Truist Financial Corp (TFC) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen.

Welcome to the BB&T Corporation third quarter 2007 earnings conference call.

At this time, all participants are in a listen only mode.

A brief question and answer session will follow the presentation.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host, Ms.

Tamera Gjesdal, Investor Relations Manager for BB&T.

Thank you.

You may begin.

Thank you, Diego.

Thanks to all our listeners for joining us today.

This call is being broadcast on the internet from our website at www.bbt.com/investor.

Whether you are joining us this morning by webcast or by dialing in directly, we are very pleased to have you with us.

As is our normal practice, we have with us today John Allison, our Chairman and Chief Executive Officer, and Chris Henson, Chief Financial Officer, who will review the financial results for the third quarter of 2007 as well as provide a look ahead.

After John and Chris have made their remarks, we will pause to have Diego come back on the line and explain to those who have dialed into the call how to participate in the question and answer session.

Before we begin, let me make a few preliminary comments.

BB&T does not make predictions or forecasts.

However, there may be statements made during the course of this call that express management's intentions, beliefs, or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different is contained in the company's SEC filings, including but not limited to the company's report on form 10K for the year ended December 31, 2006.

Copies of this document may be obtained by contacting the company or the SEC.

And now, it is my pleasure to introduce our Chairman and CEO, John Allison.

Good morning, Tamera, and thank you for joining us.

I will try to give you some insight into our third quarter financial results along with the year to date results, focusing primarily on asset quality and noninterest income.

I'll share with you a few thoughts about merger and acquisitions and then some thoughts about the future financial performance.

Chris is going to give you some deeper insights in what's happening to our margin, noninterest expenses, taxes and our capital position and then of course, we'll have time for questions.

Our GAAP net income for the third quarter was $444 million, up 6.5%.

Operating earnings were $448 million, up 5.7%.

GAAP diluted EPS for the third quarter was $0.80, up 3.9%.

And operating diluted EPS was $0.81, up 3.8%.

The $0.81 was $0.03 less than the consensus estimate.

By far, the primary reason we missed the consensus was the impact of market disruption on our capital markets and other businesses, which we think was in the $25-26 million range, about $0.03 a share.

And I'll talk a little bit more about that.

If you look at our returns, they remained very good.

Our cash ROA was 1.50%.

Cash ROE 26.86%.

Our cash basis EPS was $0.84, up 3.7%.

Our year to date, we had similar kind of results.

GAAP net income $1.323 billion, up 3.6%.

Operating earnings $1.334 billion, up 5.5%.

GAAP EPS $2.40, up 2.1%.

Operating EPS $2.42, up 3.9%.

Cash EPS $2.51, up 3.3%.

And similar kind of returns which were still very healthy.

Cash ROA 1.55% and cash ROE 27.83%.

If you look at the factors driving the financial results, margin continues to be a big challenge for us, although we think there's going to be some improvement in that regard as Chris will discuss.

But our margin continued to decline to 345 in the third quarter from 355 in the second, down 10 basis points, and down from 368 back in the third quarter of 2006.

And as I said, Chris will give you some good insights there.

Noninterest income was a challenge and kind of countered with the trends we've been having.

If you look at noninterest income, you take out purchase acquisitions in the MSR impairment annualized second to third was actually down 34%.

Third to third was basically flat, up 0.6%.

Year to date is up 6%.

Again, looking at each one of these areas excluding nonrecurring and purchases.

Insurance commissions, we had a fairly challenging quarter.

It was down from the second quarter, which is partly seasonality.

But we're also experiencing very intense price pressure in the insurance commission business.

If you look at third to third, we were up - - we were essentially flat in terms of insurance revenues taken out for Which actually is very good compared to the industry and we haven't seen the third quarter reports.

But I know looking at the numbers we've seen from our peer group in the insurance business, most are experiencing anywhere from 5 to 10% reductions in revenue because of really soft pricing markets.

We're actually moving market shares simply keeping our revenues flat in insurance.

Service charges was good news.

Our service charges annualized link were up 15.8%.

A third over third up 11.3%.

We added 30,000 net new transaction accounts.

We added 91,000 year to date.

We continue to do well in terms of creating new client relationship and service charge revenues.

Our non-deposit season commission which is primarily our debit bank card fees annualized link up 3.1%, third to third up 11.2%, pretty healthy growth there.

Investment banking down 4.5% on a link basis.

Up 6% third to third.

Obviously, that market has slowed with what's going on in the overall capital markets.

Interest revenues were flat.

Mortgage banking income was down slightly in the third.

It was $31 million in the second and $27 million in the third quarter.

Up a little bit from $24 million in the third of last year.

Despite the fact that we had a very good production quarter.

Our production was $3,225,000,000.

One of the best quarters we've had in terms of production.

The commotion in the mortgage market impacted the short term profitability of our mortgage banking business.

As you know, we practically don't do any subprime lending and we're very largely a portfolio lender with (inaudible) being our large production is focused to that marketplace.

We did have a small amount of production that went into the capital markets and we did take some small losses in that regard.

One time in nature because we mostly -- it won't affect our business going forward.

In fact going forward, we're very optimistic because there's a flight to quality and you can see with our production volumes.

Despite a very soft mortgage origination business, we're clearly moving share.

Our very traditional business while we had some losses in the third quarter as the market went through the disruption should benefit in the fourth quarter and going forward in the-- what actually happened in the mortgage marketplace.

Because we're a very traditional mortgage originator.

Other income was down significantly in the third quarter compared to the second and down 60% third to third.

This decline in other income was mostly market related activities in our capital markets business and also in our (inaudible) business and hedge related activity.

As I mentioned earlier, if you look at all the market related losses, you'd think they totaled about $26 million about $0.03 a share.

The good news is that they shouldn't happen again in the future unless we have the same kind of market disruption and none of the losses are critical to revenues going forward.

They were just-- they caused disruption in the marketplace.

The other item that's important is our noninterest expenses, which is a very good story.

Noninterest expenses annualized second to third were down 19.7%.

Third to third down 4.7% and year to date is actually down 0.8% and that is good news and Chris is going to give you some insight into how that happened.

Looking at growth, actually pretty good results from the loan growth side, from a GAAP perspective annualized second to third, a total loan growth was 9.8%.

You can take out purchase acquisitions, securitizations and leveraged leases.

Average loan growth second to third, we were pretty pleased with.

Commercial was 6.5%.

Direct retail 1.6.

Sales finance 12.5.

Revolving credit 19%.

Mortgage 13.

Specialize lending 16.4.

Total 8.2.

Kind of look at those and compare them to the third to third numbers to see what the direction is.

Commercial was 6.5.

Direct retail 2%.

Sales finance 10%.

Revolving credit 11.

Mortgage 11.

Especially lending if you take out the F code and fluctuation was 19.2% and total 7 4%.

In the year to date, numbers are similar but different and you kind of see what's happening in the portfolio.

Commercial 6.4.

Direct retail 3.1.

Sales has been 10.4.

Revolving credit 8.1, mortgage 11.3.

Specialized lending without the F code is 22.4.

And then the total, 7.7.

If you look through the portfolios, then what you see is commercial has actually been fairly stable at around 6.5% growth rate.

What's happening in that portfolio, we're having a pretty significant slowdown in the residential related construction lending as you would expect.

Though we're having a healthy growth, as we're seeing in our portfolios, both in the small business market and in the corporate market.

So that's offsetting can slow down in the residential related construction lending.

The only negative is that residential construction related lending had some of the best margins because of the pricing in it.

Direct retail continues to slow, and that is a challenge for us.

Our sales finance business is actually fairly strong.

We continue - - we believe to move market share in the automobile finance business.

We were ranked again as the No.

1 prime lender of automobiles in America in terms of service, quality.

Also, we began to enter both the RV and boat market and are having pretty good success in those market places.

Our revolving credit business, momentum is building.

And that's really an internal push to sell more credit cards and particularly commercial credit cards into the small business marketplace.

I think that's largely an internal effort.

Mortgage, as I mentioned, is very solid and we're pretty optimistic about where that goes.

One good thing about mortgage is we're porfolioing now, particularly in the jumbo market we have much better spreads in them.

Much more rationality in the jumbo marketplace.

We are seeing some slowing in our specialized lending, specifically in our subprime automobile finance business reflecting what's going on in the marketplace.

Overall though, loan growth looks very solid and we have got some pretty good momentum going into the fourth quarter.

Positive growth is a little bit of a mixed bag.

We continue to struggle with noninterest bearing deposits.

Again, if you take out purchase acquisitions annualized link of noninterest bearing we're down 5%.

A third over third down 3.6%.

Most of the decline is on the commercial side.

I think it reflects our clients using liquidity and also the fact that they can get higher returns and people coming out of DDA into cash management accounts to get higher interest.

Client deposits annualized link 4.1%.

Take out purchases in both cases up third to third 5.6%.

Year to date, 7.4%.

Total deposits annualized link 9.3% and third to third up 4.8%.

Solid deposit growth, just the mix is not like we'd like it to be.

We'd like to have faster noninterest bearing deposit growth obviously.

We did have very good news with the FDIC market share numbers.

We either maintained or gained market share in every state we operated in.

As you may remember last year, we moved market share in every state we operated in with the exception of West Virginia where we maintained the No.

1 market share position.

Three years in a row where we've been maintaining or gaining market share in every state we operate in which is-- I doubt there's any other commercial bank in our size category that can match that kind of size deposit momentum.

The big issue that I'm sure everybody is focused on is asset quality.

We did have a rise in our nonperformers and in our charge offs.

Our nonperformers increased from $423 million in the second quarter to $547 million at the end of the third quarter, from 0.33 to 0.42.

Our charge offs increased from $76 million in the second quarter to $90 million.

And the loss ratio increased from $0.35 to $0.40.

Looking at our loss ratio excluding our specialized lending in the second quarter was 0.20, in the third quarter was 0.23.

Interestingly enough, that 0.23 is a very good loss ratio.

On of the interesting things that's happening, we're having a rising level but it's on a very low base and the actual level charge off is not very high by historical standards.

Year to date, our losses are $227.35 million excluding specialized lending $0.19.

Again, a very good number.

In terms of provisioning, we provisioned $105 million charge off $90 million so we added $15 million.

Year to date, we provisioned $264 million and charged off $227 million so we added $37 million to the provision.

Our coverage of nonaccruals did decline from 283 in the second quarter to 223 at the end of the third quarter.

That's still good coverage of nonaccrual loans.

Our reserve remained flat.

104 at the second and 104 at the end of the third and so we maintained the reserve.

If you look at the numbers, it is a fairly significant deterioration in credit quality.

But again off a very low base of nonperformers and chargeoffs.

The deterioration was in practically all our portfolios.

Within the portfolios, it was primarily driven by challenges in the residential real estate market.

In addition, we did have some increase in regional acceptance.

Our subprime automobile lender and that's coming from two categories.

We're having a slightly higher default rate.

But mostly, we having entire losses on repos because of softness in the used car market.

In addition, we did an acquisition in Texas last year.

And we have some problems around that acquisition that fortunately we think we've worked through.

So we're optimistic we'll have a little better results on the rates going forward, but we have had some deterioration out there.

If you look into the markets where we've had the biggest challenges, the largest concentration is in Atlanta and a lot of the problems that we've had in Atlanta are related to an acquisition we did there on Main Street last year.

We also have had some problems in the greater metro D.C.

-- not so much in interior D.C.

but in the outlying areas around D.C.

Unfortunately, some problems in Florida although we're not a big Florida lender.

Relative to our exposure we've had some deterioration in Florida.

Obviously, we don't know exactly where we're going from here.

I will tell you what our guesses are.

We do expect nonperformers to continue to rise, but we are a very secured lender.

We deal with people that have been in the market a long time.

We only like loans in markets where we operate essentially with well known to builders and we think that we won't have a huge rise in losses even though we will continue to have a rise in nonperformers.

Our guess, and it is a guess, is that our total losses will probably continue to be in the .40 to .50 range, similar to the third quarter.

Maybe a little higher than the third quarter with implied losses in our core portfolio, concluding our specialized lending business.

And again, I would say that is a guess.

But we expect a rising level of nonperformers but we don't expect huge losses because we are basically a secured lender.

With that said, let me change direction and talk a little bit about merger and acquisition before I share with you a few thoughts about the future.

I just want to reiterate comments we made at a recent investor conference regarding our acquisition strategy.

We are for all practical purposes out of the community bank acquisition business for two basic reasons.

We think the prices are way too high.

Several recent deals were not rational and from our direct experience that the community banks are the residential real estate lenders of last resort and it would be hard to do due diligence in the kind of market we're in today.

So I won't say it's not possible that we would do a community bank deal but we're pretty much out of that market for the time being.

We also mentioned in the conference that we haven't explored our merger (inaudible ) opportunities and we can't find a partner that fits culturally and economically.

We're still interested in theory, conceptually in that concept, we certainly don't see anything happening in the immediate future because of the issue of the cultural and economic fit.

We will continue to pursue relatively small nonbank acquisitions especially in insurance.

You saw how we announced two agency acquisitions in the consumer and commercial and finance related areas.

We did announce the acquisition of collateral real estate integrated with [Laureate Capital], our commercial mortgage originator.

The companies together have a combined origination last year of around $10 billion, combined servicing portfolios of about $20 billion.

We think they're great synergies (Inaudible) both products and markets to each other, and there are some significant long term efficiencies.

On the surface it's not a great time to make an acquisition in the commercial real estate market.

Although the commercial side of real estate continues to do well in the insurance market.

With this acquisition we'll have a greater capacity for both [fanny and Freddy ]in the multifamily problems which are really (inaudible).

So we think in many ways, it's a pretty good time to make that kind of acquisition.

All right.

Now let me share with you a few thoughts about the future.

As Tamera said, we certainly don't make future earnings estimates and this is a particularly difficult time to say what's going to happen to the future and obviously, depends a lot on the economic environment.

For us, the most significant question is what's going to happen in the residential real estate markets.

We did a very small amount of subprime.

We didn't do negative amortization mortgages.

So as I said earlier, we think our mortgage origination business will benefit in both revenues and profitability.

We'd a FHA portfolio lender and our spreads and volumes are improving.

We're optimistic about that.

The bigger effect we're having, of course, is on our residential development and construction lending, which is a big business for us.

We operate with well established local builders.

We don't do very little national track builders.

However, the local builders are being impacted by the mortgage market disruption and the foreclosure rates in subprime and significant discounting by the national track builders.

They're facing some liquidity problems.

And even where market prices haven't declined, and frankly, in a lot of our core markets prices haven't fallen, clearly volumes have fallen.

There's simply not that many buyers.

When you do get foreclosed assets, it takes you a little longer to liquidate them.

We think -- and again this is the guess category -- it will be another, probably a year to 18 months before we get through the cycle.

I would expect to see some improvement in the spring.

The big thing right now is consumer psychology.

People want to buy homes and are waiting when the bottom is and they think prices are going to keep falling and when the bottom gets here, we think the activity will return.

The good news in our markets generically speaking we have migration of population.

People will need houses and the market will correct.

We have been through a number of real estate cycles.

I've certainly been through them in my career, and they always do correct.

While this one may be a little deeper than people originally anticipated, the fundamental demographics and economics in most of our are pretty good and if -- one thing that's nice--people are saying we're having more problems in Atlanta, but the affordability of housing in Atlanta is still very positive and people are moving into the market.

So that's a self-correcting phenomenon, and that's true for most of the markets that we operate in.

Based on that, we expect nonperformers to continue to rise as I mentioned earlier.

We think charge will go up some, but we don't think it will go out of a long term normal range, 40 to .50 for the total portfolio and your core portfolio of 0.25 to 0.30.

Obviously, we could be wrong about that, but that's what we expect.

As Chris will discuss, we are liability sensitive by design.

This a hedge against real estate risk.

As the Fed has always cut rates when faced with a real estate recession as they should, how much of this liability positioning will turn into net interest income obviously depends on the loan volumes and asset and liability mix, et cetera, but we are better positioned for the current environment than many financial institutions.

We are positioned as a intentional [head] or hedge against real estate exposure to have a liability sensitive position.

I do also think that there's long term good news for us in this environment.

Much of the irrationality both in risk taking and pricing is gone.

Risk spreads are returning to more normal, more appropriate levels.

In addition, BBT is primarily an originate and hold business with the exception of what have we do for Freddy and Fanny.

We're pretty much origination and hold.

The origination and sell business is what's really been impacted by what's happening in the markets.

It had become pretty irrational, particularly in 2005 to 2006, early 2007.

We will not lose much business from the market situation long term.

But we stand to gain as the market returns to a more rational level.

But while you hate to have disruptions like this which certainly negatively impact in the short term, I'm fairly optimistic that the trends of what's going on are good for us in the long term.

With that said, let me turn it over to Chris for deeper insights into a number of key performance factors.

Thanks, John.

Good morning.

I'd like to welcome you to our call.

I'll just speak briefly about net interest income, noninterest expenses taxes, and capital.

First looking at net interest income based on operating earnings.

If you look at linked quarter, we had average earning asset growth very healthy, up 10.3% adjusted for purchases.

That produced $992 million in net interest income which was a1/2% annualized increase over linked quarter adjusted for purchases.

Common quarter's average earning assets were up 7% adjusted for purchase accounting, produced again $992 million in net interest income, which is a 1.4% decrease over the prior year quarter after adjusting for purchases.

Year to date ,we've had a like amount of earning asset growth at 6.5% adjusted for purchases which produced $2.94 billion in net interest income, which is a 1.1% decline over prior year adjusted for purchases.

As John commented, the margin in link core perspective was down 10 basis points from 355 in the second to 345 in the third.

Common quarter was down 23 from 368 3rd quarter of '06 to 345 and then for the year, year to date basis down 21 basis points from 375 to 354.

As John just mentioned, during the third quarter we remained liability sensitive, operating in a very difficult market condition which negatively impacted both the asset and liability side of the balance sheet.

We did experience an increase in nonaccruals, changing asset mix and a slight increase in our total interest-bearing liability costs.

In fact, total interest bearing deposit costs increased during the quarter while the cost of long term debt also edged up a bit when compared to the second quarter.

Our deposit mix shifted somewhat toward higher cost deposits in a linked quarter basis, and I'll speak more about that in a moment.

And so when you look at the yields and rates, you can see link quarter total earning assets were actually down three basis points and total interest bearing liabilities up five, causing spread (inaudible) of about eight basis points.

If kind of look into detail there, you can see the core securities portfolio once again performed well overall, while loan yields actually declined this quarter, primarily the result of the 12 basis point production in commercial loans and leases.

In part was the cause of (inaudible) Fed prime rate down which a large number of our commercial loans are indexed to in the nonaccrual increase John mentioned.

After decreasing last quarter, our interest bearing deposit costs actually increased in seven basis points in the third quarter, and we saw that really two primary places, three basis point increase in interest (inaudible) and then a nine basis point in other deposits.

Common quarter total earning assets were up 12, interest bearing liability costs up 29.

We had about 17 basis points (inaudible) comparison really driven by other client deposits and CDs which increased 33 basis points and 31 basis points respectively.

If you look at the main drivers of the 10 basis point decline and the link quarter comparison there are three reasons for that.

First was the effect of the changing asset mix.

For example, we're now putting a declining percentage of higher-yielding assets such as commercial real estate loans and to a lesser extend direct retail on the books, on our balance sheet, while simultaneously putting an increased percentage of lower-year-holding assets on the books such as mortgage loans.

So changing asset mix is certainly one driver..

Secondly, increased levels nonaccruals and then thirdly, increased liability costs which really is a result of a general shift to higher cost deposits.

In the quarter, we saw interest checking retail checking product and also noninterest bearing BDA balances just move away from us as clients used their liquidity potentially as a result of the market disruption that we experienced.

So really felt like that was the primary driver of the liability cost issue.

Looking forward, just wanted to point out again our Alco model forecast based on [Blue Chip Consensus forecast] and in the model we're assuming today the Fed funds rate will decline 25 basis points at the end of October and remain relatively flat for the balance of 2007.

And into 2008 or flat for the balance of 2007 into '08.

And as for our forecast we expect the margin to remain relatively flat during the fourth quarter and improving slightly as we move into 2008.

Looking at noninterest expenses we were pleased with our expense results here today.

Versus our stated growth goal for 2007 of 4% adjusted for purchase acquisitions.

Really pleased with the year to date performance.

We continue to focus a lot of energy toward productivity improvement across the entire company, and as a result I think expect strong expense control for the balance of 2007 and into 2008.

During the third quarter, noninterest expenses declined on a link common and year to date basis and as a result achieved positive operating leverage and improved operating efficiency measured by cash basis efficiency ratio for the fourth consecutive quarter.

I'm very pleased with that.

Also important to point out that excluding one insurance acquisition at the close of the quarter we reduced by FTEs by 118 during the third quarter.

So if we drill down expenses just a bit more, you can see that noninterest expenses year to date were down 0.8% over the prior year quarter, well ahead of our 4% target.

And the driver of that, really, was in other operating expenses which was down about $26 million.

If you kind of look at that detail, it was decreases and advertising and also software expense, small level chargeoffs and also decline in phone expense.

Look at common quarter, we were down 4.7% over the prior year quarter adjusted for purchases, and that 4.7 equates to the decline of 44 million after purchases, and it's really in two areas, personnel and other operating expense.

First looking at personnel, we saw decreases in the pension plan due to change in estimated amounts in actuary, we saw declines in the value of (inaudible) trust and declines in incentives for insurance and executive (inaudible) plan as well as deferred comp plan.

And in other operating expenses we saw declines in advertising and public relations and some in chargeoffs.

If you look in (inaudible), we were down 19.7% adjusted for purchases, which was appropriate given the noninterest income decline.

And that equated to being down about $46million after purchases, again in two areas, personnel and other operating.

Some similar items, personnel for link quarter was driven by decline in market value trust, pension expense, and then incentives in executive comp plan, insurance and investment incentives.

In the other expense category, again some similar items.

Advertising, public relations, retail and bank card expense, donations in operating chargeoffs.

Overall, I would say I"m very pleased for the entire year and I think we have done a very good job in controlling FTs and sort of placed us where we are and where we're headed.

Looking at a quick update on our expense savings for recent acquisitions, Main Street, First Citizens and Coastal Financial.

You might recall, we had targeted savings of $27.7 million, and we have achieved all of those to date.

$3 million in this past quarter and you might remember that conversion was a year ago.

September of '06.

So we will not be reporting on Main Street going forward.

First Citizens' we targeted $7.5 million and we have achieved 5.7 year to date.

And you might remember they converted them in November of '06 and $1.9 million of that came in this quarter for First Citizens.

And Coastal Financial, we targeted $19 million and we have achieved $5.3 year to date.

That conversion was in August of this year and $4.8 million of that came in the third quarter.

Moving our attention to taxes, I wanted to comment on effective tax rate and what to expect.

You can see effective tax rate actually declined slightly from 33.09% in the second quarter to 32.83% in the third.

Nothing unusual there.

Going forward we expect the effective tax rate to be stable in the 32.5 to 33.5% range.

So not a lot of volatility in the tax rate.

And then looking at capital, again no significant changes in our capital strategy during the quarter and our targets remain the same.

Leveraged capital is targeted at 7%.

Tangible equity is targeted at a minimum of 5.5%.

We point out that equity to total assets as of end of period was 9 5%, Tier 1 in the period was at 9.3.

Total capital in the period, total risk base in the period was 14.6, and then leveraged capital end of period was 7.33%, well above our target of 7.

We did repurchase 3.1 million shares for $123 million year to date.

All that coming in the third quarter and we plan to repurchase in the range of three to 4 million shares during the fourth quarter.

And also as a reminder just point out our dividend is projected to be $0.46 for the fourth quarter, which represents a 9.5% increase over the prior year quarter.

And that concludes my comments.

Thank you.

Before we move to the question and answer segment of this conference call, I'll ask that we use the same process as we have in the past, to give fair access to all participants.

Please limit your questions to one primary inquire and one follow-up.

And then if you have further questions, please reenter the queue so that others have an opportunity to participate.

Now I will ask Diego our operator to come back on the line and explain how to submit your questions.

Thank you.

We will now be conducting the question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Gary Townsend with FBR Capital Markets.

Please state your question.

Good morning.

Good morning.

Could you talk your home builders exposures and just provide any -- I got on the call late.

I'm sorry if you covered it already.

Gary, our residential development construction lending is the area we're most conscious of following in the marketplace.

We lend to people that have been in the market a long time, are established builders and we are a secured lender.

We take the real estate as collateral.

We don't do national track builders and we don't generally do out of market builders.

We do people that are part of the marketplace.

What we're seeing is our builders are facing more liquidity problems.

They're being impacted of course by the lack of availability of mortgages for certain market segments, the foreclosures coming out of subprime and all day markets and to some degree, I think, at least particularly in the short term, the fact that the large national builders have been giving gigantic discounts on houses in order to move inventory which has created a perception among potential buyers that they ought to be getting discounts and that's slowed activity.

We haven't had large subdivisions get in trouble yet.

We're a pretty diversified lender.

We have had a number of projects that builders have basically give it to us.

We don't think we have material losses in what we're seeing.

But it's going to be a year or so until we get through the real estate cycle and I think the biggest thing is the psychology when potential buyers believe the floor has been achieved in the market and also just the anxiety around the availability of financing.

Whether or not it's true has impacted, I think, consumer activity.

Our single biggest concentration of problems is in Atlanta.

And a lot of those came out of our Main Street acquisition.

In fact the vast majority of it come out of our Main Street acquisition.

We're having some problems in the what I'd call the extended metro D.C.

market area.

Not right around D.C.

but the areas that we're growing that have fairly long commutes.

And percentage wise we're having more problems in Florida.

Fortunately, we're a fairly small Florida lender.

And I would say Florida is the toughest market we're in but fortunately it's not a big market for us.

Your guess is as good as mine, but having been through several of these cycles I would think another year to 18 months until we get through it.

I wouldn't be surprised to see some improvement starting in the spring.

By this time next year it would be clear the market has turned.

Price declines, pretty significant in Florida and some in metro D.C.

A lot of our core markets, like Charlotte and Raleigh, we're not seeing any material price declines but activity has slowed.

Even where the prices haven't fallen that much.

That's kind of an overview of where we think we are in that regard.

And have your commented at all on home equity exposures and trends there?

I'm sure you did and I missed it.

I apologize again.

We actually not have, and I guess I'll knock on wood because I have seen some other people having problems in the home equity market.

We're not having material problems in our home equity loan portfolio.

We were -- I'd call us an A plus lender.

We didn't do the odd stuff that was done in the home equity business.

Very high credit scores for our borrowers.

And I really don't see material losses in our home equity business.

The biggest problem we're having is lack of volume.

There's just no demand and that's one of our-- that, and our other direct retail lending, some of our highest margin products.

We're not having credit problems and I don't think we're going to have credit problems.

[We're n very low loss ratios.

] We might go up a little, but I don't see us having big credit problems either in home equity or in our traditional direct lending portfolios.

The credit scores that we have on our client base and portfolio.

Gary, to that point, the credit scores in equity loans are about 724.

First mortgages about 78% and equity line's credit scores are about 757.

On the home builder, you might be interested.

Our average loan size is 262 and we've got about $40, $45 million in exposure to our top 25 relationships.

And the jump in commercial loans and leases -- that seems by default to be your focus going forward, just keeping that under control.

We only have two categories of problems.

One is residential real estate related that go through a number of portfolios, and the other was our subprime automobile dealer did have a spike which we think will move back.

As car prices correct and also we had problems around an acquisition we did in Texas.

But that's really where the challenges have been.

Thank you for your comment.

Sure.

Thank you.

Our next question comes from Nancy bush with NAB Research.

Please state your question.

I have to ask kind of a blunt question here and I hope you'll forgive me in advance.

The question is you just have not had a great record this year in sort of predicting where your net interest margin was headed and I wanted to get your thoughts about what the major variables have been that have been so difficult to predict and do you feel you're sort of getting a handle on telling us where it's going?

I'd be happy to take a shot at that.

You know, we did see some compression this quarter.

I think what we did not know were the level of nonaccruals.

Nonaccruals might have been a little more than we would have anticipated.

I also think volume plays a great deal in what occurs from quarter to quarter and the change in asset mix that we've experienced that I commented on would also be a variable.

With the slowdown in single family that John just explained.

Those are our higher yielding and more intensive kind of credits that have been flat from quarter to quarter.

And in part replacing that with mortgage loans, et cetera, is really kind of a driver.

And I would say liability sensitive I think it played out like we-- to some extend like we thought.

The fallen rates we hadn't got much benefit of occurred the 18th of September.

But in fact our liability or our deposit costs actually decreased second or first to second quarter but we saw that increase this quarter.

So for liability sensitive that would be a little bit more punitive to us than a down rate cycle would have been and some of those rate increases on the liability side were driven in part by the market disruption.

Earlier on we were in an effort to invest in other interest bearing deposits and what we saw during this quarter that I think we didn't anticipate was more movement away from (inaudible) interest checking and people were just using their liquidity and we saw the same on the borrowing side.

Utilizations were up on our loan clients.

So I don't think we could have anticipated that.

I think it was deeper than we had seen.

All right.

Do you think you'll continue to have the same kind of variability that you've had or is this the second to third quarter decline the worst?

That's a fair question.

I think the variability from second to third was greater and I think it was greater because of the market disruption.

When I say market disruption, not just liquidity.

But we really saw as John has commented on, the increase in nonaccruals.

I think the variability should be somewhat less as we move forward and again, declining rates are good for us.

We're clearly liability sensitive and to the extend that deposit rates behave accordingly, then we sort of win.

But without the market disruption I think some of the variability goes away.

And my follow-up would be this.

Given that CRE proving to be a challenge for you and a number of your peers, are you seeing a heightened regulatory attention to that and is there any sense that there are going to be targeted exams going forward on the CRE portfolio?

If you could just comment on the regulatory environment right now, I'd appreciate it.

We just had a target exam and fortunately while they always have issues, it came out very well in terms of how well we were managing that portfolio.

I'm definitely confident the regulators will be focusing on that portfolio and we did just finish an exam with favorable results.

I think there will be -- one man's guess, a bigger effect maybe on some of the community banks that don't have all the systems that maybe they need in the kind of environment we're in.

Is there a heightened -- I'm hearing there's a heightened communication with the regulators now at the largest banks.

That there are a lot more phone calls than there used to be a few quarters ago.

Is that your experience as well?

Actually, no.

It's funny.

We weren't doing the things that got the regulators excited.

We weren't in the subprime business.

We didn't do negative amortization mortgages.

We weren't in the equity market.

We didn't have liquidity problems.

They're actually talking to us less.

Maybe they're spending more time talking to other people.

And I'm not saying they might not change their mind.

We seem to be getting less regulatory attention, and maybe rightly so because we weren't doing this stuff.

Every cloud has a silver lining.

That's right.

Thank you very much.

Thank you, Nancy.

Our next question is from Christopher Marinac with FIG Partners, LLC.

Good morning.

I wanted to ask your about your sense of commercial real estate relative to residential.

We talked about that negative relative to other builders.

What are you seeing on some of the traditional commercial stuff, whether it's office or shopping centers or the other various types of (inaudible)?

The irony there, Chris, is those markets are continuing to do well, the occupancy rates remain high in the office market.

If anything, apartments are picking up.

I don't know if people are being forced out of homes.

There are excess homes, and yet they can't get mortgages for a house.

Apartment construction is -- and apartment occupancy rates are good.

So it certainly could be the commercial rea estate will follow residential.

Traditionally, it has.

But traditionally what's created the corrections is high interest rates and we don't have a high interest rate environment and the cap rates make a big difference in the commercial end of the real estate market.

One thing that has happened is a lot of the commercial conduits have closed down.

And that has a big impact on refinances.

One thing that was going on pretty big in the commercial real estate market people were able to refinance at a lower cap rate.

Cap rates have moved up some.

The conduits are not available so there's maybe less activity in the refinancing of the market which then may slow the other end.

If you can refinance at lower rates and also sell and the new buyer can get a new tax deduction that does spur commercial real estate.

My own instinct is twe'll see some slowing in commercial real state..

But commercial real estate shouldn't have big problems unless the economy its gets in trouble.

Okay, about deposit pricing, and do you think it's going to be hard to pass along any further Fed cuts, let alone this Fed cut that we just experienced on the deposit side?

I think it's going to be mixed.

The biggest practical problem we have today is that Wachovia has been more aggressive on the positive pricing than traditionally.

And my guess is they're trying to move out the deposits they got from Golden West.

It could be very expensive.

I don't know.

I'm obviously outside of that.

And they usually have been pretty willing to cut -- not usually a big price competitor on deposits.

They've just been more price competitive than usual.

They may be just a temporary phenomenon.

But the community banks have backed down more than the usual I think because they don't have the loan demand and they got other challenges.

And for us, our big competition on prices has been on the community bank side.

I tend to think that over the next 90 days, the deposit pricing -- at least on the CD side -- will reflect the decline in the Fed funds rates.

Great, John.

Thanks very much.

Our next question comes from Steven Alexopoulos with J.P.

Morgan.

Please state your question.

Good morning, everyone.

Good morning.

John, I'm curious, if you expect nonperformers and net charge offs to both increase over the next couple of quarters, does that mean you also expect reserve coverage to increase?

I don't know -- there's a pretty mathematical formula and we try to take our losses on the front end.

By the time we get something to other real estate, we've traditionally, in fact up through September made gains when we liquidated that portfolio.

So I don't know.

It depends on how material the change is.

But I don't know that that will cause a rise in reserves or not.

That phenomenon now under the GAAP rules is pretty much a mathematically driven kind of process.

And just a follow-up on the margins so I understand this right.

I know you're saying you expect the margin to be flat in the fourth quarter and then up in '08.

If you're looking at your funding more, your loan growth with wholesale funds, I'd imagine that securities you put in your portfolio, about $1 billion, was probably 2% margin on that.

Why won't the margin stay under pressure here?

Relatively flat and some of the wholesale funding you saw this quarter was related to the market disruption as I commented on to Nancy's question.

So we ought to be able to return to hopefully a little better core funding like we had seen in the first to second quarter when you actually saw the deposit costs decline.

So you would have some of that.

And I think you know, over time we're going to continue to try to affect the asset mix as best we can as well, and you begin to get a full quarter of the benefit too of the rate drop that happened the 18th of September and we really hadn't gotten much of the benefit of that.

It's mathematical phenomenon based on the fact that we're liability sensitive and the assumption on the improving margin is that we have another 0.25% more drop in the Fed funds rate.

The mathematical fact that we're liability sensitive has to offset the negative changes in the asset mix.

Assuming the volumes are in the right places and it's what we projected in the model.

if you factor in the competitive environment, you just said what Wachovia is doing, do you think it's realistic you'll be able to drop deposit rates?

I do because I think everybody is under margin pressure.

You just saw everybody's results.

At some point we have to get rational and including all forms of competitors.

I think there's going to be a lot of motivation for people to bring down deposit rates.

Thanks.

Our next question comes from Todd Hagerman with Credit Suisse.

Good morning.

John, I was wondering if I could just follow up in terms of your outlook you reiterated expectations with the loss rates in the portfolio, 40 to 50 basis points.

We're now at the low end of that range.

I guess what I'm having trouble with is reconciling your outlook that the housing market -- it could take anywhere from a year to 18 months or so to kind of work its way through if you will.

I'm just trying to gauge what gives you that greater degree of confidence that the loss severity will remain relatively allow?

Well, as I said earlier it was a guess.

And the reason is I don't think we have big losses in a lot of stuff will end up foreclosing on.

Because we are a secured lender and typically, a lot of the builders really face either liquidity problems or they just don't want to do it and they don't want to go through that process and I think we will work through a lot of those kind of projects without a big losses.

Obviously if the market goes deep enough and it lasts long enough, then we'll have more problems than we expect at this point in time.

And that's partly mitigated on the assumption that the economy itself doesn't tank.

And if the economy doesn't tank, people are going to want to buy houses and so that the price declines will start stopping and then it will be a cycle of actually holding the real estate and selling it.

So that's the guess why we don't expect our losses to be a lot higher.

Todd, I might add two items too.

Our objective would be to throw more resources at the nonperformers and work with them as John pointed out.

If you look back the last sort of 10 years how we behave, you got to decide for yourself whether this downturn or the single family downturn is worse than the past.

We, at the low point were 27, 28 basis point range in losses and high point in '02 in the 48 basis point range.

(inaudible) So conversely we tend of the sort of the -- we tend to kind of work through them as John said.

Just to give you that historic perspective.

Maybe as a follow-up, as a secured lender and granted the industry real hasn't seen losses in close to 20 years in real estate.

With respect to your home builder portfolio, what specifically have you done in terms of enhancing your security position on that portfolio?

And how are you working through that?

You really have to do that before the cycle starts, A, by not being greedy in your lending practices and B, servicing your portfolio very closely.

We require equity in the projects.

We deal with people we've known that are in the marketplace.

We control the number of SPEC houses.

We do a really good job of making sure we don't advance until the work is done.

You run the risk that the house ends up being worth less because the market has deteriorated.

But usually, there's a profit margin in houses and most losses in construction lending happen because they advance too much money on the house or they've done unsecured loans to the builder and he's used it for working capital in the short run.

Or they hadn't gone out and inspected the subdivision and make sure the power got put in, the roads got put i, or those kind of things, or allowed the builder to have way too many SPEC houses and he's sitting on a great inventory of unsold houses.

While I'm sure we've made some of those kind of mistakes, we haven't made a lot of those kind of mistakes because we were very traditional residential construction development lenders.

We tend to deal with -- we don't have the very big subdivisions which is where you have the biggest problems.

You can work through it easier.

Very (inaudible).

We have it all the way across our footprint.

We're not overly concentrated in any particular market.

All what I call the ABC basics of residential construction development lending matter in times like this.

Also we're not an out of market lender.

We lend in markets where we know the markets and we understand the markets.

We didn't get in the condo market.

If you look at the big issues, I think the big losses are going to be in the condo lending business and we're a very small condo lender.

And the reason the condos had much more volatility is you tend to get more speculators.

if you're dealing in the single family residential markets you're less likely to get speculators in that marketplace in that.

So you're less likely to have price volatility and less likely to have fallouts from people not buying the condos.

So I think the fact that we've had -- it's core business for us.

We have -- you know, our senior credit officer has been through several of these real estate cycles.

As I've been.

And we haven't changed our standards.

That doesn't mean that we're demeaning from the cycle.

It just means that we didn't do the excess stuff at the margin which is usually where you get the biggest losses in a correction like this.

Thanks very much for your comments.

Appreciate it.

Our next question is from Matthew O'Connor with UBS.

Please state your question.

Hi.

Good morning.

You guys have done a good job managing expenses this year, and you talked about targeting 4% growth next year in your budget.

If revenue comes in a little bit weaker than expected or there's a little more pressure on credit, is there more flexibility there and how low do you think that 4% can go?

When we talked earlier in the first, second quarter we got this question or whether we had additional flexibility and we said the potential was there to continue to reap some benefit and I think we've been able to demonstrate that.

I've got to say, though, year to date we'vegone down about 800 (inaudible) and I think added probably net 24 or 25 branches in the process.

So you know, we are -- while I think we're good where we are I don't know if we have a lot of flexibility in terms of additional percentage gains, but I feel very good about expense control across the company, as good as I've ever felt, and I feel very good about being able to hold what we have and there might be the potential to add back some revenue potential in certain places, but overall I feel pretty good about where we are.

Okay.

And then separately, assuming the (inaudible) environment doesn't improve, what do you think about your excess capital generation in '08?

Should we assume that it's going towards buy backs or how do you feel about adding securities given wider spreads and probably a steepening yield curve?

Probably buy backs.

Exactly right.

Okay.

Thank you.

Thank you.

Our next question is from [David Pringle] with [Fells Point Research].

Please state your question.

Good morning.

Good morning, David.

Just -- you in the construction lending for the single family, you do lend to interest reserves, right?

That would be atypical for us.

We may have interest reserves in a project if we have extra collateral in the project.

But generally, we expect the borrower to carry the interest.

That's generally our pattern.

You mentioned increase in nonaccruals affected the margin in the third quarter.

How many basis points did that cost you?

I'm sorry I didn't hear the question.

Impact of nonaccruals on the margin basis points.

Oh.

My guess is probably be in the sort of the four to five range.

Four to five base points?

Yes, I don't have an exact number.

I would have guessed a little less than that, Chris.

I would guess about two basis points.

Hang on just a minute.

Let me see if I have that.

While you're doing that, have you been renegotiating any single family exposures?

I don't know what -- we obviously might be making more loans to people using other collateral so they have cash flow to hold their houses, that kind of thing.

I wouldn't say we do many, what are technically called renegotiations.

We work with our borrowers.

Most of them have been clients of ours a long time.

We try to help them through tough times.

That's a long term strategy for us.

Provided they're cooperative and doing what they're supposed to do.

They're willing to put up their (inaudible) and help us lend them more money.

That kind of thing.

But in terms of formally renegotiating because of projects and problems, we would do very little of that.

And I wouldn't say a lot of that is going on.

So if you do a rate reset then we're unlikely to see it as a renegotiated loan?

We would do very few rate resets.

That would be -- typically if we were in that type of circumstance, the rate would go up instead of down.

We don't normally do that kind of stuff.

And then on the DDAs, do you know how much of the decline for the flows and noninterest bearing deposits, are they being affected by consumers or commercial?

It's almost all commercial.

Consumer DDA is rising.

Commercial DDA is falling.

I think there's two basic reasons.

One, the people that do have excess liquidity are going to cash management, where they would just leave the DDA because they didn't have returns.

And two, I think our client base has less liquidity.

A lot of our builders had huge liquidity.

One thing that it's important to remember, the people that have been in the building business had a long positive run and now they're using the liquidity to keep their projects viable.

And then you have title and insurance companies that have less liquidity and I think there's just generally less liquidity in the business community.

So you got two factors.

Less commercial liquidity and people going into cash management for higher returns.

Yes, you saw that in California about a year ago.

And how much of your DDAs were actually builder related?

I would not know off the top of my head.

It wouldn't be a huge percentage because builders don't typically keep a lot of extra DDA.

Get some cash for it.

And I did have that and it was closer to two basis points.

You were exactly right.

Thank you very much.

Sure.

Thank you.

Our next question comes from Betsy Graseck with Morgan Stanley.

Please state your question.

Just on the home equity business, it would be useful to understand how you are managing that in the environment where home prices are deteriorating.

Do you -- and how frequently do you refresh things like [cycle and LTD].

Do you ever take any action on limiting the lines that you have extended that might not be utilized at this stage?

We do have periodic reviews of a ll home equity lines looking at collateral values.

It would be atypical for us to cut somebody's line because of declining appraisals if their performance had been very good and if they had extra leeway in their lines.

As I said maybe earlier, we are just not having material problems in our home equity business.

I think it's because a large percentage of our borrowers have great credit scores and unless you have something happen in terms of the economy and they're losing their jobs or something like that, they would be unlikely to default on their home equity lines.

The 750 kind of scores.

We just didn't get into the home equity business.

It was really used to help people buy homes that they shouldn't be buying.

We didn't do much of that kind of lending.

Can you (inaudible) the channels that you use to originate the home equity?

It's all direct.

We don't do anything but direct home equity.

Just a little knitty question, but other noninterest income-- You might have been mentioned this earlier, but I didn't hear and I apologize.

Other noninterest income had a noticeable drop Q on Q.

What was the driver of that?

It was primarily market related activities.

Some losses we had in our capital markets business.

Some losses we had in our brokerage operations.

Most of the fall in noninterest income was related to market disruption.

Okay.

Thanks.

Thank you.

Our next question comes from Chris Mutascio from Stifel Nicolaus.

Please state your question.

I missed a good bit of the call during your comments, so forgive me if you've addressed this.

John, could you talk a little bit at about the insurance commissions.

I hear a lot of comments on the margin during the Q&A.

When I look at my model, it looks like the insurance commissions were probably the bigger miss I had.

I know you talked about in the release about competitive pressures, but is the fourth quarter a good run rate to go forward with?

Competitive pressures that difficult to see the drop from second to third?

That's a good question.

Two phenomenons we had in the insurance business.

Number one, there is seasonality between second and third.

Traditionally, it's been there.

Secondly, we had intense pricing pressure more than we had expected.

It intensified during the quarter.

I would say typically prices have fallen anywhere from 10 to 15%.

And enough to be noticeable in terms of people even refinancing their insurance midstream on the commercial end of the marketplace.

Our insurance commissions third to third were essentially flat if you take out purchase acquisitions, and that actually represented a fairly material market share move in order just to keep the commissions flat.

We should have a stronger fourth quarter than the third quarter.

But the growth rate -- the internal growth rate has slowed not -- taken away the seasonality.

Fourth quarter is strong seasonally, but the internal growth rate is going to be fairly modest.

Forgive me if you went over that earlier.

No.

It's a good question.

Our next question comes from Gary Tenner of Suntrust Robinson Humphrey.

Please state your question.

Chris, I think when we last spoke in the last quarter, you talked about a buy back in the second half of the year, I think between 7 and 9 million shares.

I think you bought back about 2 million shares this quarter?

3.1.

In fourth quarter we just kind of targeted between the 3 to 4 million range.

Okay.

Perfect.

Thank you very much.

Thank you.

Our next question comes from Jefferson Harralson with KBW.

Please state your question.

Thank you.

I wanted to ask about -- you had mentioned the assets of conduits and kind of leveraged most aggressive buyers of commercial real estate going away.

And you think -- what impact does that have on the banks?

I assume it would translate into higher cap rates and maybe lower collateral.

Maybe lower paydowns as the conduits were taken away business from you on th either side.

That's a great point.

It might actually be net 30 positive.

It goes to the general issue.

There's been a huge transition model wise from origination and hold to origination and sell.

Part of what blew up in the markets because a lot of the buyers were not able to get back to the underlying credit.

We do some commercial mortgages and some fanny may, Freddy mac.

So the general move back to origination and hold probably will help us.

One thing that I think will help us, we do a fair amount of commercial real estate nonresidential that was getting paid off really fast.

Even before construction loans got finished there was such a ready conduit market.

I think some of those construction loans will now sit on the books for two or three years, which is what we like because they're good projects before they go to the secondary market.

And I think that will help our outstanding some in that arena.

We're having great experience right now in the commercial real estate and nonresidential commercial real estate market.

And while I think it will soften some, I don't think we're going to have problems in the type of properties we finance.

And so I think it will be a benefit for us.

Thanks a lot.

Thank you for all of your questions today.

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Ladies and gentlemen, this does conclude today's conference.

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Thank you all for your participation.