Truist Financial Corp (TFC) 2008 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corp., first quarter earnings 2008 conference call.

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

A brief question and answer session will follow the formal presentation.

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

It is now my pleasure to introduce your host, Ms.

Tamera Gjesdal, Senior Vice President of Investor Relations for BB&T Corp.

Thank you, you may begin.

Good morning, everyone, and thank you, Diego, and thanks to all our listeners for joining us today.

This call is being broadcast on the Internet from our website at BB&T.com/investor.

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

As is our normal practice we have with us today: John Allison, our Chairman and CEO, and Chris Henson, Chief Financial Officer, who will review financial results for the first quarter of 2008 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 how those who have dialed into the call may 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 managements intentions, believes and 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, 2007.

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

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

Thank you, Tamera, good morning, and thank you all for joining us.

The areas that I'd like to discuss, the financial results for the first quarter, primarily focusing on credit quality which of course is the big issue.

A few quick comments about mergers and acquisitions and then share with you a few thoughts about the current environment in the future.

Chris will give you some updates on numbers and we'll have some time for questions.

Looking at GAAP net income for the first quarter we made $428 million an increase of 4.7%.

Operating earnings for the quarter were $401 million, down 5.6%.

GAAP diluted EPS for the quarter was $0.78, up 1.3%.

Operating diluted EPS was $0.73, down 6.4%.

The $0.73 was consensus with the -- consistent with the consensus estimates.

There was a lot of noise in the quarter.

We did include $43 million in security gains as part of operating earnings.

The reason we did that is that we had an unusual opportunity because of the slope of the yield curve and the very high quality of our investment portfolio we were able to take the gains and increase net interest income this year by over $11 million without increasing risk or materially extending the maturity of the portfolio.

The odd set of opportunities in a very favorable one reflecting the very high quality of our bond portfolio.

If you take out the security gains and exclude them from the operating earnings, operating earnings were $0.68 per share.

On the other hand we added $98 million to the loan loss reserve above charge offing which obviously an abnormal factor to have to do.

If you take out both security gains and the addition to the loan loss reserve and operating earnings would have been $0.78.

If you look at the factors driving earnings there was some very good news from our perspective and that was the continued improvement in our margin which increased from 354 -- from 346 to 354, eight basis points, the second quarter in a row.

Our decision to be liability sensitive as a hedge to risk in the real estate market has turned out to be very wise and Chris will be giving you some incite into the margin.

Nonforest income growth we are fairly pleased with in light of the kind of environment we are in.

Looking annualized fourth to first, excluding nonrecurring items, purchases and net mortgage service right impairment, noninterest income growth was 5%, first to first was 9.3%.

Again, excluding nonrecurring items and purchases and then we will focus on first to first because we have a lot of seasonal noise that happens in a number of our businesses and have happened over a long period of time.

I will focus on first to first comparison.

Insurance commissions were up 4.9%, which in this environment is extremely impressive.

We are in general premiums have been falling 10% to 15%, so we are obviously moving share pretty rapidly in the insurance business.

Service charges were up 9.2%.

We added 36,000 net new transaction accounts, a very strong performance.

Our nondeposit fees and commission which is basically our debit card bank card fees were up 11.3%, investment banking 4.9%, trust was essentially flat, mortgage banking income excluding mortgage servicing rights was up 38.6%.

We did have a number of accounting changes, a fair, we to incorporate fair value accounting which added $31 million, but we also had an impact of SFAS 159 which increased our personnel expense by $16 million.

We had a very strong production quarter in mortgage loans.

Last year first quarter we produced about $2.5 billion originations.

In the first quarter of 2008 we are $4.4 billion, up 78% in a tough market.

We are significantly moving market share due to the elimination of a number of our competitors and a clear flight to quality.

There is a lot of volatility in the market which made it difficult for to us capture in terms of revenue the whole increase in production volumes, but we think we will be able to do that going forward.

So while we had a strong first quarter in the mortgage business and obviously depends on market conditions, we are very optimistic we are even show some better results going forward in terms of bottom line profitability out of mortgage banking.

This is kind of a fundamental shift in the business and the elimination of the irrational competitors is very good for us.

We had kind of strange results in other income which was down 76% compared to the first quarter.

We had a few positive like decline derivative activities was up $10 million.

We had kind of a series of negatives.

Trading losses were at --- got strength over $6 million.

We had SFAS 157 adjustment of $9 million.

Our anti-trust was down $12 million.

[Bowley] was down $15 million.

We had partnership losses of $8 million.

Last year the first quarter we had sale of an insurance subsidiary where we made $19 million.

So that was down $19 million compared to that.

Our other noninterest income at $15 million is far below our normal run rate.

Now the numbers bounce all around, but our normal run rate is about $40 million.

And while this number will vary from quarter to quarter, we had a much lower number than we typically will have in the other noninterest income.

One factor I wanted to mention looking forward that will impact earnings, we are in the process of considering doing the sale of lease-back on a number of our physical facilities.

We haven't finalized the agreement and depend on the pricing being something that's favorable to us.

If we are able to execute the sale of lease-back it will increase EPS about $0.01 this year because of the timing.

But the annual run rate going forward will be about $0.04 a year.

And we hope that transaction will get done in the next couple of quarters.

Net revenue growth was I think good news.

If you look at annualized fourth to first and you try to take out all the noise and get the same store sales numbers, take out nonrecurring items, purchases, mortgage servicing rights, also exclude other income and security gains, we'll get to a real same sales numbers annualized fourth to first we were up approximately .2% in a tough environment, annualized first to first up 7%.

Fee income ratio was 40.2%, kind of a little bit above our short-term goal, our long-term goal is to get to 45%.

Had a good story on expenses.

Annualized fourth to first up 5.6%, first to first 4.4%, taking -- again taking out purchases and Chris will give you some incite into the expense numbers.

Loan growth was also a good story overall.

Looking at average loan growth, annualized fourth to first using GAAP we were up a total up 8.5%.

If you look at fourth to first without purchase and leverage sales and looking at the difficult portfolios we had very strong commercial loan growth at 15.4%, direct retail was essentially flat, sales finance is essentially flat, strong revolving credit, basically credit card growth at 14%.

Mortgage was up 6.1%, but a lot of that was a warehouse as we had very little growth on purpose in our portfolio of mortgages and specialized lending was essentially flat, for total growth of 8.9%.

If you look first to first, again using GAAP, total loan growth was 9.2%.

Taking out purchases and leverage sales commercial loan growth was 9.4%, direct retail 1.8%, sales finance 5.2%, revolving credit 15.4%, mortgage 10.3%, specialized lending 7.1%, total growth 7.9%.

So we actually had stronger real growth fourth to first than we've been having if you look at first to first, and most of the increase in momentum was in our commercial lending business, and in our revolving credit business.

We had very strong C&I loan growth.

The disruption of the capital markets has given us some lending opportunities.

A number of our major competitors are less competitive, less irrationality going on in the pricing and risk taking elements in the commercial market.

It's clearly a flight to quality.

And we are known as a reliable lender.

We also are experiencing higher utilization in our commitments, probably reflecting the economy.

We had practically no growth in our residential construction development business on purposes, and we have slower CRE growth, but very strong C&I growth.

Our direct retail is essentially flat.

What we are seeing is fairly strong production volumes, but since we are pretty much an A-grade lender we have a fair amount of our home equity lines refinanced as people go and refinance their first mortgages.

Sales finance business, the automobile industry is very slow particularly domestic companies which we are largely related with.

We are clearly gaining share which happened with a number of the other finance entities but it's a slow growth environment we are in.

Credit card business is strong.

Focused on our own client base.

Mortgage production as I mentioned earlier was excellent, but we are not portfolio much of our mortgage business.

Specialized lending business is slow, really reflecting the economy.

Overall we were pleased with our loan growth.

Looking at the deposit growth, noninterest bearing deposits first to first were down 3.3%, annualized link 11.3%, client deposits without purchase accounting, again, first to first up 3% basically flat on an annualized link basis.

And total deposits, up 3.6% first to first, and annualized link again without purchases up 6.2%.

We have consciously slowed our deposit acquisition program to improve our margins.

There seems to be a continued level of irrationality from community banks on deposits that are income rates which are inconsistent with the capital market rates.

Also in terms of noninterest bearing deposits real estate market has impacted not just our builder clients, but we have a lot of title insurance and attorneys, etc., that are related to real estate.

We also have a quirky things one of our largest transaction a clients that almost $1 billion in deposits got acquired, and that's one of those black birds that happens to you.

We still had the capacity to accelerate deposit growth at any time we want to, but we really want the market to get more rational before we focus on doing that.

The big issue of course is asset quality, and I want to focus on that.

We did have a fairly significant increase in nonperformers.

They increased from $696 million to $989 million and as a percentage of assets from .52% to .73%.

Almost all the increase was in the residential real estate related activity.

The reason for the increase our economy in our area is experiencing a recession.

I think we were a little slow to get into it, maybe why we had a little drag in the increase.

And the other thing we are an A-grade lender and the first problems in the real estate markets were in higher risk credits, and we are seeing problems in people that a year ago certainly had been classified as A-grade credits.

We are trying to deal very effectively with the problems.

You will note that our 90-day past dues only went up from .24% to .27% so we are getting on line accrual status aggressively.

Our charge-off results were up, but still pretty good.

Charge-offs in the fourth quarter were .48%.

They went up to .54% in the first quarter.

If you take out specialized lending charge-off the fourth quarter were 2.8% and charge off the first quarter .32%.

So we are still getting very good results from a charge-off perspective.

We did provision $223 million.

We charge off $125 million, so we added $98 million, almost $100 million to our reserve above charge-offs.

Our coverage of charge-offs on -- remained at about 2.2 years of coverage.

Coverage in nonaccrual loans was 1.44.

The reserve -- if you look at the reserve to loans excluding loans held for sale increased pretty significantly from 106 at the end of the first quarter last year.

110 at the end of the fourth quarter and then 119 at the end of the first quarter of 2008.

Let me talk a little bit about our residential construction and real estate related portfolios and our mortgage related portfolios because that's the focal point from a credit quality perspective.

Those of you that actually have the press release I'll refer you to the very last page, credit supplement page two, that looks at our commercial real estate portfolio and specifically our residential acquisition development and construction portfolio.

You note that the portfolio is about $8.8 billion.

It's about 9.3% of loans.

It's a very diversified portfolio with small loan size every client relationship of only $1.1 million.

You will also note that we have very small condo portfolio which is where a lot of the biggest problems have been.

We did have rising nonaccruals and charge-offs in all of those portfolios.

Our total nonaccruals for the whole portfolio were -- 2.75%.

Losses, .27%.

We do have a reserve of approximately 4% on that portfolio already in our loan loss reserve compared to 2.75% of nonaccruals so our reserve is more than nonaccruals in that portfolio already.

The other commercial real estate portfolio which is largely office buildings, hotels, warehouses, apartments, rental houses, shopping centers, continues to do very well.

We really are not having any material problems in that portfolio today.

Obviously we could.

You see that nonperformers are only .47%.

Charge-offs only .02%.

And for the total commercial real estate portfolio nonperformers are 153 and charge-offs .14%.

If you look at the residential acquisition development construction loan portfolio our concentration of problems remains Atlanta, Florida and now metro DC and largely what we call the peripheral areas of metro DC parts of Northern Virginia even into the panhandle of West Virginia versus downtown metro DC.

So we are starting to have more problems there.

The Carolinas are continuing to do well as you can see from these numbers, very low nonperformers and very low charge offers in the Carolinas.

Looking at the page before that those of you that have the press release we'll take time to talk about our residential mortgage portfolio and our home equity portfolio.

We are a large residential mortgage lender and an A.

grade lender, our prime portfolio is $12 billion, very high scores as you can see, 17 there, 17, it's almost all first mortgage loans.

Accruals are .74% and loan losses are .08%, still very good numbers.

The average loan to value in that portfolio is 74%.

The Alt-A portfolio, again, very high credit scores, all first mortgages, we are having some rise in nonperformers there to 125, losses are .24%.

Our average loan to value in that portfolio is 67%.

Construction permanent portfolio, that's really for individuals that typically buy a lot, get a builder to build on their lot for them.

We are very a high level of nonaccruals up to 2.27, charge0offs still remain low at 12 basis points.

What's happening in that portfolio people start to build a new house expecting to sell their old house and couldn't sell their old house.

That's where we're having problems.

That has an average loan to value of 76%.

And the general point I wanted to make and one reason you will see nonaccruals go up much more than charge-offs is we are a very secured lender and even when we end up foreclosing on a piece of property we typically don't lose much money.

It even goes into our very small sub-prime portfolio where we have an average loan to value of 75% in our sub-prime portfolio, and our losses are less than 1% in the sub-prime business which is not -- it's a very small business for us, and it's a traditional kind of business.

The problems for residential mortgages look a lot like the construction, Florida being the primary area we are having problems, but also in Atlanta and in parts of metro DC and those typical markets where we are having issues.

The loss ratios in that portfolio for the first quarter were .14.

Traditionally that portfolio has had about a five basis points loss ratio.

So it's up a lot from traditionally.

For this year we think losses will be anywhere from 15 to 20 basis points.

That's up a lot from the five basis points.

But still very high quality portfolio and we just really don't see large losses there.

Home equity loans and lines, you'll see that we are primarily a home equity lender in terms of loans.

That's our main business and 77% of those are first mortgages, high credit scores, 724, small loans, average size, $47,000.

Losses have gone up a little bit to .40%.

The nonaccruals are low at .47%.

Home equity lines, we are not a big home equity line lender relative to our size.

We try to lend to our clients almost all of our home equity lines would be to our clients.

In fact about 40% of our home equity lines are behind BB&T first mortgages, very high credit scores, 757.

We are having a higher level of losses there, not many nonaccruals, high level losses of .68%.

What's happening and this is particular true in Florida, if you have a default on a home equity line you are not going to by a mortgage because of what's happening to real estate values.

And so we are not having a much higher default rate, we have having a higher loss rate when we have defaults, but we are an A-grade home equity lender and dealing mostly with our client base.

You will also see gross charge-offs on the portfolio are .49%.

That the concentration tends to be in Florida and in Atlanta and in metro DC, same markets we talked about.

Our projection is that this is fairly close to a run rate for our home equity portfolios, and we think it will be something like .50, maybe .5555 this year in home equity lending losses.

Our biggest challenge is in the residential construction and development lending business.

We are a large residential construction development lender, it's been a core business for us for over 30 years.

We have successfully weathered multiple down turns in real estate in the past.

We only make loans in our market where we understand the market to builders we know.

We very closely service those relationship.

We began our tightening standards in the summer of 2005.

Our strategy much of which had to happen before the market started tightening is to understand the markets.

We think any migration of population and affordability are very important.

We know our clients, the character, the network, the experience, control on several units, diversify risk.

Now we are putting a great deal of focus on intense servicing, making sure we don't over advance.

We are trying to work with our clients to help them stay in business to get through the challenging times.

We only basically finance feasible clients that have been in the business a long time, many of which have a lot of net worth from the big profits they made over the long positive real estate cycle.

Obviously there are times when bars couldn't be helped and we try to deal with those problems very aggressively and take our losses early on.

It's important to note that we are a secured lender.

We anticipate more deterioration in nonperforming assets and increase in charge-offs as we tend not to have large losses on foreclosures.

We are moving real estate fairly effectively right now.

Part of that may be the season, may be the spring, traditionally by the time we get an asset into other real estate we traditionally don't have losses, in fact net/net we often have gains in our other real estate portfolio.

Let me make a few comments on some of our other loan portfolios.

We continue to have strong credit card growth.

Most all the credit card portfolio is growing with our client base.

We are getting strong growth in markets where we did mergers three, four years ago.

Losses have increased somewhat.

We are not experiencing significant problems in this portfolio.

Losses have increased in our sales finance portfolio to the 75 basis points level reflecting both economy and used car prices up until recently.

We do actually anticipate lower loss ratios going forward as prices have firmed somewhat for used vehicles.

The reason we accept our sub-prime automobile business continues to experience higher than normal loss rates, but interestingly enough both charge-offs and nonperformers improved in comparison to the fourth quarter.

While we expect a higher than normal loss rate for the year we anticipate the lots will actually continue to decline over the course of the year.

The tightening of standards by GMAC and others is actually allowing us to upgrade our risk at very attractive returns in that business.

The commercial and industrial lending business is strong both from a growth and a quality perspective.

We are actually reducing our risk as lower risk rate companies are actually encountering the markets and low risk clients are seeking other financial institutions with lending capacity like BB&T.

We have an interesting phenomena going on, we are trying to help nonprofit institutions in our market deal with the auction rate market situation.

We have over $4 billion in loan and letter requests from high quality hospitals, universities, etc., and other public entities in our area.

This is a volatile situation and we are not sure how much of it will be funded, but we are in a position to meet the needs of our community and to make a profit doing it.

We certainly expect both loan loses and nonperforming assets increases.

However over the long-term both our nonperforming assets and our loan losses have consistently been better than the industry and we expect that to continue.

The best aspect of our asset quality is that we either totally avoid it or have very small exposure to the type of risks that have so significantly negatively impacted many of our large financial institution competitors.

We did not do negative amortization mortgages.

We have a tiny traditional sub-prime portfolio.

We do not do CDOs, SIVs, or a long list of other instruments.

One of the guiding principles in our lending business is only make loans which we believe are objectively in the bars best interest.

While this concept will not eliminate losses it significantly reduces the probability of losses in the long term.

Our focus on quality also reflected in our bond portfolio.

In recent years we actually experienced a lower yield on our bond portfolio than most of our competitors and we got criticized for that.

It reflected lower risk.

While that hurt in short term, the higher quality of the portfolio has allowed to us take gains and increase earnings at the same time this quarter.

Leading asset quality and refocusing on overall results we are reasonably encouraged with the first quarter particularly in light of the economic environment.

We experienced solid loan growth, solid noninterest income growth, accessible expense control and a very positive improvement in the net interest margin.

All healthy achievements in this market.

Changing direction just a couple quick comments on mergers and acquisition.

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

A combination of our stock price and our inability to do due diligence on community bank real estate portfolios has made us very unlikely at least in the immediate future to do community bank acquisitions.

We are continuing to aggressively look for insurance agency acquisitions.

You see several listed in our press release.

We will also look at a few other nonbank acquisitions, but most of our activity will be in the insurance arena.

We have the fastest internal growth rate and the best productivity of the 10 largest brokers in the U.S.

It's a very difficult market for independent agencies, which makes it a good time for us to do acquisitions and leverage our operating advantage.

So hopefully you'll continue to see targeted insurance acquisitions.

With great trepidation I will share with you a few thoughts about the future.

I did first want to remind you that we do not make forward earnings projections, and anything I say about the future may be wrong and probably will be wrong with the kind of environment we are in today.

We use the blue chip consensus economic forecast for planning purposes.

Two-thirds of the blue chip forecasters say we are already in a recession.

It sure feels like one in a lot of ways.

However they are consensus is the economy will begin recovering in the second half of 2008 and be in a recovery in 2009.

Real estate markets are obviously very important to us.

We expect real estate markets to remain slow and for prices to continue to fall maybe another 5% to 10%, but will vary a lot by market.

We do think real estate will bottom this fall and be recovering in the spring of 2009.

Real estate cycles typically run three years and spring of 2009 will be three years.

I also strongly believe that real estate values particularly residential real estate values will be higher in three years than they are today.

The fundamental demand for residential real estate has not changed.

As indicated earlier we expect rising levels of both nonperformers and charge-offs.

We will probably have more challenges relative to nonperformers than charge-offs as we are a secured lender.

Last time we told you our guess and we emphasized it was a guess was that charge-offs would be in the .50 to .60 basis points range.

Our new guess and it is also a guess is the charge-offs will probably be in the .55 to .65 range.

Still very acceptable level given the kind of environment we are in.

While credit quality is a dominant concern it should be noted that the rest of our business is doing fairly well.

There is a clear flight to quality in the mortgage business which will significantly impact in a positive way this business for us.

We are seeing more rationality in loan pricing and in risk to underwriting, which is improving our lending spreads, and general loan competition is more rational and capital markets competition has diminished dramatically.

A lot of positive pricing from community banks remains irrational.

We are seeing more banks become more rational in deposit competition.

As Chris will highlight we have and will continue to benefit from our liability sensitive position even though we are now moving to hedge against rising rates in 2009.

Two other important general considerations, we believe our model for doing business has been confirmed.

We are a quality differentiated client focused competitor.

In addition we are primarily in the origination whole business.

We were being negatively impacted in 2005, 2006 and 2007 from the origination sale competitors.

More rationality in this market is good for us.

In addition since we were not in these businesses, we are not losing the revenue from not being in the businesses going forward, and I think that's important.

So our model has been confirmed.

In addition the demographics and economics of our core markets are strong.

We have in migration of population in most of our markets and above average population growth.

More people moving into markets helps a lot with real estate.

Population growth cures the real estate market over the long term.

We also have very large market shares in our markets.

In fact we have the largest market share of any of the 15 largest banks in the U.S.

relative to their markets which is the foundation for efficiency.

In the markets where we don't have rapid population growth we tend to have very large market shares.

I am certainly concerned about the residential real estate markets and the general economy and we recognize these factors will be negatively impacting our business in the short term.

However I remain confident about our long-term performance because of the fundamental principals with which we run our business have been reconfirmed in this process in a very positive way.

With that said, let me turn it over to Chris for some more comments.

Chris.

Thanks, Don.

Good morning, I also would like to welcome each of you to the call.

As is normal I'd like to speak to you briefly about net interest income, net interest margin, noninterest expenses, taxes and capital.

First looking at net interest income, based on operating earnings if you look at the year to date comparisons you can see the average earning assets were up 7.6% adjusted for purchases which produced year to date basis of $1.34 billion in net interest income, a 5.7% increase over prior year adjusted for purchases.

If you look at linked quarter comparison, first quarter to fourth '07, you can see earning asset growth was up 5.1% adjusted for purchases.

Again, $1.34 billion in net interest income, a very healthy 10% annualized increase over linked quarter adjusted for purchases and net interest income.

And as John commented the margin based on operating earnings we were very pleased with was up eight basis points from 346 in the fourth to 354 in the first quarter '08.

On a year to date basis we were down seven basis points, 361 first quarter of '07 to 354 first quarter of '08.

Just a few comments about the margin, during the first quarter we did maintain our liability sensitive position which John pointed out served as somewhat of a hedge against the current real estate market.

The positioning really margin improvement accelerated commensurate with the significant decrease in short-term interest rates that we experienced during the quarter.

We continue to experience healthy balance sheet growth.

As pointed out an increase of nonaccruals unfavorable change in asset mix, we continue to book declining percentage of higher yielding assets like commercial real estate loans and direct retail loans, a lot of booking increase of lower yielding assets like C&I and mortgage.

Although the margins in C&I loans and mortgage loans are improving as risk premiums increase.

Our client deposit growth once again slowed and resulted in a funding mix shift toward higher cost alternatives.

If you look at year to date comparisons on yields and rates, you can see total earning assets were actually down 61 basis points, while total interest bearing liabilities were down 69 basis points, creating positive spread of eight basis points.

On a linked quarter comparison you can see total earning assets were down 42 basis points while interest bearing liabilities were down 60, creating an 18 basis points improvement in the spread.

And you can see the securities portfolio actually performed very well, the yields up three basis points in what I think is a very difficult environment, and I think speaks to the quality John was mentioning earlier.

While yields declined primarily in the loan portfolio due to a 94 basis points reduction in commercial loans and leases, that portfolio is 73% variable so you would expect that with short term rates falling.

Total interest bearing liability costs declined significantly as a result of a big declines in other interest bearing deposits in fed funds and other borrowings due to the repricing that was taking place.

And once again just like last quarter all deposit and funding categories declined during the quarter.

The main driver of the eight basis points improvement in net interest margin during the first quarter was clearly the decrease in our interest bearing liability costs, which resulted really from two items.

One, really effective control of our deposit and funding costs.

And then, secondly, maintaining the liability sensitive position during the falling interest rate environment.

Really saw that play out well, during the first quarter.

As we look forward, benefits should continue to accrue from the current positioning throughout the year.

Our (alco) model which is based on the blue chip consensus forecast assumes a 25 basis points reduction in fed funds rate in April, and also a 25 basis points reduction in August, and so the forecast is that we expect margins to increase slightly in the second quarter and continue to increase throughout the year to the low 370s by year end.

And then finally we are beginning to hedge against our rising rates in 2009 as we begin to move forward.

So very pleased overall with the margin and expect positive movement for the balance of the year.

In noninterest expenses, we were pleased with our expense growth especially on a year to date basis after adjusting for purchase acquisitions of 4.4%.

And given the first quarter is traditionally our lowest quarter with respect to noninterest income generation specifically the seasonality seen in insurance services, service charges and nondeposit fees and commissions, but given that, we maintained a relatively strong operating efficiency as evidenced by the cash basis efficiency ratio of 52.4%.

Also interesting to note the movement in FTEs, just want to do give you a little detail on that.

If you look at our FTEs in the first quarter of 2008 when compared to first quarter 2007, you would see that they increased only by 53% excluding acquisitions.

They were actually up 850, but 797 of those were acquisition related.

So the net increase excluding acquisitions up only 53%.

On a linked quarter comparison excluding acquisitions FTEs increased by 273, about 100 of those were added in payment services, electronic delivery and insurance services as revenue producers and/or revenue initiatives in the case of electronic delivery.

About 50 were added special assets, another 25 in our leadership development program, and the balance of approximately 100 were simply to replace existing vacancies throughout the company.

So overall felt really good about our FTE control as well, and we stay focused on that because really that will drives a lot of many other expenses.

Noninterest expense growth rates, if you drill down a bit year to date again 4.4% increase over prior year adjusted for purchases equates to $1 increase in total noninterest expense of $40 million after purchases again the 4.4%.

The drivers there, personnel expense was up $8 million, occupancy and equivalent up $5 million, and then other operating was up $27 million to round out to $40 million.

Taking personnel first the drivers there were the largest being and really the primary driver was due to the decrease in the capitalized salary expense and mortgage due to the adoption of FAS 157, 159, new accounting standards that John talked about, mortgage adopted January 1st.

So we had expense this year that would have historically been deferred recognizing in this period comparing back to '07 when it would not have been there.

So that certainly drove personnel.

In occupancy and equipment it was increased rent evenly split between new de novo losses as well as rent and other nonde novo, it was a small number, $5 million.

Other operating expense was up $27 million the drivers there were about six items pretty evenly distributed.

For increase in professional services, increase in bank card and bonus rewards expense, small increase in advertising, increase due to fewer gains on the sale of real estate, increase in write downs on foreclosed property, and then a small increase in charge-offs.

So that are the reasons behind the common quarter change.

Linked quarter expenses were up 5.6% annualized over the linked quarter adjusted for purchases.

So that total noninterest expense in dollars was up $13 million, or again 5.6%.

The drivers there were -- personnel expense was the primary driver, up $27 million, while occupancy and equipment was really down and it was rent as it was in past discussion and other operating expense was down $10 million.

So the real driver was personnel expense and we drilled down into that, what you see is about half of it was due to social security -- increase in social security and unemployment taxes and increase in the risk expense due to fourth quarter employees reaching their contribution sales.

And you typically see that shift in social security unemployment taxes for the first as well.

We also had $8.7 million, again was less capitalized salary expenses being deferred, so we realized more expense in the quarter as a result of mortgage adopting FAS 157, 159 new accounting standard.

And we had a small standard in executive incentive accrual, which was related to a credit accrual that was taken in the fourth quarter, so we are getting the negative swing of that in the first, and then small increase in salaries due to annual increases that were in effect April 1 of 2007.

So that rounds out really the drivers for personnel, $27 million that really drove overall increase of 13 in the noninterest expense line.

I want to briefly update you on the progress with respect to our recent acquisitions.

We only have one remaining and that's Coastal Financial.

You might recall our targeted savings there was $27 million.

We actually converted Coastal August of 2007, and versus that target of $27 million we have saved $18.7 million to date and $7 million of that came in the first quarter.

Looking at taxes, just want to do comment on effective tax rate and what you might expect going forward.

Effective tax rate actually went from 30.83% in the fourth quarter to 31.57% in the first, and you might recall I commented during last call that we did have a $3 million year end credit through up in the fourth quarter but overall tax is fairly stable.

Going forward we expect the effective tax rate to be in the range of 31.5% to 32.5% for the second quarter, and also for the full year 2008.

Speaking to capital just a moment, really no changes to overall capital strategy to report.

Capital position overall continues to remain very strong.

Equity to total assets at the end of the period stood at 9.4%.

Risk-based capitals in the period -- tier one risk-based capital was at 9%.

Risk-based total capital, very strong at 14.1%.

So obviously our risk-based capitals remain strong in a difficult environment.

Leverage capital to end the period actually increased from 7.2% in the fourth quarter to 7.3% in the first quarter of 2008, well above our 7% target.

Tangible equity was at 5.6%, slightly above our target of 5.5%.

Overall capital continues to be one of the strengths of BB&T.

As for share repurchases, we did not repurchase any shares during the first quarter.

And looking forward we do not plan to repurchase shares in the near term, but we just constantly reevaluate our position based on the market and capital levels, etc.

As a reminder our dividend in the second quarter was $0.46, represents an increase of 9.5% over the prior year quarter.

And kind of looking forward given our strong capital position and current projections we do anticipate increasing our dividend in 2008 with the level of increase will depend on the market conditions at that time.

So that concludes my comments.

Overall, I would say we are pleased with the quarter.

At this point I will turn it back over to Tamera for further instructions.

Thank you, Chris.

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

Please limit your questions to one primary and then one follow up.

If you have further questions please reenter the queue so that others may have an opportunity to participate.

And now I will ask Diego to come back on the line and explain how to submit your questions.

Thank you.

Ladies and gentlemen, we will now be conducting a question and answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Steve Alexopoulos with JPMorgan.

Please state your question.

Hi, good morning, everyone.

Chris, looking at the seasonal decline in the insurance commissions, it was a lot less than we've seen in other first quarters.

I was wondering if there were any one timers in the revenue line?

No, I don't think, not that I can think of.

I think just reflective of what John spoke of, we really are I think moving market share but don't know of any large one time kind of items.

We have expanded our product line, that's part of it, we are in some arenas than we weren't in before.

That's probably why you're seeing some growth.

That's true.

And maybe just one follow up on nonperformers, if we look at the $1 billion in nonperform hing assets is that some written down market value or is that book value?

It would vary, when you go through the nonperforming process, when it gets to other real estate we try to get it down to market value.

The rest while it's in the process you write it down but you are always -- you don't want to do it multiple times.

You are going through a valuation process.

When you put in nonaccrual you put it in reserves, we think the reserves way more than cover more than the accruals which you haven't written all the nonaccrual down to market value because you have to go through a valuation process.

Let's say you are getting ready to foreclose on a piece of property, you put it on nonaccrual but then you have got to go through the foreclosure process and you have got to go through the evaluation process and the time you end up owning it you will have written it down, but initially you may not know totally what the write down ought to be.

You my right down half of what the loss ends up being or more than what the loss ends up being because you are just in kind of an evaluation process.

Thanks, guys.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Matthew O'Connor with UBS.

Please state your question.

Hi, guys.

John, I think we always -- we all appreciate your M&A comments.

I'm just wondering maybe broad perspective, do you think there will be a lot of situations where there's distress banks looking to sell?

And then of course how does BB&T fit into that?

I think that there are a lot of banks for sale and no buyers right now just based on the calls we get.

How -- there are maybe not distressed to the point that they could get assistance.

How many will actually get distressed to the point where the FDIC steps in and provides assistance I really don't know.

I do think there's some markets like Florida where there's some real, real challenges in the community banking market.

Though it's really a little bit hard for me to judge.

We traditionally have been very cautious on buying companies that were in financial trouble because we are basically a quality oriented business.

We don't really like to fix up things that are broken too badly.

We would look at companies that maybe have some specific challenges and have a good long-term client base, but we would be real cautious in getting very aggressive about assisted transactions.

Okay.

That's helpful.

And just my follow-up question, you gave your guess on the charge-offs going forward.

Any guess on nonperformers in 2Q and the back half of the year?

I'm really trying -- we have our estimates but they are so volatile that I really -- our models show a slow in growth rate in nonperformers and if the economy improves by the end of the year you actually start seeing some improvement.

But that is very dependent on what the economy does.

Okay.

Thank you.

Our next question comes from Mike Mayo from Deutsche Bank.

Please state your question.

Hey, John.

Lower growth rate from NPAs from up 50% means a lot of -- that's a big change there, so if you could just give a little more color.

So far the Carolinas have been safe.

That's helped you out.

And also with regard to home price depreciation, I guess some people will say based on affordability home prices could have another 20% to fall.

So just a little more color on the outlook for NPAs.

Well, I'm cautious about actually giving you formal estimates, but I can tell was we're seeing.

As our numbers reflect so far, the Carolinas have held up very well.

We are still actually having some appreciation in some markets like Charlotte and Raleigh which is interesting.

The coastal part of the Carolinas has slowed considerably.

We are seeing declines -- continued declines in-house prices in place like Florida and in the Atlanta market, because it really is high inventories and not that many buyers.

Our guess and it is a guess is that on average we are probably facing a 10% additional decline from where we are now, which will have been in some markets 25%, 30% from the peak, in other markets it won't be that big a decline, but you are not getting material declines in markets that didn't have some rapid depreciation.

If you look back declines are in markets that were growing very rapidly, and it's ironic in some cases they are down 30% but more than they were three years ago.

So the real vulnerable person is a buyer in the interim and particularly the speculators that got stuck with houses they thought they could sell.

I'm guessing, but I think that we probably have got another 10% to go on average.

And a follow up, how much do you think these housing related problems, and we'll call the commercial real estate housing related indirectly, how much do you think that is spreading now or is likely to spread to other asset categories?

Well, it's certainly impacting I think the automobile business pretty dramatically.

I think the fact that people have less comfort in equity in their homes, the less in security makes them less willing to do bigger purchases.

It's impacting the furniture business pretty significantly.

Obviously people by furniture when they by new homes and that's a deferrable purchase until and so you have furniture retailers struggling.

So I think the bigger picture in deferrable categories are where you are seeing the biggest problems.

Whether you could have that go through to shopping centers I don't know.

I'm in the process and every spring I go visit ever are all 33 of our community banks, and I'm having opportunity to talk to our small business, middle size business clients.

The story -- if you are in the residential construction development business you aren't having any fun.

If you are in the commercial end of the market most everybody says things are fine.

They may not be fine going forward.

But I'm not getting anybody on the commercial side that's not pretty optimistic that isn't still doing pretty well from an economic perspective.

So so far it's reflective in our numbers but also the sentiment it hasn't hit the commercial market.

One thing in the early '90s a lot of the downturn was commercial not residential because you had so much excess building.

And this time around you probably have some excess building but it's nothing like the early '90s where you had so much excess lot development in retrospect in the residential side of things, I think that's why you are having a much more serious correction on the residential versus commercial.

Alright.

Thank you.

Thank you.

Our next question comes from Nancy Bush with NAB Research.

Please state your question.

Hi, good afternoon, John.

There certainly has been more than the usual share of volatility in your market in financial institutions over the past few months, and I'm wondering if you're beginning to see any market share come your way as one of the more stable players in that market.

We really are, Nancy, particularly in the C&I lending business, both the trouble and account for markets and I guess people wanting to be secure that they have even multiple sources or they have strong sources.

I would say the attitude of our sales teams is the best I've ever seen it.

It's still a challenging environment because you have to be very careful you don't get adverse selection in this kind of environment, but we are having particularly in the C&I lending -- commercial and industrial lending business we really have having a great deal of success.

Are you seeing it -- are you seeing larger credits come or larger companies come your way than normally would have been the case, and are you able to accommodate that kind of business?

Yes, yes, we are seeing, I'd call them large middle market companies, maybe the lower end of the large market, we are having a disproportionate amount of success in that market right now.

Okay, great.

Thank you very much.

Our next question comes from Todd Hagerman with Credit Suisse.

Please state your question.

Good morning, everybody.

Just a couple questions.

First just in terms of the, John, you mentioned the reserve, the 4% allocating on the home builder residential construction portfolio.

Could you just kind of give us an update in terms of your principal assumptions there for that reserve?

And then secondly whether or not there is any unallocated piece that's associated with that?

Yes, I don't know the numbers in terms of the unallocated, there is a pretty substantial unallocated piece, but I don't know the number.

What -- when we go through the reserve requirements, the first thing they go through and look at every single watch list credit, and they reserve specific reserves against those watch list credit, and that's where you really have the biggest increase of reserves where you worry about a specific loan.

Then secondly they go back and look at loss ratios in different economic environments and for your general portfolio based on risk rates.

And we are right now in the process, been doing this for months, this is one reason where you are seeing reserves pop, everybody, you are changing your risk rate.

We are having relationships that we rate from one to 10, one is wonderful, 10 is bad, and we are having relationships that I think objectively a year ago were risk rate really suddenly become sevens and eights.

And that might not be a nonperforming status, but you are going to increase your reserves on that relationship pretty materially even though the credit is still performing and the client is still paying the loan, etc.

So, we're going -- and that is a very meticulous process.

Now it's a lot of science, it's also part of ours because you are not always know that somebody is going to go have that kind of radical decline in risk rate status.

But we very carefully follow what we think the GAAP -- what we know the GAAP rules are on establishing reserves.

In fact we have very good reserves relative to what we know today, what we know today.

Just as a follow up to that, is there any material portion of that portfolio that is not on currently, at least a watch credit if you will, it doesn't have at least some portion reserve set aside?

Out of all of that portfolio?

Sure, you have residential builders and developers that have huge amounts of cash.

Remember they had a 15-year run, some of them got very conservative and there are a lot of people buying now.

So, yes, there are parts of that portfolio, the old line guy that got real cautious two years ago saw the bubble in the market, kept some projects, but kept a lot of liquidity.

We have clients in that base that are buying, they are buying at deep discounts.

So you would have a wide range of borrowers, now you have reserves against everybody but somebody like that you have not going to have a material reserve because they are a low risk clients.

But in general the grades are drifting down pretty radically.

Okay.

Thanks very much.

Sure.

Our next question comes from Christopher Marinac with FIG Partners.

Please state your question.

Thanks.

Hi, John.

Wanted to ask you, you had mentioned that you thought this was a three-year process to go through the cycle, and that we are two years through.

Do you think we are two-thirds of the way through recognizing the losses, or do we get the bulk of those next year?

That's a great question.

We are two-thirds away recognizing the nonperformers and maybe two-thirds, we are probably more like a half left recognizing the losses.

Because we really -- it really didn't turn into losses until the fall.

If you look at prices peaked two years ago in the spring of 2006.

But because we've been on such a long run it was really last 2007 before we really started turning into losses.

So, my -- and while this is just a wild guess I guess we just halfway through the loss process in the industry.

Okay.

And then a follow-up question just had to do with North Carolina and I know you mentioned about prices going up.

Does the change in unemployment that seems to have happened in Raleigh and Charlotte last year does that percent of revenue tend to some softness in the coming quarters?

It could.

It could.

We are not seeing it in Raleigh.

I guess Charlotte, you've got to worry about what happened, the big drivers there: Bank of America and Wachovia, and what happens with their staffing levels might be big enough to impact that economy, of course there are lots of other stuff in Charlotte.

You could see some slowing in both Raleigh and Charlotte.

Certainly Raleigh we are not seeing it so far.

But neither one of those markets had the kind of appreciation had you in lots of other places.

So -- but they could have more problems than they've been having.

Great.

Thank you very much, John.

Thank you.

Our next question comes from Chris Mutascio with Stifel Nicolaus.

Please state your question.

Good morning, John and Chris.

How are you?

John, in your opening remarks you talked a little bit about selling securities and you got some gains and you were able to enhance interest income I thought you said about by $11 million for the year.

I had to step off so maybe you could addressed this later or maybe Chris' comments.

How do you go about selling securities at a gain which implies had you a yield above the market and still increase the NII, if you -- in other words, sell those securities?

I don't get that.

It was caused a weird aberrations that we had in the market.

The yield curve has been almost bizarre going and going fast up three, four years.

Secondly, we had governments and could trade-off into agencies, government agency spreads got to be crazy.

So I've never seen anything -- I've never -- that's why we count it as an operating profit.

I've never seen any time you could take bonds gains and turn around and improve your income without changing your risk or duration.

We extended the duration about a year and we went from gut treasuries to agencies.

And we were able to both get the $40 million and get $11 million increase in income.

And it just was -- A, the fact that we had the treasuries and, B., we were right on the yield curve.

We have -- a lot of banks went long.

We had a very short duration for our bond portfolio and to some degree we paid the price for that and got some criticism over the years because we were short and high quality.

With said we are going to take our risk in the lending business, we're not going to take any risk in the bond portfolio.

And because of that our bond portfolio has been very nice to us and it's one of the drivers in terms of our rising margin because we've got a low risk portfolio.

That's right where it ought to be in terms of the yield curve.

Okay.

Thank you for the color.

I appreciate it.

Thank you.

Our next question comes from Jefferson Harralson with KBW.

Please state your question.

Thanks.

I want to ask you guys about timing of losses and this [AD&C] book, if you look at the disclosure you have in Georgia and Florida, you have very high accruals in both states but you've taken pretty significant losses in Georgia but almost none in Florida.

I wanted to just ask about how you, I guess what the time line looks like when you take a construction loss.

Well, again, you go through the cycle of, you put a nonperformer because you feel they are not going to pay you, then you have to evaluate the property and then you foreclosing on the property and then you liquidate it.

We try to as we go through that valuation process, we write it down and then when we actually foreclose on it we write it down to what we feel comfortable we can sell it for.

And we've traditionally been very close in that regard.

Since a lot of the stuff has deteriorated relatively recently we are still in the process of evaluating that.

But I would point out again we are a very focused, secured lender.

Our typical loan to value ratios were 75%.

So even if a piece of property falls in value 25% we are not going to have a material loss on that property.

So sometimes those things get out of line obviously.

But we are collateral lenders in the real estate lending business and we are kind of a nuts and bolts lender with lots of small builders which means you go out and in suspect the stuff and are staying on top of it so you don't tend to have big losses in that kind of real estate, even if property values fall.

If they fall 50% you have a loss but if they are only falling 20%, 25% you are not going to have a whopping loss in that.

So, yes, we have some more losses to go through.

We've included that in what we think our loss ratio will be for the year.

As I mentioned earlier we think our loss ratio for the year will be 55 to 65 basis points and that includes the expected losses on that inventory of nonaccruals in process.

Now obviously if house prices fell more than we expect or the economy got worse it would be a different number but we feel reasonably comfortable with that projection based on the mileage we have now which is obviously subject to change.

All right.

And a follow up for Chris on the Visa gain.

Is that Visa gain in other income and what's the pretax Visa gain?

The pretax was about $34 million other gain and we got to reverse about $13.9 million in legal charges that we took last quarter.

So the charges would be in other operating expense and the gain would be in other operating income.

So other operating expense was benefited by $13.9 million.

Of course we took that out of, we took that out of operating.

Okay.

And the Visa gain is separate completely from the securities gains?

Right.

We took both of them out of operating so they are not in operating.

We tube the $13.9 million and the $34 million out of operating.

All right.

Thanks a lot.

Yes.

Our next question comes from Greg Ketron with Citigroup.

Please state your question.

Good morning.

Good morning, Greg.

The question regarding the margin outlook that you provided, Chris, the margin increasing in the low 370s by the ends of this year, and just looking in the quarter it looks like you passed through over 90% of the fed easing into the interest bearing deposit base.

And a couple of questions there.

One, do you think you can continue that rate should we see further fed easing?

And maybe some color around the expansion of margin and where that would be coming from going forward?

Sure.

I think, first, can you pass on -- or can you pick on additional pick up benefit from additional fed easing.

I think the answer is yes.

What fed easing has already occurred we are going to clearly get benefit from it whether we get 90% remain to be seen, certainly depends on competition, etc., but we are going to get a large part of it, and I think we are going to get a greater part of additional easing obviously.

So that will carry on through the year.

And then the real pick up later on in the year more like third, fourth quarter, our CD book is -- has about a seven to seven-month average maturity.

And so the repricing begins to occur in the CD book in the third and fourth quarters so that's really what's going to drive sort of the back half of the year if you will.

There's some other small item, but that's the primary one.

Okay.

And in the follow-on question to that, the deposit pricing that you pass through from a competitive standpoint, where do you stand competitively across most of your markets on deposit rates?

Does that change from where you were positioning before, or is it still pretty constant?

It's still pretty constant.

We might be -- as John pointed out we made an objective decision to try to take advantage of the liability sensitivity that we had, but I mean we still have had CD growth, and I recall as competitive, but just just looked like the right objective thing to do given sort of the market.

We've seen a little bit of moving back up from one competitor but it's not been a widespread kind off issue and we feel pretty good where we are.

I mean the future will determine what obviously what we did there in terms of pricing.

But I think we are in a pretty good place at the moment.

Okay.

Thank you.

Appreciate it.

Sure.

Our next question comes from David Hilder with Bear, Stearns.

Please state your question.

Good morning.

John, the answer to this may be obvious, but I just want to ask.

Looking at the geographic breakdown of nonaccruals in the residential ADC portfolio and also in the first mortgage portfolio, clearly the numbers as you've said for Georgia, Florida and the DC area are very different than some of the other geographies, especially in North Carolina.

Is that truly because of over building in those markets, or did you as a lender do something different in those markets as well?

I think it's a markets.

I don't think we had any different standards.

I would say if you look at Florida and what I call the peripheral areas of metro DC, it was such rapid appreciation in prices that simply made the houses unaffordable.

And in Florida you had so many more speculators than I think anybody realized.

Atlanta is a little different phenomena because Atlanta actually has great economics, inbound population, etc.

I think what happened in Atlanta was more the number of lots.

We are having more trouble in Atlanta around lots than we are around houses.

The market got ahead of itself and it's really bifurcated in that if you are kind of inside that, I guess it's the second belt line, I can't remember the number of it, 285, you're okay, but if you are outside of it you've got problems because of the gasoline prices have just really slowed.

Markets that were going very fast just suddenly hit a wall because of the gasoline prices.

So I don't think it was our standards in those markets.

I think it reflects the markets.

And in the first mortgage portfolio, no real difference in terms of owner occupied versus second home or investor of loans.

Florida, we tried not to do any investor loans.

If we got one it wasn't -- it because somebody was lying to us, not to us, but it happens fairly often in general.

We did inherit a portfolio from one of the company's we acquired in Florida that was higher risk than we normally do and that portfolio had disproportionate problems in it.

So that's been a distortion there.

And probably just because of the nature of the Florida market had a few more expensive houses and that's where you really take, if you end up foreclosing you take the biggest beating if you have a more expensive house today.

I think that would be the only difference.

I think Florida is a very tough market today.

Okay.

Thank you very much.

Yes, sir.

Our next question comes from David Pringle with [Felspoint] Research.

Please state your question.

Good morning or afternoon, I guess.

Make sure to sort of understand this home equity portfolio, the home equity loans on page nine, are those -- those are closed end the $9.832 billion?

The home equity portfolio, you got two categories there, let me make sure I get on the right page that you're talking about.

Alright the $9.8 billion, are really basically, we are calling them home equity loans.

We called them direct retail loans which is often, you see the small loan size.

You see that almost 77% of them are first mortgages.

Right.

A lot of that is someone has paid off the mortgage on the house, they want to add a room, it's not worth the up-front cost because of the size that they need to go get a regular mortgage and we just make them a first mortgage.

But those are closed end home --

Closed end, you pay X amount a month, it looks like a regular home loan, they are just small.

Is there a way somebody can put a first in front of you on one of those without you knowing it?

No.

No.

Okay.

You mentioned, the home equity lines are the open end and 22% or 23% of those are first, had you mentioned that 40% of your home equity loans are behind the BB&T first?

Yes.

So can you add the 22.8% plus the 40% to come out with a 60% of the home equity lines are either first or behind yours?

Yes, you could add those two together.

Right.

Okay.

And in theory we never did the combined loan to values, we are not supposed to be more than 80%.

So the first plus the home equity together were supposed to be obviously, it doesn't always happen but that was our normal policy and the vast majority of them, that 62% you added up would not have had a loan to value in May of more than 80%.

Okay.

You mentioned furniture, and U.S.

Bancorp.

mentioned door bells.

Do you have an idea of how much of your C&I book is sort of maybe partially or more than partially directly related to housing?

I don't know off the top of my head because you have to -- I mean the account lows is related to housing.

I wouldn't -- the more vulnerable end would be the furniture manufacturers, but a lot of that's gone international, and we don't have big exposure there any more just because it's gone international, and furniture retailers -- and we would have some retailer exposure, but it would be less than 1% of our portfolio.

We could have a bad -- in high point which is like where we live, we sell on the high point, you have the largest furniture market in the country, and a lot of people you have furniture dealers here that sell nationally, because basically because of both prices and taxes and you have some of that, and we could have a bad loan related to that.

But the whole business wouldn't be, if you added in furniture, it would be a fairly small portion of our total business.

And the one to four construction is about half of your construction book, how is the other half doing?

The -- you are talking about the commercial, the nonresidential commercial business is doing very well right now.

The nonresidential commercial business we are -- we -- if the economy goes down it's going to impact that but that looks like office buildings, it's looks like hotels, warehouses, apartments, rental houses, shopping centers and we are having very few problems in that portfolio to date.

Terrific.

Thank you, sir.

Yes, sir.

Our next question comes from Mike Mayo with Deutsche Bank.

Hey, John, a follow up.

A real simple question.

You have $4.7 billion of home equity lines.

How much of your home equity lines have been committed but not funded?

That's a good question and I don't know -- you mean how much more could we fund under those lines?

Yes, let's say I went to you and got approval for $20,000 and I've only drawn down $10,000, where does my other $10,000 show up and --

Chris, you have that -- I don't have that number.

I'm looking, but I don't think so.

We can certainly get it for you, and maybe if you call Chris, I just don't know.

If you had to guess I mean relative to the $4.7 billion, would it be 10%, 50%, the same size?

more?

I -- this is a guess.

I think we run about 65% utilization.

I was going to say 70%.

I think --

Maybe 70%.

There's probably another 30% that could be funded.

I will say this, though, the people that tends to be less than fully funded tends to be your lowest risk clients.

Okay.

Do you think that's the case in the industries, kind of two-thirds utilized?

I would guess, Mike, but I don't know.

I never really talked to anybody about that so I'm not sure.

And how much flexibility do you have to, say, forget it, I got approval for $20,000, but you say, hey, I'm a bad borrower down in the southern part of Florida, can you take that away from me?

Yes, yes, if we had some objective reason to do it.

There are rules.

And we could reappraise your house and do those kind of things if we had some reason to do that.

And then a unrelated question --

A lot of time you stop advancing for some reason, you have some genuine reason.

Okay.

And an unrelated question, I feel like you guys have been kind of on again, off again with regards to mergers of equals.

And if I timed it right I think you have kind of off.

But it just seems kind of strange that after all these years that when there seems like there's more potential combinations that you would be -- you kind of put yourself out of that market.

Well, I won't say we are out of it.

We actually went through a process last spring mostly of looking at where we thought were our objective opportunities.

We got through that process, a couple of the banks that seemed like legitimate partners on surface, we were concerned about the economics, and in the cases it seemed to work economically, there were cultural issues that seemed difficult to resolve.

In theory we would be interested in doing a merger of equals, but frankly we are -- we wanted to be sure that we are haven't taken an inordinate risk in that regard, because the merger of equals you are doubling your assets.

and the other thing is to be sure we have a cultural fit where we like the philosophy that we run our business by and feel good about it, and we want to be sure we have a cultural fit.

So, I wouldn't be shocked on the other side of all this a year or two from now if we might not have an opportunity to do that.

But it's a pretty tough world to go in and figure out what somebody else's problems are and them to figure out what your problems are and you kind of both feel good about that.

It's possible, it's just a difficult environment.

All right.

Thank you.

Yes, sir.

Ladies and gentlemen, we have now run out of time for questions.

I will turn the conference back over to Tamera Gjesdal for closing comments.

Thank you for all of your questions today.

We appreciate your participation in this teleconference.

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Ladies and gentlemen, this concludes today's teleconference.

All parties may disconnect at this time.

Thank you all for your participation.