Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

BB & T (NYSE:BBT)

Q3 2011 Earnings Call

October 20, 2011 8:00 am ET

Executives

Kelly S. 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

Daryl N. Bible - Chief Financial Officer and Senior Executive Vice President

Tamera Gjesdal - Senior Vice President of Investor Relations

Clarke R. Starnes - Chief Risk Officer and Senior Executive Vice President

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Matthew O'Connor - Deutsche Bank AG, Research Division

Nancy A. Bush - NAB Research, LLC, Research Division

L. Erika Penala - Merrill Lynch

Christopher W. Marinac - FIG Partners, LLC, Research Division

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Betsy Graseck - Morgan Stanley, Research Division

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Brian Foran - Nomura Securities Co. Ltd., Research Division

Ed Najarian - ISI Group Inc., Research Division

Operator

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Third Quarter 2011 Earnings Conference Call on October 20, 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, David, 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 third quarter of 2011, as well as provide a look ahead.

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

Before we begin, let me remind you BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, beliefs or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Additional information concerning factors that could cause actual results to be materially different is contained 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 S. King

Thank you, Tamera, and good morning, everybody. Thanks for joining our call. We recognize you all have a busy morning, so thanks for being with us. We're very pleased to have a chance to talk to you about our quarter. We think it's a very strong quarter. In fact, it's the best quarter we've had in 3 years. So we're pretty pleased. I'm on Slide 3 if you're following along. Cover a few highlights.

So net income available to shareholders totaled $366 million, which is up 74.3% versus third quarter of '10. EPS was $0.52, up 73.3% versus Q3 '10. And if you look at versus Q2, we made $0.44, so it's up an annualized 72%, so very strong. And I would just point out with regard to earnings in general, as a highlight, that we did start in the third quarter an expense and revenue optimization process. We're basically -- we're asking all of our business leaders to reconceptualize their businesses, recognize, and we think we're in for a relatively protracted period of somewhat slow growth in the overall economy. And so we're really taking a hard look at our revenues and expenses and -- but more from a conceptualization point of view versus an absolute cut perspective. So we're pretty optimistic about what that will do in future periods with regard to earnings improvement.

Taking a look at revenues. We're very pleased that tax equivalent net interest income totaled $1.5 billion. It was up 18.3% versus our second quarter. Now that was substantially influenced by a substantial increase in securities, and we did have some headwinds on the fee income side. We did have some OTTI negative impact. We had about a $37 million loss and write-down on loans held for sale, which we think is kind of onetime cleanup. We did have a typical seasonal insurance decline, which we see every time this quarter, but it's pretty significant. And we did have a meaningful FDIC loss share, negative. But remember, that's more than offset in net interest income. So some headwinds on the fee side, but some very strong underlying fee income business performances as well.

So if you look at total revenues, second to third annualized, if you exclude OTTI and loss on held for sale, which we consider to be unusual, it would be up annualized about 3.5%, so pretty strong in this environment. We did again produce positive operating leverage. And as I've mentioned to you before, we continue to selectively hire revenue producers, so we continue to invest in our revenue production and feel relatively pretty good about it.

Credit quality. Was just another great quarter. Clarke can talk to you in more detail about it, but in the highlight perspective, OREO, NPLs, performer TDRs, NPL inflows, watch list loans and charge-offs all declined, so it was another great quarter. NPAs I'm very pleased to say decreased 11.5%, and NPA inflows decreased 12.1%, both stronger than we had originally given guidance on.

We had relatively strong loan growth given the environment we're in. Average total loan growth was 4.3% versus Q2. If you look at average loan growth, excluding ADC and covered and other acquired portfolios, it was a very strong 7.4%. So we feel really good about that, and it was broad-based and with the faster pace of fast quarter. And so we're seeing good, strong loan growth in C&I, Direct Retail, specialized lending and mortgage. I'll give you a little detail on that. And right now we're seeing no signs of slowing, so our outlook is positive with regard to our loan book.

Deposits just continue to be phenomenal with noninterest-bearing deposits increasing $1.2 billion, or 21.8%, in the third. Average total deposits increased $8.6 billion, or 32%, so we're still seeing a flight of deposits into the banking system and certainly the stronger banks from a quality perspective.

If you look on Slide 4. We do have 3 unusual items I just wanted to mention to you. So I said we did have some loan in write-downs, losses in write-downs in our NPA held for sale. Remember, we've been working that down over the last year. We got a small amount left in there, so we did take a cleanup mark on that. We expect that portfolio to be basically gone within the next month or 2. But it was a pretax negative $37 million, which was negative $0.03. We sold a leverage lease during the quarter, which produces a pretax $16 million loss in other income, but we also had a $32 million positive tax effect. Substantially, most of that was on the -- a positive effect on the seller of the lease. There was some small additional independent true-ups, but that was a positive $0.02. And then this -- we had some other than temporary impairment on some securities, which was $39 million pretax, or a negative $0.03 on EPS. We do not expect much of any of that in the fourth. We just took a pretty aggressive position with regard to that in the third.

On the fifth slide. Just a little more commentary for you on our balance sheet. And I want you to use [ph] this time to think about our strategies in terms of kind of our community bank strategy, our corporate strategy and our Special Lending business strategy. So in the community bank, we are really focused and have been for the last 3 years on our diversification strategy. Recall, we told you 3 years ago that we wanted to become less dependent on real estate and relatively more dependent on C&I and also on the liability side, less dependent on CDs and more dependent on low-cost transaction accounts. We continue to execute, I think, in a superb fashion on that. But, for example, in the third quarter, new production in the community bank was 85% C&I, 15% CRE.

Direct Retail is a nice positive story in the turn, 5.9% annualized growth in the period. This is after 2 years of declines. In fact, September was our best production month since 2008. It's broad-based. We're getting a lot of growth in first lien. This is $50,000, $100,000 first mortgage loan for people who refinanced in small balance loans or doing home improvements, that type of thing. Our wealth strategy is really kicking in, getting nice growth there, as is our small business strategy. So we feel really good about our retail growth going forward.

Mortgage is beginning to have yet another ramp-up in terms of these slow interest rates, and mortgage applications were up 87% compared to the second. And our production, which, of course, as you know, lags application, was also strong, $5.5 billion in the third versus $3.9 billion in the second. So nice production in the third and likely to produce nice production in the fourth.

Deposits, as I indicate, continue to do really well. You'll recall that in the last couple of quarters, we talked to you about transitioning from free checking into what we call Bright Banking. So we're seeing strong growth in checking, money market, CDs. Now I will point out that some of our growth in CDs is due to our focus on improving our Basel liquidity. But, in general, we're gaining more active accounts, more fully banked primary relationships relative to the free checking days. So while you might not open as many accounts, you open more full long-term relationship-oriented accounts, which are more profitable, so that's a very successful strategy.

And our Specialized Lending is just, frankly, doing great. You recall over the last, it's really several years, we've invested very heavily in building those businesses. These businesses are small-ticket consumer finance, insurance premium finance, commercial equipment and mortgage, prime and nonprime auto and mortgage warehouse lending. What I like about it is it's very diversified. So all areas grew. Quality is at record levels in the businesses. Part of that is the markets themselves are actually doing pretty well, but a lot of it is we've done some really good tightening in terms of our underwriting and overall risk management processes.

It's a very diversified portfolio in 2 regards: By type, as I just described, and by market. So while we're having strong growth in there, I'm very pleased about it because it's a very diversified asset area to be growing. And then I told you in the past, we have a very unique market opportunity in the Corporate Banking area. Recall that we have not been except in the last couple of years really focused on large corporate or what you would call middle market. And a lot of the large corporate middle market players have kind of gone away, and so we are finding that there's a really pretty strong appetite out there for a high-quality, highly rated name like BB&T in the space. And so -- but we're really having some great numbers there. But we have not changed our methodology. We have not changed our approach in terms of underwriting or selection. We remain middle market-focused, very relationship-based. We're not just out buying syndicated tranches with no relationships. We avoid leveraged sponsored lending. We have strict hold limits. And even with that, our end-of-period balance has increased 16.4% compared with second quarter, and 48% over Q3 '10. So nice ramp-up but a very diversified portfolio.

We are, frankly, getting some benefit from some European fallout from the way they're pulling away from high-quality credits because of their own capital issues. And we continue to add lending personnel in that area because it's a very strong success area for us. That's also creating a lot of our deposit growth at the same time, so it's broad-based relationship again. So I want to re-emphasize that our underwriting and hold positions have not changed. And while we see some of that going on in the industry, we are very disciplined about that, and we are not going to sacrifice quality for growth.

Overall, you can make that same commentary with regard to our lower relative risk profile in general. Though as you know, our values-driven culture drives our focus on all of our businesses. So there's been no change in our risk appetite. We have minimal exposure to European banks, no sovereign exposure. In fact, I consider that to be virtually irrelevant for us just because of the nature of who we are. We operate a very conservative mortgage operation. And so while that's had a lot of notoriety, it's not a big issue for us on the negative side. It's a pretty big issue on the positive side. Recent vintage credits are very high quality. And again, we continue to focus on granularity. So we're very, overall, very disciplined about our growth strategy, and therefore, we feel good about the asset numbers.

A little more detail on that, as you look in Slide 6. So in addition to our corporate strong performance, we also have broad-based loan growth. You can see there C&I, in general, was up 7.5%, sales finance is up 2.8%, revolving credit 7.5%, residential mortgage 11%. Specialized lending, as I referred to, is very strong, 30.8%. We get some seasonality in that now. So some quarters, it's up strong, in some quarters not quite as much. So this is a pretty strong quarter. And while a low number, I'm very pleased with this Direct Retail, 3.6%, because that's a bit like an annuity because once it turns positive, it kind of tends to stay positive for quite a long cycle.

So 7.4% excluding ADC and covered loans, and obviously, we've got a big run-off in ADC, 48%, which is exactly on strategy. The covered loans are predictably declining, so incorporating all of that, 4.3%, which is, we think, strong. We did gain momentum in growth. So end-of-period loans were up $1.3 billion, annualized $5.1 billion. Our pipelines remain robust. We continue to focus on high-quality granular portfolios. And so we are raising our guidance slightly. We see loan growth in the 4% to 6% range, contingent on how the economy does.

Now I will tell you that we believe that we are moving market share. When we talk -- when I talk to our producers out there, with fairly strong loan growth, I ask them if the economy is growing that fast, and they quickly say no, that about 80% of what we're booking is moving market share. So the economy is still not growing at a very fast pace because uncertainty is still really high out there coming out of all the negative leadership from Washington, primarily. I will say on a positive, however, that we believe when we get positive leadership out of Washington, we believe, at least in our markets, and we think in general, that businesses are poised to invest, and therefore, we're poised for much better growth. I really think we've got pent-up opportunity in this market, and when we get more positive leadership coming out of Washington, I believe we'll see it happen, probably happen pretty quickly.

If you look at Page 7. Just a little bit of color with regard to deposits. We really feel good about our overall absolute growth in deposits, especially given that we keep a tight focus on managing our margin particularly with regard to costs. So our costs went down from 0.72% to 0.65%, second to third. Given strong loan growth, I think that's very good. TDA was up a very strong 21.8%. Interest checking, 14.4%, money market 28.1% and CD is a very strong 63.6%, but I want to reinforce again, part of that was some particular emphasis on public funds and large corporate deposits, which are stable deposit relationships, but you won't expect to see that kind of on a quarter-to-quarter basis.

So in spite of that focus, we grew CDs, and in spite of the fact that our -- had a 25 basis points decrease in cost. And we're not taking long rate exposure because our average CD maturity is 15 months. So we are expecting deposit growth to moderate somewhat in the fourth relative to the third because it of this focus on Basel III liquidity but still a very strong long-term performance in our deposit area.

Let me turn it to Clarke now to give you some color with regard to the credit area, and then Daryl will give you some color with regard to a number of other areas. Clarke?

Clarke R. Starnes

Thanks, Kelly, and good morning, everyone. I'm very pleased to report continued positive trends in our credit performance for the third quarter. We're particularly pleased that the pace of our credit improvement remains strong and consistent with our previous guidance. As Kelly mentioned earlier, our credit improvement continues to be broad-based, reflected by link quarter improvements in our key credit performance measures.

On Slide 8, you can see the solid decreases in the key performance categories again this quarter. We have lower levels of watch list credits, 90 days still accruing, performing TDRs, NPA inflows, NPLs, OREO, total NPAs and net charge-offs. Over the next few slides, I'll share some additional color and key drivers for these improving trends.

Slide 9 shows the significant link quarter decrease in nonperforming assets. NPAs have declined approximately $1.2 billion in the last year. Current balance, in fact, is our lowest level in 2.5 years. Total NPAs were down 11.5%, exceeding the 5% to 10% guidance we gave you last quarter, so we're very pleased about that. NPLs were down 8.9%, led by a reduction in commercial non-accruals of 11.1%. Additionally, OREO is down a significant 16.2%, and I'll mention more about that in a moment. We explained last quarter that we were moving to a more traditional workout strategy for NPAs with less reliance on larger bulk asset sales. Even so, we successfully sold approximately $450 million in problem assets this quarter. The remaining balance in NPAs held for sale dropped to only $26 million at quarter end. That amount will be sold in the next month or 2, as Kelly said.

Looking ahead, we expect to see further reductions in nonperforming assets in coming quarters. We want to reaffirm our guidance of a 5% to 10% decrease in the fourth quarter, assuming the economy does not significantly deteriorate.

Looking at the bottom of Slide 9. We are turning greater attention to a more focused reduction of OREO. You can see that inflows to OREO fell significantly this quarter, down 52.8%. That represented our lowest OREO inflow since the second quarter of '08. This improvement does reflect a more aggressive strategy to resolve problem credits without taking title to the asset. We're also trying to more rapidly sell existing foreclosed properties. In Q3, this strategy resulted in somewhat higher foreclosed property expense and much reduced inflows. These efforts we are quite confident should reduce the balance of foreclosed property at a faster pace and drive a decrease in the run rate for foreclosed property expense in '12.

Turning to Slide 10. You'll note the 12.1% decrease in NPA inflows led by a 19% decrease in commercial NPL inflows. I would also highlight that we saw a 45.6% decrease in NPL inflows compared to the third quarter of last year. Early credit indicators continue to be very positive since [ph] 90 days or more past due and still accruing declined 7.9%. We did see some normal seasonal increase, up about 5.7% in the 30- to 89-day segment, that was principally from our specialized lending and mortgage portfolios. Exclude these areas, remaining portfolios were actually down 1.9%. It is notable that of our early-stage delinquency numbers are now at levels similar to 2006. We're very pleased with these early-stage results that are now returning to more normalized levels.

Total performing TDRs decreased 9.4% this quarter, including a 32% decrease in commercial TDRs. We expect continued declines in our TDRs because we are consciously creating less modifications that would be considered TDRs. You'll note on the detailed schedules in the press release that now we have less than $250 million in commercial TDRs and 2/3 of our TDRs are in the mortgage and home equity portfolios. Those, obviously, are longer-dated modifications, so the pace of decline in TDRs will slow as the other loan categories pay down or are cured. We're also very pleased that these modifications are performing well. 88% of our performing TDRs are current. Due to the improved portfolio performance, our provision expense decreased this quarter to 66% of charge-offs excluding covered items. While our provision was down this quarter, we actually improved the NPL coverage ratio to 115% excluding covered loans.

We do plan to remain conservative with the respect to the allowance. I would point out, however, that our recent credit vintages, and those are the loans we've made actually during the downturn, are performing very well and are creating some downward pressure in our allowance modeling. But continued improvement in our credit quality indicators and performance should allow for further reductions in provision expense and a significant reduction in other credit-related costs in the coming quarters.

In summary, we're very pleased with the solid pace of credit improvement this quarter. Everything we're seeing from a credit perspective is very positive and continues to move in the right direction.

Finally, looking at Slide 11. You'll note that our charge-offs excluding covered loans for the quarter were 1.44%, down from 1.8% last quarter. This amount is consistent with our guidance from last quarter and represents a 17.6% decrease in losses compared to Q2. Total losses on a GAAP basis, which include the covered loan portfolio, were still down 5.6%. Total charge-offs did include a $53 million charge-off for covered loans. This represents losses in certain acquired loan pools that exceeded our acquisition date projections. This impairment was provided for in prior quarters subject to the loss share reimbursement with the FDIC, and therefore, had no income statement impact. We continue to be very pleased with the overall performance of the covered portfolio. In fact, the covered portfolio has performed substantially better than our original projections. Looking forward, we expect core charge-offs to remain in the 140 to 150 range in the fourth quarter. So again, I feel very good from a credit perspective. We're moving in a very positive direction despite a challenging economy.

So with that, let me turn it over to Daryl for his comments.

Daryl N. Bible

Thank you, Clarke, and good morning, everyone. I'm going to take a few minutes to discuss net interest margin, the securities portfolio expansion, fee income, noninterest expense and capital.

Continuing in the presentation on Slide 12. Net interest margin for the quarter came in very strong at 4.09%, down 6 basis points from the second quarter, consistent with our expectations. The margin continues to benefit from wider credit spreads, lower funding costs, particularly interest-bearing deposit costs and lower NPAs compared to last quarter.

When you adjust nonperforming assets and interest reversals to a more normalized level, our net interest margin would be about 7 basis points higher. There was no change in net interest income related to the assets acquired in the Colonial transaction. Adjusting for the provision for covered loans and the increase in the FDIC loss share offset, net revenues decreased $15 million due to the impact of covered assets. With regard to the margin outlook, we expect the margin to decrease to around slightly above 4% for the fourth quarter of 2011. This decline is driven by lower yields on new loans, runoff of the covered asset portfolio and a mix change in earning assets to include additional securities.

Offsetting part of this impact, the margin will continue to benefit from falling rates, from falling interest-bearing deposit costs. Also, as you can see on the graph, we remain asset-sensitive and are positioned for rising rates. Additionally, given the uncertainty in the rate environment, we continue to position ourselves to benefit should short-term rates decrease 25 basis points.

Turning to Slide 13. During the third quarter, we purchased $5.3 billion in securities, consisting primarily of fixed rate Ginnie Mae securities and Ginnie Mae ARMs. The purchase of these securities, along with significant growth in deposits, helped us make significant progress toward complying with Basel III liquidity guidelines. Even with these purchases, we are appropriately hedged to maintain our asset sensitivity. The effective duration of the securities portfolio remains at 2.7 years.

BB&T maintains a very low risk investment portfolio. Over 95% of the portfolio is guaranteed by state and federal government agencies. Additionally, approximately 28% of the portfolio is variable rate. Lastly, we also maintain a significant portion of fixed CMOs, which will provide stable cash flows and are less subject to significant extension risk.

Turning to Slide 14. Our fee income ratio decreased to 39.3% in the third quarter from 40.8% in the second quarter. The decrease was due to seasonally lower insurance income, lower service charges on deposits due to the July 1 posting order changes and lower investment banking and brokerage fees and commissions due to the rate environment and lower volume. We expect insurance income to rebound in the fourth quarter. Mortgage banking income for the third quarter was $123 million compared to $83 million in the second quarter. The increase was due to higher production revenues of approximately $23 million and a $30 million net gain in MSR from positive hedge performance. This increase is partially offset by write-downs of the residential MSR from increased prepayment fees. We benefited from an 87% increase in mortgage application volume and a 43% increase in mortgage originations.

Other deposit fees and commissions increased primarily in connection with the continued growth of Corporate Banking. The FDIC loss share income offset increased $23 million as a result of the impact of the improved cash flows from the small duration adjustment of covered assets and less impairment on covered loans.

In addition, the balance at the end of the quarter for accretable yield decreased to $2.1 billion from $2.5 billion last quarter. Security losses reflect OTTI due to weaker collateral performance for certain non-agency mortgage-backed securities.

Decrease in other income includes higher losses on write-downs of $10 million on commercial loans held for sale, $16 million in lower income on trading assets for post-employment benefits, offset in personal costs and $12 million in higher income on venture capital investments.

Looking forward, we expect fee income to improve due to stronger insurance income, much lower OTTI, if any, and decreased write-downs in NPLs held for sale as we complete those sales. Even with an estimated $35 million reduction in check card fees from debit interchange regulations, fee income and revenues will be stronger in the fourth quarter.

Looking on Slide 15. Our efficiency ratio improved to 54.6% compared to 55.8% last quarter. We achieved positive operating leverage this quarter and we expect this to continue into the fourth quarter with stronger revenues and lower expenses. Personnel expense decreased $12 million, or 7% annualized. The decrease relates to a $16 million reduction in post-employment benefit expense that are offset in lower noninterest income.

FTEs were up 67 in the quarter and 353 over last year, largely composed of revenue producers in investment services, Wealth Management, mortgage lending and Direct Retail lending. Foreclosed property expense increased largely due to higher write-downs and losses associated with a more aggressive approach to reducing foreclosed real estate Clarke talked about. Professional services increased $16 million due to legal expenses. Other noninterest expenses increased $12 million, which includes the loss of a sale of a leveraged lease, totaled $16 million.

Finally, excluding the tax benefit from the leveraged lease sale and a true-up of last year's provision from the federal tax return, third quarter effective tax rate was 21.6%. This was in line with our expectations and should continue in this range for the fourth quarter.

Turning to Slide 16. Our capital ratios remain very strong. Tier 1 common improved to 9.8% from 9.6% last quarter. Tier 1 capital improved to 12.5% compared to 12.4%. Leveraged capital remained strong at 9.2%, tangible common remained healthy at 7.1% and total capital was 16.1%. Our internal capital generation continues to provide significant financial flexibility for capital deployment in the following order: organic growth, dividends, strategic opportunities and share buyback. Our current estimate for Tier 1 common under Basel III is 8.8%, up substantially with the last quarter, driven by an increase in retained earnings, improved OCI and lower levels of DTA and MSR. We believe this will meet the 7%-plus 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 the CCAR capital plan. This positions BB&T with additional financial flexibility.

As a reminder, we plan to call all of our trust preferred securities during 2012 and ending in 2013. With that, let me turn it back to Kelly for closing remarks and Q&A.

Kelly S. King

Thank you, Daryl. So as you can see, we consider this to be overall a great quarter, especially given the environment especially because I think we are a very good Main Street bank. We're not being affected by some of the global macro issues that you're hearing. Obviously, the general U.S. economy has been slow for these last several periods. Although we see no evidence that recent discussions in Washington are immediately and directly affecting credit, so we, as we indicated, had very strong credit performance in the third and look forward to be strong in the fourth. So underlying fundamentals in loans and deposits are exceptionally strong. We've made great progress on accomplishing our diversification and workout strategies, continue to invest to drive revenue and loan growth. As I mentioned, we are reconceptualizing our businesses to drive revenue and expense optimization, and we believe we are providing the best value proposition in our markets. So in spite of the fact that the last several quarters continued to improve, we still believe our best days are ahead. Now I'll turn it back to Tamera for questions.

Tamera Gjesdal

Thank you, Kelly. Before we move to the Q&A segment of this call, I'll 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 have further questions, please re-enter the queue so that others may have the opportunity to participate. David, could you please explain the procedures?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Matt O'Connor with Deutsche Bank.

Matthew O'Connor - Deutsche Bank AG, Research Division

Just on the business optimization strategy, any numbers that you can put out there either on the revenue side or specifically on the expense side? I think last quarter you talked about the total environmental cost embedded both in the revenues and expenses and some update on that. And maybe the timing. Obviously, it's a little lumpy right now as you work through some of the OREO. But you mentioned that'll come down next year. Any numbers around one, the environmental costs, and then two, just the optimization strategy in general?

Kelly S. King

It's a good question. So conceptually, the way we are approaching this, and we think is the right approach, is a challenge to our managers to start with a clean sheet of paper, given the new world we're operating in from both a regulatory, environmental, economic perspective, to reconceptualize their businesses. We have a very thorough process where they, upon reconceptualization, they present their information to a team that Daryl leads and then it's ultimately presented to our entire executive team. And frankly, the response has been extremely enthusiastic. People really appreciate this approach versus a cramdown where I just say cut 5% or cut 10%. So we have not set a number. I'm not going to set a number. I believe we will get better execution on running the business in a way that is sustained [ph] on improving it from a long-term point of view, not setting a direct number today. I think it'll be substantial. We'll give you some updates as we kind of go along. But today, I've not set a number. With regard to the general environmental issues and the credit issues, I'd say environmentally, obviously, there are still headwinds out there in terms of the fee income area, around Durbin and other factors that we've been dealing with. We feel really good about where we are in terms of dealing with the Reg E changes. As I indicated Bright Banking is going extremely well, and that substantially deals with that issue. I'll go ahead and address the issue with regard to Durbin, as, obviously, there's a lot of conversation, a lot of smoke out there with regard to Durbin and debit cards. I still remember my parents telling me when I was young, "When it's lightening outside, stay in the house." Well, we're kind of taking a cautious approach with regard to where the debit card issue is. But we are, nonetheless, totally committed to recapturing the lost income. I will say because of all the reaction out there, it's probably going to take a little longer than we maybe earlier thought, but we have no less degree of confidence in terms of getting that. Let me ask Clarke, though, to respond to part of your question, Matt, with regard to how we feel about recovering the credit issues, not just the provision but the other credit costs over time.

Clarke R. Starnes

Yes, Matt, as we talked about before, we think the biggest credit lever we have outside the relief and provisioning is really in the OREO side and related credit costs around personnel and legal fees. And as we said before, we think that number is easily in the $700 million range pretax. And so that's one of the reasons you've seen us take a little more aggressive stand now on our OREO liquidation and managing these inflows. So we think those numbers are -- we're beginning to see some of that benefit as we get these balances down, and we think that we'll see a good bit of that as we move through '12 and beyond.

Matthew O'Connor - Deutsche Bank AG, Research Division

Okay. And then as my follow-up, Daryl, a question for you. On Page 5 of your release, you show the net impact of the FDIC, the covered loans, and it's a very helpful table. Could you just remind us, though, as we think about that net number of 2011 that came down a little, how that will trend over time? Because I think a lot of folks are just focused on the net interest income impact. The accretable yield, as you mentioned, came down. But how do we think about the net impact trending out, not just for 4Q but maybe some thoughts on next year?

Daryl N. Bible

Yes. Over time, you will see both net interest income and the FDIC loss share impact both be reduced over time. Now from a number perspective, it might be a little bit lumpy from a quarter-to-quarter basis, but I would say it would probably trend down in the maybe $15 million to $30 million impact per quarter range, but it won't be even. It will definitely be ups and downs there. It's due to the duration of the assets both on the loan side and on the FDIC receivable. But it will start to trend down over the next 3 years as the loss share on the commercial side expires, will be the bulk of it.

Matthew O'Connor - Deutsche Bank AG, Research Division

Okay. So it's more of a kind of steady runoff as opposed to a specific year where it gaps down?

Daryl N. Bible

Yes. I mean at the end of August, third quarter of '14, and that's when the commercial fund [ph] basically gets cleaned up and then the residential one is another 5 years longer than that. But the bulk of the assets were in the commercial. I would say it would be steady projection down through the third quarter of '14.

Operator

Our next question comes from Mike Mayo with CLSA.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

Just if you could elaborate a little more on the margin and where you expect that to go next year.

Daryl N. Bible

Right now, as the benefit from Colonial runs down, our securities will go up a little bit in the fourth quarter. And we gave you guidance to be right around 4%, a little bit above there. I would say in '12, that will continue to come down, Mike, probably averaging in the year in the $3.90, give or take $0.05, so maybe $3.85 to $3.95.

Michael Mayo - CLSA Asia-Pacific Markets, Research Division

And how should we think about the relationship between the margin and the 10-year? The 10-year is lower than you or anybody else thought. Is that a useful benchmark to think about the margin? In other words, if the 10-year were to go higher and the yield curve were to steepen, then maybe the margin could be better than what you just said.

Daryl N. Bible

Sure, I mean, the 10-year is an indication of how flat the curve is. I mean, for the most part, our bank is priced 5 years and in. You have a couple of assets that are out longer than 5 years. But it is an indication of the flatness of the curve. I mean, the longer the curve stays flat, the more pressure will be on margin. We talked last quarter that we think the first year impact is about 5 basis points to margin. If it stays down for several years, then that's going to continue to put more pressure on margin. But let's just kind of wait and see how long it stays down and how prolonged that is.

Kelly S. King

But Matt, we -- everybody has their own -- I mean, Mike, everybody has their own views. But our view, my view is that while it will likely stay flat maybe for most of next year, as soon as this economy gets some sign of life, you're going to see the Federal Reserve react to that, so I don't think it's going to be as flat and as low as long as everybody else does.

Operator

Our next question comes from Ken Usdin with Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

My first question is just about in terms of loans, Kelly, I heard your points earlier about the focus on corporate lending. But this quarter, a lot of the growth was -- came in from $1 billion of residential mortgage. So I'm just wondering if you could talk us through as you think forward to the next couple of years, where you expect the majority of your loan growth to come from in terms of the mix within the portfolio?

Kelly S. King

Thank you, Ken. So we think it'll be pretty balanced. We think it'll be relatively fast growth in corporate loans, retail loans and specialized lending. The corporate loans for the next couple of years will probably still grow faster than the other 2 segments because, again, we just have this whopping unique opportunity. And we're just beginning to scratch the surface in terms of the national relationships that can be developed. So it'll grow at a faster pace. The retail is going to be -- it'll be steadily picking up pace because remember how that works when you have a mature large retail portfolio that's been running off for 2 or 3 years make that turn, it's kind of a permanent turn. It'll keep building assuming production grows, which production is growing. And then in our wealth strategy, it's really just beginning to come into its own. So I think retail will be growing at an accelerated pace. Wealth will be growing at an accelerated pace. Corporate will stay very strong. So altogether those will be the drivers. You wouldn't expect to see over the next 2 or 3 years mortgage be the driver that it has been for several reasons. One is the volumes are unlikely to be at this level for several years. I mean, rates, once they go back up, you won't see the refis. And once, frankly, other, asset opportunities are available, we'll have less appetite to retain mortgages on our book. So I would think about it in terms of corporate retail and specialized lending.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Okay, great, and my follow-up relates to the other side of the balance sheet with deposits. You had a real exceptional spike in the deposit growth. And I was just wondering if you could characterize where that deposit growth's coming from. Is it all sticky core deposit growth? Or are you seeing any type of flight to quality? Because you guys have been growing deposits very well for a while but this certainly was a real meaningful uptick.

Kelly S. King

Well, it was an uptick for 2 reasons, Ken. I think one is that we continue to see on a broad base accelerated movement to us, in general, because of flight to quality. Also, as you know, there's an awful lot of upset in our market today in terms of what's going on with some of our major competitors, mergers and other situations that's working to our advantage. And part of that is because we did have a focused strategy in terms of bulking up in terms of corporate CDs and public fund CDs around our Basel liquidity strategy. But even with that, it's relationship-based. It's people that we've known for a long time, and we just -- frankly, we're a little more aggressive in terms of attracting some of those deposits to get a bigger share of that to create that Basel liquidity that we wanted. So you won't -- that's the only other part that you'll see kind of maybe go back down as we head into the fourth. The rest of it will remain constant.

Operator

Our next question comes from Erika Penala with Bank of America Merrill Lynch.

L. Erika Penala - Merrill Lynch

My first question is a follow-up to Matt's. I think in previous calls, you've identified about $750 million to $1 billion in cyclical expenses that are mostly related to credit. And I know you don't want to commit to a number, but I was just wondering whether or not the expense optimization process that started this quarter is separate in terms of identifying separate savings from credit-related expenses?

Kelly S. King

Yes, Erica, those are completely distinct and separate. What we described to you before, 2 or 3 quarters ago, is playing out. It will methodically play out and pretty certainly play out as the nonperforming assets fade away because it's completely directly related to it. The reconceptualization process is essentially different. It is about recognizing that we're in a new world and challenging our business leaders to -- in that context to from the bottom up reconceptualize their businesses on the revenue and on the expense side. And so on the expense side, it'll be more in terms of expense reductions because of new processes and new approaches and eliminating things we were doing. On the revenue side, it'll be about reallocation of expenses. We don't expect to reduce our expenses on the revenue side. What we expect to do is increase our revenues relative to the expenses we expend by squeezing the gap between our lower-performing producers and our higher-performing producers. And based on some analysis we've done, we think there's pretty material revenue ramp out of that, so that's why we call it a revenue and an expense optimization process.

L. Erika Penala - Merrill Lynch

I see. And my follow-up question is I think for Daryl. You mentioned that some of the securities purchases were in part to be more compliant with the Basel III liquidity requirements. I guess, do you have a particular number in mind in terms of the size of the bond portfolio that would make you say, "Okay, I think this is sort of the liquidity that we need at this point"?

Daryl N. Bible

Yes. Erica, if you look at our period-end balances at the end of September, we were about $33 billion in securities. We would probably end the year at $35 billion. So we're going to go up a couple more billion, and that's probably going to be the level we're going to stay at throughout 2012, unless there's significant changes in the Basel III liquidity rules. But that's probably where we need to be based upon what we know today.

Operator

Our next question comes from John Pancari with Evercore Partners.

John G. Pancari - Evercore Partners Inc., Research Division

You talked about the opportunities to grow in the large corporate, and Kelly, you mentioned that, that's a real opportunity in terms of upside potential through 2012. Can you talk about the loan price competition you may be seeing at that end? I know you got to it a little bit in your prepared comments. But we're certainly hearing that a lot of the larger banks are pushing the large corporate pretty heavily.

Kelly S. King

Yes, that's really what's happening, John, in the marketplace. So what we're seeing is that we just had a very tiny reduction in our yield, 3 basis points. Our spreads actually went up in that corporate lending space. There is a lot of competition, particularly on the very high-end deals, which frankly, we don't participate in. We follow it very carefully, but we don't participate in a very largest deals. That's where the most aggressive pricing is going on. But there is competition throughout, but we hold firm with regard to our yield expectations, and we may not get as high a percentage of deals as others might get. We're just not going to sacrifice quality and profitability for growth. We'll work harder to try to get it, but we're not going to sacrifice quality and profitability. So it's not a major issue for us today. I would say, in general, though, if you just look for us and everybody else, even with the compression of late, it is still better than it was 2 years ago. So I mean, 2 years ago and before we kind of got -- maybe 3 years ago before we got into crisis, spreads had really -- gotten really, really low. And then they gapped up pretty nicely. We've given back about 50 basis points of that over the last, call it 3 or 4 months. But we're still 100 to 125 basis points higher than we were 3 years ago. So it's a very attractive space for us, and the internal rates of return for us are very attractive. Let me turn to Clarke, though, to just give you a bit more color on that.

Clarke R. Starnes

Absolutely. John, one of the things that I will -- a little detail out, would give you guys is that, as Kelly said, we don't purposely participate in the large syndicated league [ph] table type deals. In fact, about 80% of our syndicated participations are on deal facilities, $750 million or less, where we have specific knowledge of the industry and the management team. And so we typically get better pricing in those transactions. We also have much better opportunity to sell other noncredit services and get our shares. So that's where we focus and have been very successful, and also, it is very attractive from a risk standpoint. But to Kelly's point, we're seeing probably 50 basis point contraction over the last year or so, and tenures go out 3 to 5 years. So there's definitely more competition, and where it doesn't make sense for us, we're walking away.

John G. Pancari - Evercore Partners Inc., Research Division

Okay, great. That's very helpful. My follow-up question beyond the M&A side, can you talk a little bit about your -- an update here on your M&A appetite on the bank and nonbank side? I know you had done some insurance deals recently, but if you could talk about on the bank and nonbank side.

Kelly S. King

Yes, on the nonbank side, as you said, we have executed some recent insurance deals, kind of bread-and-butter-type deals like we've done for a long time. We see that continuing at a fairly normalized kind of pace of for the next 2 or 3 years, so we kind of -- we went through a period there where for about 18 months it just kind of really died. I think that's when everybody was just kind of backing up, trying to reassess the world. But that seems to have settled down, so we're kind of back in that game. We'll also continue to look at some specialty commercial finance and those types of businesses, but I really don't expect a lot in that area, to be honest, John. But in the bank space, what we think now is that everybody is generally still kind of hunkered down. I think everybody is kind of trying to figure out where are we on regulations, where are we on the global economy. And then to be honest, most people that are potential sellers, their prices are depressed. You always think in terms of preferring to do a deal when the prices are higher. So you get all of those factors. people are a little bit reticent to be too aggressive to date. Having said that, I think we are approaching a period, maybe we're in the beginning stages of it, where people are going to begin to realize that we're kind of in the new norm. I mean, we're not going to go back to where we were 3 years ago. And so decisions are going to have to be made strategically based on kind of the current facts. And so given that, we expect the willingness to consider strategic combinations to increase over the next year or so. We remain interested in acquisitions. We have not changed our view that our scale is important in the industry, particularly as revenue opportunities going forward is relatively slow. As technological and regulatory costs continue to increase, our scale becomes very important. We are really focused on the, I'd say the bread-and-butter kind of deals. We're not spending any energy worrying about the really big deals. I frankly think there is -- you get a lot of talk there, very unlikely. So we're not spending any energy on that. We are focusing an appropriate amount of energy on kind of the medium-sized deals. Let's just call it $3 billion to $15 billion kind of size, which I think is a good size for us to date. And -- but I want to be very clear, John, that while the question, which I appreciate, is on M&A, our #1 focus remains on organic growth. We have this phenomenal opportunity in the organic space, and that's where the vast majority of our focus is placed.

Operator

And our next question comes from Gerard Cassidy with RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

The question I had was, Daryl, you answered the question on the Colonial, what we can expect in terms of revenue and earnings. Do you have an outlook for the FDIC loss share, the reversal that you put into your noninterest income for next year? Do you have an idea what that could be running at for modeling purposes?

Daryl N. Bible

Girard, I would say it would probably continue to come down. I wouldn't say it's going to be a -- perfectly decline, but it's going to decline anywhere from $10 million to $15 million every quarter next year, in that neighborhood. I mean, it'll be a little bit lumpy. It won't be exact but in that ballpark.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Okay. And then in terms of the stress test you all will go through in the spring with the other banks, when we come out of it, banks will be permitted to probably raise their dividends and do buybacks. Can you share with us your guys' thoughts assuming you come through it with flying colors, what -- and if acquisitions don't materialize the way maybe you're hoping, would you -- I know in the past, you were really not too keen on buybacks, but would you consider that if you were authorized to do it? And maybe some comments on the dividend as well.

Kelly S. King

So Gerard, obviously, you framed it correctly. We all have to present a plan and have approval. But in that context, just to reinforce our primary -- first choice on using capital is for strong organic growth. That's always the best long-term for your shareholders. Dividend is certainly second and M&A is third and repurchase is a distant fourth. So to the extent that we continue to accrete capital at a fairly significant pace, which we believe we will, we think organic growth will be picking up so that will absorb some. We would expect to be relatively aggressive on our dividend, understanding that we have a range that we've stated in the 30% to 50% range. We're not going to be rushing to get to the top of that because, again, I've said it before, I'll say again, having gone through a dividend decrease, that's not the kind of thing you ever want to repeat again in your career. So we'll be methodical about that. But still, given it's our second priority, it's going to get proper emphasis. And to the extent that there was not M&A activity, which I've indicated I think there will be, to your point, yes, we would consider repurchase at the appropriate time. There are times -- it just kind of depends on the stock price. I mean, it's an investment. And if the price goes way down and if we have excess capital and are continuing to accrete excess capital and the internal rate return on that investment is superior to other options, then certainly it moves to the top of the list.

Operator

Next question comes from Nancy Bush with NAB Research LLC.

Nancy A. Bush - NAB Research, LLC, Research Division

A question for you. I know you said that you're going to not be relying as much on real estate lending in the future. But as you and I both know, the South is still about real estate, and I don't think that's really going to change. Can you just sort of give your parameters for particularly residential real estate lending in the future and if there are going to be any markets that you just flat-out avoid?

Kelly S. King

Yes, the ones we pretty surely will flat-out avoid, Nancy, is raw land investing. We're not going to do much of that anymore. But yes, you said 2 or 3 years ago before anybody else did, Nancy, I think a very insightful point, that the banks in the Southeast and the country for that matter, particularly the Southeast, has kind of grown up depending on real estate, and that, that was going to be a sea change for all of us. I think you were way ahead of the game on that insight. I think it will recover, but it will never be back where it was, to your point. So you saw our last -- this last quarter, 85% of our production was C&I, 15% was real estate. That will improve some. Because there is no ADC going on today. There will be some. There's very low CRE going on. There will be some. So where we will be, if you want to draw kind of a band, what is off limits is trying to turn farm land into commercial property. I tell people all the time that with all the difference in the world on the value of a piece of land, when you decide you're not going to be growing condominiums, you will be growing corn. So we've got this steeped in our culture. Then to the -- on the other end of that band is multifamily today, which is very attractive. We believe there's a long-term sea change in terms of homeownership. Therefore, there's going to be very attractive investments for folks in rental properties for a long time. That's a very appropriate kind of CRE lending for us to do. So we're not getting out of the real estate lending business. We'll be approaching it with an appropriate amount of energy given our long-term goals, so I think that will be what it kind of will be. And then -- but our majority emphasis is still going to be on C&I, particularly corporate and small business and then on the consumer side, particularly on wealth.

Nancy A. Bush - NAB Research, LLC, Research Division

Okay. And my follow-up question would be this, and it's kind of a follow-on to the first question. What do you -- if you could just reiterate your thoughts about loan losses for the company over a cycle. Have they changed dramatically? Or where does it all sort of shake out?

Kelly S. King

Yes, it has changed, Nancy, over the cycle. I can remember 25 years ago, we kind of thought our normalized range was 25 to 35. That was in a different world. But today because of mix changes in our business and because of the greater, frankly, inherent risk in the system, looking forward -- and we think we're conservative on this, but looking forward, we think a normalized loss rate is in the 60 to 80 basis point range. Now we also think that we'll be getting better yields. When we were in that 25 to 35 range, that was during the period of time, as you know, when we were going through that massive disintermediation from 80% market share down to 30% market share, so price compression was horrendous. And so we will have higher loss rate because it's kind of a new norm. The old norm was -- it never was really 35 basis points. As you know, it was really -- it was higher than that. It was just disguised. So we have a more normalized, I think, long-term rate now, and we will have better normalized yields. And then with better mix that we will have in terms of consumer and C&I, and we think we'll have more predictable yields that will give us more predictable spreads.

Operator

Our next question comes from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Just -- I'm wondering what specifically is driving the increase in the MBS, the GSEs there? And I heard your guidance or your color to a previous question saying that the securities portfolio should grow at about $35 billion. Should we assume a similar step-up in the fourth quarter in securities yields, both overall and within the MBS, GSE book?

Daryl N. Bible

Craig, this is Daryl. What I would tell you is I would say the security yields should probably be relatively flat on a link-quarter basis. The main driver is really just closing the gap to get closer to complying with the Basel III liquidity. If you go back a few quarters ago, the LCR ratio definition of what's out there today, we were significantly lower. If you look at our ratio as of the end of September and not knowing how everybody else has done, we're probably in the middle of the pack if not above average right now compared to our peers in the industry. So we've closed the gap significantly in the last quarter or 2.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then, just my follow-up question, within the specialized lending portfolio, it's been growing very quickly. You still have a pretty attractive yield there even though it's down a little bit. Can you talk about what kind of loan product mix shift is going on underneath the surface there?

Clarke R. Starnes

Yes, Craig, this is Clarke. So to remind you all, that is, as Kelly says, a number of businesses ranging from a very low-risk component of our premium finance down to our nonprime auto finance, so it blends out, we think, at a very attractive risk-return relationship. But what's occurring, probably the fastest-growing segments within that group right now are our small-ticket equipment finance business, which is smaller consumer and small business equipment lending. Those have very attractive yields. Those will probably be in the low- to mid-teens. But it's not -- it's a, more of a prime-based portfolio. And then we also are relatively underpenetrated in the commercial leasing area. And so we're growing that portfolio very rapidly. That is a pretty low-risk portfolio. It does have more C&I-like yields.

Operator

Your next question comes from Ed Najarian with ISI Group.

Ed Najarian - ISI Group Inc., Research Division

Two quick questions. First question is in terms of your reserve-to-loan ratio. As you're bringing down the level of the reserve and then growing a loan portfolio, that reserve-to-loan ratio is coming down. I think it was this quarter about 2.20%, 2.25%. I'm wondering where you think you expect that to trough out as you sort of look out to sort of a normalized reserving policy. Does that stop at 2%? Does that stop at 1.75%? Where does that sort of level off?

Clarke R. Starnes

Great question, Ed, and we don't know the final answer to that. We certainly are very sensitive to pending additional regulatory and accounting guidance around those issues. But looking at our own analytics around credit performance in the portfolios and particularly the improved risk profile of what we're putting on today, we would still expect to see our reserves and allowance continue to go down. And we think about it. It could be ultimately 1.5 to 2x that long-term loss rate as kind of a floor. But again, it'll all depend upon how we feel about the risk, what the accounting and regulatory guidance is. And then frankly, on top of all of that, we're always going to remain a pretty conservative judgmental view of all that.

Ed Najarian - ISI Group Inc., Research Division

So if I'm hearing you correctly, just -- and I know you don't want to sort of throw a number out there, but you're saying a floor of maybe 2x that 60 to 80 basis point loss annualized normal loss outlook that you talked about.

Clarke R. Starnes

That's right. That's kind of our view.

Ed Najarian - ISI Group Inc., Research Division

Okay. And then I guess my second question is I think you outlined about that you think there's about $700 million to $750 million of annualized extra credit-related operating costs that are running through the income statement right now on sort of an annual basis and that ultimately should go away. Any view on the pace of how quickly you think that goes away? Is that sort of an even decline over the next 2 years, over the next 3 years? Or how are you thinking about that extra expense coming down?

Clarke R. Starnes

Great -- another great question. We think the big driver, as we said, is the OREO balances. And so the real answer to that question will be how quickly we can bring the OREO balances down, and so the faster we can do that, the more rapid you would see us earn into those benefits. So to remain conservative, we kind of view it right now that it will be a steady sequential kind of lead-in as we continue to improve the credit. And our opportunity to accelerate that would be getting the OREO down faster.

Ed Najarian - ISI Group Inc., Research Division

Do you think the OREO starts to decline from here? Or do you think it stays at this level over the next few quarters and then begins to decline?

Clarke R. Starnes

I think it definitely declines from here, and we will use -- we'll look at it economically and use every opportunity we can that makes sense for us to bring it down on a more rapid fashion if possible with -- again, the way we think about it is, the big economic decision is if we can get the balances down that will more quickly reduce the future run rate expenses that makes sense to us. So we definitely think it should go down from here.

Operator

Next question comes from Matt Burnell with Wells Fargo Securities.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

First a question for Kelly. Kelly, I'm just curious in terms of the new program that you're putting into place, the reconceptualization process. Does that potentially have any effect on what appears to have been over the last couple of quarters some really aggressive hiring in a couple of your businesses trying to drive the momentum of those businesses in a slow-growth environment?

Kelly S. King

No, Matt. It would not directly impact that at all. In fact, in terms of the reconceptualization plan, if that business leader presented a compelling proposal to ramp up even from what we've been doing in terms of that, then we would feel fine with that. So it's about making sure, first of all, that the expenses that produce revenue that they already have allocated are properly, efficiently used. And then secondly, if they can make a proposal case for -- get [ph] even more revenue producers, then that'll be fine. And I wouldn't be a bit surprised in some of the ones, like corporate, that have done so well, I wouldn't be a bit surprised to see us continue to invest in more revenue producers there, even as we reconceptualize and maybe reduce in some other areas.

Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

Okay. And my follow-up question is for Clarke. I guess just following up on Ed's question on OREO. What's your sense of the market now for OREO transactions? As the amount of foreclosed real estate comes down in your portfolio, is there a greater propensity for BB&T to think about just selling those assets and just trying to get that balance down as rapidly as possible because of the annualized operating cost benefit elsewhere in the income statement?

Clarke R. Starnes

Well, I'll try to answer both parts of that question. I actually spent a good bit of time of last night with folks that run our OREO units and our liquidation groups and asset management areas. And interestingly enough, despite all the challenges out there and uncertainty in the economy, there's still pretty high investor appetite for these assets, in general, and there's plenty of liquidity. And we have plenty of people calling us and have every opportunity we want to sell if the prices make sense. And so what it comes down to mostly is the individual assets are just very market- and project-specific. And so what we're going through right now is looking very deeply at our remaining inventory and looking at the relative cost to carry the risk around that versus the current pricing that's available or might be available. And so what we would look at is a strong bias toward where it makes economic sense for us to be more aggressive in sales if it will have a greater leverage on reducing the run rate. And we -- the good news is we think there's plenty of those opportunities out there. And so we'll just have to take a look at each and every one of them, and hopefully, through that strategy, we would see the balances reduce much faster. I would remind everybody, though, that fourth quarter is a big cleanup period for a lot of players out there, so we know a lot of inventory's out there, and we're not going to participate in dumping assets as low prices just because everybody else is doing it at year end. I would also tell you a positive is that we already have about $100 million under contract, as we speak, for the quarter. So things are going well.

Operator

Next question comes from Betsy Graseck with MS.

Betsy Graseck - Morgan Stanley, Research Division

A couple of things on the same topic. In the press release, you indicated that management has adopted a more aggressive approach to reduce foreclosed real estate. And that's in line with the comment you made about taking the write-down on some of the exposures that you have. And I'm just wondering how are you deciding what kind of write-downs to take. Is it just to get to a clearing price to sell? How much of a percentage decline in value did you bring the properties down that you took the write-downs on?

Clarke R. Starnes

Great question, Betsy. I'm -- just remind everybody we have a very methodical ongoing process around revaluations against assets using current appraisals and market intelligence. And right now, about -- our inventory is -- appraisals are within 6 months current, and we actually revalued 25% of the inventory this quarter alone, so it's a constant process. So what you saw us do this quarter with the extra write-downs was specifically look at individual assets, to your point, and try to mark to what we believe was more of a liquidity discounts to clear those at the kind of pace we're talking about. And so that's why you saw the expenses go up a little bit. Had we not done that, it would have sequentially come down. So we think they're marked at a pretty attractive rate right now given our strategy of selling more quickly.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And then the follow-up is on Page 9 of the slide deck. You've got the inflows to OREO at $118 million this quarter. Where do you think that trends next couple of quarters?

Clarke R. Starnes

We're hopeful that you're going to see similar levels or less. So our whole strategy would be to take in less through title. And through our kind of more aggressive workout strategies on the front end, we'll deal with more of resolving the credits on the front-end level through short sales, note sales, or just workouts with the borrower. So we're going to avoid foreclosure as a last resort. And we think that alone is going to bring those inflows down, given that we're also seeing less inflows to nonaccruing loans anyway.

Betsy Graseck - Morgan Stanley, Research Division

There's a sharp decline from 2Q. I was just wondering if there was expected to be some bounce-up or not.

Clarke R. Starnes

We certainly hope and don't expect that you would see a bounce-up. So the rate of inflows or the rate of decline from there is less certain at this point, but we certainly don't expect it to pop up.

Operator

Our next question comes from Brian Foran with Nomura.

Brian Foran - Nomura Securities Co. Ltd., Research Division

On the $450 million problem loan sale, just -- and I apologize if I missed this, but did you say how much of that came out of MPA versus how much of that came out of criticized but not on nonperforming?

Clarke R. Starnes

Yes, Brian, actually all of those were actually nonperforming loans in OREO, so it was all NPA.

Brian Foran - Nomura Securities Co. Ltd., Research Division

Got it. And then so just thinking through the roll-forward to next quarter, if you hadn't sold those loans, I guess NPAs would have been flattish this quarter. You've got the guidance for 5% to 10% down next quarter. So does that mean you have pretty good visibility that the inflows are going to take another step down? Or is there some other roll-forward that I'm missing?

Clarke R. Starnes

Well, again, and we'd mentioned before that in our commercial portfolio based on all the strategies we used, whether it's curing the accounts, whether it's through resolution through asset sale or working it out with the borrower or charge-offs or movements to OREO, all that combination, we need to be under $500 million in commercial inflows to see some organic reduction in the NPAs. And so we certainly are bringing those inflows down and are hopeful and expect them to come down further in Q4. But even if they wouldn't, were not to have come down through the resolution strategies that we're using, we're very comfortable with our guidance of the 5% to 10%.

Brian Foran - Nomura Securities Co. Ltd., Research Division

Got it. Right, because the sales aren't going to go to 0. The loan market share comment, I guess one of the pushbacks I've gotten is on an end-of-period linked-quarter basis, your loan growth on the commercial side and the overall side is kind of in line with the H.8 [ph] data. Can you just help us elaborate on the market share gains? Are there seasonalities in your book that, like especially lending and stuff, that we've got to take into account? Or is it more in the pipelines you can see building? Or just kind of how you're measuring the market share gains you're generating?

Clarke R. Starnes

I think one of the biggest things you might be missing in that data that we think about is that we absolutely do not participate in the leveraged lending area, and so that data would include that subset. So if you had intelligence around more of the core lending like we do, we're quite confident that we're moving, and we know we're moving market share because the majority of the credits that we're extending are refi-ing other lenders so...

Kelly S. King

The other thing, Brian, is to keep in mind that the -- if you look at the 4.3% growth versus the 7.5% growth adjusted, when we're talking about moving market share, we're talking about it in the markets we're participating in. I mean, certainly, the runoff portfolios dilute the absolute number. So we're thinking in the markets that we're actually participating in, that's where we have to grow, is visibility. Clarke says when we talk to our producers that we know who the competitors are, then we're fairly certain that we're all going to move [ph] market share.

Operator

Our next question comes from Chris Mutascio with Stifel, Nicolaus.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Daryl, 2 quick questions. Do you all recognize gain on sale on mortgages at the time of lock-in or the time the loans are funded?

Daryl N. Bible

Chris, it's all fair value. So all the applications that we took through the pipeline, it's reflected in the third quarter numbers.

Christopher M. Mutascio - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And the second thing, I know your insurance commissions are seasonal. And so I expected them to be down this quarter, but they're down year-over-year. Can you give me more color on the negative trajectory on a year-over-year basis on insurance?

Kelly S. King

Yes. So what's happened year-over-year is we're continuing to be in a, and as you -- as they [ph] described it, a soft market. And so while the rate of decline in premiums over the year has declined, it is still down probably 5% to 7% over last year. Now we will tell you in the last 90 days, the feedback I get is we're beginning to see some hardening in the market, particularly in the wholesale space. We are also getting anecdotal feedback from the insurance companies that because they have seen degradation in their earnings, particularly coming out of their investment portfolios, their ability to accrete capital going forward is stretched. And so they're beginning to think about how they're going to produce decent returns themselves. So while it's conjecture on my part, I think we are at right at the cusp of beginning to see some real hardening in the insurance market. But we are actually moving in terms of numbers of accounts. When we look at the marketplace, we feel like we're clearly moving market share because our business is not going down as much as the overall market, but the overall market is still softening.

Operator

Our final question comes from Christopher Marinac with FIG partners.

Christopher W. Marinac - FIG Partners, LLC, Research Division

Kelly, just observing the large deposit growth this quarter, are there ever examples where you tell your staff not to take new customers or that you want to avoid certain type of deposit inflows?

Kelly S. King

No, we don't do it exactly that way, Chris. But what we do it is with price. We basically just -- when we are experiencing significantly more deposit growth than we need from a lending point of view, we just scratch it down more aggressively the price, and that basically takes care of it.

Christopher W. Marinac - FIG Partners, LLC, Research Division

Okay. Do you have any outlook on whether the same deposit inflows are possible the next few months?

Kelly S. King

I think they are very possible with the exception of the substantial bulk-up we did in corporate and public funds consistent with our Basel III strategy. So when you look in our numbers, when you look at the CD category, I think about that coming down materially, but the other numbers would look probably pretty consistent.

Tamera Gjesdal

Thank you for your questions, and we appreciate your participation in today's conference call. If you need clarification on any of the information presented, please give us a call in the Investor Relations department. Have a great day.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BB & T's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts