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BB&T (NYSE:BBT)

Q3 2012 Earnings Call

October 18, 2012 8:00 am ET

Executives

Alan Greer - Executive Vice President of Investor Relations

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

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

Christopher L. Henson - Chief Operating Officer, Senior Executive Vice President and Assistant Chief Financial Officer

Ricky K. Brown - Senior Executive Vice President and President of Community Banking

Analysts

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

Leanne Erika Penala - BofA Merrill Lynch, Research Division

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Betsy Graseck - Morgan Stanley, Research Division

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

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

Matthew D. O'Connor - Deutsche Bank AG, Research Division

David McKinley West - Davenport & Company, LLC, Research Division

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

Gregory W. Ketron - UBS Investment Bank, Research Division

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

Michael Rose - Raymond James & Associates, Inc., Research Division

Edward R. Najarian - ISI Group Inc., Research Division

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

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

Operator

Greetings, ladies and gentlemen, and welcome to the BB&T Third Quarter 2012 Earnings Conference Call on October 18, 2012. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Alan Greer, Investor Relations for BB&T. Mr. Greer, you may begin.

Alan Greer

Thank you, Katie, and good morning, everyone, and thanks to 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; and Daryl Bible, our Chief Financial Officer. We will review results for the third quarter as well as provide a look ahead. We also have other members of our executive management team who are with us to participate in the question-and-answer session: Chris Henson, our Chief Operating Officer; Ricky Brown, the President of Community Banking; and Clarke Starnes, our Chief Risk Officer. The team will be available along with Kelly and Daryl during Q&A.

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 and Daryl have made their remarks, we will pause to have the operator come back on the line and explain how you may participate in the Q&A session.

Before we begin, let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made during the course of the 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 are contained in the slide -- on Slide 2 of our presentation and in the company's SEC filings.

Our presentation also includes certain non-GAAP disclosures. Please refer to Page 2 in the appendix of our presentation for the appropriate reconciliations to GAAP. And now I will turn it over to Kelly.

Kelly S. King

Thank you, Alan. Good morning, everybody, and thanks for taking time to join our call. Overall, I feel like we had very strong results this quarter, especially given the kind of softening economy. We had pretty strong performance all across our operating segments. I would ask you to remember that insurance is seasonally lower for us in the third quarter, and we do expect it to be stronger in the fourth.

So if you look at net income, we totaled $469 million, which was up 28.1% versus third quarter. Diluted EPS was $0.66, up 26.9% versus third quarter. That was reduced by $0.04 merger-related charges. And overall, all the segments, as indicated, were pretty strong in terms of performance. Daryl is going to give you some detail, color with regard to the segments, but I just wanted to mention a few general points in my summary or general comments.

First of all, our Community Bank did a really good job continuing this quarter in growing deposits, had very strong performance in C&I and Direct Retail lending. Residential Mortgage, as you could see, had another really strong quarter, produced $8.2 billion in originations. So they're very strong performance in production and earnings. Data financial services segment had a steady production, strong quality. I will point out that the pricing competition is pretty tough out there in the segment, but we're doing relatively well. Specialized Lending had a good quarter with strong loan growth. Insurance, as I indicated, was seasonally slower, but we're expecting a strong fourth quarter. The overall insurance premiums are continuing to firm up, particularly in the wholesale side, and we're very fortunate we participate on wholesale and retail, so we'd feel good about that. In Financial Services area, our Corporate Banking area continues to exhibit strong performance, and we're really pleased with our Wealth team results. They're executing on the strategies there very well. So overall, performance in the segments was very, very good.

Year-to-date, total revenues were up $7.3 billion, up 12.5% versus last year. I would point out that revenues, again, I think are strong, given seasonality. There is some impact in terms of these revenue numbers I'm covering in terms of a partial quarter of BankAtlantic. So total FTE revenues were up $2.5 billion or 4.4% annualized, so we feel good about that. Net interest income totaled $1.5 billion, which was up 5.3% annualized versus second quarter of '12, so good performance in the revenue side.

In the loan area, which is an interesting challenge for all of us in the industry now, our average loan growth was 12.6% annualized versus second quarter. Second quarter was helped somewhat by BankAtlantic with strong performance in other lending subsidiaries: Mortgage, C&I, Direct Retail and Revolving Credit. If you do exclude BankAtlantic, average loans increased 8.4% annualized. Another strong performance in deposit area, average total deposits increased $3.3 billion or 10.6% annualized versus the second, had a nice improvement in deposit mix and cost. For example, if you exclude BankAtlantic, non-interest-bearing deposits increased 25% on an annualized linked-quarter basis, so a really good deposit performance again. Another strong quarter in credit quality improvement. NPAs decreased $179 million or 7.4% (sic) [9.4%] versus the second quarter. That's x covered assets. Foreclosed real estate balances decreased another strong $82 million or 37%. Foreclosed property expense continued to come down, decreased $18 million from second quarter or 25%, so a nice improvement in the credit area. And we're doing a really good job in expense management. This exclude BankAtlantic and other selected items. Our noninterest expenses increased less than 1%, so we feel good about controlled expenses.

If you look on Slide 4, we did have a couple of unusual items. In the merger-related and restructuring charges area, that's mostly BankAtlantic. That was $43 million. That was pretax. That was about $0.04 diluted earnings per share. In loan processing expenses, we did have elevated repurchase expenses that were related to better identification of unrecoverable costs associated with some investor-owned loans, but we do expect that next quarter to return to more normalized level.

If you look on Slide 5, we're very pleased with our overall loan growth. If you count them, it's a little bit noisy this time, but if you look at our total growth, including BankAtlantic, it's a very strong 12.6%, particularly strong at 15.7% if you exclude the run-off portfolios of ADC area and covered loans. Now if you exclude BankAtlantic, it's still a very strong 8.4% and which was above our guidance of 5% to 7%. And again, if you exclude those run-off portfolios, it's 11.2%. So even without BankAtlantic, it was a very strong quarter.

In terms of the categories, we feel really good about C&I. That was a very strong 12.4%. I will point out that the C&I market out there is very, very competitive. We are holding to our discipline and not doing leveraged financing and other forms of high hold positions in syndicated lending, so we're still being conservative relative to the market. But -- so we feel particularly good relatively about that.

In other CRE, as you can see, excluding BankAtlantic, it was basically flat, down slightly. I will point out that that's an emerging opportunity for us because, as you know, that's been running off really from the last several years, and we certainly think it's opportunistic now for us to get back more aggressively involved in that market. And so probably be careful on the credit. That's going to be a nice opportunity for us as the runoff discontinues, and the growth opportunities replace that.

Sales Finance had a strong performance at 5.1%. Residential Mortgage x BankAtlantic was 15.7%. I will point out that it will decline as we go forward. Recall that in the second quarter that we chose to not hold most of our 10- and 15-year paper. And so as we go on through the fourth and the first, you'll see a gradual decline in that portfolio.

In other lending subsidiaries, we had a very strong 26.7%. Recall that we do have seasonality in that business, particularly in our AFCO/CAFO unit, and so that'll be a little seasonally softer in the fourth quarter. So some ups and downs but overall, a good performance.

If you look at next year, I'll be honest with you guys. It's just really challenging to think about what next year is going to be. I mean, the economy is slowing. There's an awful lot of hesitation out there in the marketplace. You've heard me talk about this before. As I talk to business people, they're all basically sitting on their hands. They're scared to death about increasing taxes, increasing regulatory costs, increasing health care costs. And so the ones I'll talk to you are just basically waiting for the election, hoping some more positive leadership and hoping for some certainty with regard to how to run their businesses.

So with all of that said, I'll just point out that it's hard to project what's going to happen in this environment. We'll have a better feel for that, I think, after the elections. But even given that, I've -- I got see you in that context for next year would be continuing at 5% to 7%. And I would point out that that is nominal growth, so that would include impact of BankAtlantic. And so we feel like that's a strong growth especially given that other lending subsidiaries, as I pointed out, will have some slowness in seasonality. Mortgage will be slowing some because of the 10- to 15-year decision. So those are the negatives. On the other hand, we expect solid C&I growth, very challenging, very competitive, but our op [ph] team is doing a really good job on that. I will point out that at the end of the period, loans are up $3.1 billion or 11%, so we do have a good start as we head into the fourth quarter.

Turning to Slide 6, take a minute to look at deposits. We feel really good about deposits given what we're trying to do, which is to manage our cost and improve our mix. And so as you can see, total deposits, excluding BankAtlantic, was up 3.3%, 10.6% including BankAtlantic. And I will remind you that I mentioned x BankAtlantic to give you a sense of organic, but a lot of hard work went into bringing BankAtlantic in, so it is real growth, and it is real earning assets and good deposits. If you take out the effect of CDs, which we'll continue to manage that portfolio very carefully, they were down 8.4%. So above the line of CDs, we're up 6% even adjusting for BankAtlantic. Most importantly, I think, our non-interest-bearing deposits even adjusted for BankAtlantic are up a very strong 25%. That's what we're trying to do, is control our costs and grow our basic transaction DDA accounts, and that's working very, very well.

So if you think about our deposit strategy right now come, you got a kind of a slowing economy, you got some questions about loan growth, so it makes sense to focus on DDA growth and controlling the costs, which is what we're doing. We are very pleased that year-to-date, we had a growth in net new retail deposit accounts of 49,000, so it's working very, very well. Also pleased that in the last year, we've reduced our cost of interest-bearing deposits from 0.65% to 0.42%, and so that's really helping out our margins. CD maturity is 12 months, but we're not out there long. So looking forward, we do expect more modest fiber growth in the fourth quarter as we continue to focus on mix and lower deposit costs.

On a positive note, I would mention in case you didn't see us that we were just indemnified in terms of market share position as a ninth largest U.S. bank in total deposits as of June 30. So we feel really good about that.

On Page 7, just a little bit of comment for you about revenues. Recall that our long-term strategy is focused on diversification, and so what we're trying to do, what we are doing is designing the business to produce steady and growing EPS, dependable and growing dividends. So to get that, we focus on diversification of markets, diversification of products, which will, of course, give us diversification of revenues. So if you look at the pie chart there, you'll see a really nice diversification between the core bank or the Community Bank and the non-core businesses. And you can see the Community Bank is 48%. Insurance is 14%. I will point out that insurance has volatility and based on seasonality, so that percentage will move from time to time. But generally, we're pretty pleased with these percentages of our business mix. And frankly, looking forward, with challenges in the marketplace in core banking, I feel really good about having our revenue divided about half between the core bank and about half in non-core businesses. So it gives us a lot of flexibility depending on what parts of the market are moving.

Now given the fact that the economy is slowing and we do expect it to be challenging going forward, we are taking action to grow in spite of that. And so we've got a number of strategies I will just mention to you for the fourth quarter and going forward into next year. One is that we are going to be pretty aggressively expanding our commercial branching network in new markets. So this is a really proven way for us to expand in new markets on a very profitable basis and a relatively short-term perspective. We can't really do that in retail, but you can do it in commercial. And Ricky has developed a really good strategy to be able to do that. So we'll be working on that. We're -- Chris is still leading the charge in terms of executing on our expanding corporate banking initiative in key national markets. We'll be adding some new markets this year. We are adding a new vertical lending team, so that'll add marginally to our growth. We'll continue to have outstanding execution in our wealth acceleration strategy. Recall, we really just kind of got that up and going in the last few years, and it's really coming into its own now, so we feel really good about that going forward. We are adding more capacity in terms of producers into small business area and wealth and in our broker/dealers. And then we have a particular opportunity in executing on the Crump acquisition. So really there are 2 ways to really get really big lift in that. One is on our own wealth strategy for our own clients. So Crump has tremendous capacity in terms of helping our relationship managers to provide more insurance products to our clients. And then on the institutional or wholesale side, we are developing a really good reputation. Crump, frankly, already had a governance getting in at where we provide wholesale services for large companies like them providing for BB&T, for example. And then also, they're developing really strong relationships with other big companies like banks and insurance companies to be able to provide wholesale services to allow them to provide insurance products to their wealth clients. So we're really, really excited about that opportunity as well.

So with that, let me turn it over to Daryl, and we'll give you some more color in terms of the number of areas of detail. Daryl?

Daryl N. Bible

Thank you, Kelly, and good morning, everyone. I'm going to take the next few minutes to discuss credit quality, net interest margin, securities portfolio, fee income, noninterest expense, capital and segment reporting. Continuing on Slide 8, we really had a great quarter with respect to credit. You can see that total NPAs were down 9.4% on a linked-quarter basis. NPAs have declined approximately $1.3 billion or 42.1% over the last 12 months to the lowest level in 4 years. As a percentage of total assets, NPAs declined to 0.97%. This linked-quarter decline in NPAs was driven by lower commercial NPLs, which declined 8.8% and by foreclosed real estate, which declined $82 million or 37.1%, the lowest level in 5 years. We continue to focus on improving asset quality and are guiding to a modest reduction in NPAs in the fourth quarter, assuming the economy does not deteriorate significantly.

This guidance also excludes the potential increase in NPAs that may result from the implementation of a regulatory guidance surrounding loans not reaffirmed by borrowers following bankruptcy. We are working with regulators and expect to implement the guidance once all the factors regarding the behaviors of these loans are taken into account. The goal is to get this done in the fourth quarter. The implementation of this guidance could increase TDRs, non-accruals and charge-offs. However, we believe we have fully provided for this issue in our allowance and will not have a material income statement impact.

Looking at Slide 9, we continue to make significant progress in reducing foreclosed real estate balances, as you can see. This quarter, we saw a decrease of $82 million or 37.1% to $139 million. Since the third quarter of last year, foreclosed real estate is down $811 million or 85.4%, with total OREO balance down to $139 million. We should see some leveling off in OREO balances in the coming quarters. However, we forecast continued decline in related expenses but not at the same pace that we have seen in the recent past. You will also note that our charge-off ratio, excluding covered loans for the quarter, was 1.08%, down 1.22% from last quarter, very good improvement in charge-offs.

Third quarter losses are at the lowest level in 4 years. We expect total charge-offs, excluding covered assets, to be similar in the range of the fourth quarter and trend lower thereafter. As NPAs continue to fall, obviously, this will exclude any impact from losses arising from the loans affected by the regulatory guidance.

Turn with me to Slide 10. Net interest margin came in strong at 3.94% for the quarter, driven by the runoff of covered assets, which lowered margin 7 basis points, primarily offset by an increase of 6 basis points in our core margin. The improvement in core margin was mostly due to the full impact of the TruPS call, delayed reinvestment of this quarter's investment cash flows and a more favorable funding mix change. These were partially offset by lower yields on loans and other earning assets. We expect GAAP margin to decline to the mid 3.70s percent next quarter. This trend is driven by several factors: lower rates on new loan volume and investment purchases; runoff of higher-yielding covered assets; and finally, higher long-term debt costs due to the TruPS benefit going away. Partially offsetting this will be lower deposit costs.

We have broken out our core margin on Slide 10, which excludes the covered assets. This margin has held up well over the last 2 years. The bottom of the slide, we included our current estimate of the declining benefit from the covered assets' accretable yield and its impact on our revenues. The way to read this is the top line is the anticipated positive impact on margin through 2015. The bottom line is the negative impact on fee income or the offset, which is becoming less negative. So as the positive impact declines over time, there you will see a negative impact. In other words, the impact on net revenues will be less than the impact on net interest margin. Remember, cash flows are recalculated every quarter and may change significantly, so please use this only as a guide.

While the accounting benefit for this transaction is running off, this has been a tremendous acquisition for us. We now have #5 market share position in Florida, #4 in Alabama and have a strong foothold in -- for growth in Texas. Since the acquisition, we've generated billions of new loans with $1.5 billion in the last 12 months. We continue to gain tremendous market share, and we'll continue to see positive benefits in the future.

As you can see on the graph on Slide 11, we remain asset sensitive and positioned for rising rates. BankAtlantic and deposit mix changes made us slightly more asset sensitive. In response to the impact of the rate environment on net interest income, we decided late in the quarter to purchase $2 billion in agencies with $1.5 billion settling in October. The current portfolio is 2.1 years in duration, and the net premium is 1.2%, both very low risk numbers. Our portfolio is 98% government backed.

On Slide 12, our fee income ratio in the third quarter held steady at 42.4% compared to the second quarter. Insurance income was down from a seasonally stronger second quarter, but grew 38% over the third quarter last year, mostly due to acquisitions. We also saw continued evidence of some firming in market pricing, with year-to-date same-store sales up 3.9% over 2011. We do expect a seasonally stronger fourth quarter from insurance. Mortgage Banking income was up $29 million compared to second quarter as a result of the increased mortgage production and improved margins. We expect Mortgage Banking income to remain at a similar strong level in the fourth quarter.

A change in the FDIC loss share income was mostly due to the offset to the provision of covered loans. Other income increased $28 million based on $17 million in other income related to our post-employment benefits and $8 million increase in our income related to private equity and similar investments.

Looking on Slide 13, our efficiency ratio increased to 55.2% compared to 53.9% last quarter due to higher expenses. Personnel expense increased $22 million, including $10 million related to BankAtlantic and $17 million related to post-employment benefit expense. Foreclosed property expense continues to improve. Narrowing losses and foreclosed property write-downs drove an $18 million reduction compared to last quarter. We expect foreclosed property expense to continue to decline next quarter. Processing expenses increased $23 million. This is mostly due to the impact of additional mortgage repurchase activity in related reserves, with $28 million related to better identification of unrecoverable costs associated with investor-owned loans. We expect this expense category to return to a more normalized level going forward.

Merger-related and restructuring expenses increased to $43 million as expected, primarily related to the BankAtlantic acquisition. We do not expect any more material merger charges related to BankAtlantic. The primary driver of the increase in other expense is approximately $11 million in other operating charge-offs and similar expenses, largely related to the settlement with Visa.

Without BankAtlantic and the incremental loan processing expense, noninterest expense would have been up less than 1%. FTEs increased by 110, excluding BankAtlantic, due to adding insurance lines.

Finally, the effective tax rate for the quarter was 26.3%. We expect the rate to be about the same in the fourth quarter.

Moving to Slide 14, our capital ratios remained very strong and include the impact of Crump and BankAtlantic acquisitions and the redemption of our outstanding TruPS. Tier 1 common under Basel I fell as expected to 9.5%. We estimate our Tier 1 common under the recently issued Basel III NPR to be approximately 8% under the proposed U.S. capital rules. In addition, Tier 1 common under the proposed Basel III international capital rules is 9.2%, which is important because this measure will potentially be used for 2013 CCAR. Neither ratio includes mitigating actions, which we will take to improve our capital ratios. We are very comfortable with our Basel III capital levels and feel we have the flexibility to take advantage of opportunities.

With that, let me point out a few highlights from our segment disclosures. Turning to Slide 15. Community Banking net income totaled $250 million, up $73 million versus linked quarter. The main drivers include loan growth, lower foreclosed property expense and lower regulatory costs. Our Direct Retail lending continues to be strong with 3.6% linked-quarter growth and 10.2% third quarter 2011.

Turning to Slide 16. Residential Mortgage was up $14 million on linked-quarter basis, up sharply compared to the third quarter last year. The main drivers include continued strong originations, increased gains on sale and wider margins compared to last year. The loan loss provision is lower compared to last year due to improved credit trends and updates to loss factors. Year-over-year portfolio increased substantially, with loan service for others growing 9%. With the refi boom floating from low level rates, only 59% of our production is from refinance. Importantly, our purchase mortgages are up nearly 25% compared to last year.

Turning to Slide 17, Dealer Financial Services reported net income of $53 million. Regional acceptance continued to drive higher net interest income from the portfolio growth and improved margins. Net charge-offs are up because of seasonality at regional acceptance. We continue to open new offices and strong growth markets and are expanding our floor plan financing strategy.

On Slide 18, you can see Specialized Lending experienced good quarter growth. Loans increased 16% versus third quarter last year. High net interest income was driven by exceptional growth in small ticket consumer finance and Mortgage Warehouse Lending. Net income for this segment was lower as a result of additional provisioning in light of the significant loan growth in this segment.

Moving on to Slide 19. Insurance Services generated $16 million in net income. Income was down compared to second quarter as expected because of seasonality. And turning to Slide 20, Financial Services generated $71 million in net income, primarily driven by higher corporate banking and wealth-related income. These businesses had loan growth of 50% and 33%, respectively.

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

Kelly S. King

Thank you, Daryl. So in summary, I would say that we had a very strong quarter. As we've indicated, we do have some concerns about where the economy is going. I would point out in fairness, though, that if we get the right kind of positive leadership changes in Washington, there's a real potential for a positive economic boost as we head into next year. So I don't think we need to be overly pessimistic about where the economy is going. Nonetheless, the economies will be what economies will be. In that context, I've never felt better about our fundamental performance. Now every part of our business is doing great. We have the best value proposition in the marketplace based on asset evidence, in terms of service delivery of quality. We have great opportunities in that core bank, great opportunities in our non-core businesses. So the economy will be what the economy will be, but BB&T's going to outperform the economy. And we feel very, very confident and enthusiastic about that. Alan, let me turn it back to you.

Alan Greer

Great. Thank you, Kelly. In a moment, we'll ask the operator to come on the line and explain how the Q&A session works. As normal -- as is our normal practice, please observe the practice of asking one finite question and one follow-up so that we can maximize the number of participants. If you have additional questions, please reenter the queue. Katie, if you will come back on the line now and provide instructions for the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Jefferson Harralson, KBW.

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

Daryl, can you talk about the sources of the margin pressure that you're seeing? Is it -- what asset yield is it mainly affecting? Is it the MBS side? Is it the mortgage side? Or can you get a little more specific about what's driving the lower guidance there?

Daryl N. Bible

Yes, sure, Jefferson. So when you look at third quarter versus fourth quarter, we have margin coming down in 4 main areas. First, on the asset side, loan yields are coming down. We're seeing tighter spreads in commercial, commercial real estate. Our actual consumer loan spreads are actually holding in there well, but overall, we're seeing lower spreads on the commercial side. If you look at -- the TruPS comes off, so that benefit goes away, so our long-term debt costs will bounce back up a little bit in the fourth quarter. That's another thing. Our covered assets continue to run down. When we reran our cash flows in the third quarter, we lost another $17 million for this quarter and a like amount for the fourth quarter, as the cash flows continue to pay off and perform. So those are probably the main areas of the drivers for the lower margin.

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

It doesn't seem like in the -- when you look at your guidance for accretable yield, that change in that does not seem to be a big driver. Is that true? Or is it -- is there a less accretable yield coming in than you thought?

Daryl N. Bible

So there is a little bit less accretable yield. If you were to -- if you look at it, we're going down 17 basis points. If you go from 3.94 to, let's call it, 3.75, 8 basis points would be on asset yields repricing down; 4 basis points on covered; 4 basis points, we're going to reinvest investment securities at lower yields, probably in the mid-1% range. The TruPS runoff is worth 7, and offsetting that, you have deposits that will continue to reprice down. So that nets about 17 basis points.

Kelly S. King

Now remember, Jefferson, remember that like the investment securities, while it is having a negative impact on margin, it is having a positive impact on EPS.

Operator

We'll take our next question from Erika Penala with Bank of America.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

I just -- this is another margin question. I apologize, but I just wanted to make sure I was thinking about it the right way. So if we assume some nominal earning asset growth next quarter and take sort of the midpoint of your guidance or just 3.75%, then I get net interest income of $5.8 billion. And if I take the 600 -- sorry, if I take the $300 million that's coming off from just the accretable yield, right, and I assume some sort of growth in earning assets, let's say, 5% growth, then I get to a margin that's sort of below the 3.5% that you've indicated as core, I'm getting more of a 3.4% margin. And then you just mentioned to Jefferson that on the asset yield side, you're getting, let's call it, 8 basis points a quarter in terms of just pressure on the loan side. I guess I'm wondering if I did that right and what's the offset. And I apologize for the long-windedness of that question.

Daryl N. Bible

Yes, sure, Erika. So there's a couple of things there. So the fourth quarter impact, as I was explaining, was the 3.94% to 3.75%. As we get into next year, we don't expect to have as much pressure on the assets is what you're saying. We really aren't going to give you a 2013 margin guidance yet, as we don't have our operating plan completed yet and need to pull that together. The margin will continue to probably drift down modestly, but we continue to have some room to lower deposit rates. Our investment yields are already relatively low. So as we reinvest, that benefit maybe won't be as much. So there are some offsetting things so that the dramatic drop between third and fourth, while it will trend down next year, won't be as dramatic throughout that whole year.

Operator

We'll take our next question from Todd Hagerman with Sterne Agee.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Just a couple of questions just in terms of the loan growth. C&I, obviously, very strong, but as you mentioned, you're getting a little bit more pressure on spreads. Just curious in terms of, a, where the growth is coming from and the decision on the mortgage side with that kind of slowing down relative to kind of what you're doing on the securities portfolio going forward. Just kind of wondering how you're thinking about that in terms of the mix in the loan growth or in the loan category, as well as the aggressiveness on the C&I side and the pressure there.

Kelly S. King

So Todd, what we're seeing out there is a lot of competition in general in the C&I space. Although, frankly, we're able to get market share movement, holding our own standards in terms of quality and price. It's just you have to work much harder than you may in some other times. You're seeing a lot of demand out there in CRE, particularly in the multifamily space. Obviously, there's a huge surge because there's people who have become less interested in primary home space to moving into rentals, and so really, really strong growth there and well, a competitive, certainly acceptable pricing. So what we're basically doing in terms of the aggregate asset mix is just trying to look at the things that make sense for us in terms of our risk appetite in the short run and the long term. So we'll keep growing C&I kind of at a steady, steady pace, taking what's available to us that meets our parameters, something like mortgage. Last year and first part of this year, we grew because, frankly, there was less overall demand in the marketplace, and prices were relatively good, and we had the asset sensitivity availability to handle it. As we looked at midpart of this year, we became concerned about too much risk interest rate exposure, so we dialed back the mortgage, not because of the quality of the mortgage but because of the interest rate exposure. And so you'll see us dialing those categories up and down in the short run, but the long-term thrust in terms of C&I, focusing on CRE, the Direct Retail or the Specialized Lending businesses, all of those will continue unabated as we go forward.

Todd L. Hagerman - Sterne Agee & Leach Inc., Research Division

Okay. So just as a follow-up quickly, in terms of C&I specifically, what -- I mean, what kind of spreads are you seeing in terms of how you -- what you're putting this stuff on right now? And kind of how do you see that the next couple of quarters?

Clarke R. Starnes

Todd, this is Clarke Starnes. We see some incremental pressure. I mean, for the quarter, we still had pretty healthy spreads, 230 off on our C&I. And as Kelly said, our CRE is 80 to 100 basis points higher and we're -- our CRE production, by the way, Kelly, was up 12% for the quarter, so that's offsetting some of that. So again, we're still well north of 200 basis points on average, but there is pressure downward, particularly on investment or near investment grade credit, so that's why I think others are reaching on the risk curve to get yield, and we're not going to do that. So we expect some pressure, but I still think we can get our share.

Operator

We'll take our next question from Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley, Research Division

So question on the NIM, I just want to make sure I understand the impact that derivatives might have had on the move in the quarter. Is -- are there any derivative positions that are coming off that are impacting the change?

Daryl N. Bible

Not really, Betsy. Our derivative income is really not significant to our margin. It's only a couple of basis points, and that really had no impact on the quarter or on the forecast.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And then as we look forward, I realize you're not giving guidance, but given where RMBS yields are and you indicated did the forward, would you be taking for serious with those forwards? Or would you just be rolling forward RMBS investments, like maybe you get a little bit of a pickup on roll forward to receiving RMBS?

Daryl N. Bible

Yes, we made a decision back in June to basically stop portfolio-ing our 10- and 15-year mortgages, so we're basically selling everything that we would normally sell now through -- to the GSEs. The only mortgages that we're portfolio-ing right now are our jumbo and ARMs and some CRA type of loans.

Betsy Graseck - Morgan Stanley, Research Division

Right. And on the security side, though...

Daryl N. Bible

Yes. Securities, we're basically buying all government agencies. The yields right now in the current marketplace is in the mid-1% range. It's probably what is a good average yield of what we're buying right now.

Operator

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

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

I wanted to ask a big picture question just in terms of looking ahead to the next couple of years. We know we've got this purchase accounting headwind. The preferred dividends got a run rate next year, and then on the offsets, we got a probably better provision outlook in lower foreclosed real estate costs. But I just wanted to ask a broader question of like, can we see earnings growth next year out of BB&T given the points, Kelly, that you've been making earlier about the environment and then some of these just natural pressures? How do we think about the ability to grow earnings from where we are today?

Kelly S. King

Well, Ken, I think, obviously, we had to hedge now because we just don't know where the economy's going to be. And I think today, I mean, you have to be fairly pessimistic just based on talking the businesses and seeing what they're actually doing. On the other hand, I personally believe that as we think about postelection, I think that there's a real opportunity for positive surge because keep in mind, business people have not been investing now at that level they ought to be for a couple of years. And so you see some real opportunity there. But in any event, it is uncertain. But we feel positive, Ken, as we look forward. Obviously, we'll do better if the economy is better. But based on our most likely scenario, we feel positive about '13 versus '12 because, even though we have the spread pressures, et cetera, on the core bank, we don't get the same kind of spread pressures in terms of our mortgage businesses. We don't get the same kind of spread pressures in terms of Specialized Lending business. Our insurance business margins are likely heading up. So recall from that pie chart that about half of our revenue comes in from the core bank. The other half comes in from other sources. And so it'll be plenty challenging, but yes, I would feel positive about '13 versus '12.

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

Okay, got it. And then my second question just relates to then. You mentioned earlier invests in some of the commercial office footprints, but I'm also just wondering how much more can you do or how much do you have to invest in terms of incremental expenses versus -- in adjusting to this potentially more challenging environment? How much can actually just work on the expense base? Like, I know you guys have this program underneath the surface, but how do we understand what the tangible benefits could be from you guys taking a closer, tighter look at expenses underneath the surface?

Kelly S. King

So the degree of expense opportunity is a direct function of what we see in terms of the economy and revenue opportunity. So if the economy remains relatively positive and/or positive, then you will see us investing in revenue producers, et cetera, and growing into that positive tailwind. If, on the other hand, we hit a really negative environment for next year and things really, really starts -- continue to slow down, you will see us really, really ratchet down expenses further. We could -- we have a number of areas we can ratchet expenses that we certainly don't want to but we certainly can. We've not gone through this whole cycle. We've not done a lot of draconian things in terms of our expense structure including a tougher look at some of our fringe benefits, et cetera. And so we could get really much tougher on expenses if we had to. I don't expect that, do not project that. But it'll all be a function of where we go. I think you'll see us continue to have a clearly a competitive advantage on our efficiency ratio. But all of us are facing increasing from the regulatory side. We're being killed from all the additional regulatory burdens coming out of -- mostly from Dodd-Frank, and so that's the negative. But we are becoming more productive every day. I mean, all of our strategies are being executed in an efficient manner. We're becoming more productive. So I'd have to cautiously say that we have expense opportunity if the revenues don't come. But I hope what we do is get the revenues, and you'll see expenses stay kind of like they've been for the last couple of years.

Operator

We'll take our next question from Nancy Bush, NAB Research, LLC.

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

Kelly, just a question on, I think, probably I was not the only person who had a mini heart attack when you said that you wanted to start doing more in CRE. Could you just clarify that and sort of tell us the areas that you're going to stay out of or put any parameters around what you want to do?

Kelly S. King

So, Nancy, as you well described us in the past, our CREF -- when I say aggressive, that would be in a non-natural boring manner. So we'll continue to be as conservative in terms of underwriting as we've always been. So no, not going out and doing the crazy stuff that got everybody in trouble, big land loans and especially their projects and all of those kind of stuff, not at all. Let me emphasize: Not at all. But on the other hand, when they are really fully cash flowing good projects with good solid cash equities in the multifamily space, we'd be interested in that and in office, if they come higher. Right now, there's no supply in the office area. But if office comes back, in my positives would go to hell regarding to the economy, we would do some office buildings that will have good pre-leases and good coverages. But what we're not doing, Nancy, is we're not reducing our coverage ratio requirements. We're not reducing our tough standard with regard to having long-term projected real interest carry in terms of cash flows. You know what happens -- a lot of times when interests are low, people underwrite carry based on current rates. We project long-term normalized rates. We don't get a lot of deals because of that. But don't have a heart attack. You'll see us do nothing that you would feel uncomfortable with.

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

And my follow-up question is for Daryl. The $0.02 loan processing expense, could you just clarify that and why that was regarded as "an unusual expense" for the quarter?

Daryl N. Bible

Nancy, it was an account that we had in our mortgage area where we had some aged items, and we found these aged items and realized that it should have been written off in prior periods. So that's why we are calling it a onetime item.

Operator

We'll take our next question from Matthew O'Connor with Deutsche Bank.

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Just another follow-up question on the NIM. I think somebody had asked earlier is there any derivative drag going forward, and maybe I misinterpreted the answer or the release here, but there's a $26 million benefit that you pointed to as a reduction in funding costs this quarter.

Daryl N. Bible

That's correct.

Matthew D. O'Connor - Deutsche Bank AG, Research Division

And I thought that went away next quarter, which is one of the drivers of the NIM decline.

Daryl N. Bible

Yes, that's really the 4 basis point impact on the higher long-term debt cost that we'll have next quarter. But if you look at overall, from there on out, our derivative net income is just a few basis points. It's not significant either way.

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Okay. So once we get past the 4Q step-down, then that's relatively stable?

Daryl N. Bible

That's correct.

David McKinley West - Davenport & Company, LLC, Research Division

Okay, got you. And then just separately, I mean, obviously, as we think about the purchase accounting accretion, there's a partial offset in the fee component. And I did notice the FDIC loss share was a bigger loss, which I thought it would normally go in the other direction as purchase accounting accretion came down. So I just -- what's going on there? And then how do we think about that $90 million drag going forward?

Daryl N. Bible

So when we closed on the Colonial acquisition in the third quarter of '09, we set up an amortization a schedule for the receivable. And that was basically a defined time period, and it basically follows the schedule. On the other side, we have the cash flows that impact the interest income. We run those cash flows every quarter, and those durations move around, which causes that to move up, sometimes a little faster and sometimes slower. So that duration's moving back and forth. But what we call the FDIC offset piece is more of a defined grade or amortized period on a defined period; it doesn't change.

Matthew D. O'Connor - Deutsche Bank AG, Research Division

Yes, I guess I'm still a little confused. I mean, so the purchase accounting accretion will be coming down from this level going forward as it has been. And then, I mean -- is that $90 million? I guess -- I know there's some puts and takes, but I assume that should be coming down...

Kelly S. King

Say, Matthew, let me hit it because it's always been confusing to me. But basically, so think about it this way. The revenue is coming down, but the negative FDIC hit is coming down also. So in other words, you get a negative end, so revenue is coming down, but you got a positive and that the negative FDIC charges is reducing. The FDIC charge is not going up, it's going down, that's the positive benefit.

Daryl N. Bible

So if you look at the benefit for '12, if you net the 2, it's $600 million in net revenue. If you go to '13 and you net the 2, it's $400 million. And 2014, it's $150 million. You have to really net the blue line against the red line.

Operator

We'll take our next question from Gerard Cassidy with RBC.

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

Kelly, can you outline for us -- you've done a good job about telling us what some of the customers are thinking should the fiscal cliff hit and maybe higher taxes, so potentially slow down the economy. But if we put that off to the side for a moment, what do you see as the biggest risk for BB&T next year? Again, not in the economic recession coming because of what's going on in Washington. Besides that, what are you guys worried about the most?

Kelly S. King

That's a good question, Gerard. I think if you -- so that's a really big if. But if you set aside all of that, first of all, as I've said in my closing comments, I've never felt better about our overall fundamentals. I mean, every part of the business -- that's what's kind of frustrating today because with the overall economic picture, it kind of clouds how strong the underlying performance of the business is. Which is by the way, you guys, when you're looking at -- you really ought to look at free cash pre-provision, you ought to look at the underlying strength of the core business at BB&T, which is still very, very strong. There's only been one thing I've ever really worried about, about our business is because we are a service business and because our strategy is, by itself, having the best value proposition, which is a function of having the best quality, it really comes down to people. And so while it's not a problem for us, that's what I worried about at night is, because the entire strategy is based on having better people, better trained, better motivated, better executing than our competitors, that's the only thing that I wake up at night worrying about. Now having said that, because it is intense focus replace in terms of recruiting, in terms of our university training and sort of patient efforts, in terms of feedback we get from our clients who are engaged -- among our associates based on engagement surveys, I've never felt better about where we are with regard to our phases [ph]. But that's just what I was worried about because that's the only thing that can trip us up.

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

And as a follow-up, if we're talking here a year from now, as we're heading into 2014 and if we assume now fiscal cliff does not hit Washington's turn for the better and this housing market continues to grow better than -- like we saw yesterday, and there's now talk in October of '13 of the fed raising short-term interest rates much sooner than they currently are expected to do, which is the middle of 2015. If that proves to be true, how does that affect you guys a year from now in terms of the portfolio of durations, margins and things like that?

Kelly S. King

So that's the opposite side of my middle of my nights, Gerard. So in the middle of the night, sometimes I worry about if we don't have the right people. So all the time, I wake up just laughing and clapping my hands because of that environment. That would be a huge win for us. We're positively gapped. We've strengthened our position in the marketplace in general. We've got really, really high deposit market shares -- the shares of loans in these new markets like Florida and Alabama and Texas. That's a boom for us. I mean it would be a really, really fun time.

Operator

We'll take our next question from Greg Ketron with UBS.

Gregory W. Ketron - UBS Investment Bank, Research Division

It's going to be a short-term question and a long-term question. Daryl, on the margin, I'm sorry to go back to it, but if you look at the, I guess potential revenue or earnings pressure that the drop to the mid-70s could create, it looks like if you'd maybe just take the drop, that could be $0.07 per share. And then if you factor in the earning asset growth for the quarter, which actually ended the quarter on a strong note, so earning asset looks like it should be pretty that in the fourth quarter. That's kind of like a $0.02 or $0.03 offset. So it looks like about $0.04 to $0.05 in EPS pressure on a revenue or a pretax basis kind of a $50 million. As we kind of walk through and look at the fourth quarter earnings and into 2013, are there offsets to that, such as maybe a rebound in insurance, the lower FDI expense that you're looking at that, you think could offset the impact from the lower margin from a revenue and earnings standpoint?

Daryl N. Bible

Yes, Greg, I'll touch on it but I think my peers here will probably chip in a little bit. Yes, as you look out into '13, and I did follow your logic on the fourth quarter, but as you follow -- look into '13, definitely credit costs will continue to come down. We tried to give some guidance but we'll have more guidance in January regarding that, but we feel very good that credit quality is coming down, and maybe some others want to touch on some of their businesses?

Christopher L. Henson

Yes, Greg, this is Chris. Insurance, I think, you've touched on, is pretty clearly firming in from a price perspective. Year-to-date, we're up 4%. If you just look at the core brokerage business, pulling out a little underwriting, it's actually like 4.6%. And we're just -- what you typically see is an abrupt change when you go from soft to hard market, up 15% to 20% or so. We're only up 4%, so we're probably -- we've got another 2, 1 year, 2 years of this, I think, left. And there are kind of 3 legs to it. One is, you get the pricing improvement, then as the economy improves, you get a volume improvement and exposures. And then thirdly, sort of on out years, in the second and third year, you get a pick-up in profit-sharing commissions that are based on performance with your underwriters. So I think we're just really well positioned to take advantage of that as we kind of move forward.

Ricky K. Brown

Greg, this is Ricky. Just a little comment about -- around our commercial strategy that Kelly mentioned earlier. We think there's some real opportunity in some of these new markets for us and maybe even some contiguous markets that we're beginning to reach into that we can do some commercially oriented branch growth that can get us some loan growth, can establish some presence in concert with Chris' efforts in capital markets and some of these really work well together. Though we think that's a nice offset in terms of additional loan growth that we can have against this margin pressure, so some kind of volume growth and we feel very good about. We've had a few practice runs in Texas already, and we've seen that work very, very nicely. So we're very encouraged by that strategy. We're finalizing it. Hopefully, you'll see some more information about that soon.

Daryl N. Bible

And lastly, Greg, what I would add is our deposit costs will continue to come down last quarter. Last quarter, we said they were going to go down from 42 basis points down to 30. That was pre-QE3, so we'll probably do better than that next year. So I think you'll have that to help offset some of these asset side pressures.

Gregory W. Ketron - UBS Investment Bank, Research Division

Okay, great color. I appreciate that. And, Kelly, as we get closer to the election, seeing the housing data, particularly the Southeast improvement, prices improved, you noted that people are taking a pretty cautious view. The sense that there is a lot of pent-up demand kind of pending the election in November, and as we get the results that are more favorable to a business climate, that you could see a pretty quick recovery in investment of the excess liquidity that's on the sidelines right now?

Kelly S. King

Greg, I really do. To give you just a couple of little anecdotes. I mean I talked not too long ago with an owner of retail furniture store. He had like 50 stores, so he does have his own trucks to deliver all of his furniture. And he said, "I have not replaced a truck in over 8 years." He said, "I need to replace my entire fleet but I'm not going to do a thing until after this." So I believe the day after you get a change, he'll go out and replace his entire fleet. We've seen people holding back in terms of technological investments. Do I need to update all of my software and all of my hardware? I've been holding back. You could work to those. So there's just a lot of that out that's holding back. And I may be wrong, but I personally feel pretty strongly. This is based on talking to 400, 500 businesspeople in the last year. I think it's a pretty good economic sample. I think under the scenario you described, we would definitely get a positive hit. And by the way, I know everybody's concerned about rates. My own scenario, and I mentioned this over the Barclays conference, my own scenario is that next year, we're going to see higher rates. Either 1 or 2 reasons. Either the accrued stays in; that's not as favorable to the business and we have relatively low growth. I think we should be spending like crazy, which is to drive up inflation fields which is what drive up rates or we get a more positive business climate, which takes business investment surges, loan demand grows, that drives up rates. Now I know Bernanke can hold down to short term and he can hold down to 10-year, but he can't hold down all rates. So I think any way you turn, as we get towards next year, you're going to be seeing upward pressure on rates.

Operator

We'll take our next call from Kevin Fitzsimmons with Sandler O'Neill.

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

Just real quickly, most of the questions have been dealt with, but the initiative you talked about in terms of expanding the commercial branches, just wanted to get a feel. I think, Ricky, you had mentioned before, new markets, so is that really Texas we're talking about? Are you talking about actual states that you're not in at this time? And what would some of those be if that is the case? And then secondly, can you just give us a sense on that seasonality of insurance? I would assume it's going up but not up to the pace of last quarter, maybe something in between, if you could give us a sense if that's a good assumption?

Ricky K. Brown

Yes, thank you very much, Kevin, for that. But our focus is going to be in the 3 opportunity markets that we have in front of us: Texas, Alabama, Florida, some places that we have opportunity. So that's where we're looking and that's where we'll make the final assessment about what we do. Longer term, we'll see how that plays out. If we're successful, it would have some applicability in other places.

Kelly S. King

We'll ask Chris to give his comment on the insurance question.

Christopher L. Henson

Yes, Kevin, the insurance. You've got several other things that's kind of underlying the business. You've got the pricing pressure we talked about or the pricing improvement. Then you've got current kind of coming online, which is kind of a nice pickup as well. So I think the fourth quarter is going to look at little bit better than what you're seeing currently. Probably in the kind of the up, could be 5%, 5% or so, 5% to 10% sort of where we are at the moment.

Operator

We'll take our next question from Michael Rose with Raymond James.

Michael Rose - Raymond James & Associates, Inc., Research Division

Just one more question on the margin. Does the implied drop this quarter change your kind of longer-term outlook of 3.6% to 3.7%?

Daryl N. Bible

It does not, Michael. I think in January, we'll give you a clear guidance for 2013 after we get our operating plan pulled together. I will just say from where we are in the fourth quarter, we had modest pressures next year and I think we'll give you more color next quarter.

Michael Rose - Raymond James & Associates, Inc., Research Division

Okay. And then back on the expenses, with some of these new initiatives your commercial branches and some of the other things you mentioned, how does that -- what's kind of the expense associated with some of those efforts?

Kelly S. King

Michael, in general, on the expenses, as I indicated earlier, if things don't go well in terms of revenues -- and we'll be really, really tough on expenses. Every expense will be put under intense scrutiny. And frankly, in that environment, we will not make investments and expense initiatives that do not generate positive revenue -- positive income for the year, we would hold back. On the other hand, if we stay more positive, then we'll be investing more in revenue opportunities. In some cases, they're a little short-term dilutive and maybe positives early next year, but you're always having to make investments looking forward to grow the business. So we'll just have to measure those as we go along and truth is right now, I can't tell you how that'll go. I can tell you the end of the day, our profit will be the focus. And so if the economy is tough, we'll be focusing tough on expenses to get to profit. If the economy is better, we'll get more revenue because of some expense-side investments that create more revenue and we'll just have to play it by the ear as we go along.

Operator

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

Edward R. Najarian - ISI Group Inc., Research Division

So, Daryl, let me apologize up front for the 10th net interest margin question here, but I just thought I'd ask in a way that might clarify things a little bit for sort of the outlook for next year. So if we assume we're around $375 million for the fourth quarter and then we look at that sort of blue line versus red line chart on Page 10 of the slide deck where you talk about the net revenue from covered loans next year at about $400 million, what would you say would be the net revenue from covered loans in the fourth quarter of this year?

Daryl N. Bible

Let me see. I would probably say, in the third quarter, you can see in our press release, we're about $130 million in net revenue, if you look on Page 6 there. So it would probably come down in the neighborhood of around $20 million.

Edward R. Najarian - ISI Group Inc., Research Division

Okay. So something in the neighborhood of $110 million?

Daryl N. Bible

$100 million to $110 million in that neighborhood.

Edward R. Najarian - ISI Group Inc., Research Division

Okay, so you're annualizing in the fourth quarter to about $440 million. So what you're telling us is the drop-off in revenue in 2013 from where you think you'll be in the fourth quarter in that mid-370s NIM level is not very much, in terms of drop-off in covered loan accretion?

Daryl N. Bible

Yes, this is a caveat. I mean we run cash flows every quarter and it's been volatile so -- but if you look at it over a longer time period, it's a modest gradual decline over the next couple of years. But every time we rerun cash flows, it gets a little lumpy, but you got the trajectory right.

Kelly S. King

Ed, I'm going to make this comment for you and others. And I'm sure you all understand this but I just -- to emphasize the point. I don't want anybody to get -- take out of context that graph on Page 10 as it shows a projected decline in net revenues from Colonial, because that is a very incomplete picture. We're just trying to show you the impact on margin. But even that's incomplete because remember, this is basically a declining portfolio that we've got 3 years ago. At the same time, we are growing, the -- if you will, the new Colonial and this is growing by the day. We've had huge, billions of dollars increases in loans and deposits and other fee income. And so if you looked at that, you could draw the conclusion that aggregate BB&T profitability is down by that much. That would be very inaccurate, because the whole Colonial business is just really wrapping up, really rapidly. And so we thought about could you do some kind of a comprehensive graph that looked at all of those aspects because as you can imagine it would be too convoluted. But it would be very inappropriate to look at that and draw some whopping conclusion about negative impact on BB&T for next year. It would be totally to not to focus on the rest of the positive benefits from the merger.

Operator

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

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

And I'm sorry to beat what is pretty clearly nearly a dead horse at this point. But, Kelly, I wanted to follow up on your comment in terms of the -- on Slide 10, in terms of the reduced accretable yield. And I appreciate that there's far more benefits than the NIM impact from the decline in the accretable yield. But if I take the current net interest income from the third quarter, annualize that and then reduce it by the $600 million of accretable yield that you're estimating at this point for 2013, I estimate a net interest margin in the 3.5% range versus what you're reporting now. So I guess I'm just curious, as you see that $300 million decline year-over-year in the reported net interest income, is there any offset that you might be able to generate in the spread revenue specifically to help us get a better [indiscernible] what the direction for net interest income is?

Kelly S. King

Let me make one general comment. Daryl will give you the details. But keep in mind, when you look at that reduction from $900 million to $600 million, that's $300 million. If you look at the bottom line, you get $300 million -- it's only $200 million. So you got -- it's only $200 million, first of all. And then you have the positives that I alluded to earlier with regard to more loan volume, which improves revenue, not necessarily the margin but revenue. And then we do have, to your point, fee opportunities, insurance opportunities, wealth management opportunities, all of which won't be a NIM; that would be noninterest income that will be very positive as well. But let me ask Daryl to pick up any additional detail.

Daryl N. Bible

Hey, Matt, if you look on Slide 10 and you look at the top part under that first bullet point, we list 3 offsets there. You have 1,000 specialty businesses. Those basically yield around 10% and they're going to grow faster than the loan yields, so that will be an offset. We don't see that offset in the fourth quarter because of seasonal decline there, but it's still growing faster year-over-year versus total loans. You have CRE, which is not running off anymore, and will start to grow. That yield is higher than the C&I and other portfolios, and we talked about deposit costs. So those are your offsets.

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

Okay, okay. Let me switch to my second question. I guess I was curious as to the relatively low percentage of refi mortgages that you had in the quarter versus purchase mortgages. And I guess I'm curious if that's something that BB&T is specifically targeting or is that something that your customers are coming to you and requesting higher -- more purchase mortgages rather than refis?

Clarke R. Starnes

Yes, Matt, this is Clark. Number one, we are very targeted consciously in our origination strategy on more purchase because we know, at some point, refis wane, so we feel very good about our sales efforts there with the building community and with clients to earn more purchase. And then frankly, we do have very good brand around our mortgage business and our markets, so clients that are purchasing homes are coming to us. And to a final point, we are seeing more housing activity in many of our markets. So that we are seeing improvement in housing and so we're seeing more buys in a lot of our markets. And we're getting, I believe, our fair share of that.

Operator

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

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

So I just wanted to go back to the branch initiatives that you mentioned earlier. Is there any comparison that's different today between buying versus building on branches? Are there acquisitions that may make more sense and easier or is it just simpler to go on your own?

Kelly S. King

Chris, what we try to do is look at -- we try to look at -- we do look at the internal rate of return analysis on build versus acquisition. And obviously, as you would know, it depends on more on deposit acquisition as it does on cost to build, because the cost to build is not that variable. In this case, the cost to build a house is going to be lower because we're going to be looking at acquiring vacant, primarily vacant, existing or previously bank buildings, where we get them at a real deep discount based on current market values and we don't spend that much money on them because it will be a commercial strategy and the exact nature of the branch does not vary. It's not as important as it is in retail. So, number one, the cost of these will be lower. But on the acquisition side, it's just a function of 2 things. One is, what is the acquisition price? And the other is what is the availability? We obviously, as you know, we look at deals all the time, but I would say, in general, the sellers' desire to returns today are generally higher than we're willing to invest in. And so that's why we are looking to some degree, why we are looking at this de novo strategy, because we're not going to go out into acquisitions that violate the fundamental principles that we've laid forth. We'd be glad to do them, but we look at the organic growth and merger growth as interchangeable, and we like to have a nice healthy combination but if acquisitions are too expensive, we've got plenty of capacity from an organic point of view. And so this time, you can surmise that we are not expecting much acquisition activity and so therefore, we're focusing more on the organic growth.

Alan Greer

At this time, Katie, if I could just say that we've given as much time as we can. And we do have a few more names in the queue, but we, due to the time, we need to go ahead and end the call. Kelly, do you have any closing remarks?

Kelly S. King

No, just as I said to everybody, thanks for joining us. We appreciate your ongoing support of our company, a lot of good questions, a lot of challenging issues out there, but I'll restate again, I've never felt better about the fundamental performance of our company and the fundamental opportunities that we have going forward. Everybody have a great day.

Alan Greer

Thank you. This concludes our call. Have a good day.

Operator

That concludes today's conference. We appreciate your participation.

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