bearing deposit cost decreased to 0.9% in the fourth quarter, compared to 1.23% in the fourth quarter '09.

So you could see what's happening is this has allowed us to adjust our mix, get more important long-term transaction relationship accounts, manage our CD costs and get us in some CDs that didn't matter in terms of our total relationships and as a result, manage our cost down which has helped our profitability.

So with that, let me turn it to Clarke now for some important and I think encouraging details in the credit area. Clarke?

Clarke Starnes

Thank you, Kelly, and good morning, everyone. I'm very pleased to report positive credit performance for the quarter. As Kelly mentioned earlier, we experienced a broad-based improvement in credit quality as reflected by linked-quarter improvements in essentially all of the key credit performance measurements from early-stage indicators, all the way through to non-performing asset levels and losses. This improvement is very consistent with our efforts to more aggressively resolve problem credits and move through the last stage of this credit cycle.

If you follow me to Page 8, you can see these results which include lower levels of watch list credit, total delinquencies, TDRs, NPL in flows, NPL, OREO, total MPA and losses. Given these strong results in a better economic outlook, we feel more confident about our future credit direction as we begin 2011. What I'll try to do over the next several slides is to share some color and key drivers for these improving results.

On Slide 9, it provides more detail regarding the early-stage indicators. As we discussed last quarter, our internal watch list problems continue to decline, reflected by a 7.2% decrease in the watch list this quarter. We also saw a notable decline in early-stage delinquencies, so it's 30 to 89 and 90 buckets of 11.5%. In fact, included in this level is the lowest 30 to 89 levels since first quarter of 2008. Driving this performance was a significant reduction in our commercial delinquencies at 39.6%.

It's also interesting to note that our overall retail delinquencies were basically flat for the quarter, when we would typically see a fourth quarter seasonal increase. Our covered loan portfolio from the Colonial acquisition continues to outperform our initial expectations with total delinquencies from a client perspective, down 58% link quarter, and this is the second in consecutive quarterly reductions. I would note that our problem asset reporting this quarter excludes government insured mortgage balances in the tables, which is more consistent with peer reporting, but we have included these balances in the footnotes in our release table. So I would note that for you.

As we've discussed throughout this credit cycle, our primary credit issue has been the stress in the single-family home build or ADC portfolio. And while it only represents about 7% of total commercial loans, it's still accounted for approximately 39% of commercial NPLs and 33% of commercial losses this quarter. So we've been working very diligently to work through the problems in these portfolios as quickly as possible.

As Kelly said, we made excellent progress in the quarter, significantly reducing the balances and we've actually contracted the balances over $2 billion throughout 2010. So as a result, we feel very good about the progress we're making to rightsize this Lending segment, which we believe is probably more like $2 billion to $3 billion for rightsize over the longer term. And so the intense focus on getting to the right level of this portfolio should help us substantially reduce non-performing assets and losses as we move forward.

So turn to Slide 10, we're very pleased to report a second consecutive quarterly decrease in both performing TDRs and non-accrual inflows. Total performing TDRs decreased approximately 10% this quarter, including a 25% decrease in commercial TDRs. We still believe these modification efforts, however, positively impact our portfolio performance. And that's evidenced by the fact that 75% of all our TDRs are in a performing status and 87% of the performing TDRs are current.

It's also notable that only 25% of our performing commercial TDRs are related to the high-stressed single family ADC loans. So we'll continue to use TDRs judiciously to help our clients that are experiencing financial difficulties, but we would still expect steadily declining levels in overall TDRs as our portfolio and quality continues to improve.

In addition to creating less TDRs each quarter, our non-accrual inflows were also lower. They were down 10.2% for the quarter and notably, commercial inflows down 18.1%. Since the commercial inflows make up the majority of total inflows, the continued improvement in this area is another indicator of improved credit quality. The current level of commercial inflows primarily reflects our aggressive efforts to resolve existing watch list account. So as our watch list continues to decline, we would certainly expect future level of commercial inflows would reduce as well.

On Slide 11, you can see the total non-performing assets basically peaked in Q1 and it steadily decreased for three consecutive quarters. Total NPAs were down 4.2% for the fourth quarter on a linked basis, with NPLs down 4.6% and OREO down 3.5%.

One of the drivers of this improvement was strong execution in our problem asset disposition strategy. We sold, as Kelly said, approximately $600 million of problem assets in the quarter at average sales prices that were generally consistent with our targets. OREO sales totaled $249 million and note sales of approximately $343 million. So the total amount of commercial notes in the held for sale portfolio was reduced to $521 million at quarter end.

One of the things we're very careful about those reevaluation in this portfolio on a quarterly basis, we've marked it to about a 47% mark, which is consistent with our sales results to date. I would note that sales activity remains strong. We've already got a $125 million contracts to date and we've got good activity. We're very committed to our full-pronged sales strategy we described last quarter. We had a good mix of sales in all of those channels this quarter, and we're very confident we'll successfully liquidate the remainder of the portfolio over the next quarter or two.

On Slide 12, you'll note that our GAAP charge-offs for the quarter were 2.15%, which is considerably lower than the 3.54% in the third quarter. This number does include about $26 million of marks related to several loans that were moved from held for investment to held for sale and sold in the quarter. Excluding the losses attributed to those loans, our core losses of 2.07% were consistent with the guidance we provided last quarter and very similar to the level of core losses we've had over the last several quarters. So due to the improved portfolio performance, our provision expense for the non-covered portfolio essentially covered charge-offs, although we did not elect to release reserves for the quarter.

The total allowance continues to provide strong coverage of NPLs at 126% on a GAAP basis, and 119% once you exclude the covered loans. You will note that the total provision expense for the quarter included $100 million provision related to the 0/33 review of cash flows related to the covered loans from the Colonial acquisition. The accounting treatment for these loans requires immediate recognition of any impairment of individual loan segments through the provision expense. But you should remember that this provision is 80% offset by the FDIC loss share receivable fee income. Daryl will discuss 0/33 review in further detail in just a moment.

So continued improvement in our credit quality trends against the more positive economic outlook should allow for us to reduce provision expense as we go into 2011. So in summary, the positive results over the last several quarters and the execution of our asset disposition strategy, together with clear improvement in the various credit quality indicators gives us more confidence that our overall credit problems have peaked and we should expect improved results as we go through 2011.

Certainly, achieving these results will require continued efforts over the next several quarters. But I'm particularly proud that we've been able to work through the majority of our problems consistent with the objective we stated all along of assisting as many clients as we can during a very difficult credit cycle while preserving shareholder value. So with that, I'm going to turn it over to Daryl.

Daryl Bible

Thank you, Clarke, and good morning, everyone. I would like to continue on Slide 13. I'm going to discuss net interest margin, investment activity, fee income, non-interest expense and capital. After that, I will discuss our outlook for some key drivers for 2011.

Net interest margin came in a bit better than what I expected. For the fourth quarter it was 4.04%, down five basis points from the third quarter. We said that margin would be down around 10 basis points for the fourth quarter. However, we continue to see better overall improvement from the Colonial portfolio.

Adjusting for the FDIC loss share asset as an earning asset which is similar to our peers, our adjusted margin dropped eight basis points to 3.75% for the fourth quarter. This decrease is due to the de-risking strategy. The margin benefited from positive asset and funding mix changes, lower cost funding and improved credit spreads.

When you adjust non-performing assets and interest reversals to a more normalized level, our net interest margin will be about 11 basis points higher. Net interest income on covered assets increased $42 million compared to the prior quarter. Based on the results for our reassessment of the fourth quarter, included our loan loss provision of $100 million related to the acquired loans from Colonial. Remember, under the terms of the loss share agreement, this additional provision has offset 80% resulting in an $80 million increase in non-interest income. So while there are a lot of moving parts from Colonial this quarter, the net impact is a positive $12 million compared to last quarter.

Turning to Slide 14. Before rates went up in the fourth quarter, we completed our de-risking strategy of the securities portfolio. We sold $6.5 billion of securities with a yield of 3.68%. Later in the quarter, we purchased $7.6 billion of short, average life and floating rate securities yielding an average of 1.35%. This generated net gains of $99 million for the quarter. We added these high-quality securities to increase our asset sensitivity and reduce OCI risk. These floating rate securities comprised 22% of the total portfolio at year end.

We also sold $400 million of non-agency mortgage-backed securities, to reduce potential future losses for impairment. For the past three quarters, we have sold a large amount of pass-through securities and generated about $550 million in net gains. Most of these gains would no longer be present, as increases in interest rates have lowered the value of these longer duration fixed rate securities. We lengthened the CD portfolio by being a little bit more aggressive in longer term CD pricing. This is in response to the increase in fixed rate loan demand such as residential mortgage and automobile loans.

These efforts will have a positive impact on a growing total client deposits at a slightly faster pace. Finally, we unround about $1 billion of received fixed swaps for the quarter. All of these actions have made us more asset sensitive, positioning us to benefit in a rising rate environment.

Turning to Slide 15, our fee income ratio fell slightly to 41.8% from 42.3% in the third quarter. The decrease was mostly due to decreases in insurance income, deposit service charges and mortgage banking income. As expected, service charges on deposits decreased due to regulatory changes. However, we are pleased that we are performing better than our original estimates. We continued to adjust pricing in products in 2011. The goal is to minimize the loss of revenue while remaining responsive to our clients.

Mortgage banking income for the fourth quarter was $138 million compared to $184 million in the third quarter. This decrease was mostly due to narrow mortgage spreads on loans sold and a decrease in valuation of mortgage servicing rates and related hedging. Investment banking and brokerage fees and commissions continued their outstanding revenue growth in 2010, setting us up for positive momentum in 2011. Check card and bankcard fees both remained strong due to higher activity and increased account penetration. Finally, the FDIC loss share income net to zero this quarter. The $80 million provision we discussed was offset by negative accretion due to higher interest income on several assets.

On Slide 16, you will see that our efficiency ratio increased slightly to 55.3% from 54.1% last quarter. Personnel expense increased $37 million or 22.9% annualized link quarter. Mostly due to higher production related incentive expenses in the capital markets and mortgage groups and post-employment benefits. Foreclosed property expense decreased $5 million or 11.9%, largely due to lower losses and write-downs on foreclosed properties. Additionally, our FTEs increased by a total of 23 on a linked-quarter basis, and decreased 1,040 on a common-quarter basis mainly related to Colonial.

Looking out into 2011, we plan to add FTEs in revenue-producing areas.

We continue to expect a reduction in non-interest expenses as our asset quality issues abate. We will continue to focus on driving positive operating leverage, which will move our efficiency ratio back towards the low 50% range in two to three years. The fourth quarter effective tax rate was lower producing an annual rate of 12%, consistent with our level of pretax earnings, tax-exempt income and tax credits.

On Slide 17, you will see our capital ratio has remained one of the strongest in the industry. Tangible common at 7.1%, Tier 1 common improving to 9.1%, Tier 1 capital 11.8%, leverage capital at 9.1% and total capital of 15.5%. We believe that BB&T already meets the capital levels required by Basel III. Based upon our preliminary assessment and our current projection of Tier 1 common under Basel III at 7.5%.

Turning to Slide 18, we want to give you some key drivers in performance for 2011. As a reminder, this includes forward-looking commentary, which Tamera mentioned at the beginning of this call. For loans, we continued to experience faster growth in C&I and consumer loans and declines in commercial real estate. This will result in an overall gross rate of 3% to 5% in total loans held for investment. For deposits, we expect them to increase 1% to 3% with much higher growth and lower cost deposits. Again, this is consistent with our goals of improving the mix of deposits.

Based upon the growth rates, spreads remaining at current levels and a relatively stable yield curve, we expect net interest margin to be in the high three 90s for the full year plus or minus five basis points. Non-interest income will be affected by overdraft charges and debit interchange fees. And higher interest rates will negatively impact residential mortgage production. In light of these factors, we see non-interest income being relatively flat excluding security gains.

For non-interest expenses, we should see expenses start to decrease as asset quality improves, resulting in a slight decline in expense. As earnings improved, our corporate tax rate will increase to an annual rate of 20%. And finally, we see net charge-offs trending down through 2011 to 1.5% or a bit better later in the year.

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

Kelly King

Thank you, Daryl. So in summary, we feel like we're really well positioned for the future. Our underlying performance for our businesses is strong as you've seen. Client service metrics are at historic highs. C&I loan growth accelerated during the quarter. Likewise, substantial improvement in the deposit mix area and accelerated DDA growth. We have maintained a positive revenue growth in the very challenging environment, significant investments in revenue businesses. And as we have mentioned, we will be adding several hundred revenue producers during the year.

And we expect meaningful declines in the credit cost area in the coming months, continued steady declines in inflows with more significant decreases we expect in the second half. In NPAs, we expect continued declines as we complete the disposition strategies. TDRs, as Clarke described, we expect continue to decline.

So if you look at kind of the macro strengths that we have looking forward, as we've talked to you about in the past, we think this industry-wide reintermediation is going to play well for us to cover our capital strategy and our lending expertise. Significant investments and revenue growth opportunities will continue to pay dividends for our shareholders. We think there will be merger opportunities as the industry continues to consolidate.

Our community banking model, we believe, can support produce the best value proposition in the market. We are fortunate that we are in some of the best markets in the country and maybe in the world. And we have an outstanding team. Really, a deep culture that allows us to execute on strategies that we think are important. So with that, we'd be glad to take your questions.

Tamera Gjesdal

Thanks, Kelly. Before we move to the question-and-answer segment of the call, I will ask that we use the same process as we have in the past to give fair access to all participants. You will be limited to one primary question and one follow-up. If you want further questions, please reenter the queue. Yvonne, will you please come back on the line and explain how to submit their questions?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Adam Barkstrom with Sterne Agee.

Adam Barkstrom - Sterne Agee & Leach Inc.

Kelly and Clarke, maybe you guys could give a little bit more color. I'm just curious. The performing TDRs, as you highlighted, were down this quarter. Could you give us more color why? I mean, were they charge-offs, do they return to performing and then what types of loans were those mostly?

Clarke Starnes

This is Clarke. It was a mixture of what you said but certainly some were liquidated, others cured. And then frankly, we're not doing as many new TDRs and modifications at this stage of the cycle. But the majority of those are other CRE and C&I, and we're doing less ADC as I've said.

Adam Barkstrom - Sterne Agee & Leach Inc.

And then as a follow-up, I guess one of the big questions on everybody's mind Kelly is the dividend. And curious as to your commentary on that and certainly, it was focal point on the Wells Fargo call and certainly the JPMorgan call. Curious on what you're saying now about dividends?

Kelly King

As you know, Adam, we're all in the process of the capital stressing process. That said, all of the data had to be in by January 7. We made, we think, a really good submission. We feel really confident about our capital levels and our projected capital levels even through difficult stress scenarios. And so we're very confident that we will be qualified to have a dividend increase. Obviously, they get to decide. And so none of us can say with any certainty what will happen. We'll know, I guess, in the March timeframe. But we would certainly hope to have a small increase. But Adam, as I pointed out, you should not look for BB&T to have a huge increase like the others because remember, they're mostly trying to get their dividend to where we've been for the last two years. So we have the fourth highest dividend of the S&P banks, 2.5% or so yield. And so while we want to have a small increase to show our shareholders that we are committed to returning capital to them, we just don't want people to expect it to be huge increase because it wouldn't make sense because we need to, of course, return capital to our shareholders. But importantly, we need to maintain capital for important organic and acquisition opportunities as we go forward.

Operator

We'll take our next question from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG

Kelly, with excess capital still growing here, can you update us on your thoughts for M&A? And also if bank acquisitions are still attractive here after several new data points in the quarter.

Kelly King

Well, clearly, we will be creating meaningful capital as we go forward. And I think a lot of people are thinking in terms of substantial dividend increases and a lot of people are talking about major capital repurchase programs. We certainly are thinking in terms of dividend increases. We're not thinking so much about repurchase programs because we do think that we will have opportunities to lever our capital in terms of acquisition opportunities. So we remain, I would say, meaningfully aggressive with regard to looking at merger opportunities. But I think the key is going to be helping settle out with regard to the reasonableness of mergers. We've said in the past and I remain committed to a disciplined approach. Any merger that we consider have to meet three criteria. And that is being sure that it is strategically compelling, that it is an acquisition where we can ring the asset quality so that we don't take on any material level of asset risk and that it's meaningfully accretive to our shareholders. Some of the recent data points that you alluded to would suggest that some buyers are going to be heading back to the 90s or the last decade in terms of pricing. I think that's more of an aberration than a sustained trend. I think you're going to find most of us being pretty disciplined in terms of pricing deals. And frankly, the acquisition targets need to be very careful in terms of importance that they consider because people that are willing to go and pay absorbative prices are not likely to be able to generate a long-term returns that they might think they're going to offer, because the market I don't believe is going to tolerate overpaying for deals today or going forward.

Craig Siegenthaler - Crédit Suisse AG

And just a quick one for Clarke on credit quality. With commercial loans held for sale ending around 520 and also $600 million of problem loan sales in the quarter, how should we expect these levels to both trend in the first half given the charge-off guidance?

Clarke Starnes

We would expect, as I said, that the held for sale portfolio will be liquidated over the next quarter or two. Given the velocity we have, we think we will be out hopefully by mid-year.

Operator

We'll take our next question from Ken Usdin with Jefferies.

Kenneth Usdin - Jefferies & Company, Inc.

Couple of ones on some of the outlook. You'd mentioned that you do expect charge-off to trend downward positive direction in 2011. But Clarke, what can we expect as far as reserve released this year? Outside of the Colonial, $100 million, it looks like you matched this quarter. So given your comments on delinquencies, how are you thinking about the reserve and reserve levels?

Clarke Starnes

Certainly a very good question. We've been thinking a lot about it. As we've said before, we intend to be pretty thoughtful and considerate about the appropriate level of our reserves. And we want to avoid frankly a risk of a premature release. However, given the continued improvement in our credit trends and as I've said, a more positive economic outlook, we would expect lower provisioning as we move forward and that's likely would include some releases.

Kenneth Usdin - Jefferies & Company, Inc.

And then on the fee income side, x securities gains, you're talking about holding a kind of flat even with the headwinds that you mentioned. So I'm just wondering, can you talk to the areas that you do expect to grow to have enough juice to offset those expected declines?

Daryl Bible

Sure, Ken. This is Daryl. What I would say is, we see insurance, our investment banking growing. Our other deposits, trust, bank card, all those line items growing next year.

Kenneth Usdin - Jefferies & Company, Inc.

And with a magnitude enough to offset the run rating of all those other factors?

Daryl Bible

Right now, I think the biggest wildcard is the Durbin amendment and the debit interchange fees. And Kelly might want to comment on that.

Kelly King

Yes, Ken. Just before I mention that, just keep in mind we have made substantial investments in corporate banking and capital markets. And as those corporate banking relationships pickup, that generates huge related capital markets businesses. So when you look at our wealth strategy, capital market strategy, investment and insurance, et cetera, all of those we think are really performing well in '11. On this Durbin thing, I think it's premature to start trying to project what earnings impact they may have. I am reasonably optimistic that before July, when it is supposed to kick in, that we will see some change coming out of Congress with regard to this. I've talked to a lot of people. There is a lot of effort going on to try to explain to Congress that this whole Durbin amendment is an absurd intervention into the flea market system. First of all, for Congress to step in and specifically implement price controls in one area, it's just silly on its face. But more importantly, we can demonstrate that the effect of this will be bad for consumers, bad for the institutions, bad for the economy. And so many congressmen are beginning to be sensitive to that including Barney Frank, who has recently said on several occasions that he is quite willing to work with the Republicans to revisit this issue. So we're being reserved right now in terms of what impact that may have. We think it will be muted. But in the event that it's not, then we would expect to make appropriate fee and pricing changes in all the other areas to compensate for it over a reasonable period of time.

Kenneth Usdin - Jefferies & Company, Inc.

One more question for Daryl. Daryl, can you just split out for us when you think about the margin coming down to 390s next year, just what you're expecting from either the comparison of the dollars of Colonial versus year-over-year and versus what the core is doing? Could you illustrate that on to slide? But can help us understand the moving parts a little bit better?

Daryl Bible

What I would tell you is we think margin for next year is going to be relatively stable. So it shouldn't really trend higher loan but cumulatively flat. And core should be pretty much reflective of that. Colonial has about $2.4 billion of accretable yield yet to come through as the assets amortize down. And that's going to be decreasing as those assets come down. But it's still going to be a fair portion of what you're seeing come through right now. So definitely it's going to contribute to margin overall and keep our margins close to 4%. But I think overall, core margins should be relatively stable, especially as we're growing our assets in getting a positive mix change by the yields that we're getting there and attracting low-cost deposits. Both of those drivers are really helping maintain our margin on a core basis.

Kenneth Usdin - Jefferies & Company, Inc.

So the decline is mostly lower Colonial relative to the fourth quarter?

Daryl Bible

There was a little bit of overhang from the de-risking strategy and investments in the fourth quarter. So you have a full quarter impact in the first quarter.

Operator

And we'll take our next question from Gerard Cassidy with RBC Capital Markets.

Gerard Cassidy - RBC Capital Markets, LLC

Kelly, if I look at BB&T's long-term profitability on an ROA basis from 1997 to '06, which we kind of view as peak profitability for the banking industry, it looks like you guys had about 152 basis points on assets as you earn profitability. When we get out of this net and we're back to normalized times, whenever that is, 2013 possibly, where do you see your ROA coming in at considering how the business has changed?

Kelly King

So really good questions, Gerard. I think that when it all settles down, ROAs will be on the 140 to 150 level, not materially different than the past. Now remember, the ROA depends meaningfully on what levels of equity we end up with because when you have higher equity, you will definitely have higher ROAs. So I'm assuming in this that we will have ROAs in the 16% to 18% kind of level because we think equities going to be relatively inflated prior to those previous periods. And so I think what you're seeing is there's some movement on the equity side upward. It's putting some pressure on ROA. The increase in equity is holding up ROA. The headwinds are pushing down on ROA. And when you get through with it all, there won't be a material difference in ROA as we go forward.

Gerard Cassidy - RBC Capital Markets, LLC

And Daryl, you showed us that you'd shortened up the maturity of your investment portfolio. If for some reason, the Fed starts to raise rates sooner than we all think, in July, August and they start raising the fed funds rate and possibly fed funds is 1.5% to 2% by the end of the year in the long curve and we still have the upward sloping curve. What does that due for your margin, and then also the impact on the investment portfolio?

Daryl Bible

From an investment portfolio perspective, we will probably have about a third of our securities that will be floating rate. So as that goes up 100 basis points, the portfolio is increasing and then you're still replacing, I probably say, 30 or 40 basis point positive impact on the portfolio for a given 100 basis point move. As far as how much impact you have on margin, you can see on our table that we will basically benefit with the rising rate forecast. So I would say margins would continue to improve if rates were to go back up. The first 50 won't be as great because we have a lot of commercial loans that have artificial moves [ph] on them such as that you will get a repricing there. But after the first 50 basis points move, our net interest income will improve and probably in the five to 10 basis points range.

Operator

We'll take our next question from Matt Burnell with Wells Fargo Securities.

Matthew Burnell - Wells Fargo Securities, LLC

I wanted to follow-up on one of the earlier questions in terms of the fee income. Daryl, can you give us a little more color on how we should think about the service charge on deposit trends, which you noted were negative in the quarter and the very strong numbers that you put up in check card fees and bankcard fees? And how you're thinking about repricing a lot of your retail and small business products to reflect the new regulatory environment?

Daryl Bible

Matt, the service charges we expect to be relatively flat year-over-year for us. And then as far as the bankcard and check card fees, we're planning to have high-single digit, low-double digit growth in those line items.

Kelly King

Matt, I might add that what we are doing and I think most are doing is frankly restructuring our deposit products. We went through the last decade or so of giving everything away and free checking, et cetera, et cetera. We're moving already back to where you were more in the 70s and 80s where you'll have fees for accounts unless people keep substantial balances or other revenue producing business with us. So the days of free checking are gone and the days of pricing more standard fees for accounts will be what you see going forward. And then they will be adjusted over time depending on the overall revenue levels of growth and also our cost structures. So it will take a little time for that to adjust out. But in the bottom line, I don't think they're going to sell us out. The whole Fee business will be materially different. It will just be materially different in terms of levels, it will also be different in terms of the structure.

Matthew Burnell - Wells Fargo Securities, LLC

A follow-up for Clarke. Clarke, you mentioned the ADC portfolio, you thought should be at a normalized level going forward of about $2 billion to $3 billion. You had $4 billion at the end of the year in that portfolio with about $2 billion in runoff in 2010. So should we expect the ADC portfolio will be down to where you want it on a long-term basis by the end of 2011?

Clarke Starnes

Great question and I think that's the right way to view it. We would view that to get to the initial rightsize of this problem, we would know the three quarters or so. So I mentioned the $2 billion to $3 billion on the longer-term basis is probably the right size. But with muted starts right now, we would expect to be more on the lower end of that. And then as the market improves and there's more construction starts, we would obviously have a normalized level at the higher end of that range. So in our view, we probably got another three quarters or so to really get it where we need to be. So we feel confident by the end of the year, it will probably be close.

Operator

We'll take our next question from Brian Foran with Nomura.

Brian Foran - Goldman Sachs

I have a question on the covered loan interest income and I apologize, but I'm going to rattle up a couple of numbers just to make sure because I don't understand it every quarter. Page 11, we've got $271 million of interest income on covered loans and another $50 million from covered securities, both with about 60.5% yield. So I guess the first question is as I tried to translate that, it's big. It's about 15% of interest income. But can you walk us through how does that actually translate to pre-provision earnings? I'm assuming the funding cost that we should put against that is higher, e.g. the longer-term debt book. I'm assuming part of that is also from Colonial. I don't know if there's non-interest expenses and workouts that are big enough that you can call out. I'm assuming that portfolio at the highest servicing cost. And then when you talk about the FDIC offset and the 375 adjusted core margin, can you just clarify, does that strip out any of this or is that just a provision offset when you talk about the FDIC offsetting piece?

Daryl Bible

What I would tell you is that the fee income was netted to zero. So we had $100 million in provision that we talked about. 80% of that was offset in the FDIC receivable. But then we had the accretion from the loans and the securities, and those basically cancelled out which will basically have a net zero impact on the FDIC receivable this quarter. You are correct in that, all we're really showing on the table is the purchased accounting for the assets. We do not share what the funding cost is of these assets. We don't show what the operating costs are or anything like that. So we're just showing you an earnings impact based upon these assets. But obviously, the net profitability of all that is lower due to the other costs that are layered in there. What you will see overtime is these assets will continue to wind down so that accretion on income of these assets will decrease as the assets come down. So the impact will be less and less on net interest margin. We're still about $2.4 billion of accretable yield left to come through, and we'll probably expect that over the next two to three years on average. But there will be a long tail because the loss share agreement on the retail side goes out 10 years. But it's definitely helping to keep our GAAP margin higher, but the rate that we show the 375 basically includes the FDIC loss share asset as an earning asset. So it kind of put those earnings -- part of that assets, you can kind of see what the full GAAP margin is altogether which is maybe one way you could look at it. Some of our peers show margin that way with all they netted together. We just basically show you all the pieces separated.

Brian Foran - Goldman Sachs

So I guess as a follow-up, when we think about core margin, should we think about a third margin that tries to adjust for the accretion here? As we think out to 2013 or so when the majority of the accretion is realized and you're in that long-tail phase, is 375 a sustainable core margin even after accounting for the loss of this high-yielding asset? Or is it lower? How do you backfill the yields you'd had because ultimately it's going to be lost to $320 million of interest income you got this quarter?

Daryl Bible

I think if you get out to 2013, our asset quality issues are behind us. And you basically get that picked up on that 11 basis points there. So I think we feel pretty comfortable. 370, give or take, five or 10 basis points is a good core margin once everything flows through. With Colonial and the asset quality issues, that's probably a good reflection of what our margin is. That said, these are real earnings. They are accreting to capital and it's basically capital that can be used to support organic and strategic growth or be returned to the shareholder.

Brian Foran - Goldman Sachs

But the 375, core margin you show? When we try to calculate that, can you give us the denominator? I guess, the numerator and denominator we should use the back in to that 375, just the numbers?

Daryl Bible

You basically take the income from the loss share asset in the numerator and then you take FDIC loss share asset, that's a non-earning asset, put that in the denominator and the earning asset. If you have any more detailed questions we could take some follow-up.

Operator

We'll take our next question from Christopher Marinac with FIG Partners.

Christopher Marinac - FIG Partners, LLC

Kelly, just curious on your overall appetite for more goodwill on the balance sheet and how that impact your decision on potential acquisitions going forward?

Kelly King

Well, I don't think more or less goodwill independently will be a factor. I think it'll be a matter of looking at the EPS accretion. And so as we look at the internal rate return and net cost of value in our merger models and they drive us. So we're not opposed to goodwill at all. It just depends on how the whole earings stream works through in terms of our models and specifics in terms of EPS.

Christopher Marinac - FIG Partners, LLC

And I guess my follow-up is more general about overall geography down the road. I mean is your long-time picture of being in growth markets with strong demographics still the same, or will this environment cost you to expand or bend some of your long-term principles on that?

Kelly King

Well, we think your markets and the characteristics of them is obviously, really, really critical because if you think about it, banks are nothing more or less than a reflection of the markets they serve. And so therefore, it's very important to be an attractive growth market, which we are. That having been said, that would not preclude us from looking and expanding into less higher growth markets. As we did, for example, in West Virginia. You really you just have to look at two kinds of strategies. And so in a slow growth market, you have to focus much more emphasis on cost control, having deep relationship with your clients and expects for loan growth. In the higher growth markets, of course, you invest in revenue production and you have higher increases in cost but you bring a nice profit to the bottom line. I personally think and kind of thought about this first over the last two, three years I really think that's a merit to some more diversification in terms of markets. I'll be honest with you, I'm real happy that we had Kentucky and West Virginia in the last two, three years. I wouldn't be opposed at all, for example, to have some exposure in the Midwest. I think the Midwest is a market that has been in a state of decline but has probably found its the bottom. With all that's been going on in manufacturing and the auto industry, I think it's quite possible in the next 10 years or so, that market may surprise a lot of people. I wouldn't want to be domiciled in the Midwest but a nice blend of fast-growing markets and good, stable, more rural and manufacturing type markets is actually a pretty good place to be.

Operator

There's a follow-up from Adam Barkstrom with Sterne Agee.

Adam Barkstrom - Sterne Agee & Leach Inc.

Clarke, you mentioned in your slides the problem loan sales. Can you remind us within a range of where those pricing ranges are?

Clarke Starnes

Yes, Adam. As I mentioned earlier, for the quarter, we sold about $311 million worth of commercial notes. We also told you we have $249 million. But as far as pricing and valuations, we originally, when we move the commercial notes to held for sale last quarter, we took an initial mark of about 45%. Since that time, our sales activity has been -- revalued those assets consistent with that activity and it's about 47%. So we're very really close to our marks and what I would tell you is our four-pronged strategy is really working well, and we had a good mix of all four channels this quarter. So what we see is that we get very strong pricing when we can do direct sale particularly if there is more involvement in finding the sponsor as opposed to, for example, an auction where you're going to have your weakest pricing but you can move the assets very quickly. So we think it's important for us to use a mix of that. But I would suggest to you that blending all that out best resulted us in our marks in our sales activity being very close to what we have originally targeted.

Adam Barkstrom - Sterne Agee & Leach Inc.

Kelly, I wonder if you would care to comment on the pricing that we saw for the Sterling deal?

Kelly King

I wouldn't, Adam, comment specifically about that deal. But I would say that when we look at deals like that, we think in terms of our three criteria of strategic alignment, asset quality control and resulting in a meaningful accretion. I would say that some of the prices that I've seen recently in our models would produce permanent dilution. And so we would not be interested in deals that are pricey. I know sometimes people think in terms of deals like that as being just because of scarcity and other considerations. But we think in terms of at the end of the day, if it's probably diluted to your shareholders, it's not a good deal. And so I think it you're seeing a little bit of exuberance right now that will probably wane when the reality of those kinds of prices have settled in.

Operator

We'll take our next question from Bob Patten with Morgan Keegan.

Robert Patten - Morgan Keegan & Company, Inc.

I guess the question is to Clarke. Can you give some color around where you think the credit related forclosure expenses and marks and where that line is going to be going for the rest of the year? Obviously peaked last second quarter, steadily moving down. And break it down into what are marks, what's maintenance and so forth?

Kelly King

Good question, Bob, and what we would suggest is that we would still have recently heavy but steadily directionally declining levels in the valuation marks and write-downs over the next couple of quarters, trending downward particularly, as we hit the second half of the year. So in our internal view in forecasting, we've assumed again trending downward but still healthy levels of cost to eliminate the OREOs when we move forward. I'd also remind you that maintenance expenses is really a function of promotional size of the portfolio and the way you can think about that is the maintenance cost on that is typically about 10% of the notional balance on an annualized basis. So that continues to be very consistent number for us. So as that number comes down, the OREO notional comes down, you're going to see that maintenance cost drop accordingly. As far as the held for sale marks, again, we will continue to revalue based on sales activity and so we reset the portfolio at the end of the year based on sales to date. And so we'll see how the activity in demand goes for the remaining assets in the core right now, and then we will adjust accordingly. And so, we would expect potentially some more marks if we chose to exit more rapidly. But hopefully, it will be close to what we had originally put in.

Robert Patten - Morgan Keegan & Company, Inc.

And Daryl, quick question. Just in terms of what's left over on the securities gain side, I may have missed that so I apologize. What's left in terms of the uptick to take securities gains over the next couple of quarters?

Daryl Bible

I think at year end, the portfolios had a net loss. But there is approximately $50 million to $100 million left to gain, so we don't really have any plans to do anything. Our de-risking strategy is pretty much over with.

Operator

And that concludes the question-and-answer session today. At this time, Tamera, I will turn the conference back to you for any additional or closing remarks.

Tamera Gjesdal

Thank you, Yvonne, and thanks everyone for your questions. We appreciate your participation. If you have any follow-up questions or any clarification, please give Allan Gray or myself a call. Thanks and have a good day.

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