Truist Financial Corp (TFC) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation third quarter earnings 2008 conference call on Thursday, October 16, 2008.

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

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

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

Thank you.

You may begin.

Thank you, Michelle, and thanks to all of 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.

We have with us today John Allison, our Chairman and Chief Executive Officer; Kelly King, our Chief Operating Officer; and Chris Henson, Chief Financial Officer, who will provide a look ahead as well as a review of the financial results for the third quarter of 2008.

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

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

BB&T does not make predictions or forecasts; however, there may be statements made during the course of this call which 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 10(K) for the year ended December 31, 2007.

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

Now it is my pleasure to introduce our Chairman and Chief Executive Officer, John Allison.

Thank you, Tamera.

Good morning and thank you all of you for joining us.

The areas that I will does include our financial results for both the third quarter and year-to-date, especially focusing on credit quality.

Then we will share with you a few thoughts on what we believe the impact of these recent government programs are on BB&T.

Share with you a few projections and thoughts I guess is a better word, about where we are in terms of future performance.

Chris will give you some in depth into a number and performance areas, and then we will talk about the executive transitions with Kelly giving you an overview of strategy going forward and of course the Q&A afterwards.

Looking at third quarter results, there was some noise.

We had $35 million in after-tax security gains which actually was greatly timed in this market.

We had $26 million in after-tax charges related to the impairment of debt and primarily equity securities and $6 million in other charges which are all excluded from operating earnings.

GAAP net income was $358 million, down 19.4%.

Operating earnings $355 so not much difference in the two, down 20.8%.

GAAP EPS $0.65, operating EPS $0.64.

The $0.64 was equal to consensus estimate of the earnings.

Cash basis EPS was $0.67.

A number that a number of you have focused on and we think is an interesting and important number in the context of the current environment is pretax pre provision operating earnings were $865 million, up 12% indicating strong core performance.

Our cash ROA for the quarter was 1.12%, cash ROE was 19.77%.

Year-to-date, our GAAP net income is $1,214,000,000, down 8%.

Operating earnings being $1,133,000,000, down 15%.

Our GAAP diluted EPS is $2.20, operating diluted EPS $2.06, and cash EPS $2.14.

Our cash ROA for the nine months is 1.22%, cash ROE 21.33%, all good performance numbers in a very difficult environment.

Looking at the factors driving earnings.

We continue to have good news in terms of our margin.

Our margin improved from 3.65% in the second to 3.66% in the fourth, up from 3.45% in the third quarter of 2007.

Challenging environment in regards to margin and Chris will discuss that with you in some more detail.

Non-interest income second to third, if you take out non-recurring items, fair value accounting related to mortgage servicing right and mortgage servicing impairment purchase acquisition second to third we are actually down 20.7%.

Third to third we were up 4.8% and year-to-date 3.4%.

We did have a little extra noise in the third quarter in that we have a (inaudible) trust for our executive (inaudible) plan which goes up and down with the stock market and we had a pretty big $15 million fluctuation in that trust which reduced revenue but also reduced the expenses.

It has very little effect on the bottom line, but it makes the revenue growth look a little weaker.

If you take out that fluctuation annualized second to third, non-interest income growth was 13.2% down and third to third up 5.3%.

Looking at our various sources of non-interest income and excluding non-recurring items and purchases, insurance income third to third was essentially flat, it's essentially flat year to date, annualized link it was down 20.6%.

Most of that is seasonality.

Usually our second and fourth quarters are strong quarters in insurance.

Also, the insurance market continues to weaken.

We are doing extremely well, those of you that follow the industry, because of the very sharp decline in proper property and casualty insurance rates, all of our competitors are down revenues and we've been able to maintain essentially flat revenues, which I think is real evidence of a pretty significant market share move in our insurance business.

Service charges on deposit accounts remain strong, third to third up 12.1%, annualized link up 9.3%, up 11.8% year to date.

We are having great success in attracting new clients.

We added 31,000 net new transaction accounts in the quarter and 101,000 year to date and, if anything, our client acquisitions is accelerating.

Non-deposit fees and commission, which are mostly our debit cards and bankcard fees, third to third up 6.2%, down annualized link 5.7% reflecting, I think, a weaker economy and some natural seasonality, year to date up 8.6%.

Investment banking and brokerage third to third down 4.5%, down 18.1% annualize link, basically flat for the year.

Obviously investment banking is a tough market to be in but relative to the market, we are pleased with our results.

Our trust and advisory, investment advisory revenues third to third down 7.5%, down 10.5% annualized link and 4.2% year to date reflecting again the market situation.

Mortgage banking income has been good news even if you take out mortgage service rights and the change in fair value accounting for mortgage banking.

Third to third we were up 43.8%, annualized link up 18.1%, residential mortgage originations in the third quarter were $3.7 billion compared to $3.2 billion last year in the third quarter, and year to date mortgage originations are $12.9 [billion] compared to $8.7.

We are obviously having a pretty major market share move in our residential mortgage origination business.

Net revenue growth annualized second to third taking out purchases and the other items I mentioned before was down 4.5%.

Third to third up 8.8%, year-to-date 6.7%.

Non-interest expenses, which Chris will talk about in a little detail, annualized second to second down four-tenths of a percent, third to third up 7.8%, year-to-date 4.3%, pretty effective expense control and we continue to improve our efficiency position.

Loan growth annualized second to third on a GAAP basis was 4.5%.

If you can take out purchase and leverage sales, the total growth was 4.7%, but we were pleased with growth in certain categories.

Commercial loans were up 9.2%, direct retail was essentially flat as it has been pretty much the whole year.

Sales finance 6.7%, revolving credit 14.7, mortgage is down 8.8%.

Part of that is the warehouse.

If you take out the warehouse, mortgage would only be down 2.2%.

Specialized lending had a 20.7% growth rate.

If you take out the warehouses, our second to third annualized growth rate was 6%.

So pretty decent growth given the kind of environment we are in.

Third to third GAAP basis 7.7% total loan growth.

Commercial third to third 13.6, direct retail continued to be flat, sales [finance] 4.8, revolving credit 13.7, mortgage 3.1, specialized lending 7.3, and total is 8.2%.

So you see some slowing of loan growth but given the economic environment, we are pretty pleased with the loan growth numbers.

We are seeing what I would call some flight to quality.

We are able reduce (inaudible) adding very high quality relationships.

Our CNI growth has been particularly strong.

It started to slow recently in the economic environment.

We have had some growth in commercial real state independent of our residential lending portfolio.

We've actually been able upgrade quality there because the markets are so tight we've been able to get some real good quality relationships.

Direct retail has been a challenge.

A lot of that is simply people don't have equity in their houses to loan against and also a lot of apprehension in the consumers.

Sales finance is probably some good news.

We have been gaining market share in a very slow automobile market and we've been growing our boat and RV business with real high quality relationships because there's not much competition in the market today.

Revolving credit.

We've had healthy growth.

We've had some rise in charge-offs, as you can see from the numbers, but not -- way better than the industry, and our revolving credit, basically our credit card business, is only with our clients and basically people that have checking accounts with us.

Specialized lending.

Most of the growth was in regional acceptance and in AFCO CAFO, our premium finance business, as corporations need more premium financing in this kind of market.

The mortgage portfolio we are experiencing very strong production but we are letting our own [hail] portfolio liquidate in the normal process because Freddie and Fannie are offering such great rates that it's a great opportunity to sell into the Freddie and Fannie market place our new production.

Good news is on our deposit growth, very encouraging in that regard.

Non-interest bearing deposits taking up purchase acquisitions are essentially flat third to third, annualized link up 2.9%.

Our client deposits, however, without purchases, third to third up 4.6% but the annualized link growth rate was 16.5% and if you exclude client CDs over $100,000 in what we call a core deposit number, third to third up 4.4%, annualized linked up 19.6%.

Total deposits, that's again without purchases, up 6.9% third to third and 15.3% annualized link.

Clearly our strategy worked.

We were not very aggressive on deposit pricing because we thought it was out of line in the spring.

We clearly have seen a flight of quality resulting in very strong deposit growth which has continued post the end of the quarter and we are having a very rapid growth rate on new accounts.

We are clearly gaining market share, so good news on the deposit side.

Asset quality I know is the big issue and it continues to be the challenge for the industry.

Our problems and focus is on the residential real estate market where most of the deterioration has been occurring.

Our nonperformers did increase to $1,638,000,000.

As a percentage of assets, that was an increase from 0.95 to 1.20.

Our charge-offs increased to $242 million from $170 million in the second quarter.

And as a percentage of loans charge-offs increased from 0.72 in the second quarter to 1% in the third quarter.

If you take out our specialized lending operations, charge-offs in the second quarter were 0.53 and 0.82 in the third quarter.

If you look at the provision for credit losses in the quarter was $364 million, it was $122 million more than charge-offs so we continue to provision substantially more than charge-offs.

Year-to-date, we provided $917 million, charge-off $537 million or we provided $380 million more than charge-offs.

The ratio of the allowance to nonaccrual loans declined from 1.4 to 1.15 but we do have over 100% coverage of nonaccrual in loans.

We raised the reserve again, this, at the end of third quarter last year was 1.05, end of the second quarter it was 1.33, ends of the third quarter, 1.45, so very systematic increase in the reserve.

There was some positive news.

While 90-day past dues still accruing went up slightly from 0.29 to 0.31, 30 to 89 day past dues were flat at 1.63.

We are having a lot of success in moving nonaccrual loans into foreclosed real estate which enables us ultimately to be able to sell.

Let's focus on the reel state related credits which are, for those of you that have the press release are covered in the credit supplement.

I'll refer you to page 1 in the credit supplement that looks at our residential acquisition development and construction loans which is our primary focal area in terms of real estate lending risk.

First, good news I think from a risk perspective, we've been systematically reducing this portfolio.

At the end of the first quarter we had $8,768,000,000 in this category, in the second quarter it was $8,611,000,000 and at the end of the third $8,328,000,000.

So we've reduced the category buy about $440 million in the last couple of quarters.

Continues to be very diversified.

We are having rising nonperformers and charge-offs in every category.

At the end of the quarter our nonaccrual loans in residential development and construction were 5.02%, charge-offs 1.44.

We do have a 5.5% reserve against the nonaccrual loans so our reserve more than 100% of nonaccruals in that category.

We really are seeing very similar trends in terms of where we are having challenges, if you look at the distribution by markets.

I do think the BB&T has done a very good job of underwriting in this category.

I think it could get better than the industry but we have certainly benefited by our distribution.

You can see our problems are focused in Atlanta in Georgia, which is primarily Atlanta, in metro D.C.

which impacts Virginia numbers and in Florida.

In fact, if you look at Florida you can see that we are 12.48% nonaccruals and 2.24% charge-offs and in Atlanta we are 8.42% nonaccruals and almost 4% charge-offs.

So our markets that have been giving us the biggest challenge continued to so.

Fortunately, we are continuing to do well in North Carolina and South Carolina which have a lot of our business and in Virginia outside of metro D.C.

which is a little bit more difficult to see in these numbers.

A lot of our core markets continue to perform well particularly in this environment and while we are seeing some deterioration, we are still not seeing major deterioration in those markets.

Looking at other commercial real estate loans which is basically the nonresidential real estate related loans in the next category, you'll see that there are $10,847,000,000, that's actually an increase of 10,569,000,000 at the end of the second quarter.

We had some growth in that category.

The new loans are very low risk.

We've been able to underwrite very high standards in this market which is very hard for people to get financing in that category.

We are having a little bit of problem in commercial land and development loans which is a small lending category, 2.8% of our loans where nonaccruals have gone up 2%.

But, overall, other commercial real estate continues to do well.

It's at 0.90 nonperformance and 0.11 charge-offs so we are not having, experiencing problems there.

Obviously we could if the economy deteriorates, but so far that category continues to do well and we really are not seeing evidence of increasing problems.

Again, to the degree that there are problems, they are pretty focused in Atlanta and in Florida.

Florida is the only place where we have meaningful issues and they are 4.69%, fortunately the Florida portfolio is a small portfolio for us.

Looking at the next page on credit supplement two, talks about our residential mortgage portfolio.

First, you'll note that we are primarily a prime lender with $12 billion prime portfolio.

You will also note that in every category we have very high credit scores and low loan to values.

Even our [alt A] portfolio we has a 67% loan to value.

The only area that we are having, well, in a certain sense we are having rising nonperformers and nonaccruals in every category but the only area that the numbers are of any material concern is construction and development lending where we've gone to 3% and 0.88 gross charge-offs.

Basically, what's happening in that portfolio is people are having a difficult time selling their old house so they can't really fund the new house that's been in construction.

If you look at the distribution by markets, our challenges are the same.

They are in Florida, Atlanta and metro D.C.

market.

Florida numbers are not good with 5% nonaccruals and 1.30 losses, but on the total portfolio nonaccruals are 1.75 which is high for us, but still much better than what's happening in the markets in general, and gross charge-offs are 0.42 which, again, is high for us but much better than the market in general.

Looking at our home equity portfolio, we have two components, one is the home equity line which I think most people think of as home equity and the home equity loans which are really loans on people's houses that usually don't have extra advance features, they are usually a fixed amount and repayable on a monthly basis.

It is noted our home equity line portfolio is not very big.

It's very high credit scores, 759.

23% of our home equity loans first mortgages and average loan to value 67%.

Same thing on a, that was on our lines, on our loans, again, hi FICO scores, 77% of our loans are first mortgages and 67% loan to value.

If you look at the home equity portfolio in terms of lines, nonaccruals are low but charge-offs are high for us at 0.89 and that's basically because when we have a problem with the home equity line today we are just having to charge the whole thing off because there's no equity in the houses, although our default rates aren't particularly high, we are just taking lots of losses per default.

In home equity losses, 0.54 loss, 0.63 charge-offs.

Again, high for us but certainly much, much better than you are seeing in the marketplace.

In the total portfolios, nonaccruals were 0.50, charge-offs 0.66.

To the degree we have any problems, again, Atlanta, Florida, metro D.C.

with Florida being the only really bad numbers but still those numbers look extremely good versus the industry.

Looking at some of our other portfolios we have not seen a significant deterioration in quality in the CNI portfolio but obviously economic conditions are a concern.

Our sales finance losses remain high for us at 0.76% but they are extremely good relative to the industry and we are not seeing a big rise in losses and sales finance.

What we are seeing is not high repo rates but we do repo particularly in SUV we get a big loss because of what's happening in the used car market.

We are seeing a number of competitors exit that business which we think will help us.

High risk auto business, loss ratio increased a little second to third but it's flat relative to third quarter last year at 7.5%.

It's clear that GMAC and Ford were doing a lot of high risk auto loans at low rates.

It's allowed to us actually improve our quality while keeping the same yield in that portfolio.

Regional remains profitable and we expect it to remain so.

We are having increasing success in migrating nonaccruals in foreclosed property and are having reasonable sales activity in the foreclosed property.

While we have experienced some losses in selling foreclosed real estate, the losses have been immaterial.

Our goal was to write nonaccrual loans down to liquidation value when we put them in other real estate and we've been successful in doing that.

In every portfolio segment, the new loans we're making are less risky than our existing portfolio as we tighten lending standards.

With that said, let me change direction and talk a little bit about the impact on the recent government programs.

First, looking at the Hope program we see very little if any benefit to that program to us.

In fact, we are a little worried about it because we think it could actually hurt real estate values and could be detrimental to the high quality lenders.

The original (inaudible) program has very little value to us.

In fact, again, it's not clear whether this will help or hurt real estate markets and how it would be executed effectively.

Obviously the stock market voted against both of these programs.

It's a little more difficult to evaluate the impact of the new car program.

It certainly helps us absolutely by stabilizing markets but it is far more beneficial to weak banks versus strong banks and, again, the market reflected that fact.

We have not had any liquidity problems.

In fact, we've had terrific amount of good liquidity that's been a flight to quality and we've been able to fund overnight at very low cost so we weren't experiencing some of the problems that other people had.

In terms of participating in the new car program, there are four main components.

First is commercial paper borrowings.

Our commercial paper borrowings are small and it is at very favorable prices so we doubt we would participate in that program.

We will participate surely with the FDIC in insurance and noninterest bearing deposits.

It's really simply not practical to not participate, given our competitors will have the insurance.

Again, we have had a positive inflow of deposits for us but we think that our competitors have FDIC insurance, we will have to.

The third component we are looking at is the FDIC debt program.

We will basically decide whether to participate in that program based on cost.

Again, we haven't had any funding problems but when you can get an FDIC insurance guarantee even with the fee it is probably, or at least in some cases, would be potentially advantageous to us on a cost basis so we will just look at that on a cost basis.

We are still studying the capital investment program.

We are in a very strong business for capital as you know.

However, it's going to be difficult not to participate so we will probably participate, one, the regulators are certainly encouraging us to.

Second, it does have some favorable capital costs as we understand it today.

Thirdly, our competitors will be taking advantage of the program and the, finally, it just provides us a potential for capital for acquisitions if those are realized.

So we haven't made a final decision, but given the whole set of circumstances we will probably participate.

Having more liquidity and less fear in the financial system is obviously beneficial to all financial systems.

However, the net of these programs is probably slightly negative for healthy banks.

Some of the opportunities which would have been created are no longer available and we do not get many direct benefits.

I have to admit that I am concerned and kind of amazed despite all the amount of resources devoted to rescue programs, none have dealt with the fundamental problem of deflation in residential real estate markets which is causing the problem in the capital markets.

We strongly believe that some form of tax credit for residential real estate purchases is need to do stabilize the real estate market and with it the mortgage market.

Problems in the financial system again are primarily reflecting problems in the real estate market.

Change direction again.

Let me comment on the Wachovia Wells merger.

Wachovia is our number one competitor in many of our markets.

While we would have preferred Citigroup to buy Wachovia because we think they would be a little bit easier to compete against, we are quite ready to compete with Wells.

Wells is certainly a well run company.

We have a very high regard for them.

Learned a lot from them over the years; however, Wells has no brand equity in our core markets.

Typical mid size small business and retail clients are not familiar with Wells and the (inaudible) North Carolina and Lynchburg, Virginia, where BB&T together absolutely dominate markets.

We have extremely strong brand equity.

We will continue to gain market share.

It appears that Wachovia has violated a trust with the clients and shareholders that's hard to repair.

Also this is a big deal for wells will be portfolios pose some integration risk, one, Wachovia, probably more, and are continuing to move Wachovia clients to BB&T today.

BB&T service quality is considerably better than Wells, we have a better sales program and cross-sell ratio so we look forward to you knew competitive environment.

Let me make a few comments about the future and obviously anything I say about the future could easily be wrong and this is a very difficult environment to even speculate about the future.

I have personally never experienced as much uncertainty when talking to business owners and individual clients in the community.

The strong sense of uncertainty has got to affect economic activity.

We have plenty of money to lend but loan demand, except for high-risk borrowers, has slowed considerably.

Will the stabilization account for markets eliminate this uncertainty and cause a turn to more normal conditions?

Your guess is as good as mine.

Obviously what happens in the economy will have a big impact on our business.

My guess is that we are already in a recession.

The issue is how long the recession will be.

Given that background, based on what we know today and obviously this is subject to change, we expect loan loss in the fourth quarter to be about 1% to 1.25% and nonperformers to continue to rise.

We will continue to raise our loan loss reserve reflecting this environment.

For the year, this will result in loan loss of about 0.85% which actually is, I saw some of the write ups, that 0.85% was a year projection so we are actually, we think, going to be consistent with the upper end of the range we shared with you last time at the last call.

For 2009 we are guessing, and I do mean guessing.

We think loan loss in the first half of the year will remain in the 1% maybe up to 1.25% range and hopefully decline in the second half of the year as we continue to work through the real estate market.

We are seeing some stabilization in some real estate markets if the economic environment is not detrimental.

Despite the challenges, there is some good news in that we do not have any material exposure to the CDO's, CES's, and our core markets do not have the excesses in residential real estate prices which have caused so many problems.

The reason that some of the North Carolina markets aren't having the problems, we just didn't have the appreciation in those markets.

Also, BB&T is growing market share on practically every front.

We have a very strong accelerating deposit growth.

Our pretax preprovision operating earnings for the third quarter are $865 million, an increase of 12%.

So, yes, this is a challenging environment but I think our relative performance is strong.

With that said, now let me turn it over to Chris for his insight into several very important core performance measurements.

Thanks, John, good morning and I also would like to welcome you to the call.

I'd like to speak to you briefly about net interest income, net interest margin, non-interest expenses, taxes and capital.

I first look at net interest income based on operating earnings and look at year-to-date.

Earning assets were up a healthy 7.1%, adjusted for purchases; produced income of net interest income of $3,233,000,000, a 9.1% increase over the prior year adjusted for purchases.

Look at link quarter.

Earnings assets were up 4.2% adjusted for purchases and produced net interest income of $1,109,000,000, 7.3% annualized increase over link adjusted for purchase.

On a common quarter basis, earning assets were up again healthy 6.1% adjusted for purchases and 11.7% increase over the prior year.

John already commented briefly on margin but we were pleased with the stability of the margin actually up a basis point from 3.65% in the second to 3.66% in the third.

Really pleased with the progress we made over the last year and so the common quarter comparison up 21 basis points from 3.45% third a year ago to 3.66% currently.

And on a year-to-date up 7 basis points from 3.54% to 3.61%.

During the third quarter we did continue to benefit slightly from the declining rates that occurred earlier in the year.

As we had told you, our CD portfolio repriced accordingly.

As mentioned last quarter's call though, we continue to hedge against rising rates that were anticipated in 2009, repositioning the balance sheet to neutral to slightly asset sensitive earlier in the quarter and, as you know, late in the quarter that direction of the curve moved.

While we experienced an increased in nonaccruals, obviously we continue to experience healthy loan growth and improved new loan spreads.

We continue to see those widen and despite the increased deposit competition, as John pointed out, our client deposit growth was really strong during the quarter and our funding mix also shifted toward lower cost alternatives.

In fact, on an average balance basis client deposits grew three times faster than loans on a link quarter comparison, so we are real pleased with the deposit growth overall.

You look at yields and rates, on a year-to-date basis you can see total earning assets were down 94 basis points while total interest bearing liabilities were down 122, so we actually got spread improvement of 28 basis points.

On a link quarter basis, total earning assets were down 9 basis points while total interest bearing liabilities decreased at a faster rate, 11 basis points, created 2 basis points spread improvement.

The elements of that you can see the securities portfolio actually improved 2 basis points, primarily as a result of higher investment yields and mortgage-backed securities, while loan yields again declined due primarily to a 17-basis point reduction in commercial loans and leases.

Just a point there, that portfolio is 74% variable.

Then also a reduction in direct retail loan yields.

Total interest bearing liability costs declined as a result primarily of the CD portfolio repricing down 40 basis points and then smaller declines in other interest deposits other interest bearing deposits and then fed funds and other borrowed funds.

The margin performance in the third quarter I would call it solid, given the environment.

The main divers are the 1 basis points improvement really was the effective control of our deposit and funding costs, primarily the repricing of the CD portfolio and also improvement in our funding mix the first quarter, we've seen that over the last several.

[Alco] model is currently based on the forward curve, currently assumes that fed funds will decline to 1.25% later this month at fed meeting and remain flat until mid 2009 and increase thereafter which is a difference in the curve from a quarter ago of about overall about 75 to 125 basis points lower than what we saw about a quarter ago.

Looking forward, we are obviously managing many variables in what I call a variables in what I call a very difficult operating environment.

Therefore, do expect a slight decline in our margin during the fourth quarter in the range of 2 to 3 basis points in the quarter primarily a result of four items.

First, increased deposit costs due to heightened competition, potential for increased borrowing costs due to the dislocation in LIBOR.

While we have seen that come in some, it's still fairly wide.

Increased costs associated with our trust preferred issuance that we executed in mid September.

I will speak about the impact of that in a minute.

And then also being just slightly asset sensitive to declining rates.

Turn our attention to non-interest expenses we were pleased with our overall expense control results.

Once again during the third quarter noninterest expense growth rates adjusted for purchases were favorable on both a year-to-date and link quarter basis.

While the common quarter non-interest expense growth rate appeared somewhat high, it was driven by higher than normal growth rate in the other non-interest expense category which was also the case for year-to-date link quarter comparisons.

The other non-interest expense categories unusually high primarily as a direct result of the current credit environment.

In that category you have expenses such as legal expenses, write-downs on foreclosed property, maintenance on foreclosed properties, repossession expenses which are really driving the category and would be anticipated during an environment such as this.

I think it's still important to note that we again achieved positive operating leverage on a year-to-date and link quarter basis and maintained a strong operating efficiency as evidenced by the improved cash basis efficiency ratio of 51% during the quarter.

Also wanted to do point out that the number of end of period FTEs in the quarter compared to second decreased by 405, excluding acquisitions, while at the same time opening 12 net new branch offices during the quarter.

So pleased overall with the expense growth.

If we drill down just a moment, first looking at year-to-date, you can see there was a 4.3% increase in non-interest expenses which equated to about $120 million after purchases and driven really by occupancy and equipment expense and other operating.

Occupancy and equipment was really increases in IT equipment, communications expenses, rent expense excluding de novo locations, and then also de novo occupancy expense as well.

Other operating was up about $120 million and the drivers there were increase in professional services, retail and bankcard expense, and those were primarily the revenue producing or cost saving in nature.

And then also we had write downs on foreclosed property, legal fees, maintenance on data processing software, decreased gains on sale of fixed assets, maintenance expense on foreclosed properties, loan repossession expenses and a small bit of charge-offs as well, operating charge-offs.

Then on a common quarter basis you can see that we were up 7.8% which is about $72 million after purchases, and driven by three areas, personnel, occupancy and equipment, and other operating.

Personnel was really primarily driven by increase in salaries due to salary increases that kick in April 1 in our company and then also promotions.

Also had an equity based comp increase due to investing requirements for retirement-eligible employees and that's not new expense dollars or increase in marginal dollars, it really historically was all realized in the first quarter in the month of February and because we have changed the eligibility, it's now spread over the second and third quarters so we changed it in 2008 so comparing back to 2007 when it would not have been in the third quarter, it would have been in the first.

Occupancy was the same items I had mentioned before, rent, IT and communication, and then other operating up $60 million and, again, professional services, advertising and marketing effort to take advantage of sort of window of opportunity we see.

And then retail and bankcard expenses, all of those revenue producing items.

Then the non-revenue producing items, again write downs, foreclosed property, legal fees, maintenance foreclosed properties, same items I mentioned with the addition of FDIC insurance expense.

Link quarter, looking at the detail, we actually had a decrease of 0.4% and the driver there was really personnel which was down $15 million and that's a function of change in market value of the (inaudible) trust as John had commented on, and an increase of about 13 given total non-interest number being down a million.

The other operating is really the same items that we had already covered related to the credit environment.

Overall, I would say very pleased with overall expense control in the quarter.

Looking at taxes very briefly.

Just want to comment on the effective tax rate and what to expect in the fourth quarter.

You can see the effective tax rate went from 27.64% in the second to 29.14% in the third and going forward we would expect the effective tax rate to be in the 30% to 31% range for the fourth quarter.

Looking at capital.

Just like to mention three items before reviewing the ratios.

First, just a reminder that we did issue $450 million in Tier 1 qualifying hybrid capital.

That was a retail deal with a coupon of 8.95% which was really a opportunistic raise to support growth and we were exceptionally pleased with the execution on that issue.

Secondly, we have updated our credit stress test at 930 where we assume 1% losses and 2% reserves in 2008, and then 150 basis points of losses and 3% reserves in 2009.

And, as a result, anticipate anticipate continuing the current dividend of $0.47 a quarter but still feel very comfortable with our capital being able to absorb the stress.

Finally, just want to point out that as you may know there's a regulators joint proposal to lower risk rates on Freddie and Fannie guaranteed securities and if that's approved, just want to give you an idea of the impact.

It would have a positive impact on our Tier 1 capital of about 13 basis points and to total capital of approximately 18, 19 basis points.

Wanted to do mention that.

Now look at our ratios, briefly, equity of total assets in the end of period was very strong at 9.4%.

Our risk base capital end of period ratios had nice increases, Tier 1 went from 8.9 in the second to 9.4 in the third with total going from 14% to 14.4%.

Both improved significantly as a result of the retail trust preferred issue that I mentioned a moment ago that we did in mid September.

Leverage capital actually increased from 7.2% to 7.6%, well ahead of our 7% target.

Tangible equity also increased to 5.8% above our 5.5% target.

And then finally as a reminder just want to point out we have not repurchased any shares in 2008 and do not plan to repurchase any in the near term.

That concludes my comments.

I'd like to now turn it back over to John for some additional comments.

Thank you, Chris.

We want to just take an extra minute and talk about management succession which is obviously an important issue.

As I'm sure all of you know, I announced my retirement as Chief Executive Officer effective at the end of this year.

I will remain as Chairman of the Board for a year and then on the Board thereafter.

I will admit this is an awkward time and frankly if I had waited and gotten in this environment I I'm not sure I would have announced this retirement, but I have already announced it and it's been a very long-term process.

I have observed, as I'm sure you have, that many CEOs don't plan for their retirement and either the company gets sold or more likely a weak success or an outside hire takes leadership which is very detrimental to both shareholders and employees.

We have a unique situation in BB&T.

There were five of us that had worked together to take BB&T from a farm bank to a multistate financial institution.

We were all in the same age group and are like to the retire in a short period of time.

Given the circumstances, five years ago we began a very systematic management succession process with several of the individuals in that original five group retiring at their own plan.

During that time we added six new members to executive management team.

All six are proven leaders at BB&T.

All have over 20 years experience, several 30 years experience at BB&T yet are relatively young in their 40s or early 50s.

This is a strong team for the future.

I do believe the process itself should give you confidence as an investor in the system way we run BB&T.

I'm particularly pleased that Kelly King will be taking my place at CEO.

Kelly and I have worked together for 36 years.

He's reported directly to me for 27 years.

People have asked me what advice I am going to give Kelly as I retire and my answer is that I have already given it to him.

In fact, I have probably given it to him 100 times.

Kelly has been in our executive team for 25 years, involved in every decision that matters over that period of time.

He's also a very dynamic, very strong leader.

He will do an outstanding job leading BB&T.

Before I turn it over to Kelly I did want to thank all of you for your feedback and support over the years.

Some of you I have known a long time and certainly consider to be friends.

I appreciate these relationships greatly and hope to see you in the future.

And I do thank you for your support over the years.

Now let me ask Kelly to share our strategy in this very challenging environment.

Thank you very much, John.

Let me say for the benefit of the group how great the experience has been to work with John and our entire team for all of these years.

John is an outstanding mentor, great CEO, as you all know, and I feel we have all benefited from his experience and his leadership.

I will say, as John mentioned, very, very confident in our team.

Average years of service of our executive team going forward is 28 years of service with BB&T.

The age range is from 41 to 60 and average is 50.

So it's a relatively young team.

They are very experienced, well-trained, very energized and we are ready to go.

I would also mention as we go through this transition that one should not expect dramatic or material changes certainly in the short term with regard to our strategies and objectives.

I have been a close part, as John mentioned, in working with him and the rest of the team in developing the strategies so it would be unreasonable to expect a lot of changes just because of change in leadership.

I would also mention that as we go forward there are really three non-negotiables at BB&T from our perspective.

One is our vision.

We have a vision of creating the best financial institution possible, not because you have to but because that's achievable and something we want to do, it's motivational.

Our mission of helping our clients achieve economic success and financial security is not negotiable, and our values are not negotiable because that's the way we choose to live our lives and choose to lead the company.

Everything else is strategic and tactile and does change from time to time and would you expect to see some changes in strategies as conditions change.

Let me mention the four key strategies as we go through the rest of this year and into '09 to effectively manage through the credit cycle, second to achieve superior revenue growth, third, to create a perfect client experience and, fourth, to control cost or maximize economic profit.

Just a couple of comments on each one.

Obviously job number one today is managing through the credit cycle.

It is an extremely difficult environment.

It is very dynamic and, therefore, incumbent on all of us to be tightly focused on making sure we get through the cycle, minimizing loan losses but at the same time working with our clients because we do not intend to do what a lot of companies do which is to throw out our good long-term clients just because they hit a bump in the road.

Obviously, our number one objective is to take our shareholders and generate a good long-term return.

However, we will be working with our clients.

We find that actually optimizes their results and ours over the long term.

We have allocated a large amount of resources to deal with our problem credits.

We will need to add allocate probably more as we go forward.

We've gotten our regional president's and all of our relationship managers tightly focused on dealing with loan losses so that we mitigate the challenges that we have and that is going extraordinarily well.

When you think in terms of working through the credit cycle obviously deposits, liquidity and capital are very, very important.

As has been mentioned, our deposit base is very strong with client deposits growing 16.5% for the third quarter annualized 31,000 net new transaction accounts.

And at the same time we've been able to manage the costs so that we can produce stable margins, so we feel like the deposit acquisition programs is a real strength of BB&T.

I would say that as the FDIC guarantee of debt program rolls out, many companies that have been deposit poor and capital poor have been raising rates very rapidly in order to attract deposits and we expect that to be mitigated some as we go forward because of the additional risk guarantee from the FDIC.

Likely, also with the addition of capital injected into the system liquidity should improve for the whole system.

Although I will say for us liquidity has not been an issue.

Interestingly, over the last several weeks we've been funding ourselves overnight at less than 1% and in some cases borrowing overnight at zero which has been very, very attractive to us.

One of the most important challenges is to go through this environment is to avoid adverse selection.

We are certainly very focused on that.

We don't want to pick up problems that other people are trying to kick out.

And, importantly, one of the things we are trying to do is this will be a continuing objective for the next few years is to diversify our balance sheet.

One of the opportunities for us is to become somewhat relatively less dependent on real estate and more dependent on CNI relationships.

We will be pursuing that very aggressively as we go through the cycle because a lot of the CNI companies are really being jerked around by some of their previous suppliers because of capital and liquidity concerns.

We think that will prove to be very successful for us in terms of diversifying the asset side of our balance sheet and simultaneously it will help to adversity the liability side because, frankly, as you grow more CNI and small business loans you get more deposits, particularly in DDA because real estate declines typically do not provide a lot of deposits and certainly not much DDA.

Our second objective is to focus on superior revenue growth.

It's very important in this type of environment to not turn totally inward.

A lot of companies do that.

But revenue both is very, very important in this kind of environment.

If you think about it, there are really only three ways to focus on revenue growth.

Get better prices, better margins from your existing products that you are selling to existing clients, sell more products to your existing clients, i.e.

cross-sell, and then attract more relationships.

We have key strategies in place with regard to all of those.

I personally think in terms of restoring price discipline for the survivors out of this process that we are going through, I believe there will be, over time once the dust settles, upward pressure on the margin because an awful lot of the pricing pressure we've had over the years have been because of a [disinmediation] of bank balance sheets into the capital markets where because of less capital and less reserve, pricing has been very, very thin.

As that process moves through and we reintermediate the balance sheet of the banking system we think that that will restore better pricing and frankly there will be less competition, a lot of the weaker (inaudible) are being weeded out.

We have, as you know, a very effective sales culture at BB&T.

We focus on what we call IRM, integrated relationship management.

It is a very, very effective program for us and we expect that to continue.

I would mention to you that over the last four years our fee income per FTE has increased from $90,000 in '04 to $130,000 this year to date annualized for a rate of increase 44% which is a pretty significant change and that process continues to improve as we make it more effectively executed in our newer regions that have joined the BB&T family over the last several years.

And then we will be focusing on organic and acquisition growth.

Obviously the organic growth opportunity coming through this correction process is enormous.

John spoke to the tremendous results we are already having with Wachovia, we are having it to a lesser degree but also with other institutions as well.

As competition weakens and some competitors go away because of our strong balance sheet, our strong liquidity position and our very stable be and effective sales culture we would expect that our organic growth would continue to be very strong and actually accelerate.

On the acquisition side, as we look forward we believe there will be some excellent opportunities after the dust settles.

Frankly, right now it's unlikely that many people are going to be able to do mergers because they are probably appropriately keeping their head down trying to get through it.

But on the other side of this, we believe there will be companies that would like to join an organization like BB&T that has proven strategies that are enduring and effective and capable leadership that has proven that it can lead in difficult and good times and we will be aggressively interested in such combinations on a basis that will not be materially diluted to our existing shareholders.

We simply think there's an opportunity to combine with other institutions and make it mutually beneficial to both sets of shareholders that would be our philosophical approach as we go forward.

Our third objective is to create the perfect client experience focusing on quality.

We believe the value is a function of quality relative to price and the primary emphasis on quality today is reliability.

I will tell you today after talking to a lot of clients and a lot of our client managers people get it.

They understand quality.

They understand reliability.

And while over the last 10 or 15 years quality hasn't mattered as much people have been more price sensitive, we clearly think that today and going forward, reliability, responsiveness and competency becomes the driver in relationships and, therefore, price becomes relatively less important.

(inaudible) BB&T we have 20 years experience in developing and executed on our community bank model.

It is the best bank model in the industry we believe today because it puts highly experienced well-trained power local leadership close to client so that they can provide excellent quality relative to the prices that we charge.

I do have some results to report to you which affirm that it's working for us.

Each year we have an outside research firm, [Merits], which is an international well recognized firm do client service quality studies for us.

We recently got updated reports for this year and our branch satisfaction survey, these are amazing numbers to me, on a 1 to 10 scale our retail increased from already high 9.18 to 9.25 which is a statistically significant increase.

And our business increased from 9.12 to 9.17.

Those are absolutely unbelievable quality scores and speaks to the value proposition we offer.

Greenwich is an international firm that focuses on business relationships and does business survey studies.

They recently completed their '08 studies.

We are very proud of the fact that we were only one of 14 banks in the country that got the national award for overall satisfaction which put us in the top 2% of all banks surveyed.

We got three national awards in overall satisfaction, personal banking satisfaction and treasury management satisfaction and we believe those results plus the Merits results affirm that we are delivering the best value proposition in the market.

Finally, in order to focus on revenue and service quality and be able to afford the additional cost that is required to focus on mitigating credit risk issues it's very important in this environment to focus on controlling costs.

Chris mentioned the very good results we are seeing on the third quarter annualized basis.

We are very tightly focused on that.

We expect to have, as we go forward through the rest of this year and next year, flat to decline FTEs.

We do not is expect to have any material layoffs but we simply are able to deal with any reductions we need through attrition.

Although I will tell you that a very important thing is happening at our company and that is overall turnover rate is declining very, very rapidly and we have one of the best turnover ratios in our business.

Nonetheless, there is sufficient turnover to be able to reduce staff if necessary, so we will be moving forward focusing on a tight control of costs and we will be doing such things as focusing on simplification.

I mentioned one thing to you you may find interesting.

In this environment with all of the conversation from various parties about how to make credit decisions and all the sophisticated mathematical models that have been developed that's the kind of complexity that creeps into organizations that oftentimes does not deliver results.

I tell our lending folks sometimes, in spite of all the models if you get right down to it there are only two questions you are trying to answer, one is can they pay and the other is will they pay you.

I think sometimes if we just focus on those two we get better results than looking at sophisticated mathematical models.

We are, in addition, focusing on eliminating nonessential activities with a sharp focus on client centric activities.

As you grow in an organization sometimes activities creep in that aren't directly correlated with client relationship growth and we are taking a sharp look at eliminating any nonessential activities.

We think there's some opportunity there.

When you get through with those objectives, I believe you will see that we are very tightly focused on managing quality, managing are managing quality of assets and focusing on revenue simultaneously which we believe will, at the end of the day, ultimize the relative return to our shareholders and will produce long-term optimum returns in terms of share price.

These are very, very difficult times, I will admit that.

I believe with the support of our employees, our Board and our communities, client constituencies our best days are ahead of us.

Before I conclude my remarks I do want to recognize John.

I know you would all want to do this.

So maybe on behalf of all of you, certainly on behalf of all our employees and our Board, John Allison is a phenomenal human being and an outstanding CEO.

I think you only have to look at the results of 26 years of consecutive increases in operating earnings and 37 consecutive increases in dividends, a 20-year compound increase in EPS of 10% which is phenomenal.

And certainly in the current environment which is yet another time that our/John's leadership has been tested I think most people would agree that our performance, while absolutely not what we would like is relatively superior.

I would simply say to you that while John will be absolutely missed as a friend and an associate, he's earned his well deserved retirement.

We wish him the best, he and his family and keep in mind that he will remain our Chairman and will remain on our Board so we will certainly have his counsel as we go forward.

Tamera, that concludes my remarks and I will turn it back to you.

Thank you very much, Kelly.

Before we move to the question and answer session of this conference call, I ask that we use the same pros he is as we have in the past to give fair access to all participants.

Due heavy call volume today our conference call provider will limit your question to one primary and one followup.

Therefore, if you have further questions police reenter the queue so that others may also have an opportunity to participate.

I will now ask our operator, Michelle, to come back on the line and explain how to submit your questions.

Thank you.

(OPERATOR INSTRUCTIONS) We will take our first question from Brian Foran with Goldman Sachs.

Hi.

Good morning, or I guess good afternoon.

I guess there's a lot of confusion right now about what is the appropriate level of capital and I'm not sure [tarp] has really helped matters.

When you kind of think about capital today, what is the appropriate level you think about?

Is it only Tier 1 or is there a minimum tangible common ratio that you feel comfortable with?

And if you were to raise capital via the tarp program, would you view that as capital to be deployed or would you simply view that as capital to strengthen ratios but ultimately not to redeploy?

Chris, you want to answer the first question and I will come back on the second one.

Sure.

Obviously we feel like we have adequate Tier 1 and the capital raise we just did on September 10 was primarily an opportunistic raise for, to take advantage of growth opportunities that we saw occurring and potentially growing in the near future.

So we feel very well capitalized and adequately so currently.

In terms of your question about common, about 18 months, two years ago when it was frankly not looked at very hard we implemented a tangible common minimum ratio of 5.5%.

We currently in the third stand at 5.8%.

So we feel like we are positioned very well from a capital perspective to kind of deal directly with your question.

I will, John, refer you to and maybe deal with, how you deal with it going forward.

We are properly capitalized.

I think having too much capital wouldn't be a problem in this market because just the fear that's out, the apprehension that's out in the market place.

If we were to participate in this program, part of our motivation is that the regulators want to sue, which you have got to keep the regulators happy.

The second is we think it would give us some extra security in this kind of environment but also give us some extra flexibility.

We think that there are going to be some acquisition opportunities either now or in the near future and this is a relatively inexpensive way to raise capital for acquisition opportunities.

We are, we've got plenty of lending capacity and hopefully we can, if the economy stabilizes, so we can grow our loan portfolio and again this is relatively cheap capital for that purpose the way it's been presented to us at this point.

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

Hi, good afternoon.

How are you doing?

Could we talk about how you are thinking about your construction portfolio?

I know you went through some of the details there earlier but it would just be helpful to understand how you're thinking about incremental loans that you're making to that group and dealing with some of the stresses you have seen in that portfolio and how you're thinking about the reserving in it as well?

In terms of the residential construction development portfolio we basically have been work to reduce the size of the portfolio.

We've reduced it from $8,768,000,000 at the end of the first to $8,328,000,000, at the end of the third quarter.

We are still making loans to builder that we have long-term relationship with and are doing okay.

Remember, a number of markets our builders are doing okay.

Places like Winston Salem we might have a few people struggling, but the house prices have never went up, there are a few people still buying houses.

So there's some markets where things aren't anywhere near as bad as they are, say, in Florida so you have to make some market by market decisions.

But we are, in general, we are working on reducing that portfolio.

We are giving advise to our builders to not start new houses when they don't start them obviously we are not going to finance any new developments, those kind of things, so it's a very systematic process.

In terms of problems, we are, we will work with builders if they have reasonable economic expectations that they can work with the problems, if they got carrying assets.

Remember, we had a long period where builders did well and some of the more cautious builders, they have major reserves, they recognize the cycles come and they have a very high probability of making it through the cycle.

Other builders weren't cautious are in markets in places in Florida where it's just devastating.

And so we are, it's not practical to help them through the cycle.

We are working on that.

When it becomes clear to us and at that point clear to the borrower we are trying to get to properties as quickly as we can.

We foreclosing if necessary.

In a lot of cases we are taking deeds in lieu of foreclosure.

And then as soon as we get it we are trying to sell.

Once we can't work with the builder we are trying to get it through the process as quickly as possible.

We have had one past sell I call it which we came out pretty well in that sales process and the number of our bigger problems we do have, we have interested buyers.

There is still activity in the market and a lot of these things have been already discounted pretty significantly.

So we are working through the cycle.

I'll be honest I think if we had to have this upset in the capital markets we were clearly, in my opinion, seeing the end of the real estate cycle.

We would have been having a recovery next spring.

I hope that will still happen but I don't know what the economy is going to do to it.

But the real estate cycle was moving.

Typically been a (inaudible) cycle and we were headed towards a clear correction phase and I just don't know what this economic environment does to that.

Bringing the loans down, is that anything more than just not making new loans and allowing the portfolio to pay off over time?

Generally speaking.

Obviously you're foreclosing on some and may ends up in other real estate selling but generally speaking it's not making new loans and selling property in the normal course of business, plus in some cases you're having to liquidate them.

We'll take our next question from Stephen Alexopoulos with JPMorgan.

Hey, everyone.

John, I was curious.

I know the average deposit growth was strong.

You guys highlighted that a couple times.

When I looked at the period end balances they were essentially flat.

If you were growing accounts I don't know why that wouldn't show up in some of the period end balances.

Just wondering how do you reconcile that?

We had a big surge in period end balances at the end of June.

A fair amount of it actually came out of large investment banks and other people I'm not really sure why that happened, and then since then we had some of that run off but it wasn't there during the whole quarter and we've had very strong individual deposit growth rates, very strong what I call it true core business clients growth rates.

June 30 is where a lot of the FDIC market share data and you tend to have money move around a lot in banks on that June 30 date.

So we had a pretty big run up at June 30 but it wasn't reflected.

If the look at the second quarter average growth is not that strong on purpose because we were not being competitive because we thought the CD prices didn't make any sense at that time.

I'm sorry, I missed that, what was behind that surge last quarter that ran off this quarter?

The FDIC does a deposit market share data June 30.

Banks have pretty big flows in and out from investment banks and other people around the end of that actual date, the June 30 date.

Just a quick follow up, when we look at the reserve right now, I know you said you feel like we are in a recession.

Is that based on a recession scenario in terms of the level of reserves you have four some of your consumer portfolios?

We think so.

Obviously we are facing a moving target, but you can see why consumer portfolios are not doing anywhere as well as they have in the past.

They are doing very well relatively to the industry.

We keep constantly updating forward projections, but you are chasing a moving target and it depends obviously on where the economy goes from here.

Based on, we have a very sophisticated model but you have to make assumptions in any of those kind of models and based on that model we are absolutely property reserved.

We will take our next question from Jefferson Harralson with KBW.

Thanks.

I wanted to do ask a question on debt to construction credit.

The gross loss numbers there on credit supplement line I just want to make sure those are year-to-date loss numbers, not Q3 loss numbers.

In the supplemental sheet?

That's right, the 1.44% gross charge off as a percentage of outstanding.

Those are year-to-date.

Okay.

So if you look at your North Carolina loss rates for construction versus your non-North Carolina loss rates, the rates are so far apart.

Do you think that the North Carolina economy has just done better?

Do you think it's your legacy of lending in North Carolina or do you think that you are more aggressive in your non-North Carolina lending or how do you think by the wide difference in the results of that construction lending?

I think it is multifaceted.

One, we have been here a long time so we know the client relationships and almost everybody we deal with has been long time clients with us.

We understand the markets very well so we tend to avoid over building in a situation.

I think that the North Carolina economy has done fairly well but the main thing is we simply didn't have the appreciation that happened in Florida that happened in Georgia, in Atlanta or in metropolitan DC.

If you can get into Virginia, outside of metro D.C.

in these numbers you would see that these numbers look very good in Virginia and South Carolina, it's not just North Carolina, it's North Carolina, South Carolina, Virginia.

We also have really big shares in some of the smaller markets, the goal for North Carolina that haven't had a lot of appreciation and aren't having the down side in the market place.

I think it's a combination of knowing the markets, knowing the clients and rural markets.

The other thing I would say, too, is that a lot more of our business outside the Carolinas and outside, in metro D.C.

came through acquisitions.

And particularly Atlanta being the place where we really had high losses out of acquisitions and relationships that came through those acquisitions.

And probably had client relationships that we would not have naturally had that you just don't run off in the acquisition process.

I think one thing that helped us, frankly, compared to other people, we slowed down acquisitions pretty significantly and I think that was fortunate, particularly in Florida where certainly we made some of our own bad loans but a lot of it was legacy history out of relatively recent acquisitions.

Just a followup.

Do you think that the North Carolina loss rates that are so low are they going to start to catch up with the non-North Carolina loss rates or do you think they can stay at or near this level?

I think they are going to go up.

The loss rates are unusually low.

I would be really surprised if they went anywhere near Atlanta or Florida or metro D.C.

because we just didn't have the appreciation.

The affordability factor is a huge factor in actual losses ratio and we just didn't have the (inaudible).

In Atlanta you didn't have so much appreciation, but just built too many houses.

So are they going to go up?

Are they going to get worse?

Yes.

Are they going to get anywhere near Atlanta, Florida and metro D.C.

rates?

I would be you had stunned if that happened.

I think that would be highly unlikely.

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

Hi, everyone.

Good afternoon.

John, you indicated that BB&T would be eligible for treasury capital.

Just wondering if there is any sense if you have what the criteria is and whether all the bigger banks you think will be eligible or just the strongest ones, like BB&T?

All we really have is probably the press releases you have and even our regulators haven't been fully informed.

We have talked to a number of what we consider our strong peers and I think everybody is kind of in the situation that we are.

Based on what we've been told, it looks economically attractive and it's clear that the regulators want us to do it.

They add a bunch of bells and whistles that become less attractive we wouldn't be willing to do it.

It's hard for me to know about the availability issue.

I hate to say I'm skeptical but it's interesting that Morgan Stanley and Goldman and Citigroup who were all under tremendous stress got allocated in the first allocation.

It seems a little bit of an odd thing to say, well, this is just going to help the institutions if you look at the stress that was on all three of those companies before this allocation happened.

So I don't know, there may be some magic way they decide to do it but, and I don't know if there's any legal protection or how it's done equitably, but all three of those companies were really, really struggling before they got these capital occasions.

And their stock price upon allocation reflected that.

So just to say it's going to stronger institutions it would seem odd that they are included in the first group.

Okay.

As a follow-up question, Kelly, to elaborate a little bit on your M&A comment, just how do you think about small deals versus larger deals, the pros and cons to both, and then in versus out of market as you look out over the next couple of years and deals that might be interesting there?

Well, I think there are several factors that drive the attractive to us.

First is the overall market characteristics secondary to the company characteristics, particularly around strategies and culture.

But particularly on size and in and out of market, I think today absent some type of FDIC assisted deposit only deal which might be smaller, we would tend to be looking for fewer larger deals and maybe our history would indicate simply because the amount of effort that goes into doing any acquisition.

What we want to make sure of as we crank our acquisition engines back up is we do not want to dilute our organic growth machine which is now doing extremely well.

We would lean towards the larger size.

Now in terms of larger size, I'm talking preferably in the $3 to $15 billion size.

Would we consider something larger?

Maybe, but you wouldn't expect to see us going out and doing a lot of very large acquisitions, larger than $15, unless it was something really, really unusual and potentially had some type of an assistance program with it.

Certainly over the next three to five years, virtually all of our acquisition activity in the banking space will be in market.

We simply have a lot of opportunities in the greater Maryland area, the greater Georgia area.

And even though Florida is not something we are looking to grow today, for obvious reasons, long-term there is an enormous opportunity for us in Florida.

I would say most of it will be in market.

(OPERATOR INSTRUCTIONS) We'll take our next question from Scott Valentin with FBR Capital Markets.

Thanks for taking my question.

Just on the outlook for losses, you mentioned the 1% to 1.25% level for net charge-offs in the first half of '09, I think it's pretty substantially below peers with the running today.

Just curious maybe what your outlook is for the economy in terms of a rough estimate of [GDP] or unemployment or some sense you can give us as to maybe how severe you believe a downturn could become and how that factors into the loss guidance?

We don't have an answer to that.

I mean it's just so, we are assuming we are in a recession.

We are assuming, I guess, in terms of that kind of guidance that the recession isn't terrifically deep.

It may be fairly long.

And that some of these stabilization factors, the huge amount of liquidity that's being pumped into the economy, Federal Reserve keep us from having a really deep, really long recession and at least some measures are taken to effect work on the housing market.

If we have the great depression then all bets are off I don't know how you measure against through that kind of economic activity.

So we are assuming we are in a recession.

We are assuming it's a pretty tough recession.

But we are not assuming that it's a disaster from an economic perspective.

I don't know how anything including a professional chemist has an economist has an answer to that right now.

Fair enough.

Just a followup question.

In terms of loan severity you mentioned when a loan gets put into REO there is a fair value done.

The actual realization price when you dispose of the asset has been pretty close to the fair value price.

Can you talk about the size of your write-downs you're taking, maybe one or two asset classes?

It varies across the whole spectrum.

If you look at some of the retail portfolios is where we are getting big write-downs relative, if you look at our actual default rates say in our automobile finance business, our sales, sales finance business, they really haven't gone up much but we repo an SUV we might take a $20,000 loss.

There's just literally no market for it.

On home equity lines, again because we are pretty much an A grade lender we are not getting big increase in the default ratios but on home equity lines because housing prices have fallen and most defaults are occurring in the Florida, Atlanta, and metro D.C.

you don't buy it in so you lose 100% on whatever is on the home equity line.

At the other end of the spectrum in our traditional mortgage business our loss basically we are doing 70% loan to value when it starts out even if the price has fallen 20% we are not getting big losses per house in that business, we are just getting more houses back with a few exceptions because you have such radical declines in Florida.

That's the only place we are getting a big house, big loss per house because you might have done 75% loan to value and now the house is worth 50% what have it was last year so with a few of those exceptions in the mortgage side we are not getting big losses per houses.

Interesting enough, on the residential construction and development side typically we are not getting high percentage losses again because we normally had equity in those projects, 25% equity to start with.

Builders that had (inaudible) we didn't do it with people that didn't have some other equity they've been pumping in it.

So the loss for foreclosure, now it's going to vary, you catch some big ones that you did a mistake on, but I would say the loss severity in that case might be 10% to 15% to 20% when we end up foreclosing.

We'll take our next question from Todd Hagerman with Credit Suisse.

Good afternoon everybody.

John, I just wanted to do ask you a question in terms of the reserve coverage.

You mentioned in your remarks just in terms of the expectation for reserve build to up on a go-forward basis, and just thinking about the recession scenario, if you will, how should we think about the reference that you made to kind of the coverage of nonperforming loans, it came down, again this quarter, presumably with an increase in [MPL] it's going to continue to decline own a go-forward basis.

But how should we think about that coverage as you think about it and expectations for reserve increase going forward?

That's a good question but one that's not easy to answer.

We actually have a very sophisticated comprehensive formula for how you project your reserves.

And the formula really doesn't look at reserve coverage relative to nonaccruing loans.

That's not how you work it.

You kind of work it on loss expectations and so the reserve coverage of nonperforming loans ends up being a consequence, it's not a driving factor.

And because you basically, you have to use that kind of process you obviously are making judgments in the process.

I don't think we have a magic answer of the loan loss reserve in relation to nonaccruing loans.

It will go down some but I don't know that it's a result not a driver in the formula.

Okay.

Then maybe just as a followup could you give us a better sense of again just in terms of the [A&D] portfolio and the 5.5% reserve coverage there just in terms of how that might break out particularly within the land portion?

I don't know if I have that off the top of my head.

Chris, do you have that?

No, I don't, but land would be higher than single-family construction just because the debt and loss expectations would be larger in land but I don't have an exact number for you, Todd.

We might get that for you if you want to call.

I don't have it with me.

(OPERATOR INSTRUCTIONS) We will take our next question from Al Savastano with Fox-Pitt Kelton.

How guys.

How are you?

Just curious, you are seeing a lot of pressure in the auto sector.

Can you remind us what your exposure is to auto dealers.

We have a lot of auto dealers that we have long time business relationships.

We have a small wholesale portfolio.

We've never been a big player in wholesale mostly because of the rates have been too cheap in wholesale.

We are not going to have material losses because of the shake out in the automobile dealerships, it's just not going to be a big issue.

We have a lot of people that that have been in the business a long time that are not too debt heavy.

We have a few that are leveraged and we can have a few problems related to the shake out but it's not material issue for us.

We are actually bigger in the actual sales finance business and automobile dealers aren't borrowing a lot of money to run their businesses.

Thank you.

Sure.

And we will take a final question from Kevin Fitzsimmons with Sandler O'Neill.

High everyone.

John or Kelly, just wondering if you could address the dividend.

You mentioned that you did the stress test again on the dividend and is that something we can kind of expect every quarter?

And how do you reconcile the two options of, why don't we do like a lot of the banks have done and do everything we can to preserve capital and cut the dividend versus obviously you have a large retail shareholder base that probably values that dividend?

Granted they are probably watching the news every day and they know the pressure the industry is under.

I'm just curious how you reconcile those two outcomes and what will it, what would we need to get to a stress test where it would indicate that you would be under well capitalized for you to make that move or are there other factors at play?

Thanks.

I will try to answer that.

We are actually, about every month we are stress testing looking forward, looking at the dividend, it's obviously an important to us.

As you saw, our capital ratios are actually rising.

We think we are going to continue to be able to raise those capital ratios and even with, I think this goes back to the fact this issue of preprovision, pretax operating earnings of $865 million, we have a pretty strong business going on here even in this kind of environment.

Our retail shareholder dividends are very important, many of them live on it, it's a part of their lives.

We've seen that in contrast to what Wachovia did and we see it a lot here in Winston Salem, but remember this is where the original Wachovia started.

It really hurt a lot of people's lives.

Dividends is important to our client base.

Frankly, for our typical retail shareholders they focus a lot more on dividends than they do on the share pieces, most of them have no basis in the stock they got out a long time ago and the dividends is really important.

Obviously if we need to cut the dividends to protect the institution that's a no-brainer, as our forward projection shows we can continue to pay the dividends we will couldn't to do that.

If we got to the point where we thought it was in jeopardy, which could happen, if we get into a severe recession we will deal with it then.

We are looking at it every month.

Right now our forward projection is under what we think is worse case scenario unless this thing is a lot deeper than we hope it will happen we can continue to pay the dividend and hope to continue to do that, plan continue to do it unless we get some surprise.

Okay.

Just lastly, John, how would you, you mentioned the Wachovia integration with Wells.

I mean, how would you characterize that?

Is this really a huge opportunity for you guys or is it, we are not in the days of first union and core states any more?

Is this banks do a better job generally of integrating?

Is it going to be something that will you get some benefit from but not something that will be really significant?

How do you look at it?

I think it's going to be significant, really significant, the reason is I don't think it's just the integration issue.

I think, if it had been a normal merger of Wachovia by Wells that would have been one thing.

But remember Wachovia was having very visible problems for months leading into this, making lots of people antsy.

They had, in a lot of our footprint, they had lots of shareholders were disappointed with how it was handled and felt, I don't know the word, betrayed for lack of a better word.

So I don't think Wells is coming into a normal integration situation.

I think if they were, they are a really good company, they really do a great job and we would get some peripheral benefit but it wouldn't be material.

I think it's going to be a challenge given what happened pre acquisition in the mindset that's been created for them.

So I might be surprised but we are still picking up business.

I would just -- I met with our regional president's first thing this morning and they say they are still picking up business, it's slowed some, but it was an avalanche of business for a few weeks, it's slowed some but I think we will continue to get a lot of business.

With no further questions in the queue, I will turn the call back over to our presenters for any additional or closing remarks.

Well, thank you, Connie, and thank you for those questions.

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Thank you and have a good day.

Thank you.

Thanks.

This concludes today's conference.

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