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BB & T (NYSE:BBT)

Q2 2011 Earnings Call

July 21, 2011 8:00 am ET

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

Todd Hagerman - Sterne Agee & Leach Inc.

Michael Mayo - CLSA Asia-Pacific Markets

Matthew Burnell - Wells Fargo Securities, LLC

Craig Siegenthaler - Crédit Suisse AG

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P.

Ed Najarian - ISI Group Inc.

Brian Foran - Nomura Securities Co. Ltd.

Betsy Graseck - Morgan Stanley

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc.

John Pancari - Evercore Partners Inc.

Gerard Cassidy - RBC Capital Markets, LLC

Robert Patten - Morgan Keegan & Company, Inc.

Matthew O'Connor - Deutsche Bank AG

Operator

Greetings ladies and gentlemen, and welcome to the BB&T Corporation Second Quarter Earnings 2011 Conference Call on Thursday, July 21, 2011. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Tamera Gjesdal, Senior Vice President of Investor Relations for BB&T corporation. Thank you. You may begin, Tamera.

Tamera Gjesdal

Thank you, Kelly, and good morning, everyone. And thanks to all of our listeners for joining us today. This call is being broadcast on the Internet from our website at bbt.com. We have with us today Kelly King, 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 2011, as well as provide a look ahead.

We will be referencing a slide presentation during our remarks today. A copy of this presentation, as well as our earnings release and supplemental financial information, are available on the BB&T website. After Kelly, Daryl and Clarke have made their remarks, we'll pause to have Kelly come back on the line and explain how those who have dialed in this call may participate in the Q&A session.

Before we begin, let me remind you BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Additional information concerning factors that could cause actual results to be materially different is contained 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. 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, and thanks for your interest in BB&T. We're excited about presenting our results to you today. In fact, we believe this is our best overall quarter in 2 years. And you'll see that as we go through the various parts.

So starting out with a focus on earnings, we did have net income available to shareholders that was $307 million, a 46.2% increase in net income versus the second quarter 2010. EPS was $0.44, up 46.7%. And it was really the strongest EPS number we've had since first quarter of '09. There were many very positive aspects to the quarter but obviously a significant amount of the improvement, we'll call it improvement, credit quality, which we'll talk about.

Our revenues totaled about $2.2 billion, up 28% on an annualized basis in the second quarter. That was largely driven by lower deposit cost, strong insurance, as you recall last second quarter was a really strong insurance quarter for us and lower losses on sale of our problem assets. And also for the last really 1.5 years we've continued to have revenue producers and that's helping drive our revenue production. In the credit quality areas, a really, really good quarter, significant progress in credit quality improvement. OREO, NPLs, performing TDRs, delinquent loans, NPL inflows, watch list loans and core charge-offs all declined, really great.

NPA decreased 13.2% and importantly, NPA inflows decreased 24.9%. Clarke is going to give you a lot of color on that in just a bit. In the loan area, our average loan growth was 3.4% versus first quarter and that does exclude our runoff portfolios in ADC and our covered portfolio. They're still solid in this relatively slow environment. The growth was pretty broad-based. It was led by growth in specialized lending, Sales Finance, C&I and mortgage and we'll give you a little more detail on that.

In the deposit area, we had average non-interest bearing DDA increased $1.2 billion or 22%. Average client deposits increased $1.8 billion or 7.1% and average client deposit, excluding CDs, increased $2.5 billion or 12.3%. So overall, solid performance in earnings, revenues, credit quality, loans and deposits.

Let's go to Slide 4. Give you a little more detail on some of our key areas relative to our revenue strategies. Importantly, our community bank model continues to produce the best value proposition in the market, we know that based on direct client feedback but also based on statistical feedback we get from independent outside research firms. We have the best quality offering of any of our major competitors in our marketplace.

And we've made excellent progress through the community bank and diversification strategies on the loan and the liability side. So if you look at some of the lending points, our second quarter new production mix was 85% C&I versus 15% CRE. That again is focused on the diversification strategy. Our new C&I production was up an annualized 10% compared to the first quarter, and June was our second best production since 2009. So it was really strong. And we finally had a turn in direct retail, while it did drop [ph] on average, the point-to-point growth second versus first was 2% annualized point-to-point. And that's after 11 quarters of run-offs. So that's an important inflation point because we've had good steady production, it's just we've had some strong run-offs in some of the areas we wanted to run off and now that it's turned it's almost mathematically certain to continue to grow at an increasing rate as before. So we feel good about that.

In the deposit area, as you know, we, and most others are going through some pretty material structural changes in the deposit line up because of the recent regulatory changes. We have now successfully rolled out our Bright Banking package, which is our basic replacement for free checking, it's going very, very well. We continue to have significant growth in non-interest bearing deposits as I mentioned. So our strategies are moving away from free checking into our new Bright Banking products and moving away from a more price-sensitive CDs and into more DDA and transaction accounts, it's really working very, very well.

A number of the investments that we've made in our niche lending businesses are -- continue to pay off for us. You'll recall that over the last really, 5 or 6 years we invested heavily in those areas and in all of those areas, they're producing really good results, which is why I'll show you in a moment our specialized lending increase was very significant in this environment.

On the fee side, our Trust and Investment Advisory business is doing well, income increased 15.4%, compared to the second quarter of '10. That's really a function of better markets and better execution and a lot of that execution is coming out of our Wealth division where we've been focusing intensely on for the last few years and really beginning to be fruitful now where our revenue in Wealth increased 11.8% compared to second quarter of '10. So that business is working well, and we continue to add revenue produces in the wealth area because we have a lot of fertile opportunities out there.

I want to spend just a minute on our corporate banking area and be sure that, number one, you realize it's a major focus for us but also I want to be clear about what it is we do. At the first quarter call I think we have a little bit of confusion about what it is we are doing here. So let's be clear. What we are doing is participating in what the market considers to be the middle market. And sometimes you will hear us say large corporate because, for us, large is small or middle of the middle market in terms that the market recognizes, so we really haven't changed in terms of the kinds of companies we're focusing on. It's just we've broadened our focus.

So our focus remains on middle market. It remains relationship based. We're only doing businesses where we go out and call on the clients, we're calling the CFOs, we're calling the CEOs, we're in their offices. We're not out buying just syndicated charges, syndicated packages. In fact, to give you a feel for this, our target is -- in terms of revenue size, is for public companies with $250 plus million in revenue, private companies $500 million plus. And really, total borrowings for $500 million or less. So you can see that the really big companies that a lot of the very large national players are dealing with is just not our market.

So we're focused on that solid middle-market group, which is where we have a great interest and a great specialty. Now the reason we're having such good results is because we've broadened our markets, we discussed some great new markets that we are underserved in Texas, Alabama, Florida. And we really view this strategy as a national footprint. So our bankers are out developing relationships that meet our target criteria across the country and we that have particularly unique opportunities in Texas, Alabama, et cetera, where we recently had some expansion.

Also, we've expanded some of our vertical concentrations, energy is one that we recently added that we're focusing a lot of attention on and getting phenomenal results. We're really only focusing those areas where we have expertise, where we have research expertise and staff expertise so that when we're calling on these clients, we're not only in their offices, we know something about the business and we know about their industries. I want to re-emphasize that our underwriting standards have not changed. They are conservative and are focused on the same principles that we have had for a long, long time.

Given that, we are having good results. I would point out that our shared national credits gets a lot of focus. Part of this is, for us, is international credits as you know that's basically just where multiple companies are doing -- bank companies are doing business with one company. That doesn't inherently make it suddenly get accredited, it just means multiple companies are in there doing their banking.

We do have a Shared National Credit portfolio, it's growing modestly, but the outstanding balance is $3.1 billion, so it's not like a massive part of our portfolio. The broader issue, this broad middle-market corporate banking focus, important though it is growing, our end of period balance has increased it's up 11.5% compared to first quarter. So we're getting good leverage there and getting the kind of credits that we're trying to focus on.

One final point on the quality issue, I just want to emphasize we are board leverage sponsored lending, we have strict hold limits, we've not changed those. And so we're not stretching the parameters in terms of the risk factors in terms of how we approach this. We simply have expanded the market territory and the focus of having frankly more bankers on the street looking for the business.

So turn with me now if you're following on Slide 5. Just a little bit more detail on loan growth. Like in past quarters, you'll see that our absolute total loan growth on a second quarter annualized basis is modest 0.6%. But remember we have a really big-time runoff in our ADC portfolio, 42.5% decline and a modest runoff in our covered portfolio, 20.5%. So if you exclude those, our normal kind of focus portfolio grew 3.4% on an annualized basis. C&I was 2.6%. Sales Finance, which is doing great, quality is phenomenal, the yields are good, 5.9%, residential mortgage 8.6% and specialized lending, as I indicated earlier, did really well, growing 11.9%.

So this lending strategy is working exactly the way we want, going 2/3 of our total net loan growth in non real estate. Our loan yields are holding up nicely, there's a lot of competition in the market no question but our loan yields decreased only 3 basis points versus the first quarter. So our folks are doing a nice job in terms of holding up our yields. Our growth did gain momentum here in the quarter, for example, our end of period loans were up $810 million, annualized 3.2% and if you isolate in on C&I, which is our primary thrust, the end of period or point-to-point was up $579 million or 6.9%.

So what you can see is that as we move through the second quarter, we started gaining momentum. Now if you recall in the first quarter, it started out really strong coming out of the strong end of the fourth quarter, but it started slowing a little into the first quarter as we went through this little soft patch. Now we're seeing that while it's still uncertain in the marketplace, to be sure, our volume started really building as we headed towards the second quarter, end of the second quarter. A lot of that frankly is where we're removing market share and really where we are being allowed to have relationship with companies that have lost other relationships with banking companies that have gone out of business or merged away and we, as a top 10 player, are a very good candidate to be a part of their banking group. And so we're having really good success in those, and a reason to be optimistic as we head into the corporate lending area.

So if you turn with me to Slide 6, just a couple of comments in the deposit area. I would say mostly our strategy of diversification is about as close to excellent execution as I can imagine. DDA is up 22.2%, interest checking up 67%. Our CDs as in previous 2, 3 quarters are down 12.8%, that was by design, recall our strategy there is to move out some of those more expensive, single service CDs because, number one, they're expensive; number two frankly, we don't need excess funding today and so buying expensive single service CDs makes no sense. So we've not been doing that. So total client deposits are up 7.1%, which is very good.

Our average client deposits, excluding CDs, increased $2.5 billion or 12.3% on an annualized quarter basis. Interest-bearing deposit cost did decline to 0.72% compared to 0.82% in the first quarter. So we're getting the diversification we want in the areas we want it in and that's helping us get diversified and bring our costs down at the same time, which of course is our strategy but it's pleasing to see that we're able to make it work.

And I would say that looking forward, we expect to see continued strong deposit growth in the second half of the year, which will allow us to continue to keep an appropriate amount of downward pressure on cost, which will help support our improving margin. So now let me turn to Clarke and let him give you a good bit more detail and color with regard to the credit quality year. Clarke?

Clarke Starnes

Thank you, Kelly, and good morning, everyone. I'm very pleased to share continued improvement and positive trends in our credit performance for the second quarter. We're particularly pleased that the pace of credit improvement accelerated meaningfully this quarter.

As Kelly indicated earlier, the credit improvement was broad-based, reflected by linked-quarter improvement in all key credit performance measures from early stage indicators to NPAs and core losses. This performance reflects the third consecutive linked-quarter improvement in each credit indicator and is consistent with our previous guidance and expectations to more aggressively resolve problem credits and move through the last stage of this challenging credit cycle.

These results are summarized on Slide 7. While we have shown you a similar slide the last 2 quarters, we are pleased to report greater decreases in many categories this quarter. Results included lower levels of watch list credits, delinquencies, performing TDRs, NPA inflows, NPLs, OREO, total NPAs and core losses. Given the successful and sustained execution of our problem asset resolution strategies over the last year, we would expect continued improvements in our asset quality results as we move forward. Over the next few slides, I'll share some additional color and key drivers for these improving trends.

Slide 8 details a significant linked-quarter decrease in nonperforming assets. Total NPAs were down 13.2% in the quarter, with NPLs down 16.8% and OREO down 5.7%. Total NPAs peaked 5 quarters ago and has steadily decreased with a cumulative reduction of approximately $1 billion.

Significant improvement in the inflows of new problem assets and continued strong execution of our asset disposition strategy drove these results. We sold $675 million of problem assets in the quarter, with average sales prices consistent with our targets. Disposition of the loans totaled approximately $448 million, which included retail mortgage of $271 million and commercial notes of $177 million, as well as OREO sales of $227 million.

Total problem asset sales over the last 12 months have totaled $2.2 billion, and the remaining commercial NPLs in the held-for-sale portfolio have been reduced to a level of only $116 million. These strong disposition efforts have supported the material reduction in our nonperforming assets. As we conclude this accelerated disposition strategy, we feel very good about the execution.

Due to the successful disposition strategy and lower NPL inflows, we now anticipate a more traditional but continued aggressive approach to problem asset workouts. But with less reliance and larger bulk sale efforts.

Turning to Slide 9. You can graphically see the 24.9% decrease in total NPA inflows. This reduction was driven by a 24.9% decline in commercial NPA inflows and lower inflows in each of our reported lending segments. This quarter's inflows were substantially below at 47% the levels we experienced in the second quarter last year. As I mentioned on the call couple of quarters ago, reducing quarterly commercial inflows to $500 million or below will allow us the opportunity for continued improvement in nonperforming assets without reliance on aggressive note sell efforts.

As we continue to work through our identified watch list accounts, we would expect ongoing improvement in the inflows each quarter. Talking about TDRs, total performing TDRs decreased 10% this quarter, including a 25% decrease in commercial TDRs. As part of our asset disposition strategy, we have been offering fewer modifications, particularly in our commercial portfolio, with the majority of our TDRs offered to our residential and consumer borrowers. This is evidenced by the fact that in 2Q, 30% of our performing TDRs were commercial versus 58% in the second quarter of 2010.

We still believe, however, that prudent modification efforts are appropriate for some of our borrowers and enhance our overall results. This is supported by the fact that 76% of our TDRs are in a performing status and 90% of performing TDRs are in fact current. Now let me comment on the new accounting guidance related to TDRs.

Based upon discussions with our accountants and regulators, we really don't expect much impact on our results, if any. We believe the conservative approach to accounting for modifications we have previously taken is consistent with the new guidance.

On Slide 10, you will note that our total charge-offs for the quarter were 1.8%, up from 1.65% last quarter. However, this amount does include $87 million in charge-offs, which include loss on sale and allocated reserves for the mortgage sale we completed this quarter. Excluding the mortgage sale, core charge-offs were 1.46%, down 11.6% compared to last quarter. This core level of charge-offs reflects the lowest level in more than 2 years.

Our charge-off guidance last quarter was that we would break through 1.5% by the end of the year, on the core basis we have obviously met this projection a couple of quarters early.

For the remainder of 2011, we expect total quarterly charge-offs at levels consistent with the core loss levels we experienced this quarter.

Due to the improved portfolio performance, our provision expense decreased this quarter and came in at approximately 70% of total charge-offs. However, the provision was 78% of core charge-offs. While our provision was down this quarter, we actually improved our NPL coverage ratio to 114%, excluding covered loans. I would also point out that when you adjust for the impact of the small colonial impairment we had this quarter, about $15 million, and the specific reserves associated with the mortgage loan sale, we had a reduction in our allowance of $78 million this quarter, which is only modestly higher than the $64 million last quarter.

Continued improvement in our credit quality performance will likely allow for further reductions in provision expense and other credit-related costs in the second half of the year. Finally, looking at Slide 11, we also experienced a very strong reduction in early stage indicators. Total watch list assets were down 9.5%. Early-stage delinquencies 30 to 89 and 90 days past due buckets were down 11.7% to the lowest level in 3 years. A 46.6% reduction in commercial delinquencies combined with better than anticipated seasonal results in the retail oriented portfolios drove this improvement.

As we've discussed numerous times during this credit cycle, our primary credit issue has been the stress in the single family ADC portfolio. As a result, we have been working diligently to reduce the exposure in this segment. I'm very pleased to report that we made excellent progress reducing balances $400 million, including held for sale this quarter. And additionally, NPL inflows in this segment for the quarter were down 47% over first quarter. With lower inflows and much reduced exposure, we believe the remaining credit issues in this portfolio will be very manageable.

So in summary, we're very pleased with faster pace of credit improvement this quarter. Everything that we are seeing from a credit perspective is very positive and continues to move in the right direction. The sustained execution of our asset disposition strategy, coupled with clear improvements in early credit quality indicators, including lower inflows, supports our confidence in our credit direction, which will remind you all we have significant earnings leverage due to the sizable credit infrastructure we have to build and these credit costs can clearly be reduced in the coming quarters. Therefore, we would expect further improved results and lower credit costs for the remainder of the year. With that, let me turn it over to Daryl.

Daryl Bible

Thank you, Clarke, and good morning, everyone. I'm going to discuss net interest margin, fee income, non-interest expense and capital. Continuing on Slide 12. Net interest margin for the quarter came in very strong at 4.15%, up 14 basis points from the first quarter. The margin continues to benefit from positive funding mix changes, lower cost of funding and increased yield on covered loans and lower nonperforming assets compared to last quarter.

Specifically, the 83 basis point decrease and the average cost of long term debt was the result of issuing new debt at favorable rates and repositioning of hedges, which can then be amortized over the expected life of the instrument. When you adjust for nonperforming assets and interest reversals to a more normalized level, net interest margin would be about 9 basis points higher.

Net interest income on covered assets increased $19 million compared with last quarter. Adjusting for additional provision of $15 million on covered loans, and an increase in the FDA fee loss share expense, net revenues decreased $19 million for covered assets.

With regard to margin expectations, we expect the margin to decrease to a range of about 4.05% to 4.10% for the remainder of 2011. This is driven by lower yields on loans, a less favorable asset mix and a slightly higher cost of long-term debt. However, margin continues to benefit from positive funding mix and falling costs of interest-bearing deposits. Also, you can see on the graph on Slide 12, we remain asset sensitive and are positioned for rising rates. Additionally, given the uncertainty of the rate environment, we also positioned ourselves to benefit should rates decrease 25 basis points.

Turning to Slide 13. Our fee income ratio increased to 40.8% in the second quarter from 40.1% in the first quarter. The increase was driven by higher insurance income, service charges on deposits, check card fees, bankcard fees and merchant discounts. As expected, insurance income is usually strongest in the second and fourth quarters. Additionally, insurance market is showing some signs of improvement due to better economic conditions.

Service charges on deposits increased $10 million, or 29.7% annualized linked-quarter, primarily due to the rollout of Bright Banking and other new service offerings at the beginning of the quarter. As a reminder, BB&T Bright Banking replaced free checking and, as Kelly said, the rollout has been very successful. Both check card and bank card fees remained strong due to increased activity and account penetration.

Mortgage banking income for the second quarter was $83 million compared to $95 million in the first quarter. This decrease was primarily due to a 33% decline in application volume, a lower net gain on MSR hedging and fewer sales and lower margins on production. Trust and investment advisory income increased 18.7% annualized linked-quarter as market conditions improved.

FDIC loss share income offset increased $23 million as a result of the impact of cash flow reassessments, which showed improving cash flows from covered assets. In addition, the balances at the end for accretable yield increased to $2.5 billion from $2.3 billion last quarter. This is the result of decreased loss projections in the covered Loan portfolio.

The net loss on securities resulted in an $18 million in OTTI, largely offset by gains on nonqualified pension assets. Finally, we are modifying our prior estimate for the impact of Durbin, posting order change and Reg E. We currently expect the total annual run rate impact of $395 million in lower revenues versus our prior estimate of $450 million. To date, we have identified offsets for about half of the impact to service charges and check card fees. We are working on additional revenue generators to close the gap further. As this process moves forward, we will continue to introduce new product and service offerings for our clients.

On Slide 14, our efficiency ratio improved to 55.8% compared to 57.1% last quarter, primarily due to increased revenues. We also achieved positive operating leverage and expect this to continue for the second half of the year as non-interest expenses are expected to decline.

Personnel expense decreased $11 million or 6.4%, mostly due to lower FICA and unemployment taxes. FTE employees increased 252 this quarter but are essentially flat compared to the second quarter last year. Our second quarter hires include revenue producers in Wealth Management, capital markets, electronic delivery and mortgage lending. Professional services increased $13 million due to revenue producing business expenses and specialized lending, specifically premium finance and small ticket equipment finance, in addition to legal expenses increase due to the credit environment.

Other non-interest expenses increased $21 million, largely due to litigation-related recovery in the first quarter of this year. Finally, the second quarter effective tax rate was 21.8%, in line with our expectations.

Turning to Slide 15, our capital ratios continue to remain among the strongest in the industry. Tier 1 common improved to 9.6% from 9.3% last quarter. Tier 1 Capital is 12.3% compared to 12.1%. Leverage capital is 9.5% compared to 9.3%. Tangible common remained healthy at 7.2% and total capital at 16% compared to 15.8%. Our internal capital generation continues to provide support for both organic and strategic opportunities.

Our current estimate of Tier 1 common under Basel III is 8.3% up substantially compared with last quarter. We believe we will meet the Basel III requirements, including the SIFI buffer once the regulators publish the U.S. Capital rules. In addition, we are well ahead of our projected capital levels as presented in our annual plan. This positions us with additional financial flexibility.

Let me reiterate Clarke's comments related to the new TDR accounting guidance. We feel very confident that the accounting change will not have a significant impact on BB&T, and we feel certain that our TDRs will continue to decline as we move forward. With that, let me turn it back to Kelly for closing remarks and Q&A.

Kelly King

Thank you, Daryl. So as you can see, overall, we had improvement in our credit trends and credit trends accelerated. We had strong fundamentals across our business lines. We are successfully accomplishing all of our strategies that we've set out, many of which we set out 3 years ago. And we continue to invest to drive revenue in loan growth and we're seeing that realized. And we believe we are providing the best value proposition in our market, which is ultimately the most important driver of long-term revenue and profitability. So at the end of the day, we believe our best days are ahead and look forward to demonstrating that over the next several quarters and now we'll stop and entertain your questions.

Tamera Gjesdal

Thank you, Kelly. Before we move to the question-and-answer segment of the conference call, I'll ask that we use the same process that we have in the past to get fair access to everyone. [Operator Instructions] And now I'll ask Kelly to come back on the line and explain how to submit your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go ahead and take our first question from Mike Mayo with CLSA.

Michael Mayo - CLSA Asia-Pacific Markets

I just wanted to follow up on the growth in the commercial loans. If you had 3 categories to give the reason to, one reason would be there's a pickup in commercial loans generally, the second category would be market share gains and the third category would be increased risk-taking. Now how would you explain the commercial loan growth? And also I heard 11% growth versus the first quarter, that was just the middle market loans, that was not the shared national credits, is that correct?

Kelly King

Yes, that's right. Clearly, the primary driver of ours will be market share movement, no question about that. The second would be, to some degree, some pickup in loan growth in general as the markets began to get a little more confident. Although to be honest, there's a lot of reservation out there because what what's going on in Washington and Europe, et cetera. And the third one increase in risk will be 0 in terms of impact on us.

Michael Mayo - CLSA Asia-Pacific Markets

And one follow up, what is the loan utilization rate this quarter compared to last quarter?

Kelly King

It's about 34%, 35% and it's still kind of flat.

Michael Mayo - CLSA Asia-Pacific Markets

Okay. So it's really market share expansion?

Kelly King

That's right.

Operator

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

Matthew O'Connor - Deutsche Bank AG

I just want to drill down a bit on the funding side of the equation. We're seeing some of the stronger banks be able to lower their funding costs. We saw that from you guys, both the deposit rates came down, the long-term debt cost came down. Maybe just a little more color in terms of what drove some of the decline in long-term debt, specifically, and just how much more opportunity there is to bring down the funding costs in total from here?

Kelly King

I'll take part of that. Daryl will cover the debt part. As you can see from our numbers and really kind of from general industry numbers, the industry is kind of flush with deposits right now because consumers aren't spending as much. They are paying down debt and/or saving more, savings rates are up pretty significantly. Businesses are remaining very, very cash flush and so save money it's letting in [ph] wouldn't be a particularly strong overstatement. And so while you want to be fair to your clients, it certainly gives us the opportunity to manage down our rates, particularly when we have as I indicated earlier single service site clients. So I think there is still opportunity. Our projection is that at least for a while now, and that's certainly is several quarters, that most likely is that rates will be relatively flat. There's just no energy in the market out there to cause the Fed or anybody else try to raise rates, if anything if they could figure out how to lower them, they probably would. So I think there's a little bit opportunity to go down, obviously, we're pretty close to floor so it's not dramatic there. We're down with on the deposit side, and then Daryl can speak to the debt side.

Daryl Bible

So just to reiterate what Kelly said, we expect our deposit costs to go down probably 3 or 5 basis points again this quarter. On the long-term debt, it's really a function of some new debt issuances we did and we swapped those and we also were able to unwind some hedges and able to amortize those gains over the estimated life. So the combination of those 2 really had our long-term debt cost come down and that should stay down at that level maybe bounce up a little bit but it should stay relatively close to that level that we're at on a go-forward basis for the next couple of years.

Matthew O'Connor - Deutsche Bank AG

Okay. And then just as my follow up, obviously there's been a lot of de-risking of the credit book the last few quarters here, out of cost, it's been offset with the revenue strength. But as we're thinking about the asset sales and credit improvement going forward, there are more bulk sales that you would expect and some related hits from that? Or is it more just kind of slugging through loan by loan at this point?

Clarke Starnes

This is Clarke. I think the latter is the best description. We don't anticipate any additional large transfers, remind you all last year we transferred almost $1.9 billion in our strategy and we've got that notionally down to $230 million and now $116 million on a book basis and we're almost out so we feel very good about that. So what we're transitioning to now is more of the single name credit by credit aggressive disposition strategy. And included this quarter, we did a good bit of that so we think within our current charge-off guidance and problem asset improvement guidance that we will be able to do those types of strategic liquidations without a big impact on losses and still have good credit improvement.

Operator

And we'll go to our next question from Todd Hagerman with Sterne Agee.

Todd Hagerman - Sterne Agee & Leach Inc.

Clarke, I just wanted to drill down a little further on the disposition strategy. Just as I think about the level of OREO, you're still carrying in excess of $1 billion. The held for sale component came down just under $2 billion this quarter, most of that through the commercial line. But the question centers, as you talk about this loan by loan kind of slugging it out over the remaining quarters, if you will, I'm just trying to think about, how do I think about underlying credit qualities related to that held for sale bucket and that excessively large -- the proportionally the OREO category? How do I think about the credit quality trends and the pace of improvement going forward?

Clarke Starnes

Fair question, Todd. The way we think about it, I mentioned for us mathematically, we really needed to get new NPL inflows in the commercial side and down under $500 million. If you just look through how we would reconcile through that, our movements to OREO and how our loss taking and then what we would call resolutions, those would be upgrades to accrual. They will be short sales with our borrowers. They would be strategic one-off sales or frankly asset sales or payments by the clients. And so at a lower inflow number, we can make all that work even with the levels we're carrying now and see what we think steady quarter-to-quarter decreases in the NPA levels without any significant impact on our loss guidance. So it all comes down to reducing those inflows, and we do have very active appetite still from the strategic investor community and with the borrowers contacts and for a number of these assets, so we're able to work many times cooperatively with the borrower or sell the note ourselves without having to resort to a big bulk sale.

Todd Hagerman - Sterne Agee & Leach Inc.

I hear what you're saying, Clarke. But as I think about it, I mean, should I think about just again that kind of pace of improvement, and kind of the level of mortgage within those categories, is it kind of a, as we've seen here in the last couple of quarters kind of a mid- to high-single digit kind of a pace? Or can we look for something a little bit greater than that?

Clarke Starnes

Usually, I think about it with the current economic outlook barring any significant shot from here and even with a slow economy, what we would expect is a mid- to high-single digit improvement each quarter or more. And so it's going to depend about how aggressive we are but we feel very comfortable we'll stay in that steady range.

Operator

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

Craig Siegenthaler - Crédit Suisse AG

Just first on your longer term kind of NIM expectations here, are you still kind of expecting a core NIM in the 3.70% to 3.80% range. And I'm also wondering how did your underlying core NIM trend in the second quarter from the first quarter, you back out colonial elevated NPAs and excess liquidity?

Daryl Bible

So Craig, if you look at long-term net interest margin, we're still in the 3.70%, 3.80% range, that hasn't changed. As far as the core margin goes, our core margin did expand and it's mainly driven by the benefits that we saw on the right-hand side of the balance sheet both on deposits and long-term debt. So it was up easily probably 10 of the 14 basis points on a core basis.

Craig Siegenthaler - Crédit Suisse AG

Got it. And then when I look at Slide 13 on your expectations for Durbin, Reg E and also order change, if I just think about the run rate of revenues now and then I move in to the fourth quarter when Durbin begins, what is the impact, if you can give us annualized or on a quarterly basis, just some Durbin and order change because really Reg E's are in the numbers now?

Daryl Bible

Yes, that's right. So if you just look at our line item, check card fees, we would expect that to fall about $40 million from third to fourth quarter due to Durbin. So that will be the impact from a quarter-over-quarter basis. If you just look at the interchange, you can annualize that. That's probably about in the 150 range, there's your seasonality on a quarter-to-quarter basis.

Kelly King

Keep in mind, Craig, that while we've made changes that's pretty substantially to cover all the issues that we had on the Reg E and the fee income and the NSF side, we've not yet made any changes with regard to picking up or replacing them from the debit side. We're evaluating, like everybody else, a lot of strategies. We will be executing strategies to substantially replace that. We're trying to be careful, we just literally got the final ruling in the last couple of weeks. So we'll be doing some testing. We'll be doing some careful thinking about this. Daryl's right, we'll probably get that kind of change in the fourth because we're not going to rush out and make dramatic changes because this a very delicate thing because debit cards are now the majority of the payment system. And so we have to do some testing with our clients, figure out where the sensitivities are and where can we best recover our cost. And make no mistake about it, over a period of time, we will recover this cost and recover revenues because it's too significant for us to just absorb. And I think the market is going to figure out how to do it, it may take a few quarters but we will figure it out.

Operator

And we'll go to our next question from Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley

Just want to touch base on Slide 14 where you talk about the expense ratio. You indicated positive operating leverage this quarter and that you think that's going to continue going forward, could you just give us a sense of how you're thinking about that trajectory over the next several quarters given the puts and takes on things like Durbin, as well as what you expect you can get to as a normalized "efficiency ratio"?

Daryl Bible

So for the next quarter or two, Betsy, the way we're going to get positive operating leverage is when we get on the expense side of the income statement. Our revenues we expect net interest income to be higher, we expect fees to be down a little bit in the third quarter. But our expenses will come down, which will help drive the operating leverage. We're still expecting, when we talked last quarter, our efficiency ratio to continue to trend down, will probably be in the mid-50s the rest of this year, but start to move down next year, especially if this credit costs continue to decline. And our target is still to get back, historically we've been in the low 50s. We believe our operating run rate can get us back to the low 50s. We've got to really get through all that asset quality to come down to more normalized levels.

Kelly King

And Betsy, just a little more color, keep in mind that there's still embedded in our expense structure a kind of cost related to credit. I mean legal costs and it's allocation of time of our officers that are devoted to credit resolution versus revenue and it's just on and on and on. So that will slowly and steadily come down. And also to be honest over the last couple of years, we've invested a lot of money in building out our infrastructure to have stronger risk management systems and economic capital systems and so forth because as a top ten institution today and with Basel III around the corner, we thought it was necessary to invest heavily in building out those systems so that we are first-class top 10 institution, which we've largely done now. So as those costs, one, the credit costs tend to go down as the infrastructure cost begins to moderate, that begins to release some of the pressure on the efficiency ratio.

Betsy Graseck - Morgan Stanley

So the follow up is that you've got capacity internally to do more given the infrastructure investment you've done, as well as on a capital perspective, you indicated internal capital generation is high enough to support not only organic but also offering for strategic growth. Could you just give us a sense as to your mind as what you're looking for as it relates to strategic opportunities?

Kelly King

Yes, so Betsy in terms of strategic opportunities, that's obviously the more significant opportunity in terms of levering infrastructure cost. It's kind of interesting, the strategic margins, the merger scenario, I think is beginning to heat up probably about 1 year later than we all thought, but it is beginning to accelerate. We certainly plan to be aggressive with regard to looking at acquisition opportunities as we have. But I always try to remind everybody that there's so much oversized emphasis on mergers that the number one focus for us is on organic growth. We have such great markets and such great under-utilized strategies that we simply are going to make sure our number one focus is on organic. Notwithstanding that, however, we will be looking at the various opportunities that are available. As you know, they're very unpredictable. But when we approach those, we will approach them as we have said and that is that they have to meet our 3 criteria. Number one, they have to be strategically attractive; number two, we have to be able to bring the asset quality, we're just not going to take on an institution with a bunch of asset quality that we can't control, I mean we control it through the mark, [ph] but of course it has great implications for your price; and then third is it has to be meaningfully attractive to our existing shareholders, otherwise, it makes no sense to us. So as long as they meet those criteria, we will pursue them and to the sense that they do not, we will pass them.

Operator

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

Matthew Burnell - Wells Fargo Securities, LLC

I want to follow up I guess on another direction on Betsy's question in terms of the capital levels. Obviously your capital levels are quite strong now particularly the Basel III Tier 1 common ratio being above 8%. Your dividend payout ratio now, however, is above 30%. So how are you thinking about potentially increasing if you do buybacks in an environment where you continue to exercise the discipline that you've shown already in terms of acquisitions?

Daryl Bible

Matt, this is Daryl. What I would tell you is that we target our dividend payout ratio to be between 30% and 50%. I would expect that to stay in the probably lower half of that range going forward. As our earnings continue to improve, I would expect our dividend to improve proportionately to that. And as far as buyback goes, we really do buyback at the tail on the dog, really targeting what capital you need it to be. And we need to meet our organic growth opportunities first. We still continue to look at strategic opportunities at the end of the day, if we still have excess capital, then that will be something that will be considered but I wouldn't expect a buyback anytime this year at least.

Matthew Burnell - Wells Fargo Securities, LLC

Okay. And maybe Clarke, could you provide a little more color in terms of the credit infrastructure comments I guess that Daryl made and what the size of those are relative to the operating expenses that you're currently reporting?

Clarke Starnes

If you recall, Matt, last quarter Daryl laid out the non-personnel related, what we believe, direct cost on an annualized basis to be probably $750 million or more. We feel still feel that's a good proxy. But beyond that, to Kelly's point, we have several hundred people and a number of associated cost in a workout infrastructure area that we think has substantial capacity to either be brought down or support features strategic opportunities. So we think between the 2, the leverage is pretty significant.

Daryl Bible

And we're just really scratching the surface on that improvement. It's just now starting to happen.

Clarke Starnes

That's right, we're just now beginning to see the significant reduction coming quarter, for example, in the OREO expense right now. But the majority of it, we have not realized yet.

Operator

And we'll take our next question from Bob Patten with Morgan Keegan Investments.

Robert Patten - Morgan Keegan & Company, Inc.

That was my question but just in general, where do you guys see the opportunities based on what you're seeing, it looks like end of period loans for a lot of the banks are starting to move a little versus average for the quarter. So it looks like things have picked up. But is it in the small business, is it the C&I, is it again Mike Mayo asked it, but is it taking share, is it acquisitions, what markets, is Birmingham your best market, where do you really see the opportunities?

Kelly King

It's pretty broad-based in terms of markets. Obviously, we're getting really phenomenal opportunities in places like Birmingham and Mobile, Alabama and Huntsville, Alabama and places like that where we have good existing infrastructure, and yes, have never been a part of the lending operation in that market. So same thing in Florida. And so those are going really well. But also when we are pursuing these verticals specialty areas in various parts of the country, we're in a solid base in C&I. We are having tremendous success because again, if you kind of think about it like this at about the same time we decided that we wanted to be a participant in that national corporate middle market space, a lot of these companies were looking for another partner because a number of their existing partners had gone away. The Nat Cities of the world and the Wachovias of the world and the First Union. So we were looking at the very same time they were receptive and so it's been very receptive but it's across the board within C&I. Small businesses, it's not yet really moving to be honest. That's the part of the business economy that's still struggling. It's one of the largest systemic issues in terms of job creation because they do create the majority of the jobs. But they're still struggling. Now the fallout rate in that market is slowing, as they get stabilized, but as you can imagine, they're still very reticent to go out and invest, they're still kind of hanging on by the fingernails so I think the large market is just doing better. They just have more flexibility to respond to the environment and frankly they have stronger balance sheets and so they're willing to make more investments. So I think that's why you're seeing that. And then in our particular case it's just a lot of market share movement.

Robert Patten - Morgan Keegan & Company, Inc.

Okay. And then to Clarke. Clarke, when you guys look at your annual reviews for lines of credit and small business middle-market, are you seeing improvement year-over-year in the financial presentations that the companies are giving you in terms of updated appraisals and updated financial information?

Clarke Starnes

Absolutely, Bob. I would say, while businesses are very reticent to borrow, they are absolutely improving their health year-to-year. And so particularly in the middle market side, the improvement in operating earnings and particularly in their balance sheets and their liquidity levels looks really good. They're just very reticent to borrow and to Kelly's point, majority of what we're seeing and find again to is refis or dividend recaps, very little fix plant and equipment expansion, a little bit of M&A. So again improving strong-looking balance sheets, just not a lot of new activity. We're just fortunate to be able to participate in a number of those refinances.

Operator

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

Brian Foran - Nomura Securities Co. Ltd.

I guess on the Insurance Brokerage business. Recognizing the seasonality but focusing more on year-over-year growth, we've gone from negative 4 in 4Q to negative 1 in 1Q to plus 4 in 2Q. Is it possible, do you have a sense of how much that is pricing versus how much of that is market share and for those of us who don't know the business as well, is mid-single-digit growth rates reasonable gets at the go forward or is it still accelerating right now?

Kelly King

It's a good question, Brian. So we are still in this proverbial soft market. There's been just a little bit of a price improvement in the wholesale space which precedes the retail, but not dramatic. So we've not yet turned to a hard market. And while all of our folks predict that it is right around the corner, I'll say they've been saying that to me for several years. And so I think the fact is there is relatively excess capital still in that business. And as long as it is, you're going to stay the price is kind of like where they are. So our increase is market share movement. We've clearly been very successful in the marketplace in terms of our strategy. So typically, what you see if the market is down 4% or 5%, you might see us up 1% or 2%. So we tend to have that kind of spread over the market based on our strategy. And I really kind of think that's the way to think about it going forward. I mean, I think that's I'll say to next year, assuming no change in the prices, then you can kind of think about our growth in the 2% kind of range, maybe 3%. If you get some price improvement, this thing is like an annuity. I mean it is a lever factor that is like 1:1. So when we do hit the hard market, which is why we keep investing in this and continue to make acquisitions because it's a great business for us today with about $1.1 billion of revenue and very profitable. We're the most profitable and the most productive of the top 10 brokers and have been for the last 6 years in a row. And so it's a really good business. Not growing quite as fast as we'd like but got a lot of future opportunities.

Brian Foran - Nomura Securities Co. Ltd.

And then if I could follow up on the swap benefit or the hedging benefit, you talked about on the long-term debt, is this like mechanically do you pull forward an amortization gain and then that gain steps down each quarter going forward, which I guess would be akin to what we saw at Huntington last year? Or is this more like you had a basic [ph] swap that was out of the money, it now ends so there's a consistent drag that just doesn't show up in the numbers. So I guess what I'm really is does the benefit from the swap amortization thing you referenced decrease over time? Or is it a constant benefit going forward?

Daryl Bible

Yes, Brian. It's Daryl. Two things to that, so part of it was we did some new issuances that we put a new swaps and we're basically it's going to be a floating-rate to us so, some of the benefit you saw there will change if LIBOR changes. Right now, LIBOR is down a little bit from when we put them on. But that's probably forecasted to be relatively stable for the next year or so until the Fed decides to raise rates. On the piece that was unwound from a gain perspective, it's more on a level yield type basis. I would expect it probably to bleed down a little bit, it shouldn't be substantial. But I would say that the benefit should cause the long-term debt to go up a couple basis points a quarter. But substantially, you still have that benefit there for the remaining estimated life of those instruments. So we feel pretty good for the next couple of years that what you see in the benefit there is going to be close to that, just up a little bit.

Operator

And we'll take our next question from Ed Najarian with ISI Group.

Ed Najarian - ISI Group Inc.

Most of my questions have been answered, but I just have one quick question. On the back of a pretty good quarter with provision to loan ratio, I think, in about the 1.25 to 1.30 range. The ROE was still at 7.25%. So I know you talked about operating leverage, revenue growth, potentially some more credit quality improvement, but what's your ROE target over the long-term for this company? And how quickly do you think you can get to double-digit ROE? And maybe what are some of the near term drivers that will that get us to a double-digit ROE?

Kelly King

The important question on that we're all wrestling with is what is the E, what are the rate equity levels but if you kind of assume kind of...

Ed Najarian - ISI Group Inc.

I think you're kind of at your appropriate E right now, it's not like you probably have to go much higher.

Kelly King

Yes, we agree with that absolutely. So clearly, we think in the new world, the new normalized ROE is in the 14% to 16% kind of range. It certainly will be improving steadily, literally I think quarter by quarter. And the big drivers are we still got huge costs, as Clarke just alluded to with regard to credit cost in the business and as those credit cost come down, there's really not a lot else in the business that has to change over time for us to get back to kind of that normalized kind of level. We'll be changing and improving a lot of other things in terms of efficiencies and other types of revenue, but the big drag on ROE today is still lock-in credit cost.

Ed Najarian - ISI Group Inc.

So you think you can double -- so from this kind of performance that you can double the ROE of the company?

Kelly King

Yes.

Ed Najarian - ISI Group Inc.

Okay. And literally that can happen from revenue growth, expenses, all of that is enough? Because I mean it seems, again, I just look at the numbers and certainly, there seems like a number of things that you continue to improve. But it doesn't seem like there's a massive amount of additional credit leverage given where the provision level was this quarter. There's some, but it seems like given the amount of reserve and capturing where the provision was that a big chunk of that is behind you. How would you respond to that?

Kelly King

Well, you're just looking at a part of the equation and that's understandable because it's hard to see. But we know and it's what we've kind of outlined I think for the last quarter, but the embedded cost in credit resolution throughout the entire income statement is huge. And so when you begin to let that lead off over time in addition to some more normalized levels of reserve and provision cost, then you begin to get it. Let me get Clarke to kind of review again kind of the issue of all of those embedded costs.

Clarke Starnes

We think, again, the direct cost to loan are at least $750 million and when you add in all the personnel side, you could be heading up toward north of the $1 billion. And then the other thing to remind you all that we said last time that we still believe with our current view of loan asset mix and as we move forward with our diversification strategy, our long-term risk appetite around loss taking with that mix is probably 60 to 80 basis points annualized losses. And while we don't know what the new world will totally be around allowance, we would expect that to maybe be 2x that level. So I think the combination of the credit cost coming down and a more normalized provisioning world and allowance levels certainly make a huge impact.

Ed Najarian - ISI Group Inc.

In terms of the operating cost expense savings, that $750 million to $1 billion, how much of that is personnel related?

Daryl Bible

Yes, so out of that $700 million, I would say when we came up we were very conservative I would say little over $100 million was FTEs, which we know we when came up with that number that some of the people that are on the workout groups side now will get redeployed as revenue producers. So if we were just being true to that, we would have much more decrease in those support groups. But we think long-term, we're going to redeploy a lot of the FTEs back into the field to actually produce revenue. So we're little bit conservative on the actual savings on the personnel side.

Operator

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

John Pancari - Evercore Partners Inc.

On the margin, you talked about your outlook implying some modest lower loan yields, can you talk about the loan pricing that you're seeing right now and how competition might be impacting your expectation for loan yields in the coming quarters?

Clarke Starnes

It's a fair question. What we've seen is that there's absolutely pressure in the marketplace particularly in the segments we're playing in on the middle-market side and it's coming down. While it's still very favorable relative to the peak in '07, it is coming down and what I would suggest to you is that in our case that segment in the marketplace we've seen pressure probably in the 25 to 50 basis points range thus far. So it's clearly a lot of pressure out there, but that's kind of our experience to date.

John Pancari - Evercore Partners Inc.

Okay. And is it mainly on pricing? Are you seeing some compromise in terms?

Clarke Starnes

It started with pricing and certainly the most pressure is on pricing but we are beginning to see in a number of structural issues developing in and around tendering term and other deal structure issues and frankly, we're not just choosing to participate in those areas. So we are seeing risk-taking out there in the marketplace at a higher level, but even all that being said, it is still better structures than we saw [indiscernible].

John Pancari - Evercore Partners Inc.

Okay. And then lastly, can you just talk about your plans for reinvestment of liquidity into the securities portfolio? I'm sorry if you may have indicated some expectations earlier on the call but you put up some good growth in the bond portfolio this quarter and just wanted to get your thoughts about what type of investments and duration that you're looking at for the coming quarters?

Daryl Bible

Yes, so John, for what we've bought this past quarter, we were really conservative on the durations. We bought floating rate CMOs, short fixed rate CMOS and adjustable-rate mortgage backs which sure drove that increase. As our liquidity continues to improve, you will probably see us continue to purchase more securities next quarter, trying to manage our overnight liquidity position. I think depending on what we see right now, we will probably do security similar to that, we may start to go out a little bit longer with a different mix of securities. So I think it's the combination of securities going forward.

Operator

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

Gerard Cassidy - RBC Capital Markets, LLC

I may have missed this, so I apologize if you've already answered this question, but do you guys have any levels where you are comfortable with the commercial mortgage portfolio? When do you think that and the ADC portfolio will bottom out and will stabilize?

Kelly King

I'll take part of this, Gerard, then Clarke can chime in. The ADC portfolio is basically at the bottom. I mean part of it will go down a little bit more but it's pretty low. And we said $2 billion to $3 billion and it's kind of in the range. Then the CRE side we've actually got some opportunities now because we have a pretty good appetite for multi-family. And we're fortunate to have a really good production vehicle in multi-family in our Grandbridge operation. And so we can take that and let's say take minus 2% CRE portfolio, and we can actually begin to grow it now over the next several quarters. So that's a growth opportunity, a revenue opportunity. And the way we look at risk diversification, because our risk tolerance issue was not around income-producing properties, it was around ADC. And so, yes, the ADC has about found its bottom, might start growing a little bit by the end of this year but won't be a material issue. On the other hand, CRE will be a growth opportunity for us.

Gerard Cassidy - RBC Capital Markets, LLC

And then the second question on the mitigation strategies for the Durbin amendment, what's the prospect in you guys opinion that banks move to an actual annual fee for debit card similar to what credit cards charge today or even if you go back 25 years ago before the ATMs charged for the foreign transactions, they were for free and then obviously now we all pay a fee. Do you think the industry will be brave enough to step forward and say, you know what, because of this we need to charge $25 a year for a debit card?

Kelly King

I absolutely do. Ironically in a lot of these areas we're going back to the future. So yes, I think that whether it will be an annual fee of $25 or whether it will be $2 a month. I don't know, but my guess is when it settles out, it will be something in that neighborhood.

Operator

And we'll go to our next question from Kevin Fitzsimmons with Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P.

Just 2 quick questions, just reserve releasing not a surprise that, that's part of the story here but just wondering if you can comment on the pace to expect going forward. When I look at the pace this quarter, I'm thinking it's probably a little elevated from the disposition activity you had with charge-offs. So do we look at it being more at pace from the prior quarter? And then secondly, Kelly, just wondered if you can comment on M&A, in non-bank related M&A and specifically not to get specific on an institution but there's been a lot of discussion about a southeastern based broker/dealer that's on the block and again just generally conceptually, is that even something we should think about you all looking at and wanting to add to in your business?

Kelly King

Clarke will take the first part and then I'll do the M&A part.

Clarke Starnes

Kevin, regarding the reserve release, I think you're pretty much on track, the way we think about it and believe that you should think about it in this quarter when you look at our core provision, our total provision was $328 million. We had a $15 million impairment for a small colonial pull, so if you adjust for that, we also had $53 million of allocated reserves for the resi mortgages we sold, so obviously those reserved were tied to those loans. So when you adjust for that the way we think about the allowance reduction for the quarter was about $78 million. That was about a little under 19% of our pretax. And if you look at last quarter, our allowance reduction was $64 million, which was actually 22% of pretax. So what drove all this is credit quality improvement and given the fact that we're not going to be doing any large bulk transfers at this point, I think you'll see a fairly steady normalized improvement in provisioning provided and we're very comfortable that we'll achieve this, that our quality continues to improve.

Kelly King

On the M&A side, I think you can expect to see us continue to do insurance acquisitions. And admittedly in the last year and a half or so we haven't done as many, but the market really kind of changed, I think with the soft market, we've the overall uncertainty in the market, a lot of sellers just kind of went into hibernation for a while. But that's really changed in the last 90 days. So I think you'll see us continue to pursue a fairly aggressive bolt-on strategy for insurance acquisitions. On the broker/dealer side, it's unlikely you would see us do anything of any material size there. Number one, the one you're probably referring to, we suspect probably won't end up with a bank, but we're pretty pleased with the broker/dealer arrangement we have, it supports our franchise very well we can grow it organically. We don't really see the broker -- acquiring a large broker/dealer is an essential part of our business. We have a really good robust Capital Markets business in a strong retail operations. So you might see us do a small bolt-on type of thing but any type of big one I wouldn't expect to see in our future. One thing you may see though, Kevin, that I think a lot of people will begin to think about is kind of a nontraditional bulk acquisition, which you somewhat characterize merges [ph] as, I think you may see more non-whole company assets purchases as this whole remediation process unfolds. You haven't seen too much of it so far but I think you'll see more of that in the future and that's something we're going to be certainly looking at.

Operator

And we'll take our next question from Jefferson Harralson with KBW.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc.

I'd like to follow up on Pancari's kind of security deal question, seems like there's some opportunity there. Overtime if you want to, what is the current duration of the MBS portfolio? And I see that 1.69% yield there, what could that be without a lot of extra effort?

Daryl Bible

Yes, so Jefferson, what I can tell you is about 30% of the portfolio is floating rate so when rates do increase, we will get benefit and those yields will rise. I will tell you that our duration right now, the portfolio, is in mid 3% range -- or 3 year range. It fluctuates depending on prepayments. But I would say it's from 3.25% to 3.75%. Going forward, I would just say, we expect purchase to be mixed, what I said earlier. Some fixed rate, longer duration as well as some ARM and floating rate securities.

Tamera Gjesdal

Although we have a number of callers left in the queue, we are out of time for today's conference call. Daryl and I will be reaching out to you for your follow-up questions. Thank you, everyone, for your questions. We appreciate your participation today and give us a call if you need anything. Thank you.

Operator

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

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